<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 1998
REGISTRATION NO. 333-42535
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------------
TELEPHONE AND DATA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6749 APPLIED FOR
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
30 NORTH LASALLE STREET
CHICAGO, ILLINOIS 60602
(312) 630-1900
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
----------------------------------
LEROY T. CARLSON, CHAIRMAN WITH A COPY TO:
TELEPHONE AND DATA SYSTEMS, INC. WILBUR C. DELP, JR., SIDLEY & AUSTIN
30 NORTH LASALLE STREET ONE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60602 CHICAGO, ILLINOIS 60603
(312) 630-1900 (312) 853-7000
(Names, addresses, including zip codes, and telephone numbers,
including area code, of agents for service)
----------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER APPROVAL BY SHAREHOLDERS.
----------------------------------
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
----------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(2) OFFERING PRICE(2)
<S> <C> <C> <C>
Preferred Shares................................... 326,664 shares (1) N.A. (2) N.A. (2)
Series A Common Shares............................. 6,933,233 shares (1) N.A. (2) N.A. (2)
Common Shares...................................... 53,878,129 shares (1) N.A. (2) N.A. (2)
TDS Telecommunications Group Common Shares......... 40,540,908 shares (3) N.A. (2) N.A. (2)
United States Cellular Group Common Shares......... 60,811,362 shares (3) N.A. (2) N.A. (2)
Aerial Communications Group Common Shares.......... 40,540,908 shares (3) N.A. (2) N.A. (2)
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
Preferred Shares................................... $0 (2)
Series A Common Shares............................. $0 (2)
Common Shares...................................... $0 (2)
TDS Telecommunications Group Common Shares......... $0 (2)
United States Cellular Group Common Shares......... $0 (2)
Aerial Communications Group Common Shares.......... $0 (2)
</TABLE>
(1) If the Tracking Stock Proposal described herein is approved by the
shareholders and the reincorporation merger of Telephone and Data Systems,
Inc., an Iowa corporation ("TDS Iowa"), with and into Telephone and Data
Systems, Inc., a Delaware corporation ("TDS Delaware"), becomes effective:
(i) each Preferred Share, no par value ("Existing Preferred Stock"), of TDS
Iowa outstanding at the effective time of the merger will be converted into
one Preferred Share, par value $0.01 per share of TDS Delaware ("New
Preferred Stock"); (ii) each Common Share, par value $1.00 per share
("Existing Common Stock"), of TDS Iowa outstanding at the effective time of
the merger will be converted into one Common Share, par value $0.01 per
share, of TDS Delaware ("New Common Stock"); and (iii) each Series A Common
Share, par value $1.00 per share ("Existing Series A Common Stock"), of TDS
Iowa outstanding at the effective time of the merger will be converted into
one Series A Common Share, par value $0.01 per share, of TDS Delaware ("New
Series A Common Stock"). The amount of New Preferred Stock being registered
is based on 326,664 shares of Existing Preferred Stock issued and issuable
at November 30, 1997. The amount of New Series A Common Stock being
registered is based on 6,933,233 shares of Existing Series A Common Stock
issued and outstanding at November 30, 1997. The amount of New Common Stock
being registered is based on 53,878,129 shares of Existing Common Stock
issued and outstanding at November 30, 1997. In addition, there is being
registered hereby such additional shares of New Preferred Stock, New Series
A Common Stock and New Common Stock as may be required due to changes in the
number of shares of Existing Preferred Stock, Existing Series A Stock and
Existing Common Stock between November 30, 1997 and the effectiveness of the
Tracking Stock Proposal.
(2) The shares will be issued to shareholders without consideration.
Accordingly, pursuant to Section 6(b) of the Securities Act of 1933, as
amended, there is no registration fee.
(3) If the Tracking Stock Proposal described herein is approved by the
shareholders of TDS Iowa, TDS Delaware expects to distribute two-thirds of
one TDS Telecommunications Group Common Share of the Company, par value
$0.01 per share ("Telecom Group Shares"), one United States Cellular Group
Common Share of the Company, par value $0.01 per share ("Cellular Group
Shares") and two-thirds of one Aerial Communications Group Common Share, par
value $0.01 per share ("Aerial Group Shares"), per share of New Series A
Common Stock and per share of New Common Stock (the "Distribution"). The
amount of Telecom Group Shares, Cellular Group Shares and Aerial Group
Shares being registered is based on 60,811,362 shares of Existing Series A
Common Stock and Existing Common Stock issued and outstanding at November
30, 1997 which, pursuant to the Merger Agreement, will be converted into an
equivalent number of shares New Series A Common Stock and New Common Stock.
In addition, there is being registered hereby such additional number of
Telecom Group Shares, Cellular Group Shares and Aerial Group Shares as may
be required due to changes in the number of shares of Existing Series A
Stock and Existing Common Stock between November 30, 1997 and the record
date for determination of holders of New Series A Common Stock and New
Common Stock entitled to receive the Distribution.
----------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PRELIMINARY COPY
TELEPHONE AND DATA SYSTEMS, INC.
30 North LaSalle Street, 40th Floor
Chicago, Illinois 60602
312/630-1900
[LOGO]
, 1998
Dear Fellow Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders of the
Company to be held on , 1998, at 10:00 a.m. Chicago time, at Harris
Trust and Savings Bank, 111 West Monroe Street, 8th Floor, Chicago, Illinois, in
the Auditorium (the "Special Meeting"). The formal notice of the meeting and a
proxy statement/prospectus are enclosed.
At the Special Meeting, you are being asked to vote on a proposal that
would, among other things, create three new classes of common stock intended to
separately reflect the performance of the Company's cellular telephone, landline
telephone and personal communications service businesses ("Tracking Stocks"),
and change the state of incorporation of the Company from Iowa to Delaware (the
"Tracking Stock Proposal"). The Tracking Stock Proposal and the related
transactions discussed below are important to the Company's long-term
performance and to all shareholders of the Company.
Some of the principal reasons for the Tracking Stock Proposal are:
- to give greater market recognition to the value (individually and
collectively) of the Company and of the Company's three principal business
groups ("Tracking Groups"), thereby enhancing shareholder value over the
long term, while at the same time enabling the Company's businesses to
preserve the benefits of being part of a consolidated enterprise;
- to provide the Company with greater flexibility in raising capital and
making acquisitions, using equity securities specifically related to the
Tracking Groups;
- to enable the Company to more effectively tailor employee benefit plans to
provide incentives to employees of the Tracking Groups; and
- to provide shareholders with the opportunity to invest in separate
securities that specifically reflect the underlying businesses, depending
upon their investment objectives, as well as permit shareholders to
continue to invest in all of the TDS businesses through the Common Shares
and Series A Common Shares.
Credit Suisse First Boston ("C.S. First Boston") and Salomon Brothers Inc
and Smith Barney Inc. (collectively doing business as "Salomon Smith Barney")
have acted as financial advisors to the Company in connection with the Tracking
Stock Proposal. The Company has received opinions from each of those firms with
respect to certain aspects of the Tracking Stock Proposal. As indicated in the
letters from such firms attached as Exhibits C-1 and C-2 to the accompanying
proxy statement/prospectus, such firms state that they are not expressing any
opinions as to other aspects of the Tracking Stock Proposal, including any
opinions as the value of the Tracking Stocks or the prices at which such
Tracking Stocks may trade. See the section entitled "Proposal 1--Tracking Stock
Proposal-- Opinions of Financial Advisors" in the accompanying proxy
statement/prospectus.
The Board of Directors has studied the Tracking Stock Proposal, has
consulted with its financial and legal advisors, and has carefully weighed
potential advantages against potential disadvantages, and has concluded that the
positive aspects of the Tracking Stock Proposal outweigh potential adverse
aspects. THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TRACKING STOCK
PROPOSAL, BELIEVES THAT THE ADOPTION OF THE TRACKING STOCK PROPOSAL IS IN THE
BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" THE TRACKING STOCK PROPOSAL.
Under the Tracking Stock Proposal, you are being asked to approve an
Agreement and Plan of Merger (the "Merger Agreement") between the Company and
Telephone and Data Systems, Inc., a Delaware corporation and wholly-owned
subsidiary of the Company ("TDS Delaware"), pursuant to which the Company would
be merged (the "Merger") with and into TDS Delaware, with TDS Delaware
continuing as the surviving corporation. Immediately prior to the effective time
of the Merger, the Certificate of Incorporation of TDS Delaware would be amended
and restated to, among other things, authorize Preferred Shares, Series A Common
Shares and Common Shares and to establish the rights, limitations and
preferences of such shares. In the Merger, except to the extent that the
<PAGE>
holder of any shares dissents from the Merger and seeks appraisal rights for
such shares, each issued Preferred Share of the Company would be converted into
one Preferred Share of TDS Delaware having substantially similar rights,
limitations and preferences, except as described herein, and each issued Common
Share and Series A Common Share of the Company would be converted into one
Common Share and one Series A Common Share, respectively, of TDS Delaware,
having the rights, limitations and preferences described herein. YOU SHOULD
RETAIN ALL CERTIFICATES WHICH REPRESENT SHARES OF THE COMPANY SINCE SUCH
CERTIFICATES WILL CONTINUE TO REPRESENT SHARES OF THE SAME CLASS OR SERIES OF
TDS DELAWARE FOLLOWING THE MERGER.
The Restated Certificate of Incorporation of TDS Delaware would also, among
other things, authorize three new classes of common stock, to be designated as
United States Cellular Group Common Shares (the "Cellular Group Shares"), TDS
Telecommunications Group Common Shares (the "Telecom Group Shares") and Aerial
Communications Group Common Shares (the "Aerial Group Shares").
- The Cellular Group Shares, when issued, are intended to reflect the
separate performance of the United States Cellular Group (the "Cellular
Group"), which consists of the Company's interest in United States
Cellular Corporation, currently an 81%-owned subsidiary of the Company
operating and investing in cellular telephone companies and properties
("U.S. Cellular").
- The Telecom Group Shares, when issued, are intended to reflect the
separate performance of the TDS Telecommunications Group (the "Telecom
Group"), which consists of the Company's interest in TDS
Telecommunications Corporation, a wholly-owned subsidiary of the Company
operating landline telephone companies ("TDS Telecom"), and includes the
allocation of certain corporate debt.
- The Aerial Group Shares, when issued, are intended to reflect the separate
performance of the Aerial Communications Group (the "Aerial Group"), which
consists of the Company's interest in Aerial Communications, Inc.,
currently an 83%-owned subsidiary of the Company providing broadband
personal communications services ("Aerial").
Subject to the approval of the Tracking Stock Proposal by shareholders and
the effectiveness of the Merger, the Company intends to:
- offer and sell Telecom Group Shares in a public offering for cash, subject
to prevailing market and other conditions (the "Telecom Public Offering"),
and allocate the net proceeds thereof to the Telecom Group;
- offer and issue Cellular Group Shares in exchange for all of the Common
Shares of U.S. Cellular which are not owned by the Company, subject to
approval by a special committee of the board of directors, the full board
of directors and the shareholders of U.S. Cellular, pursuant to a merger
between a subsidiary of the Company and U.S. Cellular (the "U.S. Cellular
Merger");
- offer and issue Aerial Group Shares in exchange for all of the Common
Shares of Aerial which are not owned by the Company, subject to approval
by a special committee of the board of directors, the full board of
directors and the shareholders of Aerial, pursuant to a merger between a
subsidiary of the Company and Aerial (the "Aerial Merger"); and
- distribute one Cellular Group Share, two-thirds of a Telecom Group Share
and two-thirds of an Aerial Group Share in the form of a stock dividend
with respect to each outstanding Series A Common Share and Common Share of
the Company (the "Distribution").
It is currently expected that the Distribution would take place in July 1998
or later, after the completion of the Telecom Public Offering, the U.S. Cellular
Merger and the Aerial Merger. As soon as practicable after the Distribution, the
Transfer Agent for TDS Delaware will mail certificates representing whole shares
of Tracking Stock (and cash in lieu of fractional shares) to all shareholders.
The Merger and the Distribution are intended to be tax-free to non-dissenting
shareholders (except with respect to any cash received in lieu of fractional
shares).
Upon the completion of the Telecom Public Offering, the U.S. Cellular
Merger, the Aerial Merger, and the Distribution, the outstanding shares of each
Tracking Stock would represent in the aggregate an approximately 80% interest in
the related Tracking Group. Approximately 20% of the common equity value of TDS
attributable to each Tracking Group would initially be retained (the "Retained
Interest") in a residual group (the "TDS Group"), along with all other interests
held by the Company. The value of the common equity of TDS in the TDS Group
would be represented by the outstanding Series A Common Shares and the Common
Shares of TDS Delaware.
-ii-
<PAGE>
The Company is filing an application to list each of the Cellular Group
Shares, the Telecom Group Shares and the Aerial Group Shares on the American
Stock Exchange ("AMEX"). The Common Shares of TDS Delaware would be substituted
for the existing Common Shares of the Company and would continue to be listed on
the AMEX under the symbol "TDS."
If the Tracking Stock Proposal is implemented, holders of Preferred Shares
issued before October 31, 1981 and Common Shares would have the power to elect
one more director in addition to the directors which they currently elect.
Immediately after the Distribution, a current holder of Common Shares and
Series A Common Shares would continue to receive an aggregate dividend which is
equal to the aggregate dividend which such shareholder currently receives from
the Company, assuming the shareholder retains the Telecom Group Shares received
in the Distribution. Approximately 25% of the current dividend would be paid
with respect to the Common Shares and Series A Common Shares, and approximately
75% of the current dividend would be paid with respect to the Telecom Group
Shares. The Board currently intends to retain future earnings, if any, for the
development of the businesses of the Cellular Group and Aerial Group,
respectively, and does not anticipate paying dividends on the Cellular Group
Shares or the Aerial Group Shares in the foreseeable future.
An example which illustrates the effects of the Tracking Stock Proposal with
respect to a hypothetical holder of 100 Common Shares is attached to this
letter.
At the Special Meeting, shareholders are also being asked to vote on related
proposals to amend or adjust certain existing employee stock plans and
agreements in connection therewith as a result of the Tracking Stock Proposal
and to approve a new plan which would permit stock awards to be made with
respect to shares of Tracking Stock.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
TRACKING STOCK PROPOSAL AND THE RELATED PROPOSALS.
YOUR PROXY IS VERY IMPORTANT. THE TRACKING STOCK PROPOSAL WILL NOT BE
APPROVED UNLESS IT RECEIVES THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF
THE OUTSTANDING VOTING POWER OF EACH OF THE FOLLOWING VOTING GROUPS, EACH VOTING
SEPARATELY AS A CLASS: (I) COMMON SHARES, SERIES A COMMON SHARES AND PREFERRED
SHARES; (II) SERIES A COMMON SHARES; (III) COMMON SHARES; (IV) PREFERRED SHARES
ISSUED BEFORE OCTOBER 31, 1981; AND (V) PREFERRED SHARES ISSUED AFTER OCTOBER
31, 1981.
If you have any questions prior to the Special Meeting, please call the
Company's Information Agent, McKenzie Partners, Inc., at 1-800-322-2885. We look
forward with pleasure to visiting with you at the Special Meeting.
Very truly yours,
LeRoy T. Carlson LeRoy T. Carlson, Jr.
Chairman President and Chief Executive Officer
-iii-
<PAGE>
ILLUSTRATION OF EFFECTS OF TRACKING STOCK PROPOSAL
The following illustration assumes that you own 100 Common Shares of
Telephone and Data Systems, Inc., an Iowa corporation ("TDS Iowa").
- If the Tracking Stock Proposal is approved, TDS Iowa will be merged with
its wholly-owned subsidiary, Telephone and Data Systems, Inc., a Delaware
corporation ("TDS Delaware").
- Your 100 Common Shares of TDS Iowa would be automatically converted into
100 Common Shares of TDS Delaware without any action on your part. The
certificates which you hold for 100 Common Shares of TDS Iowa will, after
such merger, represent 100 Common Shares of TDS Delaware and there will be
no need for you to exchange stock certificates.
- In addition, based on the expected distribution ratios, you would receive
100 United States Cellular Group Common Shares ("Cellular Group Shares"),
66 TDS Telecommunications Group Common Shares ("Telecom Group Shares"),
plus cash in lieu of 2/3 of a share, and 66 Aerial Communications Group
Common Shares ("Aerial Group Shares"), plus cash in lieu of 2/3 of a
share.
- The Cellular Group Shares, when issued, are intended to reflect the
separate performance of the United States Cellular Group (the "Cellular
Group"), which consists of the Company's interest in United States
Cellular Corporation, currently an 81%-owned subsidiary of the Company
operating and investing in cellular telephone companies and properties
("U.S. Cellular").
- The Telecom Group Shares, when issued, are intended to reflect the
separate performance of the TDS Telecommunications Group (the "Telecom
Group"), which consists of the Company's interest in TDS
Telecommunications Corporation, a wholly-owned subsidiary of the Company
operating landline telephone companies ("TDS Telecom"), and includes the
allocation of certain corporate debt.
- The Aerial Group Shares, when issued, are intended to reflect the separate
performance of the Aerial Communications Group (the "Aerial Group"), which
consists of the Company's interest in Aerial Communications, Inc.,
currently an 83%-owned subsidiary of the Company providing broadband
personal communications services ("Aerial").
- Your Common Shares would represent an equity interest in TDS Delaware
attributable to a residual group (the "TDS Group"), which would have
approximately a 20% Retained Interest in each of the Cellular Group, the
Telecom Group and the Aerial Group upon the completion of all of the
transactions contemplated by the Tracking Stock Proposal. The TDS Group
would also include all of the Company's interest in businesses that are
not attributed to a Tracking Group.
- The Cellular Group Shares, the Telecom Group Shares, the Aerial Group
Shares and the Common Shares of TDS Delaware would be traded on the AMEX.
- The 100 Common Shares of TDS Delaware would have 100 votes in the election
of 25% of the directors plus one additional director, and 100 votes on all
other matters (other than the directors elected by holders of Series A
Common Shares and Preferred Shares issued after October 31, 1981).
- The 100 Cellular Group Shares, the 66 Telecom Group Shares and the 66
Aerial Group Shares would initially have one vote per share. Thereafter,
the voting power of such shares would be adjusted prior to the record date
before each annual meeting of shareholders, based on relative market
values at such time. Such shares would vote in the election of 25% of the
directors plus one additional director together with the Common Shares.
Such shares would generally not vote on other matters, except that each of
the Cellular Group Shares, the Telecom Group Shares and the Aerial Group
Shares would have a class vote in the event of an amendment to the TDS
Delaware charter which was adverse to that class.
- If you continue to retain the Common Shares and the Telecom Group Shares,
you would receive an annual dividend of $0.10 per share with respect to
each of the 100 Common Shares and $0.48 per share with respect to each of
the 66 Telecom Group Shares, or an aggregate annual dividend of
approximately $42, which is the amount of the annual dividend a holder of
100 Common Shares currently receives.
-iv-
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1998
TO THE SHAREHOLDERS OF
TELEPHONE AND DATA SYSTEMS, INC
A Special Meeting of Shareholders of Telephone and Data Systems, Inc., an
Iowa corporation (the "Company" or "TDS"), will be held at Harris Trust and
Savings Bank, 111 West Monroe Street, 8th Floor, Chicago, Illinois, in the
Auditorium, on , , 1998, at 10:00 a.m. Chicago time
(the "Special Meeting"), for the following purposes:
1. To consider and approve an Agreement and Plan of Merger between the
Company and Telephone and Data Systems, Inc., a Delaware corporation and
wholly-owned subsidiary of the Company, which would alter the capital
structure of the Company and change the state of incorporation of the
Company from Iowa to Delaware, as more fully described in the
accompanying Proxy Statement/Prospectus.
2. To consider and approve certain amendments or adjustments to employee
benefit plans as a result of Proposal 1, as more fully described in the
accompanying Proxy Statement/Prospectus.
3. To consider and approve the Company's 1998 Long-Term Incentive Plan, as
more fully described in the accompanying Proxy Statement/Prospectus.
4. To transact such other business as may properly come before the Special
Meeting or any and all adjournments thereof.
If Proposal 1 is not approved, Proposal 2 and Proposal 3 will not be
implemented even if they are approved. If Proposal 1 is approved, it will be
implemented even if Proposal 2 and Proposal 3 are not approved.
This Notice of Special Meeting and Proxy Statement/Prospectus is first being
mailed to shareholders on or about , 1998 to holders
of record on , 1998.
The Board of Directors would like to have all shareholders represented at
the Special Meeting. If you do not expect to be present, please sign and mail
your proxy in the enclosed self-addressed envelope to Harris Trust and Savings
Bank, 311 West Monroe Street, Chicago, Illinois 60606. If you hold more than one
class of the Company's shares, you will receive a separate proxy for each
holding. To assure that all of your shares are represented, you must return a
proxy printed in black ink for Common Shares, including Common Shares owned
through the TDS dividend reinvestment plan and through the TDS Tax-Deferred
Savings Plan; a proxy printed in green ink for Series A Common Shares, including
Series A Common Shares owned through the dividend reinvestment plan; a proxy
printed in red ink for Preferred Shares issued before October 31, 1981; and a
proxy printed in blue ink for Preferred Shares issued after October 31, 1981.
Proxies given pursuant to this solicitation may be revoked at any time prior to
the closing of polls at the Special Meeting (by written notice to the Secretary
of the Company or attendance at the Special Meeting and notice to the Secretary
of such revocation). Once the polls are closed, however, proxies may not be
retroactively revoked.
By order of the Board of Directors,
Michael G. Hron
Secretary
PLEASE HELP US AVOID THE EXPENSE OF FOLLOW-UP
PROXY MAILINGS TO SHAREHOLDERS BY
SIGNING AND RETURNING THE ENCLOSED PROXY CARD PROMPTLY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROXY STATEMENT/PROSPECTUS................................................ 1
WHERE YOU CAN FIND MORE INFORMATION....................................... 2
QUESTIONS AND ANSWERS..................................................... 4
ILLUSTRATION OF CURRENT AND PROPOSED COMMON STOCK CAPITAL STRUCTURE....... 8
PROXY STATEMENT/PROSPECTUS SUMMARY........................................ 9
The Special Meeting..................................................... 9
The Merger.............................................................. 10
The Transactions........................................................ 10
Certain Federal Income Tax Consequences................................. 10
Reasons for Tracking Stock Proposal..................................... 11
Risk Factors............................................................ 12
Summary Comparison of the Current Capital Structure with the Proposed
Tracking Stock Proposal............................................... 13
Significant Differences Between Iowa and Delaware Law................... 27
Dissenters' Rights...................................................... 30
Recent Financial Results................................................ 30
Summary Selected Consolidated and Group Financial Information........... 31
RISK FACTORS.............................................................. 33
GENERAL................................................................... 42
DIVIDENDS AND PRICE RANGES OF COMMON SHARES............................... 44
DIVIDEND POLICY........................................................... 45
SELECTED FINANCIAL INFORMATION............................................ 45
PROPOSAL 1--TRACKING STOCK PROPOSAL....................................... 52
General................................................................. 52
The Transactions........................................................ 53
Background and Reasons for the Tracking Stock Proposal and Related
Transactions; Recommendation of the Board............................. 56
Opinions of Financial Advisors.......................................... 60
Interests of Certain Persons............................................ 63
Changes to Board of Directors........................................... 63
The Company............................................................. 63
The Cellular Group...................................................... 64
The Telecom Group....................................................... 66
The Aerial Group........................................................ 69
<CAPTION>
PAGE
----
<S> <C>
The TDS Group........................................................... 71
Effect of Pre-Distribution Convertible Securities and Committed
Acquisition Shares.................................................... 73
Description of Articles of Incorporation of TDS Iowa.................... 74
Description of Restated Certificate of Incorporation of TDS Delaware.... 75
Description of Terms of Tracking Stock.................................. 85
The Retained Interests.................................................. 100
Inter-Group Interests................................................... 103
Management and Allocation Policies...................................... 105
Comparison of Shareholder's Rights Under Iowa and Delaware.............. 108
Dissenting Shareholders' Rights......................................... 115
Certain Federal Income Tax Considerations............................... 116
Securities Law Consequences of the Merger............................... 119
Listing on the AMEX..................................................... 119
Stock Transfer Agent and Registrar...................................... 119
Accounting Treatment.................................................... 119
Regulatory Approvals and Consents....................................... 119
Dividend Reinvestment Plans............................................. 120
Employee Benefit Plans.................................................. 120
Certain Definitions..................................................... 120
PROPOSAL 2--AMENDMENT AND ADJUSTMENT OF EMPLOYEE STOCK PLANS.............. 128
PROPOSAL 3--APPROVAL OF 1998 LONG-TERM INCENTIVE PLAN..................... 129
BENEFICIAL OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......... 133
SHAREHOLDER PROPOSALS..................................................... 136
SOLICITATION OF PROXIES................................................... 136
EXPENSES.................................................................. 136
EXPERTS................................................................... 136
LEGAL MATTERS............................................................. 136
OTHER BUSINESS............................................................ 136
INDEX TO EXHIBITS......................................................... 137
INDEX TO ANNEXES.......................................................... 137
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 17, 1998
<TABLE>
<S> <C>
TELEPHONE AND DATA SYSTEMS, INC., TELEPHONE AND DATA SYSTEMS, INC.,
An Iowa Corporation A Delaware Corporation
PROXY STATEMENT PROSPECTUS
</TABLE>
--------------------------
This Proxy Statement and Prospectus (the "Proxy Statement/Prospectus") is
being furnished to the shareholders of Telephone and Data Systems, Inc., an Iowa
corporation (the "Company" or "TDS"), in connection with the solicitation of
proxies by the Board of Directors of TDS (the "Board"), for use at a Special
Meeting of Shareholders of TDS to be held at Harris Trust and Savings Bank, 111
West Monroe Street, 8th Floor, Chicago, Illinois, in the Auditorium, on
, 1998, at 10:00 a.m. Chicago time and at any and all adjournments
or postponements thereof (the "Special Meeting"). This Proxy
Statement/Prospectus is first being mailed to shareholders of the Company on or
about , 1998. For definitions of certain defined terms used in this
Proxy Statement/Prospectus, see "Proposal 1--Tracking Stock Proposal-- Certain
Definitions." An index of certain defined terms is attached as Exhibit G. This
Proxy Statement/Prospectus also constitutes the Prospectus of Telephone and Data
Systems, Inc., a Delaware corporation and wholly-owned subsidiary of the Company
("TDS Delaware"), filed as part of a Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended (the "Securities Act"),
relating to the shares of TDS Delaware preferred and common stock described
herein.
This Proxy Statement/Prospectus relates to the approval by shareholders of
the Company of a proposal that would, among other things, create three new
classes of common stock which are intended to separately reflect the performance
of the Company's cellular telephone, landline telephone and personal
communications services businesses, and change the state of incorporation of the
Company from Iowa to Delaware (the "Tracking Stock Proposal"). Under the
Tracking Stock Proposal, shareholders of the Company are being asked to approve
an Agreement and Plan of Merger dated as of , 1997 (the "Merger
Agreement"), among TDS and TDS Delaware, which provides for the merger (the
"Merger") of TDS with and into TDS Delaware, with TDS Delaware surviving the
Merger. A conformed copy of the Merger Agreement is attached hereto as EXHIBIT
A. Immediately prior to the effective time of the Merger, the Certificate of
Incorporation of TDS Delaware would be amended and restated to, among other
things, authorize 475,000,000 shares of capital stock and to establish the
rights, limitations and preferences of such shares (the "Restated Certificate").
A copy of the Restated Certificate is attached hereto as EXHIBIT B. Subject to
the terms and conditions of the Merger Agreement, each share of TDS capital
stock outstanding immediately prior to the effective time of the Merger will be
converted into shares of TDS Delaware stock of the same class and series. The
Preferred Shares will be converted into an equivalent number of TDS Delaware
Preferred Shares of the same series and each Common Share and Series A Common
Share will be converted into one Common Share and one Series A Common Share,
respectively, of TDS Delaware. The consummation of the Merger is subject, among
other things, to: (i) the approval and adoption of the Merger Agreement by the
shareholders of the Company entitled to vote thereon; and (ii) the receipt of
certain regulatory approvals. See EXHIBIT A.
After the Merger, the Voting Trust which controls TDS (the "TDS Voting
Trust") will continue to control the election of a majority of the Board of
Directors and a majority of the voting power of TDS Delaware. However, if the
Tracking Stock Proposal is approved, the number of directors that the TDS Voting
Trust will elect will decrease by one director, and the number of directors that
will be elected by the voting group which includes the holders of Preferred
Shares issued before October 31, 1981 and Common Shares of the Company will
increase by one director.
There has been no prior market for the Cellular Group Shares, the Telecom
Group Shares or the Aerial Group Shares. The Company is filing an application to
list each of the Cellular Group Shares, the Telecom Group Shares and the Aerial
Group Shares on the American Stock Exchange ("AMEX"). The Common Shares of TDS
Delaware would be substituted for the existing Common Shares of the Company and
would continue to be listed on the AMEX under the symbol "TDS."
--------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 33 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED IN CONNECTION WITH THE TRANSACTIONS DESCRIBED HEREIN.
---------------------
THE APPROVAL OF THE TRACKING STOCK PROPOSAL REQUIRES THE AFFIRMATIVE VOTE OF
THE HOLDERS OF A MAJORITY OF THE OUTSTANDING VOTING POWER OF EACH OF THE
FOLLOWING VOTING GROUPS, EACH VOTING SEPARATELY AS A CLASS: (I) COMMON SHARES,
SERIES A COMMON SHARES AND PREFERRED SHARES; (II) SERIES A COMMON SHARES; (III)
COMMON SHARES; (IV) PREFERRED SHARES ISSUED BEFORE OCTOBER 31, 1981; AND (V)
PREFERRED SHARES ISSUED AFTER OCTOBER 31, 1981. ALTHOUGH THE TDS VOTING TRUST
HAS THE VOTING POWER TO CAUSE THE AFFIRMATIVE VOTE OF EACH OF (I) AND (II) ABOVE
TO BE ASSURED, THE TDS VOTING TRUST HOLDS NO COMMON SHARES OR PREFERRED SHARES.
ACCORDINGLY, SUCH PROPOSAL WILL NOT BE APPROVED UNLESS IT IS ALSO APPROVED BY
THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF EACH OF THE VOTING GROUPS
IDENTIFIED IN (III), (IV) AND (V) ABOVE. ALTHOUGH THE TDS VOTING TRUST HAS THE
VOTING POWER TO APPROVE THE TWO ADDITIONAL PROPOSALS RELATED TO THE TRACKING
STOCK PROPOSAL, SUCH PROPOSALS WILL NOT BE IMPLEMENTED IF THE TRACKING STOCK
PROPOSAL IS NOT APPROVED.
IT IS IMPORTANT TO NOTE THAT HOLDERS OF CELLULAR GROUP SHARES, TELECOM GROUP
SHARES AND AERIAL GROUP SHARES WHEN ISSUED WILL, TOGETHER WITH THE HOLDERS OF
COMMON SHARES AND SERIES A COMMON SHARES, BE COMMON SHAREHOLDERS OF THE COMPANY
AND WILL BE SUBJECT TO RISKS ASSOCIATED WITH AN INVESTMENT IN THE COMPANY AND
ALL OF ITS BUSINESSES, ASSETS AND LIABILITIES. THE COMPANY CAN PROVIDE NO
ASSURANCE AS TO THE DEGREE TO WHICH THE MARKET PRICE OF ANY CLASS OF STOCK WILL
REFLECT THE SEPARATE PERFORMANCE OF THE RELATED GROUP OR AS TO THE IMPACT OF THE
TRACKING STOCK PROPOSAL ON THE MARKET PRICE OF THE COMMON SHARES. IN ADDITION,
IMPLEMENTATION OF THE TRACKING STOCK PROPOSAL WILL MAKE THE CAPITAL STRUCTURE OF
THE COMPANY MORE COMPLEX AND MAY GIVE RISE TO OCCASIONS WHEN THE INTERESTS OF
THE HOLDERS OF THE SEPARATE CLASSES OF COMMON STOCK MAY DIVERGE OR APPEAR TO
DIVERGE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS , 1998
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
The Company files reports, proxy statements and other information with the
SEC. You may inspect and copy such reports, proxy statements and other
information at the public reference facilities maintained by the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following Regional Offices of the SEC: Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies may be obtained by mail at prescribed rates from
the Public Reference Section of the SEC at its principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information. Such materials also may be accessed electronically by means
of the SEC's web site at http://www.sec.gov. Copies of such materials may also
be inspected at the offices of the American Stock Exchange, 86 Trinity Place,
New York, New York 10006.
TDS Delaware filed a Registration Statement on Form S-4 related to the
transactions described in this Proxy Statement/Prospectus. This Proxy
Statement/Prospectus is a part of that Registration Statement and constitutes a
prospectus of TDS Delaware in addition to being a proxy statement of the Company
for the Special Meeting. As allowed by SEC rules, this Proxy
Statement/Prospectus does not contain all of the information which you can find
in the Registration Statement. You are referred to the Registration Statement
and the Exhibits thereto for further information. This document is qualified in
its entirely by such other information.
The SEC allows the Company to "incorporate by reference" information into
this Proxy Statement/Prospectus, which means that the Company can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed to
be part of this Proxy Statement/Prospectus, except for any information
superseded by information in this Proxy Statement/Prospectus. This Proxy
Statement/Prospectus incorporates by reference the documents set forth below
that have been previously filed with the SEC. These documents contain important
information about the Company's businesses and finances.
1. TDS's Annual Report on Form 10-K for the year ended December 31, 1996;
2. TDS's Quarterly Reports on Form 10-Q for the quarters ended March 31,
June 30 and September 30, 1997; and
3. TDS's Current Reports on Form 8-K reporting events on November 18,
December 1, December 18 and December 23, 1997 and on January 28 and
February 10, 1998.
This Proxy Statement/Prospectus also incorporates by reference additional
documents that may be filed by the Company with the SEC between the date of this
Proxy Statement/Prospectus and the date of the Special Meeting.
YOU MAY OBTAIN COPIES OF SUCH DOCUMENTS WHICH ARE INCORPORATED BY REFERENCE
IN THIS PROXY STATEMENT/ PROSPECTUS (OTHER THAN EXHIBITS THERETO WHICH ARE NOT
SPECIFICALLY INCORPORATED BY REFERENCE HEREIN), WITHOUT CHARGE, UPON WRITTEN OR
ORAL REQUEST TO INVESTOR RELATIONS, TELEPHONE AND DATA SYSTEMS, INC., 30 N.
LASALLE STREET, CHICAGO, IL 60603, (312) 630-1900. IN ORDER TO ENSURE DELIVERY
OF DOCUMENTS PRIOR TO THE SPECIAL MEETING, ANY REQUEST THEREFOR SHOULD BE MADE
NOT LATER THAN , 1998.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT/ PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED
IN THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAT THE
DATE OF SUCH PROXY STATEMENT/PROSPECTUS, AND NEITHER THE MAILING OF THIS PROXY
STATEMENT/PROSPECTUS TO SHAREHOLDERS NOR THE ISSUANCE OF ANY SECURITIES
HEREUNDER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
-3-
<PAGE>
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
THIS PROXY STATEMENT/PROSPECTUS CONTAINS "FORWARD-LOOKING" STATEMENTS, AS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THAT ARE BASED
ON CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS. STATEMENTS THAT ARE NOT
HISTORICAL FACTS, INCLUDING STATEMENTS ABOUT THE COMPANY'S BELIEFS AND
EXPECTATIONS, ARE FORWARD-LOOKING STATEMENTS. THESE STATEMENTS CONTAIN POTENTIAL
RISKS AND UNCERTAINTIES AND, THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY.
THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE,
BUT ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION
IN MARKETS IN WHICH THE COMPANY OPERATES; ADVANCES IN TELECOMMUNICATIONS
TECHNOLOGY; CHANGES IN THE TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING
AND FUTURE LITIGATION; AVAILABILITY OF FUTURE FINANCING; START-UP OF PCS
OPERATIONS; AND UNANTICIPATED CHANGES IN GROWTH IN CELLULAR CUSTOMERS,
PENETRATION RATES, CHURN RATES AND THE MIX OF PRODUCTS AND SERVICES OFFERED IN
THE COMPANY'S MARKETS. SEE "RISK FACTORS." READERS SHOULD EVALUATE ANY
STATEMENTS IN LIGHT OF THESE IMPORTANT FACTORS.
QUESTIONS
Questions concerning the Tracking Stock Proposal to be acted upon at the
Special Meeting should be directed to the Company's Information Agent, MacKenzie
Partners, Inc., at the telephone number and address indicated below. Additional
copies of this Proxy Statement/Prospectus or the Proxy Card may be obtained from
the Information Agent or the Company's Investor Relations Department at its
principal office.
[LOGO]
156 FIFTH AVENUE
NEW YORK, NEW YORK 10010
(212) 929-5500 (CALL COLLECT)
OR
CALL TOLL-FREE (800) 322-2885
FAX: (212) 929-0308
-4-
<PAGE>
QUESTIONS AND ANSWERS
RELATING TO TRACKING STOCK PROPOSAL AND RELATED TRANSACTIONS
Q: WHY AM I RECEIVING THIS PROXY STATEMENT/PROSPECTUS?
A: The Board of Directors of Telephone and Data Systems, Inc., an Iowa
corporation (the "Company" or "TDS") is distributing this Proxy
Statement/Prospectus to shareholders of the Company in connection with a
proposal that would, among other things, create three new classes of common
stock intended to separately reflect the performance of the Company's
cellular telephone, landline telephone and personal communications service
businesses ("Tracking Stocks"), and change the state of incorporation of the
Company from Iowa to Delaware (the "Tracking Stock Proposal").
The Board of Directors is seeking your proxy to vote in favor of the
Tracking Stock Proposal at a special meeting of shareholders. At the special
meeting, you are also being asked to vote on two related proposals to amend
or adjust certain existing employee stock plans and agreements in connection
therewith as a result of the Tracking Stock Proposal and to approve a new
plan which would permit stock awards to be made with respect to shares of
Tracking Stock.
Q: WHEN AND WHERE WILL THE SPECIAL MEETING BE HELD?
A: The special meeting will be held on , 1998, at 10:00 a.m.
Chicago time, at Harris Trust and Savings Bank, 111 West Monroe Street, 8th
Floor, Chicago, Illinois, in the Auditorium.
Q: WHAT DO I NEED TO DO NOW?
A: Just mail in your signed proxy card in the enclosed return envelope as soon
as possible, so that your shares may be represented at the special meeting.
Q: WHAT DOES THE BOARD OF DIRECTORS RECOMMEND?
A: The Board of Directors has unanimously approved each proposal, believes that
the adoption of each proposal is in the best interests of the Company and
its shareholders and unanimously recommends that you vote "FOR" the Tracking
Stock Proposal and the related proposals.
Q: WHAT VOTE IS REQUIRED TO APPROVE THE TRACKING STOCK PROPOSAL AND THE RELATED
PROPOSALS?
A: The approval of the Tracking Stock Proposal requires the affirmative vote of
the holders of a majority of the outstanding voting power of each of the
following voting groups, each voting separately as a class:
(i) Common Shares, Series A Common Shares and Preferred Shares;
(ii) Series A Common Shares;
(iii) Common Shares;
(iv) Preferred Shares issued before October 31, 1981; and
(v) Preferred Shares issued after October 31, 1981.
Although the Voting Trust which controls TDS has the voting power to cause
the affirmative vote of each of (i) and (ii) above to be assured, the TDS
Voting Trust holds no Common Shares or Preferred Shares. Accordingly, the
Tracking Stock Proposal will not be approved unless it is also approved by
the affirmative vote of the holders of a majority of each of the voting
groups identified in (iii), (iv) and (v) above. Although the TDS Voting
Trust has the voting power to approve the two related proposals, such
proposals will not be implemented if the Tracking Stock Proposal is not
approved.
-5-
<PAGE>
Q: WILL THE TRACKING STOCK PROPOSAL RESULT IN A CHANGE IN CONTROL OF TDS?
A: There will be no change in control of TDS if the Tracking Stock Proposal is
approved. The TDS Voting Trust currently controls, and after the proposed
transactions will continue to control, the election of a majority of the
directors of TDS and all other matters submitted to a vote of shareholders
of TDS, except for matters that require a class vote.
Q: WHAT WILL HAPPEN IF THE TRACKING STOCK PROPOSAL IS APPROVED?
A: If the Tracking Stock Proposal is approved, TDS will be reincorporated as a
Delaware corporation through a merger (the "Merger") of the Company into a
wholly-owned Delaware subsidiary ("TDS Delaware"). The Merger is being
effected simply for the purpose of changing the state of incorporation of
TDS from Iowa to Delaware and will not result in any change in the name,
management, businesses, operations, strategies, assets or liabilities of
TDS.
Q: WHAT IS THE PURPOSE OF REINCORPORATING INTO DELAWARE?
A: It will allow the Company to benefit from Delaware's well-developed
corporate laws, which are periodically updated and revised to meet changing
business needs. Delaware courts have developed considerable expertise in
dealing with corporate issues and a substantial body of case law has been
established construing Delaware law and establishing public policies with
respect to Delaware corporations. As a consequence, a greater measure of
predictability is possible in Delaware with respect to corporate legal
affairs than is available in other states. In addition, the Company believes
that Delaware law will offer clearer guidance with respect to legal issues
that may arise as a result of the existence of separate classes of Tracking
Stock.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES?
A: No. It will not be necessary for shareholders to exchange their existing
stock certificates representing shares of TDS Iowa for stock certificates
representing shares of TDS Delaware. Shareholders should retain all
certificates which represent shares of the Company since such certificates
will continue to represent shares of the same class or series of TDS
Delaware following the Merger.
Q: WHAT IS A TRACKING STOCK?
A: Tracking stock represents shares of common stock of a parent corporation, in
this case TDS, which are intended to "track" the performance of a group of
assets or a subsidiary. The Restated Certificate of Incorporation of TDS
Delaware would, among other things, authorize three new classes of tracking
stock, to be designated as United States Cellular Group Common Shares (the
"Cellular Group Shares"), TDS Telecommunications Group Common Shares (the
"Telecom Group Shares") and Aerial Communications Group Common Shares (the
"Aerial Group Shares").
- The Cellular Group Shares, when issued, are intended to reflect the
separate performance of the United States Cellular Group (the "Cellular
Group"), which consists of the Company's interest in United States
Cellular Corporation, currently an 81%-owned subsidiary of the Company
operating and investing in cellular telephone companies and properties
("U.S. Cellular").
- The Telecom Group Shares, when issued, are intended to reflect the
separate performance of the TDS Telecommunications Group (the "Telecom
Group"), which consists of the Company's interest in TDS
Telecommunications Corporation, a wholly-owned subsidiary of the Company
operating landline telephone companies ("TDS Telecom"), and includes the
allocation of certain corporate debt.
- The Aerial Group Shares, when issued, are intended to reflect the separate
performance of the Aerial Communications Group (the "Aerial Group"), which
consists of the Company's interest in Aerial Communications, Inc.,
currently an 83%-owned subsidiary of the Company providing broadband
personal communications services ("Aerial").
Q: WHAT ARE THE COMPANY'S PLANS AFTER THE MERGER?
A: If the Tracking Stock Proposal is approved and the Merger takes place, the
Company intends to:
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<PAGE>
- offer and sell Telecom Group Shares in a public offering for cash, subject
to prevailing market and other conditions (the "Telecom Public Offering"),
and allocate the net proceeds thereof to the Telecom Group;
- offer and issue Cellular Group Shares in exchange for all of the Common
Shares of U.S. Cellular which are not owned by the Company, subject to
approval by a special committee of the board of directors, the full board
of directors and the shareholders of U.S. Cellular, pursuant to a merger
between a subsidiary of the Company and U.S. Cellular (the "U.S. Cellular
Merger");
- offer and issue Aerial Group Shares in exchange for all of the Common
Shares of Aerial which are not owned by the Company, subject to approval
by a special committee of the board of directors, the full board of
directors and the shareholders of Aerial, pursuant to a merger between a
subsidiary of the Company and Aerial (the "Aerial Merger"); and
- distribute one Cellular Group Share, two-thirds of a Telecom Group Share
and two-thirds of an Aerial Group Share in the form of a stock dividend
with respect to each outstanding Series A Common Share and Common Share of
the Company (the "Distribution").
Q: WHEN WILL ALL OF THIS TAKE PLACE?
A: If the Tracking Stock Proposal is approved, the Merger to reincorporate TDS
into Iowa is expected to take place shortly after the special meeting. The
Telecom Public Offering is expected to occur shortly after that, subject to
favorable market conditions. The Company hopes that the U.S. Cellular Merger
and the Aerial Merger can be completed by June 1998, but the timing of these
transactions depends on negotiations with independent special committees of
U.S. Cellular and Aerial. If all of these events occur as planned, the
Distribution would take place in July or as soon as practicable thereafter,
following the completion of the Telecom Public Offering, the U.S. Cellular
Merger and the Aerial Merger. However, the Board of Directors could choose
to make the Distribution or any part thereof at any time, or not to make the
Distribution, depending on the circumstances at the time.
Q: WHAT DO I NEED TO DO TO RECEIVE MY CERTIFICATES FOR THE TRACKING STOCKS?
A: You do not need to do anything to receive your certificates for the Tracking
Stocks. If all of the transactions take place as planned, certificates
representing whole shares of Tracking Stock (and cash in lieu of fractional
shares) will be mailed to all shareholders in July 1998 or later.
Q: WHAT ARE THE TAX CONSEQUENCES TO ME?
A: The Merger and the Distribution are intended to be tax-free to
non-dissenting shareholders (except with respect to any cash received in
lieu of fractional shares).
Q: WHAT WILL MY SHARES REPRESENT AFTER THESE TRANSACTIONS?
A: Upon the completion of the Telecom Public Offering, the U.S. Cellular
Merger, the Aerial Merger, and the Distribution, the outstanding shares of
Tracking Stock would represent in the aggregate an approximately 80%
interest in the related Tracking Group. Approximately 20% of the common
equity value of TDS attributable to each Tracking Group would initially be
retained (the "Retained Interest") in a residual group (the "TDS Group"),
along with all other interests held by the Company. The value of the common
equity of TDS in the TDS Group would be represented by the outstanding
Series A Common Shares and Common Shares of TDS Delaware.
Q: WHAT WILL MY COMMON SHARES REPRESENT IF EVERYTHING TAKES PLACE AS PLANNED?
A: The Common Shares and the Series A Common Shares would represent an equity
interest in the TDS Group. Upon the completion of all the transactions as
planned, the TDS Group would have an approximately 20% Retained Interest in
each of the Tracking Groups. The TDS Group would also include all of the
Company's interest in businesses that are not attributed to a Tracking
Group. The TDS Group would provide management, accounting, financial, cash
management and other services to the Tracking Groups. The TDS Group would
also be credited with the benefit of any tax losses which any Tracking Group
cannot utilize on a stand-alone basis, but which can be utilized to reduce
the consolidated tax liability of TDS.
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<PAGE>
Q: WILL THE COMMON SHARES AND THE TRACKING STOCK BE LISTED ON THE AMERICAN
STOCK EXCHANGE?
A: The Common Shares of TDS Delaware will be substituted for the existing
Common Shares of the Company and will continue to be listed on the American
Stock Exchange under the symbol "TDS." The Company is filing an application
to list each of the Cellular Group Shares, the Telecom Group Shares and the
Aerial Group Shares on the American Stock Exchange.
Q: WHAT VOTING RIGHTS WILL I HAVE?
A: Immediately after the Distribution, the holders of Preferred Shares issued
before October 31, 1981 and Common Shares would have the same voting power
which they currently have and would also become entitled to elect one more
director in addition to the directors which they currently elect. In the
election of directors, the holders of the Tracking Stocks would vote
together with the holders of Preferred Shares issued before October 31, 1981
and Common Shares (the "Public Holders") in the election of 25% of the
directors (rounded up) plus one additional director (or four directors based
on a Board of twelve directors). The Preferred Shares issued before October
31, 1981 and Common Shares would have one vote per share in the election of
such directors and with respect to all other matters, other than the
election of directors elected by the Series A Holders discussed below. The
Tracking Stocks would have no votes except in the election of such directors
and as otherwise required by law. In the election of such directors, each
class of Tracking Stock would initially have one vote per share. Thereafter,
the number of votes of each class of Tracking Stock would vary based on the
aggregate market value of such class as compared to the aggregate market
value of all shares of stock held by the Public Holders, calculated over a
twenty-trading day period ending ten days prior to the record date for each
annual meeting of shareholders. It is anticipated that the Cellular Group
Shares would have more than one vote per share and that the Telecom Group
Shares and Aerial Group Shares would have approximately one vote per share
based on anticipated market values, although this may change over time.
Under the Tracking Stock Proposal, holders of Preferred Shares issued after
October 31, 1981 and Series A Common Shares (the "Series A Holders") would
vote in the election of one less director than at present. Based on twelve
directors, the Series A Holders would vote in the election of eight
directors, as compared to nine directors currently. The Preferred Shares
issued after October 31, 1981 would continue to have one vote and Series A
Common Shares would continue to have ten votes per share in the election of
such directors, as well as with respect to all other matters (other than the
election of the directors elected by the Public Holders described in the
preceding paragraph).
Q: WHAT HAPPENS TO MY FUTURE DIVIDENDS?
A: Immediately after the Distribution, a current holder of Common Shares and
Series A Common Shares would continue to receive an aggregate dividend which
is equal to the aggregate dividend which such shareholder currently receives
from the Company, assuming the shareholder retains the Telecom Group Shares
received in the Distribution. Following the Distribution, the Board
currently intends to establish an annual dividend on the Common Shares and
Series A Common Shares in an amount equal to $0.10 per share and an annual
dividend on the Telecom Group Shares in an amount equal to $0.48 per share.
Based on the expected distribution ratio of two-thirds of a Telecom Group
Share for each existing Common Share and Series A Common Share, the dividend
rate on the Telecom Group Shares would equate to a per share annual dividend
of $0.32 per existing Common Share and Series A Common Share. The total of
this rate and the rate of $0.10 per Common and Series A Common Share is
equal to $0.42 per share per annum, which is the same as the current annual
dividend rate on the existing Common Shares and Series A Common Shares.
The Board currently intends to retain future earnings, if any, for the
development of the businesses of the Cellular Group and Aerial Group and
does not anticipate paying dividends on the Cellular Group Shares or the
Aerial Group Shares in the foreseeable future.
Future dividends on all shares of common stock will be payable only if
declared by the Board out of the lesser of (i) all funds of the Company
legally available therefor and (ii) the available dividend amount with
respect to the relevant Group, as described in the proxy
statement/prospectus.
Q: WHAT DO I DO IF I HAVE ADDITIONAL QUESTIONS?
A: If you have any questions prior to the special meeting, please call the
Company's Information Agent, McKenzie Partners, Inc., at 1-800-322-2885.
-8-
<PAGE>
CURRENT COMMON STOCK CAPITAL STRUCTURE OF THE COMPANY
[GRAPHIC]
PROPOSED COMMON STOCK CAPITAL STRUCTURE OF THE COMPANY
[GRAPHIC]
-8-
<PAGE>
PROXY STATEMENT/PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
TRACKING STOCK PROPOSAL FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL
TERMS OF THE TRACKING STOCK PROPOSAL, YOU SHOULD READ CAREFULLY THIS ENTIRE
DOCUMENT AND THE DOCUMENTS WHICH ARE INCORPORATED BY REFERENCE IN THIS DOCUMENT.
SEE "WHERE YOU CAN FIND MORE INFORMATION." FOR DEFINITIONS OF CERTAIN DEFINED
TERMS USED IN THIS SUMMARY, SEE "PROPOSAL 1--TRACKING STOCK PROPOSAL--CERTAIN
DEFINITIONS" AND EXHIBIT G--INDEX OF CERTAIN DEFINED TERMS.
THE SPECIAL MEETING
<TABLE>
<S> <C>
Date, Time and Place of Meeting.................... A Special Meeting of Shareholders will be held
on , , 1998 at 10:00 a.m.,
Chicago time, at Harris Trust and Savings Bank,
111 West Monroe Street, 8th Floor, Chicago,
Illinois, in the Auditorium.
Proposals to be Considered at the Special The following proposals will be considered at
Meeting.......................................... the Special Meeting:
</TABLE>
PROPOSAL 1--A proposal to create three new classes of common stock which
are intended to separately reflect the performance of the Company's
cellular telephone, landline telephone and personal communications
businesses, and to change the state of incorporation of the Company from
Iowa to Delaware (the "Tracking Stock Proposal").
PROPOSAL 2--A proposal to approve certain amendments and adjustments to
certain employee stock plans to reflect the effects of Proposal 1.
PROPOSAL 3--A proposal to approve the Company's 1998 Long-Term Incentive
Plan to permit the award of options and stock awards with respect to
shares of Tracking Stock as well as Common Shares.
<TABLE>
<S> <C>
Vote Required...................................... The following votes are required with respect to
each of the Proposals:
</TABLE>
PROPOSAL 1--The approval of the Tracking Stock Proposal requires the
affirmative vote of the holders of a majority of the outstanding voting
power of each of the following voting groups, each voting separately as
a class: (i) Common Shares, Series A Common Shares and Preferred Shares;
(ii) Series A Common Shares; (iii) Common Shares; (iv) Preferred Shares
issued before October 31, 1981; and (v) Preferred Shares issued after
October 31, 1981.
Although the TDS Voting Trust has the voting power to cause the
affirmative vote of each of (i) and (ii) above to be assured, the TDS
Voting Trust holds no Common Shares or Preferred Shares. Accordingly,
such proposal will not be approved unless it is also approved by the
affirmative vote of the holders of a majority of each of the voting
groups identified in (iii), (iv) and (v) above.
PROPOSAL 2--This proposal requires the affirmative vote of the holders
of a majority of the voting power of the Company. Since the TDS Voting
Trust holds a majority of the voting power of the Company, the approval
of this proposal is assured. However, this proposal will not be
implemented if the Tracking Stock Proposal is not approved.
PROPOSAL 3--This proposal requires the affirmative vote of the holders
of a majority of the voting power of the Company. Since the TDS Voting
Trust holds a majority of the voting power of the Company, the approval
of this proposal is assured. However, this proposal will not be
implemented if the Tracking Stock Proposal is not approved.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED EACH PROPOSAL, BELIEVES THAT
THE ADOPTION OF EACH PROPOSAL IS IN THE BEST INTERESTS OF THE COMPANY AND ITS
SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT ALL SHAREHOLDERS VOTE "FOR" THE
TRACKING STOCK PROPOSAL AND THE RELATED PROPOSALS.
-9-
<PAGE>
THE MERGER
If the Tracking Stock Proposal is approved, the Company will be merged with
and into TDS Delaware, with TDS Delaware as the surviving company. In the
Merger, the Preferred Shares will be converted into an equivalent number of TDS
Delaware Preferred Shares of the same series, and each Common Share and Series A
Common Share will be converted into one Common Share and one Series A Common
Share, respectively, of TDS Delaware. It will not be necessary for you to
exchange your stock certificates since such certificates will continue to
represent TDS Delaware shares of the same class or series.
THE TRANSACTIONS
Subject to the approval of the Tracking Stock Proposal and the effectiveness
of the Merger, the Board intends to take the following action:
<TABLE>
<S> <C>
Telecom Public Offering........... Offer and sell between 10,000,000 and 17,000,000 Telecom Group
Shares in a public offering for cash, subject to prevailing
market and other conditions, and to allocate the net proceeds
thereof to the Telecom Group.
U.S. Cellular Merger.............. Offer and issue 1.14613 Cellular Group Shares in exchange for
each Common Share of U.S. Cellular which is not owned by the
Company (based on shares outstanding as of November 30, 1997),
pursuant to a merger between a subsidiary of the Company and U.S.
Cellular. This transaction is further subject to negotiation of
the other terms of a merger agreement, approval by a special
committee of the board of directors, the full board of directors
and the shareholders of U.S. Cellular and certain other
conditions.
Aerial Merger..................... Offer and issue .91485 Aerial Group Shares in exchange for each
Common Share of Aerial which is not owned by the Company (based
on shares outstanding as of November 30, 1997), pursuant to a
merger between a subsidiary of the Company and Aerial. This
transaction is subject to negotiation of the other terms of a
merger agreement, approval by a special committee of the board of
directors, the full board of directors and the shareholders of
Aerial and certain other conditions.
Distribution...................... Distribute Cellular Group Shares, Telecom Group Shares and Aerial
Group Shares in the form of a stock dividend on a pro rata basis
to holders of Series A Common Shares and Common Shares. It is
currently contemplated that the Distribution would take place
after the completion of the Telecom Public Offering, the U.S.
Cellular Merger and the Aerial Merger. However, the Board
reserves the right not to effect all or any part of the
Distribution, or to effect all or any part of the Distribution,
regardless of whether or not the Telecom Public Offering, the
U.S. Cellular Merger or the Aerial Merger have been completed.
The intended distribution ratio is one Cellular Group Share,
two-thirds of a Telecom Group Share and two-thirds of an Aerial
Group Share for each of the outstanding Common Shares and Series
A Common Shares.
</TABLE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Company has been advised by counsel that no gain or loss will be
recognized by the non-dissenting shareholders of the Company in connection with
the Merger or the Distribution (except with respect to any cash received in lieu
of fractional shares in the Distribution); however, there are no court decisions
bearing directly on the Tracking Stock Proposal and the Internal Revenue Service
has announced that it will not issue advance rulings on the federal income tax
consequences of transactions similar to the Tracking Stock Proposal. See
"Proposal 1-- Tracking Stock Proposal--Certain Federal Income Tax
Considerations."
-10-
<PAGE>
REASONS FOR TRACKING STOCK PROPOSAL
The Board believes that the division of the Company's interests in its
principal businesses into the Tracking Groups would enable the Company to
benefit in a variety of ways, some of which are described below.
GREATER MARKET RECOGNITION. The Tracking Stock Proposal is intended to
result in greater market
recognition of the value (individually and collectively) of the Company and
the Company's three principal business groups, thereby enhancing shareholder
value over the long term. Additionally, a public market for each of TDS's
three principal business groups should make it easier for the capital
markets to understand and value the Company's businesses and assets.
INCREASED LIQUIDITY FOR U.S. CELLULAR AND AERIAL. The Board believes
that the Distribution would serve to increase the liquidity of the
publicly-traded equity related to U.S. Cellular and Aerial. The Financial
Advisors have advised the Company that this increased liquidity may increase
the valuation of the Cellular Group Shares and Aerial Group Shares as
compared to the recent public market values of the Common Shares of U.S.
Cellular and Aerial.
FINANCING FLEXIBILITY. The Tracking Stock Proposal should provide the
Company with greater flexibility in raising capital and making acquisitions,
with equity securities specifically related to the Tracking Groups. The
Tracking Stocks may also be used, rather than Common Shares, for TDS's
employee stock purchase plans, stock option plans and other employee benefit
plans.
SHAREHOLDER FLEXIBILITY. The issuance and sale of the Tracking Stocks
would also provide shareholders with the opportunity to continue to invest
in all of the TDS businesses through the TDS Group or any one or more of the
Tracking Groups individually, depending upon their investment objectives.
CONSOLIDATED ENTERPRISE. The Tracking Stock Proposal will retain for
the Company the advantages of doing business as a single company, including
synergies that may result from the eventual convergence of the
telecommunications and wireless industries and strategic, financial,
operational benefits, economies of scale and debt capacity that would not be
available if the Groups were separate legal entities. It would also permit
the Company to retain the advantages of tax consolidation.
ACCEPTANCE OF TRACKING STOCK CAPITAL STRUCTURES. Several large,
well-known companies have adopted capital structures involving tracking
stocks and the market performance of many of such securities has been
favorable and comparable to industry peers that are separate companies.
TAX FACTORS. Implementation of the Tracking Stock Proposal should not
be taxable to the Company or non-dissenting shareholders (except for cash in
lieu of fractional shares).
FUTURE ALTERNATIVES. The Tracking Stock Proposal will not preclude
other alternatives to increase
shareholder value.
EMPLOYEE COMPENSATION. The ability to issue shares of one or more of
the Tracking Stocks would increase TDS's flexibility to tailor stock
incentives to employees by creating stocks that are tied directly to the
stock price performance of the Group in which they are employed.
ACCEPTANCE OF TRACKING STOCK CAPITAL STRUCTURES. The use of tracking
stocks by other companies, including several large, well-known companies,
has increased in the last several years and tracking stocks are now
generally well-followed by financial analysts and accepted by investors.
BENEFITS OF DELAWARE REINCORPORATION. Delaware is generally recognized
as having a modern, flexible and nationally recognized corporate statute and
a well-developed body of case law that provides predictability and certainty
in business planning. Cases involving corporate law issues are decided in a
separate Court of Chancery in Delaware, where judges have substantial
experience and precedent in making their decisions. Due to the importance of
corporate law in Delaware, the Delaware legislature puts a high priority on
corporate law matters and is at the forefront of keeping the Delaware
corporate statute current in the face of changing business practices and
legal developments. Due to such factors, reincorporating in Delaware may
reduce the impediments and increase the opportunities for structuring
securities and financial transactions, which would facilitate acquisitions,
raising capital and other financing transactions. In addition, the Company
believes that Delaware will offer clearer guidance with respect to legal
issues that may arise as a result of the existence of separate classes of
Tracking Stock.
For additional Reasons for the Tracking Stock Proposal, see "Proposal
1--Tracking Stock Proposal-- Reasons."
-11-
<PAGE>
RISK FACTORS
When evaluating the Tracking Stock Proposal, shareholders should be aware of
certain risk factors relating thereto. Such risk factors include the following:
LIMITATIONS AND QUALIFICATIONS IN FINANCIAL ADVISOR OPINIONS. The
Company has received opinions from the Financial Advisors with respect to
certain aspects of the transactions described in the Proxy Statement/
Prospectus. Such opinions do not address all aspects of such transactions
and are subject to material qualifications, limitations, assumptions and
other factors. Shareholders should carefully consider and evaluate the
opinions of the Financial Advisors in view of these assumptions,
limitations, qualifications and other factors. See "Proposal 1-- Tracking
Stock Proposal--Opinions of Financial Advisors." See also Exhibits C-1 and
C-2 for copies of the full text of such opinions.
ABILITY OF BOARD TO UNILATERALLY CONVERT TRACKING STOCK. The Company
could, at any time, in the sole discretion of its Board, without further
shareholder approval, determine to convert each outstanding share of a class
of Tracking Stock for shares of another class of Tracking Stock or Special
Common Shares at a predetermined premium to relative market values. The
determination by the Board to redeem shares of a class of Tracking Stock for
shares of another class of Tracking Stock or Special Common Shares could be
made at a time when any class of the Company's stock may be considered to be
overvalued or undervalued, or at a time when there is no public market for
any class of stock. In addition, any such redemption would preclude holders
of the redeemed Tracking Stock from retaining their investment in a security
that is intended to reflect separately the performance of the related
Tracking Group. See "Proposal 1--Tracking Stock Proposal-- Description of
Terms of Tracking Stock--Conversion at Option of Company."
CONTROL BY TDS VOTING TRUST. The Tracking Stock Proposal will not alter
the TDS Voting Trust's present control of TDS. As of November 30, 1997, the
TDS Voting Trust held 6,334,473 Series A Common Shares, representing over
50% of the voting power of TDS with respect to matters other than the
election of directors. Based on such shares, the TDS Voting Trust would
receive 6,334,473 Cellular Group Shares, 4,222,982 Telecom Group Shares and
4,222,982 Aerial Group Shares in connection with the Distribution. Under the
current terms of the TDS Voting Trust, such shares of Tracking Stock will be
distributed by the trustees to the beneficiaries. Following the
Distribution, and after the distribution of such shares by the TDS Voting
Trust to the beneficiaries thereof, the TDS Voting Trust will continue to
hold such 6,334,473 Series A Common Shares, representing over 50% of the
aggregate voting power of the Company with respect to all matters other than
the election of directors, and will continue to be able to elect a majority
of the directors.
ANTITAKEOVER CONSIDERATIONS. The control by the TDS Voting Trust is
likely to deter any potential unsolicited or hostile takeover attempts or
other efforts to obtain control of TDS and may make it more difficult for
shareholders to sell shares of TDS at higher than market prices.
Implementation of the Tracking Stock Proposal will allow TDS to issue
Cellular Group Shares, Telecom Group Shares and Aerial Group Shares, as well
as Special Common Shares, which would not vote except in the election of
certain directors and as required by law. This may preserve the ability of
the TDS Voting Trust to continue to exercise control over a majority of
TDS's voting power and is likely to limit or deter a merger proposal or
tender offer that is not acceptable to the TDS Voting Trust. The Restated
Certificate and the Company's Bylaws also contain provisions which may serve
to discourage or make more difficult a change in control of the Company
without the support of the Board or without meeting various other
conditions.
In addition to the foregoing, other risk factors include: (i) the risks
associated with an investment in a single company and all of the Company's
businesses, assets and liabilities; (ii) the potential diverging interests of
the classes of common stock; (iii) the lack of legal precedent with respect to
the fiduciary duties of the board of directors of a company with a capital
structure which includes tracking stocks, (iv) limited separate shareholder
rights with respect to the classes of common stock; (v) the ability of the Board
to change certain management and accounting policies without shareholder
approval; (vi) the ability of the Board to transfer funds between the Groups;
(vii) the Company's ability to issue authorized but unissued shares of stock
without shareholder approval; and (viii) the potential effects of a possible
Disposition of assets attributed to a Group; and (x) the lack of assurances as
to the market price of the classes of stock following the Merger. See "Risk
Factors."
-12-
<PAGE>
SUMMARY COMPARISON OF THE CURRENT CAPITAL STRUCTURE WITH THE PROPOSED TRACKING
STOCK PROPOSAL
THE FOLLOWING SUMMARIZES THE TRACKING STOCK PROPOSAL AS COMPARED TO THE
CURRENT CAPITAL STRUCTURE OF THE COMPANY.
COMMON EQUITY INTERESTS IN BUSINESSES:
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Common Shares and Series A Currently, the Common Shares and the Series A The Common Shares and Series A Common Shares,
Common Shares (and Special Common Shares represent 100% of the common together with any issued Special Common
Common Shares, if authorized equity of the Company Shares, would represent interests in the
and issued) Company's common equity in the TDS Group. The
TDS Group would consist of all businesses and
assets of the Company other than the Cellular
Group, the Telecom Group and the Aerial
Group. In addition, upon completion of all of
the Transactions as contemplated, the TDS
Group would have approximately a 20% Retained
Interest in each of the Cellular Group, the
Telecom Group and the Aerial Group.
Cellular Group Shares N/A The Cellular Group Shares, when issued, are
intended to reflect the separate performance
of the Cellular Group, which consists of the
Company's interest in U.S. Cellular,
currently an 81%-owned subsidiary of the
Company which operates and invests in
cellular telephone companies and properties.
Upon the completion of the U.S. Cellular
Merger, U.S. Cellular would become a
wholly-owned subsidiary of the Company.
Telecom Group Shares N/A The Telecom Group Shares, when issued, are
intended to reflect the separate performance
of the Telecom Group, which consists of the
Company's interest in TDS Telecom, a
wholly-owned subsidiary of the Company which
operates landline telephone companies. The
Telecom Group also includes the allocation of
certain TDS debt.
Aerial Group Shares N/A The Aerial Group Shares, when issued, are
intended to reflect the separate performance
of the Aerial Group, which consists of the
Company's interest in Aerial Communications,
Inc., currently an 83%-owned subsidiary of
the Company which is developing broadband
personal communications services. Upon the
completion of the Aerial Merger, Aerial would
become a wholly-owned subsidiary of the
Company.
</TABLE>
-13-
<PAGE>
AUTHORIZED SHARES:
<TABLE>
<CAPTION>
CURRENT CAPITAL TRACKING STOCK
STRUCTURE PROPOSAL
----------------------- ----------------------
<S> <C> <C>
Preferred Shares 5,000,000 326,664(1)
Undesignated Shares -- 4,673,336(1)
------------ ------------
SUBTOTAL 5,000,000 5,000,000
------------ ------------
Common Shares 100,000,000 100,000,000
Series A Common Shares 25,000,000 25,000,000
Special Common Shares -- 20,000,000
Cellular Group Shares -- 140,000,000
Telecom Group Shares -- 90,000,000
Aerial Group Shares -- 95,000,000
------------ ------------
SUBTOTAL 125,000,000 470,000,000
------------ ------------
TOTAL AUTHORIZED SHARES 130,000,000 475,000,000
------------ ------------
------------ ------------
</TABLE>
- ------------
(1) Based on shares issued and issuable at November 30, 1997; the actual numbers
will be based on the number of outstanding Preferred Shares prior to the
Merger. In the Merger, the issued Preferred Shares of TDS Iowa will be
converted into Preferred Shares of TDS Delaware with substantially the same
rights, limitations and preferences, except as described herein. The
authorized but unissued Preferred Shares of TDS Iowa will be reclassified as
Undesignated Shares of TDS Delaware. As so reclassified, the Undesignated
Shares will authorize the Board to designate one or more series of common as
well as preferred stock. Such reclassification will permit the Board to
designate and issue new series of Tracking Stock, as well as preferred
stock. See "Proposal 1-- Tracking Stock Proposal--Description of Restated
Certificate of Incorporation of TDS Delaware."
PRO FORMA SHARES (based on shares outstanding as of November 30, 1997, assuming
shareholder approval of the Tracking Stock Proposal and assuming the Merger, the
Distribution and the other Transactions):
<TABLE>
<CAPTION>
CURRENT CAPITAL TRACKING STOCK
STRUCTURE PROPOSAL PERCENT
----------------------- ---------------------- -----------
<S> <C> <C> <C>
Preferred Shares
Issued 296,664 296,664
Issuable 30,000 30,000
----------- -----------
Total 326,664 326,664
----------- -----------
----------- -----------
Common Shares 53,878,129(2) 53,878,129
Series A Common Shares 6,933,233 6,933,233
----------- -----------
Total Common and Series A Common Shares 60,811,362 60,811,362
----------- -----------
----------- -----------
Cellular Group Shares(3)
Outstanding (75%) -- 60,811,362 60.8%
Retained Interest (25%) -- 20,270,454 20.3%
----------- -----
Subtotal -- 81,081,816 81.1%
U.S. Cellular Merger(4) -- 18,897,187 18.9%
----------- -----
Total -- 99,979,003 100.0%
----------- -----
----------- -----
Telecom Group Shares(5)
Outstanding (75%) -- 40,540,908 60.0%
Retained Interest (25%) -- 13,513,636 20.0%
----------- -----
Subtotal -- 54,054,544 80.0%
Telecom Public Offering (6) -- 13,500,000 20.0%
----------- -----
Total -- 67,554,544 100.0%
----------- -----
----------- -----
Aerial Group Shares (7)
Outstanding (75%) -- 40,540,908 61.9%
Retained Interest (25%) -- 13,513,636 20.6%
----------- -----
Subtotal -- 54,054,544 82.5%
Aerial Merger (8) -- 11,453,996 17.5%
----------- -----
Total -- 65,508,540 100.0%
----------- -----
----------- -----
</TABLE>
- ------------
(2) Includes 484,012 Common Shares held by a subsidiary of TDS.
(3) The distribution ratio for the Cellular Group Shares is expected to be one
Cellular Group Share for each outstanding Common Share and Series A Common
Share.
-14-
<PAGE>
(4) This amount is the product of the number of U.S. Cellular Common Shares
outstanding on November 30, 1997 which are not held by TDS (16,487,822) and
the exchange ratio offered by TDS (1.14613). The exchange ratio is equal to
the quotient obtained by dividing the total number of Cellular Group Shares
which would be deemed to be outstanding or held by the TDS Group pursuant to
the Retained Interest immediately after the completion of the Merger and the
Transactions as contemplated (99,979,003) by the total number of outstanding
shares of U.S. Cellular as of November 30, 1997 (87,231,658).
(5) The distribution ratio for the Telecom Shares is expected to be two-thirds
of a Telecom Group Share for each outstanding Common Share and Series A
Common Share.
(6) The Company intends to offer between 10,000,000 and 17,000,000 Telecom Group
Shares. For purposes of this Proxy Statement/ Prospectus, the midpoint of
this amount is assumed for all purposes.
(7) The distribution ratio for the Aerial Group Shares is proposed to be
two-thirds of an Aerial Group Share for each outstanding Common Share and
Series A Common Share.
(8) This amount is the product of the number of Aerial Common Shares outstanding
on November 30, 1997 which are not held by TDS (12,520,081) and the exchange
ratio offered by TDS (.91485). The exchange ratio is equal to the quotient
obtained by dividing the total number of Aerial Group Shares which would be
deemed to be outstanding or held by the TDS Group pursuant to the Retained
Interest immediately after the completion of the Merger and the Transactions
as contemplated (65,508,540) by the total number of outstanding shares of
Aerial as of November 30, 1997 (71,606,081).
Since the Telecom Public Offering, the U.S. Cellular Merger and the Aerial
Merger are expected to precede the Distribution, after such other Transactions
but before the Distribution, the initial Retained Interest of the TDS Group in
each Tracking Group would be approximately 80% for the Telecom Group, 81% for
the Cellular Group and 83% for the Aerial Group. Of the total equity of each
Tracking Group, not including shares issuable pursuant to Convertible
Securities, approximately 15-25% of the Telecom Group would be represented by
the Telecom Group Shares issued in the Telecom Public Offering, 19% of the
Cellular Group would be represented by the Cellular Group Shares issued in the
U.S. Cellular Merger, and 17% of the Aerial Group would be represented by the
Aerial Group Shares issued in the Aerial Merger.
VOTING FOR DIRECTORS:
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Preferred Shares issued before The holders of the Preferred Shares issued The holders of the Preferred Shares issued
October 31, 1981 and Common before October 31, 1981 and Common Shares before October 31, 1981 and Common Shares
Shares vote as a group in the election of 25% of the would vote as a group together with the
directors (I.E., three directors based on a holders of shares of Tracking Stock and any
Board of twelve directors). In such vote, issued Special Common Shares in the election
each Preferred Share issued before October of 25% of the directors plus one additional
31, 1981 and Common Share is entitled to one director (I.E., four directors based on a
vote in the election of directors. Board of twelve directors). In such vote,
each Preferred Share issued before October
31, 1981 and Common Share will continue to be
entitled to one vote in the election of
directors.
Preferred Shares issued after The holders of the Preferred Shares issued The holders of Preferred Shares issued after
October 31, 1981 and Series A after October 31, 1981 and Series A Common October 31, 1981 and Series A Common Shares
Common Shares Shares vote as a group in the election of 75% would vote as a group in the election 75% of
of the directors (I.E., nine directors based the directors less one director (I.E., eight
on a Board of twelve directors). In such directors based on a Board of twelve
vote, each Series A Common Share is entitled directors). In such vote, each Series A
to ten votes and each Preferred Share issued Common Share will continue to be entitled to
after October 31, 1981 is entitled to one ten votes and each Preferred Share issued
vote. after October 31, 1981 will continue to be
entitled to one vote.
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Tracking Stock (and Special N/A The holders of Tracking Stock (and any issued
Common Shares, if issued) Special Common Shares) would vote as a group
together with the holders of Preferred Shares
issued before October 31, 1981 and Common
Shares (the "Public Holders") in the election
of 25% of the directors plus one additional
director (I.E., four directors based on a
Board of twelve directors). In such vote,
holders of any issued Special Common Shares
would have one vote per share. Holders of
Tracking Stock would initially have one vote
per share. Thereafter, the number of votes
which shares of each class of Tracking Stock
would have in such vote would vary based on
the average Market Capitalization of such
class compared to the average Market
Capitalization of all shares held by the
Public Holders, calculated over the
twenty-Trading Day period ending ten Trading
Days prior to the record date for each annual
meeting of shareholders. It is anticipated
that the Cellular Group Shares would have
more than one vote per share, and that the
Telecom Group Shares and Aerial Group Shares
would have approximately one vote per share
based on anticipated market values, although
this may change over time.
</TABLE>
VOTING ON MATTERS OTHER THAN THE ELECTION OF DIRECTORS:
<TABLE>
<S> <C> <C>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
Preferred Shares As set forth in the designation. All issued Preferred Shares would have one
vote per share.
Common Shares The Common Shares have one vote per share. The Common Shares would continue to have one
vote per share.
Series A Common Shares The Series A Common Shares have ten votes per The Series A Common Shares would continue to
share. have ten votes per share.
Tracking Stock (and Special N/A The shares of Tracking Stock (and Special
Common Shares, if issued) Common Shares, if issued), would have no
vote, except in the election of certain
directors as discussed above and as required
by law.
</TABLE>
-16-
<PAGE>
PRO FORMA VOTING POWER ON MATTERS OTHER THAN THE ELECTION OF DIRECTORS (based on
shares outstanding as of November 30, 1997, assuming the Distribution):
<TABLE>
<CAPTION>
CURRENT CAPITAL
STRUCTURE TRACKING STOCK PROPOSAL
----------------------- -----------------------
<S> <C> <C>
Preferred Shares 0.2% 0.2%
Common Shares 43.6% 43.6%
Series A Common Shares 56.2%(6) 56.2%(6)
Tracking Stock (and Special N/A -0-
Common Shares, if issued)
</TABLE>
- ------------
(6) The TDS Voting Trust holds over 90% of the Series A Common Shares,
representing over 50% of the voting power of TDS on matters other than the
election of directors. The TDS Voting Trust would continue to control over
50% of the voting power of TDS with respect to matters other than the
election of directors if the Tracking Stock Proposal, the Merger and all of
the Transactions are implemented.
DIVIDENDS:
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Preferred Shares Preferred Shares have a senior preference to Issued Preferred Shares would continue to
all common stock. Dividends on Preferred have a senior preference to all common stock.
Shares are payable out of all assets of the Dividends on Preferred Shares are payable out
Company legally available for the payment of of all assets of the Company legally
dividends. available for the payment of dividends.
However, dividends paid on the issued
Preferred Shares will be notionally allocated
to the TDS Group.
Common Shares and Series A Common Shares are entitled to per share Common Shares would be entitled to the same
Common Shares (and Special dividends which are the same as or greater per share dividends as any issued Special
Common Shares, if authorized than the per share dividends on the Series A Common Shares and to per share dividends
and issued) Common Shares. Subject to the Preferred Share which are the same as or greater than the per
dividend preference, dividends on Common share dividends on the Series A Common
Shares and Series A Common Shares are payable Shares. Subject to the Preferred Share
out of all assets of the Company legally dividend preference, dividends on Common
available for the payment of dividends. Shares, Special Common Shares and Series A
Common Shares are payable out of the lesser
of (i) the assets of the Company legally
available for the payment of dividends and
(ii) the TDS Group's Available Dividend
Amount.
Tracking Stock N/A Subject to the Preferred Share dividend
preference, dividends on issued shares of a
class of Tracking Stock would be payable only
out of the lesser of (i) the assets of the
Company legally available for the payment of
dividends and (ii) such Tracking Group's
Available Dividend Amount. The Available
Dividend Amount for a Tracking Group is
intended to be similar to an amount equal to
the product of the Outstanding Interest
Fraction and the amount of assets that would
be available for the payment of dividends
under Delaware law if such Tracking Group
were a separate subsidiary.
</TABLE>
-17-
<PAGE>
DIVIDEND POLICY ON COMMON STOCK:
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Common Shares and Series A The Board of Directors currently pays an The Board initially intends to establish a
Common Shares (and Special annual dividend of $0.42 per Common Share and policy of declaring an annual dividend of
Common Shares, if authorized Series A Common Share. approximately $0.10 per Common Share and
and issued) Series A Common Share. Special Common Shares,
if issued, would be entitled to the same per
share dividend as the Common Shares.(7)
Cellular Group Shares N/A The Board currently does not intend to pay
dividends on the Cellular Group Shares.
Telecom Group Shares N/A The Board of Directors initially intends to
establish a policy of declaring an annual
dividend of approximately $0.48 per Telecom
Group Share.(7)
Aerial Group Shares N/A The Board currently does not intend to pay
dividends on the Aerial Group Shares.
</TABLE>
- ---------
(7) After giving effect to the proposed two-thirds of one share distribution
ratio for the Telecom Group Shares, the dividend of $0.48 per Telecom Group
Share is equivalent to approximately $0.32 per existing Common Share or
Series A Common Share (the "Telecom Equivalent Dividend Rate"). In addition,
the Board intends to establish an annual dividend rate on the Common Shares
and Series A Common Shares of $0.10 per share. The sum of this amount plus
the Telecom Equivalent Dividend Rate is $0.42 per share per annum, which is
the same as the current annual dividend on the existing Common Shares and
Series A Common Shares. The intent is that, immediately after the
Distribution, a current shareholder of the Company would continue to receive
an aggregate dividend which is at least equal to the aggregate dividend such
shareholder currently receives from the Company.
-18-
<PAGE>
SHARE DIVIDENDS ON COMMON STOCK:
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Common Shares and Series A May be distributed only as follows: (i) May be distributed only as follows: (i)
Common Shares (and Special Common Shares may be distributed to holders Common Shares may be distributed on an equal
Common Shares, if authorized of Common Shares and proportionately to per share basis to holders of Common Shares
and issued) holders of Series A Common Shares; (ii) and holders of Series A Common Shares, and
Series A Common Shares may be distributed to Special Common Shares may be distributed on
holders of Common Shares and proportionately an equal per share basis to holders of
to holders of Series A Common Shares; and Special Common Shares; (ii) Series A Common
(iii) Common Shares may be distributed to Shares may be distributed on an equal per
holders of Common Shares and Series A Common share basis to holders of Common Shares and
Shares may be distributed proportionately to holders of Series A Common Shares, and
holders of Series A Common Shares. Special Common Shares may be distributed on
an equal per share basis to holders of
Special Common Shares; (iii) Common Shares
may be distributed on an equal per share
basis to holders of Common Shares, Series A
Common Shares may be distributed on an equal
per share basis to holders of Series A Common
Shares and Special Common Shares may be
distributed on an equal per share basis to
holders of Special Common Shares; (iv)
Special Common Shares may be distributed on
an equal per share basis to the holders of
Common Shares, Series A Common Shares and any
issued Special Common Shares, and (v) shares
of any class of Tracking Stock may be
distributed on an equal per share basis to
the holders of Common Shares, Series A Common
Shares and Special Common Shares up to the
amount of the Retained Interest in such
shares of Tracking Stock. In addition, shares
of a new class or series of stock which
represents a subdivision or new business of
the TDS Group, or any assets attributed by
the Board to the TDS Group, could be
distributed to the holders of Series A Common
Shares, Common Shares and any issued Special
Common Shares on an equal per share basis.
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Tracking Stock N/A Holders of shares of a class of Tracking
Stock may receive shares of that same
Tracking Stock, as well as shares of any
other Tracking Stock up to the amount of the
Inter-Group Interest in such other Tracking
Stock. Holders of Tracking Stock may not
receive any TDS Group Shares since a Tracking
Group may not have an Inter-Group Interest in
the TDS Group. In addition, shares of a new
class or series of stock which represents a
subdivision or new business of a Tracking
Group, or any assets attributed by the Board
to such Tracking Group, could be distributed
to the holders of shares related to such
Tracking Group on an equal per share basis.
</TABLE>
DISTRIBUTION OF A TDS GROUP SUBSIDIARY:
<TABLE>
<S> <C> <C>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
Preferred Shares As specified in the designation. As specified in the designation.
Common Shares and Series A To the extent practicable, holders of Common To the extent practicable, holders of Common
Common Shares (and Special Shares would receive subsidiary shares Shares would receive subsidiary shares
Common Shares, if authorized corresponding to Common Shares, and holders corresponding to Common Shares, holders of
and issued) of Series A Common Shares would receive Series A Common Shares would receive
subsidiary shares corresponding to Series A subsidiary shares corresponding to Series A
Common Shares. Common Shares and any issued Special Common
Shares would receive subsidiary shares
corresponding to Special Common Shares.
Tracking Stock N/A Holders of Tracking Stock are not entitled to
participate in the distribution of a
subsidiary which is included in the TDS
Group.
</TABLE>
DISTRIBUTION OF A SUBSIDIARY OF A TRACKING GROUP (other than a Qualifying
Subsidiary):
<TABLE>
<S> <C> <C>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
Preferred Shares N/A N/A
</TABLE>
-20-
<PAGE>
<TABLE>
<S> <C> <C>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
Common Shares and Series A N/A With respect to the distribution of a
Common Shares (and Special subsidiary that is attributed to a Tracking
Common Shares, if authorized Group, other than a Qualifying Subsidiary
and issued) that holds all of the assets and liabilities
of such Tracking Group, holders of Common
Shares and Series A Common Shares, as well as
any issued Special Common Shares, may, in the
sole discretion of the Board, receive
subsidiary shares up to the amount of the
Retained Interest by the TDS Group in such
Tracking Group. In such event, to the extent
practicable, holders of Common Shares would
receive subsidiary shares corresponding to
the Common Shares, holders of Series A Common
Shares would receive subsidiary shares
corresponding to Series A Common Shares and
holders of Special Common Shares, if any,
would receive subsidiary shares corresponding
to Special Common Shares. The Series A Common
Shares, Common Shares and any issued Special
Common Shares would be entitled to receive
the same number of subsidiary shares per
share which are distributed in respect of the
Retained Interest in such Tracking Group.
Tracking Stock N/A With respect to the distribution of a
subsidiary that is attributed to a Tracking
Group, other than a Qualifying Subsidiary
that holds all of the assets and liabilities
of such Tracking Group, to the extent
practicable, the holders of Tracking Stock of
such Tracking Group would generally receive
subsidiary shares corresponding to Special
Common Shares. Holders of shares of Tracking
Stock of any other Group may, at the sole
discretion of the Board, receive subsidiary
shares corresponding to Special Common
Shares, up to the amount of any Inter-Group
Interest of such Group in the Tracking Group
making the distribution of subsidiary shares.
</TABLE>
-21-
<PAGE>
LIQUIDATION OF THE COMPANY:
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Preferred Shares In the event of a liquidation of the Company, In the event of a liquidation of the Company,
the Preferred Shares have a senior claim as the issued Preferred Shares will continue to
to liquidation value plus accumulated have a senior claim as to liquidation value
dividends. plus accumulated dividends.
Common Shares and Series A In the event of a liquidation of the Company, In the event of a liquidation of the Company,
Common Shares (and Special the Common Shares and Series A Common Shares the Common Shares and Series A Common Shares,
Common Shares, if authorized would share pari passu any assets remaining and any issued Special Common Shares, would
and issued) for distribution to holders of common stock. share any assets remaining for distribution
to holders of common stock based upon
Liquidation Units, with Common Shares, Series
A Common Shares and any issued Special Common
Shares each having one Liquidation Unit per
share.
Tracking Stock N/A In the event of a liquidation of the Company,
the issued shares of each class of Tracking
Stock would share any assets remaining for
distribution to holders of common stock based
upon Liquidation Units, with each Cellular
Group Share having 2.5 Liquidation Units,
each Telecom Group Share having 0.9
Liquidation Units and each Aerial Group Share
having 1.1 Liquidation Units.
</TABLE>
DISPOSITION OF SUBSTANTIALLY ALL ASSETS OF A TRACKING GROUP:
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Preferred Shares N/A N/A
Common Shares and Series A N/A In the event of a disposition of any assets
Common Shares (and Special of a Tracking Group, the holders of Common
Common Shares, if authorized Shares, Special Common Shares and Series A
and issued) Common Shares would indirectly share pari
passu any proceeds allocable to the Retained
Interest of the TDS Group in such Tracking
Group.
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Tracking Stock N/A In the event of a Disposition of all or
substantially all of the properties and
assets attributed to a Tracking Group (I.E.,
80% or more on a current market value basis),
other than in a transaction in which the
Company receives primarily equity securities
of an entity engaged or proposing to engage
primarily in a business similar or
complementary to the business of the Affected
Tracking Group and certain other
circumstances, the Company must either: (i)
distribute to the holders of the affected
Tracking Stock--by special dividend or by
redemption of shares of outstanding Affected
Tracking Stock--an amount in cash, securities
or other property or any combination thereof
equal to the proportionate interest of the
outstanding Affected Tracking Stock in the
Fair Value of the Net Proceeds of the
Disposition; or (ii) convert each outstanding
share of the Affected Tracking Stock into a
number (or fraction) of Special Common Shares
or shares of any other class or classes of
Tracking Stock (or any combination thereof on
a pro rata basis) equal to 110% (the
"Disposition Conversion Percentage") of the
average daily ratio (calculated to the
nearest five decimal places) of the Market
Value of (A) one share of Affected Tracking
Stock to (B) the Market Value of one Special
Common Share or such other share of Tracking
Stock (or any combination thereof on a pro
rata basis) during a forty-Trading Day period
beginning on the 11th Trading Day after
consummation of the transaction.
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
The Company may, at any time prior to the
first anniversary of a dividend on, or
partial redemption of, a class of Tracking
Stock following a Disposition of all or
substantially all of the properties and
assets attributed to such Tracking Stock,
convert each outstanding share of such
Tracking Stock into a number (or fraction) of
Special Common Shares or shares of another
class or classes of Tracking Stock, equal to
the product of the Disposition Conversion
Percentage and the average daily ratio of the
Market Value of one share of the affected
Tracking Stock to the Market Value of one
Special Common Share or one share of such
other Tracking Stock (or a combination
thereof on a pro rata basis), calculated over
the twenty-Trading Day period ending five
Trading Days prior to the date of notice of
such conversion.
If there is no public market for the Special
Common Shares at the time of such conversion,
the Market Value per share will be deemed to
be the same as the Common Shares.
</TABLE>
REDEMPTION AT THE OPTION OF THE COMPANY(8):
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Preferred Shares Certain Preferred Shares are redeemable by Issued Preferred Shares which are redeemable
their terms. by their terms will continue to be
redeemable.
Common Shares Not redeemable. Not generally redeemable.
Series A Common Shares Not redeemable. Not redeemable.
Special Common Shares N/A Not generally redeemable.
Tracking Stock N/A The Company may redeem any class of Tracking
Stock of a Tracking Group for a number of
shares of one or more Qualifying Subsidiaries
(that hold all of the assets and liabilities
attributed to such Tracking Group) equal to
the product of the Adjusted Outstanding
Interest Fraction of such Tracking Group and
the total number of shares of each of such
Qualifying Subsidiaries held by the Company.
</TABLE>
- ------------
(8) In addition to the redemption provisions described above, the Restated
Certificate of TDS Delaware will permit shares of capital stock, other than
the Series A Common Shares, to be redeemed by the Company, generally at fair
market value, to the extent necessary to prevent the loss or secure the
reinstatement of, or prevent the denial of applications for the renewal of,
any license or franchise from any governmental agency.
-24-
<PAGE>
CONVERSION AT THE OPTION OF THE COMPANY:
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Preferred Shares Not convertible at the option of the Company. Not convertible at the option of the Company.
Common Shares Not convertible at the option of the Company. Not convertible at the option of the Company.
Series A Common Shares Not convertible at the option of the Company. Not convertible at the option of the Company.
Special Common Shares N/A Not convertible at the option of the Company.
Tracking Stock N/A The Company may, at any time, convert each
share of Tracking Stock of any class into a
number of Special Common Shares or shares of
another class or classes of Tracking Stock or
any combination thereof, equal to the
Optional Conversion Percentage of the average
daily ratio of the Market Value of one share
of such Tracking Stock to be converted to the
Market Value of one Special Common Share or
share of such other class of Tracking Stock
(or a combination thereof on a pro rata
basis), calculated over the twenty-Trading
Day period ending five Trading Days prior to
the date of notice of such conversion.
The initial Optional Conversion Percentage
will be 115% and will remain fixed for a
period of five years, and then will decline
annually at a rate of 1% per year until the
Optional Conversion Percentage is 110% on the
ninth anniversary of the initial issuance
date of the applicable Tracking Stock.
If there is no public market for the Special
Common Shares, the Market Value per share
will be deemed to be the same as the Common
Shares.
</TABLE>
CONVERSION AT THE OPTION OF THE HOLDER:
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Preferred Shares Certain series of Preferred Shares are The series that are currently convertible
convertible into Common Shares. into Common Shares would continue to be
convertible into Common Shares.
In the event of the Distribution, such
Preferred Shares would be convertible into
Common Shares and a number of Cellular Group
Shares, Telecom Group Shares and Aerial Group
Shares as if such Preferred Shares had been
converted immediately prior to the
Distribution.
Common Shares N/A Not convertible.
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Series A Common Shares Convertible on a share-for-share basis into Convertible on a share-for-share basis into
Common Shares. Common Shares or Special Common Shares.
Special Common Shares N/A Not convertible.
Tracking Stock N/A Not convertible.
</TABLE>
PREEMPTIVE RIGHTS:
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Preferred Shares None None
Common Shares None None
Series A Common Shares Series A Common shareholders have a Series A Common shareholders would continue
preemptive right to purchase additional to have a preemptive right to purchase
Series A Common Shares for cash. additional Series A Common Shares for cash.
Special Common Shares N/A None
Tracking Stock N/A None
</TABLE>
PAR VALUE:
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Preferred Shares No par value $0.01
Undesignated Shares N/A $0.01
Common Shares $1.00 $0.01
Series A Common Shares $1.00 $0.01
Special Common Shares N/A $0.01
Telecom Group Shares N/A $0.01
Cellular Group Shares N/A $0.01
Aerial Group Shares N/A $0.01
</TABLE>
AMERICAN STOCK EXCHANGE ("AMEX") LISTING:
<TABLE>
<CAPTION>
CURRENT CAPITAL STRUCTURE TRACKING STOCK PROPOSAL
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
Preferred Shares Not Listed Not Listed
Common Shares Listed on the AMEX under the symbol "TDS". Would continue to be listed on the AMEX under
the symbol "TDS".
Series A Common Shares Not listed, but convertible into Common Not listed, but convertible into Common
Shares, which are listed. Shares, which are listed.
Tracking Stock N/A Application is being filed to list all shares
of Tracking Stock on the AMEX.
</TABLE>
-26-
<PAGE>
SIGNIFICANT DIFFERENCES BETWEEN IOWA AND DELAWARE LAW
THE FOLLOWING SUMMARIZES THE RIGHTS OF SHAREHOLDERS UNDER DELAWARE LAW AS
COMPARED TO THE RIGHTS OF SHAREHOLDERS UNDER IOWA LAW:
<TABLE>
<CAPTION>
PROVISION IOWA ARTICLES RESTATED DELAWARE CERTIFICATE
- ------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Increase in Authorized An increase or decrease in the As permitted by Delaware law, the
Shares number of authorized shares of any Restated Certificate provides that
class requires approval by the an increase or decrease in the
holders of a majority of the number of authorized shares of any
outstanding shares of such class and class may be approved by the holders
any other class which is prior, of a majority of the voting power of
superior or substantially equal to the outstanding shares of the
such class, each voting as a Company entitled to vote in matters
separate group (even if such shares other than the election of
are nonvoting), and by the holders directors, voting as a single group.
of the voting power of all shares of
capital stock.
Redemption of Shares to Iowa has no statute permitting the As permitted by Delaware law, the
Protect Licenses redemption of shares to protect Restated Certificate provides that
licenses. the Company may redeem certain
shares of capital stock, generally
at fair market value, to the extent
necessary to prevent the loss or
secure the reinstatement of, or to
prevent the denial of applications
for or the renewal of any license or
franchise from any governmental
agency.
Voting Trust Under current Iowa law, a voting Delaware has no limitation on the
trust cannot be established with a term of a voting trust.
term of more than ten years after
its effective date, unless extended.
Election of Directors The election of a director requires The election of a director requires
the affirmative vote of a majority the affirmative vote of a plurality
of the votes cast by shares entitled of the voting power of shares
to vote with respect to such present in person or represented by
director. proxy at the meeting and entitled to
vote with respect to such director.
Removal of Directors Shareholders may remove one or more Unless the certificate of
directors, with or without cause, incorporation provides otherwise,
unless the articles of incorporation the shareholders may remove
provide that directors may be directors of a corporation with a
removed only for cause. The Articles classified board only for cause. The
do not provide that directors may be Restated Certificate provides that
removed only for cause. directors may be removed with cause
by a majority vote of the shares
entitled to vote in the election of
such directors, or without cause
upon a vote by 80% of the voting
power of the shares entitled to vote
in the election of such directors.
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
PROVISION IOWA ARTICLES RESTATED DELAWARE CERTIFICATE
- ------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Meetings of Shareholders Special meetings of shareholders may Special meetings of shareholders may
be called by the board of directors, be called by the board of directors
a person or persons so authorized by or such other person as may be
the articles of incorporation or authorized by the certificate of
bylaws, or by holders of at least incorporation or the bylaws. The
fifty percent of the votes entitled Delaware Bylaws will authorize the
to be cast on any issue proposed to Chairman, President or holders of at
be considered at the special least fifty percent of the votes
meeting. The TDS Iowa Bylaws provide entitled to be cast at a special
that the principal executive officer meeting to call a special meeting.
is authorized to call special
meetings of shareholders.
Shareholder Action by Unless otherwise provided in the Unless otherwise provided in the
Written Consent articles of incorporation, certificate of incorporation,
shareholder action may be taken shareholder action may be taken
without a meeting or vote if a without a meeting or vote if a
written consent is signed by the written consent is signed by the
holders of outstanding shares having holders of outstanding shares having
90% of the votes entitled to be cast a majority of votes entitled to be
at a meeting. The Articles do not cast at a meeting. The Restated
provide otherwise. Certificate does not provide
otherwise.
Amendments to Charter An amendment to the articles of An amendment to the certificate of
incorporation must be approved by a incorporation generally requires
majority of the votes entitled to be approval by holders of a majority of
cast by any voting group with the voting power of all outstanding
respect to which the amendment would shares. Holders of shares of a class
create dissenters' rights and a are entitled to vote as a class of
majority of the votes cast by every capital stock on a proposed
other voting group entitled to vote amendment if the amendment would
on the amendment. In general, increase or decrease the par value
holders of shares of a class of or alter the powers, preferences or
capital stock are entitled to vote special rights of the shares of such
as a separate group if the amendment class so as to affect them
has any effect on such class, even adversely.
if the articles provide that such
shares are nonvoting.
Share Exchanges, Mergers A share exchange or merger must be A merger or consolidation must be
and Consolidations approved by holders of a majority of approved by the holders of a
the voting power of all shares of majority of the voting power of the
capital stock entitled to vote with outstanding shares entitled to vote
respect to such matter and, in with respect to such matter. A
general, by a majority of the shares merger or consolidation does not
of each class of capital stock which require a separate class vote by any
is affected in some manner by the class of capital stock. Delaware law
share exchange or merger. Iowa law does not provide for mandatory share
does not provide for consolidations. exchanges.
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
PROVISION IOWA ARTICLES RESTATED DELAWARE CERTIFICATE
- ------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Appraisal Rights Shareholders are entitled to dissent Shareholders are entitled to dissent
from and obtain the fair value of and obtain the fair value of their
their shares in the event of certain shares in connection with mergers or
amendments to the articles of consolidations, provided that
incorporation which materially and appraisal rights do not apply (i) to
adversely affect rights in respect shareholders of a surviving
of a dissenter's shares, and sales corporation if shareholder approval
of all or substantially all of a is not required or (ii) as to any
corporation's assets, share class of stock which is either
exchanges and mergers which require listed on a national securities
a shareholder vote. exchange or the Nasdaq national
market, or held of record by more
than 2,000 holders, unless
shareholders are required to accept
for their shares anything other than
shares in the surviving corporation,
shares in any other corporation that
is similarly listed or held, and/or
cash in lieu of fractional shares.
Anti-Takeover Law A corporation is prohibited from A corporation is prohibited from
engaging in a business combination engaging in a business combination
with an interested shareholder for a with an interested shareholder for a
period of three years following the period of three years following the
time such person became interested time such person became interested
unless approved by the board of unless approved by the board of
directors before the shareholder directors before the shareholder
became an interested shareholder, became an interested shareholder,
approved by the board of directors approved by the board of directors
and the holders of 66 2/3% of the and the holders of 66 2/3% of the
outstanding voting stock not owned outstanding voting stock not owned
by the interested shareholder after by the interested shareholder
the shareholder became an interested (except by written consent) after
shareholder or the interested the shareholder became an interested
shareholder owned at least 85% of shareholder or the interested
the voting stock outstanding upon shareholder owned at least 85% of
consummation of the interested the voting stock outstanding upon
shareholder transaction. TDS is consummation of the interested
currently subject to this provision. shareholder transaction. As
permitted by Delaware law, the
Restated Certificate provides that
TDS elects not to be governed by
this provision.
Dividends and Stock No distribution can be made if, Dividends may be paid out of any
Repurchases after giving it effect, the surplus and, if none, any net
corporation would not be able to pay profits for the fiscal year in which
its debts as they become due in the the dividend was declared or the
usual course of business or the preceding fiscal year. A corporation
corporation's total assets would be may purchase or redeem shares only
less than the sum of its total when its capital is not impaired and
liabilities plus the amount that such purchase or redemption would
would be needed to satisfy the not cause any impairment of the
superior preferential rights of capital.
shareholders upon dissolution.
Transactions Involving A conflict of interest transaction A conflict of interest transaction
Officers and Directors can be authorized, approved or can be authorized, approved or
ratified by a committee of two or ratified by a committee of one or
more disinterested directors or by a more disinterested directors or by a
majority of the shares entitled to majority of the shares entitled to
vote (excluding shares owned by or vote (including shares owned by or
under the control of any interested under the control of any interested
director). director).
</TABLE>
-29-
<PAGE>
DISSENTERS' RIGHTS
Shareholders of the Company whose shares are not voted in favor of the
Tracking Stock Proposal and who otherwise duly take all action required by Iowa
law will have statutory dissenters' rights under Iowa law. See "Proposal
1--Tracking Stock Proposal--Rights of Dissenting Shareholders." If, in the
judgment of the Board, an excessive number of shareholders assert dissenters'
rights, it is contemplated that the Board may abandon the Tracking Stock
Proposal, even if it is approved by shareholders.
RECENT FINANCIAL RESULTS
TDS's operating revenues for the three- and twelve-month periods ended
December 31, 1997 increased 29% and 25% to $412.3 million and $1,471.5 million,
respectively, compared to the same periods in 1996. The increases in 1997 were
attributable primarily to the growth in customer units. TDS's operating (loss)
income for the three- and twelve-month periods ended December 31, 1997 was
($49.0) million and ($3.7) million, respectively, compared to $32.1 million and
$153.4 million for the same periods in 1996. The decreases in 1997 were
attributable primarily to costs associated with the launch of service in
Aerial's markets of ($80.4) million and ($196.6) million for the three-and
twelve-month periods ended December 31, 1997, respectively. TDS's net (loss)
income available to common for the three- and twelve-month periods ended
December 31, 1997 was ($35.5) million and ($11.4) million, respectively,
compared to $11.6 million and $126.2 million for the same periods in 1996.
After-tax gains from asset sales contributed $3.5 million and $15.9 million for
the three- and twelve-month periods ended December 31, 1997, respectively, as
compared to $755,000 and $64.5 million for the same periods in 1996.
U.S. Cellular reported 30% and 29% increases in operating revenues for the
three- and twelve-month periods ended December 31, 1997 to $242.8 million and
$877.0 million, respectively, as compared to the same periods in 1996. The
revenue increases were primarily related to increases in cellular customer
units, which grew by 59% during the twelve-month period ended December 31, 1997.
U.S. Cellular's operating income increased 53% and 48% for the three- and
twelve-month periods ended December 31, 1997 to $19.0 million and $129.5
million, respectively, as compared to the same periods in 1996.
TDS Telecom reported 9% and 12% increases in operating revenues for the
three- and twelve-month periods ended December 31, 1997 to $116.7 million and
$444.2 million, respectively, as compared to the same periods in 1996. Access
lines grew by 6% in the twelve-month period ended December 31, 1997. TDS
Telecom's operating income decreased 21% and 4% for the three- and twelve-month
periods ended December 31, 1997 to $22.8 million and $98.6 million,
respectively, as compared to the same periods in 1996. The decreases in the
three- and twelve-month periods reflect losses incurred in start-up ventures,
such as the internet, structured wiring and CLEC operations, as well as higher
operating expenses and downward pressures on certain revenue streams in the
landline telephone business. In addition, the three-month period in 1996
included non-recurring, one-time expense reductions which increased operating
income in 1996.
Aerial reported operating revenues of $30.2 million and $56.0 million for
the three- and twelve-month periods ended December 31, 1997, respectively. All
of Aerial's markets are now in service. TDS anticipates that costs to build
Aerial's customer base will continue to reduce TDS's operating and net income
from levels which would otherwise be achieved during 1998.
American Paging, Inc. ("American Paging"), TDS's majority-owned subsidiary,
reported declines of 10% and 9% in operating revenues for the three- and
twelve-month periods ended December 31, 1997 to $22.7 million and $94.4 million,
respectively, as compared to the same periods in 1996. Revenues at American
Paging declined during such periods primarily due to competitive price pressures
in the direct distribution channel. American Paging's operating loss increased
13% and declined 4% for the three- and twelve-month periods ended December 31,
1997 to ($10.5) million and ($35.3) million, respectively, as compared to the
same periods in 1996. On February 10, 1998, the Company and American Paging
entered into a merger agreement providing for the acquisition by TDS of all of
the issued and outstanding Common Shares of American Paging which are not held
by TDS for cash for an amount equal to $2.50 per share. The merger agreement was
entered into in connection with an agreement between TDS and TSR Paging, Inc.
("TSR") pursuant to which TDS and TSR will combine their respective paging
businesses. See "Description of Business of Telephone and Data Systems,
Inc.--Radio Paging Operations" in Annex I.
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<PAGE>
SUMMARY SELECTED CONSOLIDATED AND GROUP FINANCIAL INFORMATION
We are providing the following financial information to aid you in your
analysis of the financial aspects of the Tracking Stock Proposal. We derived
this information from audited financial statements for 1992 through 1996, and
unaudited financial statements for the nine months ended September 30, 1997 and
1996. The information is only a summary and you should read it in conjunction
with the financial statements (and related notes) contained in Annexes I through
V of this Proxy Statement/Prospectus. See also "Where You Can Find More
Information" for information about other financial information incorporated by
reference herein.
SUMMARY TDS CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993
------------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues............ $ 1,070,371 $ 861,312 $ 1,186,884 $ 942,307 $ 726,036 $ 553,829
Net Income Available to
Common...................... 24,035 115,281 126,293 102,044 58,012 31,510
Earnings Per Common Share..... 0.40 1.89 2.08 1.74 1.06 0.67
Dividends Per Common Share and
Series A Common Share....... .315 .30 .40 .38 .36 .34
Total Assets.................. 4,661,071 3,933,418 4,200,969 3,469,082 2,790,127 2,259,182
Notes Payable................. 451,329 98,236 160,537 184,320 98,608 6,309
Long-term Debt (including
current portion)............ 1,241,669 926,821 1,018,851 894,584 562,165 537,566
Redeemable Preferred Shares
(including current
portion).................... 1,578 1,937 1,858 15,093 25,001 27,367
Common Stockholders' Equity... 1,968,279 2,024,386 2,032,941 1,684,365 1,473,038 1,224,285
<CAPTION>
1992
-------------
<S> <C>
Operating Revenues............ $ 432,740
Net Income Available to
Common...................... 28,648
Earnings Per Common Share..... 0.72
Dividends Per Common Share and
Series A Common Share....... .32
Total Assets.................. 1,696,486
Notes Payable................. 46,816
Long-term Debt (including
current portion)............ 426,885
Redeemable Preferred Shares
(including current
portion).................... 27,967
Common Stockholders' Equity... 877,419
</TABLE>
SUMMARY FINANCIAL INFORMATION OF TDS GROUP
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993
------------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net Income.................... $ 51,364 $ 41,600 $ 47,539 $ 22,691 $ 26,052 $ 30,972
Net Income Available to Common
and Series A Common......... 49,942 40,831 45,693 20,757 24,243 28,586
Total Assets.................. 1,357,120 1,116,973 1,079,975 1,006,728 1,038,484 802,280
Notes Payable - Affiliates.... 261,503 303,006 201,641 190,085 108,130 123,511
Notes Payable - Other......... 449,954 95,468 159,162 182,625 97,724 6,059
Redeemable Preferred Shares
(including current
portion).................... 1,579 1,937 1,858 15,093 25,001 27,367
TDS Group Equity.............. 557,394 619,500 611,147 464,618 628,963 569,407
<CAPTION>
1992
-------------
<S> <C>
Net Income.................... $ 9,914
Net Income Available to Common
and Series A Common......... 7,677
Total Assets.................. 778,906
Notes Payable - Affiliates.... 94,258
Notes Payable - Other......... 46,210
Redeemable Preferred Shares
(including current
portion).................... 27,967
TDS Group Equity.............. 549,735
</TABLE>
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<PAGE>
SUMMARY FINANCIAL INFORMATION OF CELLULAR GROUP
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993
------------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues............ $ 634,122 $ 493,331 $ 680,068 $ 480,316 $ 327,630 $ 210,344
Net Income (Loss)............. 86,382 118,582 129,929 99,742 16,393 (25,441)
Total Assets.................. 2,412,205 2,089,255 2,085,899 1,880,144 1,534,787 1,245,396
Long-term Debt (including
current portion)............ 511,465 355,805 353,761 355,747 302,219 204,455
Cellular Group Equity......... 1,571,146 1,464,150 1,476,202 1,329,454 1,093,967 940,128
<CAPTION>
1992
-------------
<S> <C>
Operating Revenues............ $ 139,929
Net Income (Loss)............. 6,194
Total Assets.................. 855,579
Long-term Debt (including
current portion)............ 331,317
Cellular Group Equity......... 450,984
</TABLE>
SUMMARY FINANCIAL INFORMATION OF TELECOM GROUP
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993
------------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues............ $ 338,700 $ 288,836 $ 402,629 $ 354,841 $ 306,341 $ 268,122
Net Income.................... 23,127 24,805 35,694 34,155 32,654 19,031
Total Assets.................. 1,361,181 1,317,312 1,352,929 1,238,954 1,138,242 959,582
Notes Payable................. 28,788 21,596 27,542 28,002 16,429 13,447
Long-term Debt (including
current portion)............ 560,833 558,608 560,921 536,476 492,946 470,257
Long-term Debt-affiliated..... 230,274 237,379 237,035 231,360 223,125 226,923
Telecom Group Equity.......... 373,895 321,836 343,816 265,387 228,800 107,298
<CAPTION>
1992
-------------
<S> <C>
Operating Revenues............ $ 238,095
Net Income.................... 22,988
Total Assets.................. 796,008
Notes Payable................. 21,163
Long-term Debt (including
current portion)............ 354,024
Long-term Debt-affiliated..... 222,021
Telecom Group Equity.......... 88,733
</TABLE>
SUMMARY FINANCIAL INFORMATION OF AERIAL GROUP
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993
------------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues............ $ 25,791 $ -- $ -- $ -- $ -- $ --
Net (Loss).................... (154,413) (23,706) (37,921) (6,468) (1,283) (67)
Total Assets.................. 899,580 532,422 672,827 360,444 21,320 512
Long-term Debt (Revolving
Credit Agreement--TDS)...... 330,426 -- -- 60,238 22,659 650
Long-term Debt................ 165,278 11,427 103,743 -- -- --
Aerial Group Equity
(Deficit)................... 284,705 451,780 437,785 281,282 (1,444) (161)
<CAPTION>
1992
-------------
<S> <C>
Operating Revenues............ $ --
Net (Loss).................... (134)
Total Assets.................. 441
Long-term Debt (Revolving
Credit Agreement--TDS)...... 450
Long-term Debt................ --
Aerial Group Equity
(Deficit)................... (94)
</TABLE>
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<PAGE>
RISK FACTORS
You should consider the following factors, in addition to the other
information contained elsewhere in this Proxy Statement/Prospectus and the
Exhibits and Appendices hereto, in connection with the Tracking Stock Proposal.
For definitions of certain defined terms, see "Proposal 1--Tracking Stock
Proposal--Certain Definitions" and Exhibit G--Index of Certain Defined Terms.
SHAREHOLDERS OF ONE COMPANY; FINANCIAL EFFECTS OF ONE GROUP COULD ADVERSELY
AFFECT THE OTHER GROUPS
Notwithstanding the attribution of assets and liabilities (including
contingent liabilities) and shareholders' equity among the Groups for the
purpose of preparing their respective financial statements, the change in the
capital structure of the Company contemplated by the Tracking Stock Proposal
will not affect legal title to such assets or responsibility for such
liabilities of the Company or any of its subsidiaries, except that TDS Delaware
will succeed to all of the franchises, rights, assets and liabilities of TDS
Iowa. Financial impacts arising from the TDS Group, the Cellular Group, the
Telecom Group or the Aerial Group that affect the consolidated results of
operations or financial position of the Company could affect the results of
operations or financial position of the other Groups. Moreover, any net losses
of the TDS Group, the Cellular Group, the Telecom Group or the Aerial Group, and
any distributions on, or repurchases of, any shares of capital stock will reduce
the funds of the Company legally available for the payment of dividends on all
classes and series of common stock of the Company.
Accordingly, the TDS Group, Cellular Group, Telecom Group and Aerial Group
financial information should be read in conjunction with the Company's
consolidated financial information. The Company will continue to prepare
consolidated financial statements and also provide such consolidated financial
statements to the holders of each of the Tracking Stocks. If the Tracking Stock
Proposal is approved, the Company will provide to shareholders of each of the
TDS Group, Cellular Group, Telecom Group and Aerial Group separate financial
statements, financial reviews, descriptions of businesses and other relevant
information for the respective Group, together with the Company's consolidated
financial statements. Upon request, the Company will provide to any shareholder
of a Group a copy of the separate combined financial statements related to any
of the other Groups.
LIMITED SEPARATE SHAREHOLDER RIGHTS
Under the Tracking Stock Proposal, holders of Cellular Group Shares, Telecom
Group Shares or Aerial Group Shares would not have any legal rights specifically
related to the assets attributed to the Cellular Group, Telecom Group or Aerial
Group, respectively, and the holders of Common Shares and Series A Common Shares
would not have any legal rights specifically related to the TDS Group, except as
described herein. Holders of Tracking Stock will be common shareholders of the
Company, and will continue to be subject to all the risks associated with an
investment in the Company and all of its businesses and liabilities. The Company
and its subsidiaries will continue to be responsible for each of their
respective liabilities.
CHANGES IN VOTING FOR DIRECTORS
At present, the holders of Series A Common Shares and Preferred Shares
issued after October 31, 1981 which have voting rights, voting as a group, elect
all of the directors (nine out of twelve directors) who are not elected by the
holders of Common Shares and Preferred Shares issued prior to October 31, 1981
(three out of twelve directors). After the Merger, holders of Preferred Shares
issued before October 31, 1981 and Common Shares will vote as a group with the
holders of any issued Cellular Group Shares, Telecom Group Shares and Aerial
Group Shares, as well as any issued Special Common Shares, in the election of
25% of the directors (rounded up) plus one additional director (or four of the
twelve present directors). As a result, holders of Preferred Shares issued after
October 31, 1981 and Series A Common Shares as such will be entitled to vote in
the election of one less director (I.E., eight of the twelve present directors).
See "Proposal 1--Tracking Stock Proposal--Description of Restated Certificate of
Incorporation of TDS Delaware--Voting Rights."
LIMITED VOTING RIGHTS; VARIABLE VOTING RIGHTS
Under the Tracking Stock Proposal, holders of Cellular Group Shares, Telecom
Group Shares and Aerial Group Shares will not have any right to vote on matters
other than the election of certain directors, except as otherwise required by
law. Accordingly, actions submitted to a vote of shareholders other than the
election of directors will generally be voted on only by holders of Common
Shares, Series A Common Shares and series of Preferred Shares which have voting
rights. Under the Restated Certificate, only the affirmative vote of the holders
of a majority of the
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<PAGE>
outstanding voting power of the Common Shares, Series A Common Shares and such
voting Preferred Shares, voting as a group, will be required to amend the
Restated Certificate, approve any merger or consolidation of TDS with or into
any other corporation, approve the dissolution of TDS or approve any other
matter required to be voted on by shareholders, except as required under the
DGCL. Under the DGCL, the holders of the outstanding shares of a class are
entitled to vote as a class upon a proposed amendment, whether or not entitled
to vote thereon by the Restated Certificate, if the amendment would increase or
decrease the par value of the shares of such class or alter or change the
powers, preferences or special rights of the shares of such class so as to
affect them adversely. As permitted by the DGCL, the Restated Certificate will
permit the number of authorized shares of any class of capital stock to be
increased or decreased (but not below the number of shares then outstanding in
such class, respectively) by the affirmative vote of a majority of the voting
power of the shares of capital stock entitled to vote with respect to such
matter, voting together as one group.
When a vote is taken on any matter as to which all stock is voting together
as one group, any one or more classes entitled to more than the number of votes
required to approve such matter will be in a position to control the outcome of
the vote on such matter. Certain matters on which holders of common stock would
vote together as a single class could involve a divergence or the appearance of
a divergence of the interests between the holders of classes of common stock.
The Restated Certificate does not require that a merger or consolidation of
the Company requiring the approval of the Company's shareholders be approved by
a separate class vote of holders of any class of capital stock. As a result, the
TDS Voting Trust, as the holder of Series A Common Shares representing a
majority of the voting power of the Company, could approve a merger of the
Company without a class vote by any class of capital stock.
The relative voting power of shares of Tracking Stock in the election of
directors elected by the Public Holders would fluctuate from time to time, with
each share of a class of Tracking Stock having a variable number of votes, based
upon the ratio, over a specified period, of the average Market Capitalization of
such class of Tracking Stock to the average Market Capitalization of all classes
of stock voting in the election of directors elected by the Public Holders. This
formula is intended to equate the proportionate voting rights of each class of
stock to their respective Market Capitalizations at the time of each annual
meeting of shareholders. The Market Capitalization of the classes of stock could
be influenced by many factors, including the results of operations of the
Company and each of the Groups, the regulatory environment, trading volume,
share issuances and repurchases and general economic and market conditions. Such
changes in the aggregate votes or relative voting power of the Tracking Stock
could result from the market's reaction to a decision by the Company's
management or Board that is perceived to disparately affect one class of common
stock in comparison to another. See "Proposal 1--Tracking Stock
Proposal--Description of Terms of Tracking Stock--Voting Rights."
POTENTIAL DIVERGENCE OF INTERESTS; NO SPECIFIC PROCEDURES FOR RESOLUTION
Occasions may arise when the interests of the holders of one Tracking Stock
and the holders of the other Tracking Stocks or Common Shares and Series A
Common Shares, or some combination thereof, may diverge or appear to diverge.
Examples include, among others, determinations by the Board to (i) redeem the
shares of a class of Tracking Stock, (ii) approve the disposition of all or
substantially all of the properties and assets of one of the Tracking Groups,
(iii) allocate consideration to be received by holders of common stock in
connection with a merger or consolidation involving the Company among holders of
different classes of common stock, (iv) allocate resources and financial support
to or pursue business opportunities or operational strategies through one Group
instead of one or more of the other Groups, (v) if and to the extent there is
either a Retained Interest or an Inter-Group Interest, allocate the proceeds of
future issuances of the Tracking Stock as a reduction (a) in a Retained Interest
or Inter-Group Interest (as the case may be) in the issuing Tracking Group or
(b) to the equity of the issuing Tracking Group, (vi) pay or omit dividends on
any class of common stock or (vii) approve transactions involving the transfer
of funds or assets from one Group to one or more of the other Groups or make
other operational or financial decisions with respect to one Group that could be
considered to be detrimental to one or more of the other Groups.
As described under "Management and Allocation Policies," procedures have
been adopted for consideration of matters involving a divergence of interests
among the holders of the Company's common stock; however, these policies could
be modified or rescinded by the Board, in its sole discretion, without the
approval of shareholders, although there is no present intention to do so. The
Board could also adopt additional policies. The Board intends to exercise its
judgment from time to time, depending on the circumstances, as to how best to
obtain information regarding the divergence (or potential divergence) of
interests, under what circumstances to seek the assistance of outside advisors,
whether a committee of the Board should be appointed to address the matter and
how to assess which available alternative is in the best interests of the
Company and all of its shareholders. The Board believes the
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<PAGE>
advantages of retaining flexibility in determining how best to fulfill its
responsibilities in such circumstances as they
may arise outweigh any perceived advantages from attempting to adopt specific
procedures in advance to cover all conceivable circumstances.
Disproportionate ownership interests of members of the Board in one or more
classes of common stock of the Company or disparate values of the classes of
common stock of the Company held by directors could create or appear to create
potential conflicts of interest when directors are faced with decisions that
could have different implications for different classes. Nevertheless, the
Company believes that a director would be able to discharge his or her fiduciary
duties even if his or her interests in shares of the classes of common stock
were disproportionate and/or had disparate values.
The Company's counsel has advised the Company that there is no definitive
precedent directly concerning the manner in which Delaware law would be applied
to a board of directors' duties in the context of a capital structure which
includes tracking stock with divergent interests. The Company has been advised
by counsel that, in general, under existing Delaware case law, disinterested
directors would be deemed to have satisfied their duty of care to the Company
and its shareholders if they act in good faith with the care an ordinarily
prudent person in a like position would exercise under similar circumstances,
and in a manner such directors reasonably believe to be in the best interests of
the Company. Based on the advice of counsel, the Company believes that, under
Delaware law, a good faith determination by a disinterested and adequately
informed Board, or a committee thereof, which discharges such duty, and which
the directors honestly believe is in the best interests of the Company and its
shareholders, would be a defense to any challenge by or on behalf of the holders
of any class of common stock to any determination by the Board that could have a
disparate effect on any class of common stock.
NO ASSURANCE OF PAYMENT OF DIVIDENDS
Dividends on each of the classes of common stock would be payable out of the
lesser of assets of the Company legally available therefor and the Available
Dividend Amount for that Group. Subject to the foregoing provisions, and
notwithstanding the Available Dividend Amount for any Group, the respective
amounts of prior dividends paid on, or liquidation rights of, any shares of
common stock, or any other factor, dividends may be declared and paid on the
Common Shares, the Series A Common Shares, any Special Common Shares that may be
issued in the future, the Telecom Group Shares, the Cellular Group Shares and/or
the Aerial Group Shares in equal or unequal amounts (with the exception that
dividends paid on Common Shares and any Special Common Shares that may be issued
in the future must always be the same per share and equal to or greater than the
per share dividend on the Series A Common Shares). Any decision to pay dividends
will depend on the financial condition, results of operations and business
requirements of the Company as a whole. In making a determination as to the
allocation of any dividends among the classes or series of common stock, the
Board expects to follow a policy under which it will consider, among other
factors, the relative financial condition, results of operations and business
requirements of the respective Groups. See "Dividend Policy."
If any of the TDS Group, the Telecom Group, the Cellular Group or the Aerial
Group incurs a net loss, the assets legally available for payment of dividends
on all classes of common stock would be reduced. In addition, payment of
dividends or distributions on any class of common stock will decrease the amount
of funds available under the limitations described above for the payment of
dividends on all classes of common stock.
ALLOCATION OF PROCEEDS OF MERGERS OR CONSOLIDATIONS
The Restated Certificate does not contain any provisions governing how
consideration to be received by the Company's shareholders in connection with a
merger or consolidation involving the Company (in which the common stock is to
be converted into other securities, cash or other property) is to be allocated
among holders of the various classes or series of common stock, except that, in
general, holders of Common Shares and Special Common Shares are entitled to
receive the same consideration per share in any merger or consolidation of TDS.
In any such merger or consolidation, the allocation of consideration would be
determined by the Board and would be subject to approval by a majority of the
voting power of all shares of capital stock of the Company, voting together as
one group.
OPTIONAL CONVERSION OF TRACKING STOCK
The Company could, at any time, in the sole discretion of its Board,
determine to convert each outstanding share of a class of Tracking Stock for
shares of another class or classes of Tracking Stock or Special Common Shares at
a predetermined premium. The determination by the Board to redeem shares of a
class of Tracking Stock
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<PAGE>
for shares of another class or classes of Tracking Stock or Special Common
Shares or a combination thereof could be made at a time when any class of the
Company's stock may be considered to be overvalued or undervalued, or at a time
when there is no public market for any class of stock. In addition, any such
redemption would preclude holders of the redeemed Tracking Stock from retaining
their investment in a security that is intended to reflect separately the
performance of the related Tracking Group. See "Proposal 1--Tracking Stock
Proposal--Description of Terms of Tracking Stock--Conversion at Option of
Company."
DISPOSITION OF TRACKING GROUP ASSETS
As long as the assets of a Group continue to represent less than
substantially all of the properties and assets of the Company, the Board may
approve sales and other dispositions of any amount of the properties and assets
of such Group without shareholder approval, because under the DGCL and the
Restated Certificate shareholder approval is required only for a sale or other
disposition of all or substantially all of the properties and assets of the
Company as a whole. In the event of a Disposition of substantially all of the
properties or assets attributed to a Tracking Group, except under certain
circumstances, the Company must distribute the Fair Value of the Net Proceeds
from the Disposition or exchange each share of that Tracking Stock for shares of
another class or classes of Tracking Stock or Special Common Shares or a
combination thereof at a predetermined premium, at the option of the Board.
The determination by the Board to exchange shares of Tracking Stock for
shares of another class or classes of Tracking Stock and/or Special Common
Shares could be made at a time when any class of the Company's stock may be
considered to be overvalued or undervalued, or at a time when there is no public
market for any class of stock. Any consideration which holders of Tracking Stock
may receive in connection with the Disposition of all or substantially all of
the properties or assets attributed to a Tracking Group may not correspond to
what such holders would receive if they held equity interests directly in the
Tracking Group. In addition, any such exchange would preclude holders of the
redeemed Tracking Stock from retaining their investment in a security that is
intended to reflect separately the performance of that Tracking Group.
The term "Fair Value of the Net Proceeds" means the fair value of the gross
proceeds of a Disposition after payment of or provision for certain specified
costs, including taxes related to the Disposition or such dividend or
redemption, transaction costs and liabilities and other obligations (contingent
or otherwise), including obligations in respect of Preferred Shares and
Convertible Securities (without duplication) attributed to the Tracking Group
involved in the Disposition. See "--Certain Definitions." If such Tracking Group
were a separate independent company and its shares were acquired by another
person, certain of those costs, including corporate and shareholder level taxes,
might not be payable in connection with such an acquisition. As a result, the
consideration that would be received by shareholders of such a separate
independent company in connection with such a stock acquisition might be greater
than the Fair Value of the Net Proceeds that would be received by holders of
Tracking Stock if all or substantially all of the properties and assets of the
related Tracking Group were sold. In addition, no assurance can be given that
the Fair Value of the Net Proceeds per share of Tracking Stock to be received in
connection with a Disposition of all or substantially all of the properties and
assets of a Tracking Group will be equal to or more than the Market Value per
share of such Tracking Stock prior to or after announcement of such Disposition.
See "Proposal 1--Tracking Stock Proposal--Description of Terms of Tracking
Stock--Disposition of Assets of Tracking Group."
ALLOCATION OF PROCEEDS UPON SUBSEQUENT ISSUANCES OF TRACKING STOCK
If and to the extent that, at the time of any issuance of shares of Tracking
Stock, (i) the TDS Group has a Retained Interest in a Tracking Group or (ii)
another Tracking Group has an Inter-Group Interest in a Tracking Group, the
Board would determine the allocation of the proceeds of such issuance among the
TDS Group, the other Tracking Group which holds the Inter-Group Interest and the
shareholders' equity of the Tracking Group, the shares of which are being
issued. Any such allocation of net proceeds to the TDS Group would reduce the
Retained Interest and any allocation to a Tracking Group holding an Inter-Group
Interest would reduce the Inter-Group Interest. See "Proposal 1--Tracking Stock
Proposal--Description of Terms of Tracking Stock."
PUBLIC POLICY DETERMINATIONS
Because of the nature of the Company's businesses, the Groups may have
diverging interests as to the position the Company should take with respect to
various regulatory issues. For example, Federal Communications Commission
regulations which may advance the interests of the Telecom Group may not advance
the interests of the Cellular Group or Aerial Group. In addition, increasing
overlap between the businesses of the two Groups
-36-
<PAGE>
resulting from regulatory changes and technological advancements may increase
such conflicts. The Board will cause policies and procedures to be implemented
to resolve any such conflicts. In the event any such conflict cannot be resolved
or otherwise requires resolution by the Board, the Board would resolve such
conflict in accordance with its good faith business judgment of the best
interests of the Company and all of its shareholders.
MANAGEMENT AND ALLOCATION POLICIES
The Board has adopted certain management and allocation policies described
herein with respect to cash management, corporate expenses and inter-Group
transactions, any and all of which could be modified or rescinded by the Board,
in its sole discretion, without the approval of shareholders, although there is
no present intention to do so. The Board could also adopt additional policies
depending upon the circumstances. The Board could decide to modify or rescind
such policies, or to adopt additional policies, and any such decision could have
disparate effects upon holders of shares of any class or series of common stock.
The Board could also allocate resources and financial support to or pursue
business opportunities or operational strategies through one Group instead of
the other Groups. The decision to allocate resources and financial support to
one Group may adversely affect the ability of the other Groups to obtain funds
sufficient to implement their business strategies. In making such determination,
the Board may also consider regulatory requirements, including those imposed by
the public utility commissions of various states and the Federal Communications
Commission. See "Proposal 1--Tracking Stock Proposal--Management and Allocation
Policies."
TERMINATION OF EXISTING INTERCOMPANY AGREEMENTS
Subject to the consummation of the U.S. Cellular Merger and the Aerial
Merger, or other transactions pursuant to which U.S. Cellular or Aerial become
wholly-owned subsidiaries of the Company, the Company intends to terminate
certain intercompany agreements between the Company and U.S. Cellular and
Aerial, respectively. Thereafter, all of the relationships between the Company
and such subsidiaries would be determined solely under the management and
allocation policies described herein, similarly to TDS Telecom, which is
currently a wholly-owned subsidiary of TDS. Many of such policies would continue
the arrangements which presently exist between the Company and U.S. Cellular or
Aerial pursuant to the intercompany agreements, but the Company would have no
contractual obligation to continue such policies after the intercompany
agreements have been terminated. See "Proposal 1--Tracking Stock
Proposal--Management and Allocation Policies."
TRANSFER OF FUNDS AMONG GROUPS; EQUITY CONTRIBUTIONS
If the Tracking Stock Proposal is approved by shareholders, all debt
incurred or preferred stock issued by the Company and its subsidiaries following
the issuance by the Company of the Tracking Stock would be (unless the Board
otherwise provides) specifically attributed to and reflected in the combined
financial statements of the Tracking Group that includes the entity which
incurred the debt or issued the preferred stock or, in case of debt or preferred
stock that is not specifically attributed to one of the Tracking Groups, the TDS
Group. The Board could, however, determine from time to time that debt incurred
or preferred stock issued by entities included in a Group should be specifically
attributed to and reflected in the combined financial statements of one of the
other Groups to the extent that the debt is incurred or the preferred stock is
issued for the benefit of such other Group.
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such other Group. The Company has
provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the Groups are
remitted to the TDS Group and certain cash disbursements of the other Groups
will be funded by the TDS Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board, in the case of a transfer from the TDS Group or one of the other Groups,
as the case may be, to another Group, reflected as the creation of a Retained
Interest or Inter-Group Interest, as the case may be, in the recipient Group, or
as an increase or decrease in any such existing interest.
There are no specific criteria for determining when a transfer will be
reflected as a borrowing or as the creation of, or an increase or reduction in,
a Retained Interest or an Inter-Group Interest. The Board expects to make such
determinations, either in specific instances or by setting generally applicable
policies from time to time, after consideration of such factors as it deems
relevant, including, without limitation, the needs of the Company, the financing
needs and objectives of the Groups, the investment objectives of the Groups, the
availability, cost and time associated with alternative financing sources,
prevailing interest rates and general economic conditions.
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<PAGE>
Generally, it is expected that the entities included in each of the Groups
will seek their own long-term debt financing. However, the Board may permit a
Group with excess funds to lend such funds to another Group which requires
funds. Loans from one Group to another Group would bear interest at such rates
and have such repayment schedules and other terms as are established from time
to time by, or pursuant to procedures established by, the Board. The Board
expects to make such determinations, either in specific instances or by setting
generally applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the needs of the
Company, the use of proceeds by and creditworthiness of the recipient Group, the
capital expenditure plans and investment opportunities available to each Group
and the availability, cost and time associated with alternative financing
sources.
Although the creation of or any increase in a Retained Interest or an
Inter-Group Interest resulting from an equity contribution by the TDS Group or
another Group to a particular Tracking Group (or any decrease in such Retained
Interest or Inter-Group Interest) would be determined by reference to the Market
Value of the applicable Tracking Stock as of the date of such event, an increase
(or decrease) could occur at a time when such Tracking Group's shares could be
considered undervalued or overvalued.
ABSENCE OF APPROVAL RIGHTS WITH RESPECT TO FUTURE ISSUANCES OF AUTHORIZED SHARES
The authorized but unissued shares of capital stock of the Company will be
available for issuance from time to time at the sole discretion of the Board for
any proper corporate purpose. Such issuances could include Common Shares, Series
A Common Shares, Cellular Group Shares, Telecom Group Shares, Aerial Group
Shares, Special Common Shares, or a combination thereof, as well as the issuance
of such shares upon the conversion or exercise of securities of the Company that
are convertible into or exercisable or exchangeable for such shares. In
addition, the Board will be able to designate and issue series of common or
preferred stock from the authorized but unissued Undesignated Shares. The
approval of the shareholders of the Company will not be sought by the Company
for the issuance of authorized but unissued shares of any class of capital stock
(or the reissuance of previously issued shares that have been reacquired by the
Company) or securities of the Company that are convertible into or exercisable
or exchangeable for such shares, unless deemed advisable by the Board or
required by applicable law, regulation or AMEX requirements. The Company has no
current plans to issue any shares of Tracking Stock except in connection with
the Transactions and as otherwise described herein. The Company has no current
plans to issue any Special Common Shares or to designate any series of
Undesignated Shares.
In addition, as permitted by Delaware law, the Restated Certificate will
permit the number of authorized shares of any class of capital stock to be
increased or decreased (but not below the number of shares then outstanding in
such class, respectively) by the affirmative vote of the holders of a majority
of the voting power of the shares of capital stock of the Company entitled to
vote with respect to such matter. No similar authority exists under Iowa law.
The TDS Voting Trust (as defined below) presently holds a majority of the voting
power of the Company. This provision could allow TDS Delaware to authorize and
issue shares of capital stock under circumstances which could preserve the
ability of the TDS Voting Trust to continue to exercise control over a majority
of the voting power of TDS Delaware and, therefore, could deprive shareholders
of TDS of an opportunity to sell their shares at a premium over market prices or
make it more difficult to replace the current Board and management of TDS
Delaware. The Company has no current intention to take any action to authorize
any additional shares of capital stock, other than as described herein. See
"Proposal 1--Tracking Stock Proposal--Description of Restated Certificate of
Incorporation of TDS Delaware."
CONTROL BY VOTING TRUST
A substantial majority of the outstanding Series A Common Shares are held in
a voting trust which expires on June 30, 2009 (herein referred to as the "TDS
Voting Trust"). See "Security Ownership of Management." The TDS Voting Trust was
created to facilitate the long-standing relationships among the trustees'
certificate holders. By virtue of the number of shares held by them, the voting
trustees have the power to elect approximately 75% of the directors, or nine
directors based on the current size of the Board, and control a majority of the
voting power of the Company with respect to matters other than the election of
directors. The Tracking Stock Proposal will not alter the TDS Voting Trust's
present control of TDS. However, assuming adoption of the Tracking Stock
Proposal, after the Merger the voting trustees would have the power to elect
eight, rather than nine, directors, based on the current size of the Board.
As of November 30, 1997, the TDS Voting Trust had voting or dispositive
power over an aggregate of 6,334,473 Series A Common Shares, representing
approximately 51.8% of the voting power of TDS with respect to matters other
than the election of directors. Based on such shares, the TDS Voting Trust would
receive 6,334,473 Delaware
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<PAGE>
Series A Common Shares in the Merger and an aggregate of 6,334,473 Cellular
Group Shares, 4,222,982 Telecom Group Shares and 4,222,982 Aerial Group Shares
in connection with the Distribution. Under the current terms of the TDS Voting
Trust, such shares of Tracking Stock will be distributed by the trustees to the
beneficiaries. Following the Distribution, and after the distribution of all of
the Cellular Group Shares, Telecom Group Shares and Aerial Group Shares received
by the TDS Voting Trust to the beneficiaries thereof, the TDS Voting Trust would
continue to have at least 51.8% of the aggregate voting power of the Company
with respect to all matters other than the election of directors and will be
able to elect eight of the twelve directors, assuming no other changes.
ANTI-TAKEOVER CONSIDERATIONS
The existence of the TDS Voting Trust is likely to deter any potential
unsolicited or hostile takeover attempts or other efforts to obtain control of
TDS and may make it more difficult for shareholders to sell shares of TDS at
higher than market prices. Regardless of whether the Tracking Stock Proposal is
implemented, the trustees of the TDS Voting Trust have advised the Company that
they intend to maintain the ability to keep or dispose of voting control of TDS.
Implementation of the Tracking Stock Proposal will allow TDS to issue Cellular
Group Shares, Telecom Group Shares and Aerial Group Shares, as well as Special
Common Shares, which would not vote except in the election of certain directors
and as required by law. This may preserve the ability of the TDS Voting Trust to
continue to exercise control over a majority of TDS's voting power. Assuming TDS
were to continue to issue additional common stock, implementation of the
Tracking Stock Proposal and the Distribution is likely to limit or deter a
merger proposal or tender offer that is not acceptable to the TDS Voting Trust.
Consequently, the Tracking Stock Proposal and the Distribution might deprive
shareholders of TDS of an opportunity to sell their shares at a premium over
prevailing market prices and make it more difficult to replace the current Board
and management of TDS.
The Restated Certificate and the Company's Bylaws also contain provisions
which may serve to discourage or make more difficult a change in control of the
Company without the support of the Board or without meeting various other
conditions. In particular, the Restated Certificate includes a provision,
similar to a provision currently included in the Articles, which authorizes the
Board to consider various factors, including effects on customers, taxes, and
the long-term and short-term interests of the Company, in the context of a
proposal or offer to acquire or merge the corporation, or to sell its assets,
and to reject such offer if the Board determines that the proposal is not in the
best interests of the corporation based on such factors. In addition, the
existence of the Tracking Stocks could present complexities and could in certain
circumstances pose obstacles, financial and otherwise, to an acquiring person.
The provisions of the Restated Certificate and the Bylaws of TDS Delaware and
the existence of the Tracking Stocks could, under certain circumstances, prevent
shareholders from profiting from an increase in the market value of their shares
as a result of a change in control of the Company by delaying or preventing such
change in control.
Like the Articles, the Restated Certificate divides the Board into three
classes, with staggered terms of office. Each year, one class is elected for a
three-year term. This may have the effect of limiting or deterring a proxy
contest for the removal of incumbent directors.
TDS is not aware of any current intention of the TDS Voting Trust to dispose
of any significant amount of Series A Common Shares of TDS or of any existing or
planned effort on the part of any party to accumulate material amounts of Common
Shares or Series A Common Shares, or to acquire control of TDS by means of a
merger, tender offer, solicitation in opposition to management or otherwise, or
to change TDS's management.
NO ASSURANCES AS TO MARKET PRICE
Because there has been no prior market for the Cellular Group Shares, the
Telecom Group Shares or the Aerial Group Shares, there can be no assurance as to
the market price of such shares following issuance thereof. There can be no
assurance that the combined market values of the Common Shares, Cellular Group
Shares, Telecom Group Shares and Aerial Group Shares held by a shareholder
immediately following the Distribution of the Tracking Stocks will equal or
exceed the market value of the Common Shares held by such shareholder prior to
the Company's announcement of the Tracking Stock Proposal, and the combined
market value could be less than such market value of the Common Shares. Until an
orderly market develops for the Tracking Stocks, their respective trading prices
may fluctuate significantly. If an active trading market does develop in any of
such shares, there can be no assurance that it will be maintained. The prices at
which the shares of Tracking Stock will trade will be determined in the trading
markets and may be influenced by many factors, including the consolidated
results of the Company, as well as the respective performance of the TDS Group,
Cellular Group, Telecom Group and Aerial Group, investors' expectations for the
Company and each Group, trading volume and general economic and market
conditions. There is no assurance that investors will assign value to each of
the Tracking Stocks based on the reported financial results and fundamental
operating prospects of the related Group. Financial effects of the
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<PAGE>
Groups that affect the Company's consolidated results of operations or financial
condition could affect the market prices of the Common Shares, Cellular Group
Shares, Telecom Group Shares and Aerial Group Shares. In addition, the Company
cannot predict the impact on the market values of each of the Tracking Stocks of
certain terms of the securities, such as the ability of the Company to convert
or redeem shares of the Tracking Stocks, the discretion of the Board to make
various determinations or the impact on the market value of each of the Tracking
Stocks of its voting power.
LIMITATIONS AND QUALIFICATIONS IN FINANCIAL ADVISOR OPINIONS
The Company has received an opinion from each of the Financial Advisors
which states that, assuming the proposed Telecom Public Offering, U.S. Cellular
Merger, Aerial Merger, Distribution and Merger (collectively the
"Recapitalization") had been effective as of the date of such opinion, the
Recapitalization would not have a material adverse effect from a financial point
of view on (i) the aggregate market value on a fully-distributed basis of the
Common Shares and shares of Tracking Stock to be distributed in the Distribution
with respect thereto (the "Proposed Common Equity") outstanding after such
Recapitalization as compared with the aggregate market value of the Common
Shares outstanding immediately prior to the announcement of such
Recapitalization or (ii) the Company's ability to raise equity capital through
offerings of shares of common equity or securities convertible into common
equity ("Equity Market Access") after such Recapitalization as compared to the
Company's Equity Market Access prior to the announcement of such
Recapitalization. Such opinions are limited to such aspects of the
Recapitalization and do not address other aspects of the Recapitalization and
are subject to material qualifications and limitations.
In particular, the Financial Advisors did not express any opinion as to what
the actual value of the Tracking Stocks will be when issued to the Company's
shareholders pursuant to the Recapitalization or the prices at which such
Tracking Stocks will trade subsequent to the Recapitalization. In addition, the
Financial Advisors did not express any opinion whatsoever as to the individual
merits of the U.S. Cellular Merger, the Aerial Merger, or the Telecom Public
Offering, or any opinion whatsoever with respect to the Reincorporation. The
opinions of the Financial Advisors do not address the Company's underlying
business decision to effect the Recapitalization and do not constitute a
recommendation to any shareholder of the Company as to how such shareholder
should vote with respect to the Recapitalization.
The opinions also state that the Recapitalization may cause a change in
perception by some investors of the future plans of the Company or the holders
of Series A Common Shares. Consequently, the opinions assume that the market has
had a reasonable opportunity to understand and evaluate the Recapitalization. In
addition, the opinions state that the Tracking Stocks which would be issued to
the public shareholders of the Company in the proposed Distribution might trade
initially at market prices below those at which they would trade on a fully
distributed basis.
The opinions of the Financial Advisors also depend on the accuracy of
certain assumptions and other factors considered by the Financial Advisors, as
described in their opinions. Shareholders should carefully consider and evaluate
the opinions of the Financial Advisors in view of such qualifications,
limitations, assumptions and other factors. See "Proposal 1 -- Tracking Stock
Proposal --Opinions of Financial Advisors." See also Exhibits C-1 and C-2 for
copies of the full text of such opinions.
NO ASSURANCE OF COMPLETION OF TRANSACTIONS
This Proxy Statement/Prospectus describes the U.S. Cellular Merger, the
Aerial Merger, the Telecom Public Offering and the Distribution as currently
contemplated by the Board. Such Transactions are subject to various conditions
and uncertainties and there can be no assurance that all or any of such
Transactions will be completed or, if any are completed, that they will be
completed on the terms described in the Proxy Statement/Prospectus.
TAX CONSIDERATIONS
Subsequent to the Distribution, the Company might engage in one or more
transactions involving shares of Tracking Stock (see "Proposal 1--Tracking Stock
Proposal--Description of Terms of Tracking Stock"). Such a transaction might be
tax-free, partially tax-free or fully taxable to the shareholder of Tracking
Stock involved in such transaction.
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<PAGE>
LITIGATION
On December 29, 1997, Airmont Plaza Associates, which claims to be a holder
of U.S. Cellular Common Shares, filed a putative class action complaint on
behalf of common stockholders of U.S. Cellular in the Court of Chancery of the
State of Delaware in New Castle County. The complaint names as defendants TDS,
U.S. Cellular, and the directors of U.S. Cellular. The complaint alleges a
breach of fiduciary duties by the defendants and seeks to have the U.S. Cellular
Merger enjoined or, if it is consummated, to have it rescinded and to recover
unspecified damages, fees and expenses.
On January 5, 1998, Richard Greenfield, who claims to be a holder of Aerial
Common Shares, filed a putative class action complaint on behalf of common
stockholders of Aerial in the Court of Chancery of the State of Delaware in New
Castle County. The complaint names as defendants TDS, Aerial and the directors
of TDS and Aerial. The complaint alleges a breach of fiduciary duties by the
defendants and seeks to have the Aerial Merger enjoined or, if it is
consummated, to have it rescinded and to recover unspecified damages, fees and
expenses.
The Company intends to vigorously defend against these lawsuits. However,
there can be no assurance that such lawsuits will not have a material adverse
effect on the Company or the transactions contemplated by the Proxy
Statement/Prospectus.
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<PAGE>
GENERAL
DATE, TIME AND PLACE OF SPECIAL MEETING
The Special Meeting of Shareholders of the Company will be held at Harris
Trust and Savings Bank, 111 West Monroe Street, 8th Floor, Chicago, Illinois, in
the Auditorium, on , , 1998, at 10:00 a.m. Chicago time (the
"Special Meeting"), for the following purposes: (1) to consider and approve the
Tracking Stock Proposal; (2) to consider and approve certain amendments or
adjustments to employee benefit plans as a result of the Tracking Stock
Proposal; (3) to consider and approve the 1998 Long-Term Incentive Plan of the
Company; and (4) to transact such other business as may properly come before the
Special Meeting or any and all adjournments thereof.
If Proposal 1 is not approved, Proposal 2 and Proposal 3 will not be
implemented even if they are approved. If Proposal 1 is approved, it will be
implemented even if Proposal 2 and Proposal 3 are not approved.
The Board of Directors has fixed the close of business on , 1998 as
the record date for the determination of shareholders entitled to notice of, and
to vote at, the Special Meeting or any adjournment thereof.
If you do not expect to be present, please sign and mail your proxy in the
enclosed self-addressed envelope to Harris Trust and Savings Bank, 311 West
Monroe Street, Chicago, Illinois 60606. If you hold more than one class of the
Company's shares, you will receive a separate proxy for each holding. To assure
that all of your shares are represented, you must return a proxy printed in
black ink for Common Shares, including Common Shares owned through the TDS
dividend reinvestment plan and through the TDS Tax-Deferred Savings Plan; a
proxy printed in green ink for Series A Common Shares, including Series A Common
Shares owned through the dividend reinvestment plan; a proxy printed in red ink
for Preferred Shares issued before October 31, 1981; and a proxy printed in blue
ink for Preferred Shares issued after October 31, 1981. Proxies given pursuant
to this solicitation may be revoked at any time prior to the closing of polls at
the Special Meeting (by written notice to the Secretary of the Company or
attendance at the Special Meeting of Shareholders and notice to the Secretary of
such revocation). Once the polls are closed, however, proxies may not be
retroactively revoked.
VOTING INFORMATION
To be approved, the Tracking Stock Proposal must receive the affirmative
vote of the holders of a majority of the votes entitled to be cast by holders of
Common Shares, Series A Common Shares and Preferred Shares, voting together as
one group, and the affirmative vote of the holders of a majority of the votes
entitled to be cast by the holders of Common Shares, Series A Common Shares,
Preferred Shares issued before October 31, 1981 and Preferred Shares issued
after October 31, 1981, each voting separately as a group. Abstentions from
voting on such proposal and non-votes will not represent affirmative votes and
will, therefore, effectively constitute votes against the matter for purposes of
such vote. A majority of the votes entitled to be cast on the proposal by each
voting group constitutes a quorum of that voting group for action on that
proposal.
The proposal to approve amendments and adjustments to employee stock plans
and agreements related to the Tracking Stock Proposal will be approved if votes
favoring the proposal cast by holders of Common Shares, Series A Common Shares
and Preferred Shares, voting together as one group, exceed the votes cast within
such group opposing such proposal, assuming that a quorum exists. A majority of
the votes entitled to be cast on the proposal constitutes a quorum of that
voting group for action on that proposal. Votes to abstain from voting on such
proposal and non-votes will not represent votes cast in favor of or opposing
such matter and will not affect the determination of whether such proposal is
approved for purposes of such vote.
The proposal to approve the 1998 Long-Term Incentive Plan of the Company
will be approved if votes favoring the proposal cast by holders of Common
Shares, Series A Common Shares and Preferred Shares, voting together as one
group, exceed the votes cast within such group opposing such proposal, assuming
that a quorum exists. A majority of the votes entitled to be cast on the
proposal constitutes a quorum of that voting group for action on that proposal.
Votes to abstain from voting on such proposal and non-votes will not represent
votes cast in favor of or opposing such matter and will not affect the
determination of whether such proposal is approved for purposes of such vote.
On December 31, 1997, the Company had outstanding and entitled to vote
53,648,683 Common Shares, par value $1.00 per share (excluding 794,575 treasury
shares and 484,012 shares held by a subsidiary of the Company); 6,936,277 Series
A Common Shares, par value $1.00 per share; and 324,667 Preferred Shares,
without par value, of which 8,899 Preferred Shares were issued before October
31, 1981 (Series A, B, D, G, H and N), and 315,768 Preferred Shares were issued
after October 31, 1981 (Series O, S, U, BB, DD, EE, GG, HH, II, JJ, KK, LL, QQ,
RR, SS and TT). Each of the outstanding Common Shares and Preferred Shares is
entitled to one vote on all
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<PAGE>
matters to come before the Special Meeting and each of the outstanding Series A
Common Shares is entitled to ten votes on all matters to come before the Special
Meeting.
The trustees of the TDS Voting Trust intend to vote in favor of all of the
proposals, subject to approval by a vote of 75% in interest of the beneficiaries
of record of the Tracking Stock Proposal. It is anticipated that the
beneficiaries will approve the Tracking Stock Proposal by the requisite vote.
A complete list of shareholders entitled to vote at the Special Meeting,
arranged in alphabetical order and by voting group, showing the address of and
number of shares held by each shareholder, will be kept open at the offices of
the Company, 30 North LaSalle Street, 40th Floor, Chicago, Illinois 60602, for
examination by any shareholder, beginning at least two business days after this
notice of meeting and continuing through the Special Meeting.
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DIVIDENDS AND PRICE RANGES OF COMMON SHARES
The following table sets forth the high and low sales prices of the Common
Shares on the AMEX as reported by the Dow Jones News Service, and the dividends
paid per Common Share during the periods indicated:
<TABLE>
<CAPTION>
SALES PRICES
-------------------- DIVIDENDS
HIGH LOW PAID
--------- --------- -----------
<S> <C> <C> <C>
1995
First Quarter............................................................................... $ 46.38 $ 36.13 $ .095
Second Quarter.............................................................................. 39.38 36.00 .095
Third Quarter............................................................................... 42.88 36.38 .095
Fourth Quarter.............................................................................. 43.25 35.63 .095
1996
First Quarter............................................................................... $ 48.75 $ 39.00 $ .10
Second Quarter.............................................................................. 48.88 43.38 .10
Third Quarter............................................................................... 45.63 37.75 .10
Fourth Quarter.............................................................................. 40.50 34.75 .10
1997
First Quarter............................................................................... $ 42.00 $ 34.50 $ .105
Second Quarter.............................................................................. 40.50 36.25 .105
Third Quarter............................................................................... 46.44 36.56 .105
Fourth Quarter.............................................................................. 48.50 42.00 .105
</TABLE>
On December 17, 1997, the trading day prior to the Company's announcement of
the Tracking Stock Proposal, the closing sale price of the Common Shares was
$45.56 per share, and on , 1998, the closing price of the Common Shares was
per share, as reported on the AMEX composite transactions.
On December 31, 1997, there were 4,087 record holders of the Company's
Common Shares, 98 record holders of the Company's Series A Common Shares and 173
record holders of the Preferred Shares. No public market exists for the Series A
Common Shares or Preferred Shares.
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DIVIDEND POLICY
The Company has paid cash dividends on its Common Shares since 1974. The
holders of Common Shares are currently entitled to receive the same or greater
dividends on a per share basis as are paid to the holders of Series A Common
Shares. It is the current policy of the Board to declare dividends on the Common
Shares and Series A Common Shares at the same rate per share. The Company
currently pays a quarterly dividend of $0.105 per Common Share and Series A
Common Shares on a quarterly basis, or $0.42 annually per share.
Following the Distribution, subject to the restrictions on the payment of
dividends described above, the Board currently intends to establish an annual
dividend on the Telecom Group Shares in an amount equal to $0.48 per share.
Based on the expected distribution ratio of two-thirds of a Telecom Group Share
for each existing Common Share and Series A Common Share, this dividend rate
would equate to a per share annual dividend of $0.32 per existing Common Share
and Series A Common Share (the "Telecom Equivalent Dividend Rate"). Following
the Distribution, the Board also currently intends to establish an annual
dividend on the Common Shares and Series A Common Shares in an amount equal to
$0.10 per share. The total of this rate and the Telecom Equivalent Dividend Rate
is equal to $0.42 per share per annum, which is the same as the current annual
dividend rate on the existing Common Shares and Series A Common Shares. The
intent is that, immediately after the Distribution, a current holder of Common
Shares and Series A Common Shares would continue to receive an aggregate
dividend which is at least equal to the aggregate dividend which such
shareholder currently receives from the Company (not considering reductions in
shares which may occur due to the payment of cash in lieu of fractional shares
in the Distribution).
With regard to the Cellular Group Shares and the Aerial Group Shares, the
Board currently intends to retain future earnings, if any, for the development
of the businesses of the Cellular Group and Aerial Group, respectively, and does
not anticipate paying dividends on the Cellular Group Shares or the Aerial Group
Shares in the foreseeable future.
The Company is a legal entity separate and distinct from its various
subsidiaries. As a company with no significant operations of its own, the
principal sources of its funds are dividends or other distributions from its
operating subsidiaries, borrowings and sales of equity. The ability of U.S.
Cellular, TDS Telecom, Aerial and other subsidiaries of the Company to pay
dividends or make distributions to the Company and, accordingly, the ability of
the Company to pay dividends on any class of its common stock, will depend on
the respective earnings, financial requirements and contractual restrictions of
such subsidiaries.
SELECTED FINANCIAL INFORMATION
Set forth below is certain selected financial information on a consolidated
basis for the Company and on a separate basis for each of the Cellular Group,
the Telecom Group, the Aerial Group and the TDS Group. This information is
qualified by reference to the more complete financial information set forth in
Annexes I through V of this Proxy Statement/Prospectus.
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SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated financial information
for the Company for each of the fiscal years in the five-year period ended
December 31, 1996 and for the nine-month periods ended September 30, 1996 and
1997. The information for each of the five years ended December 31, 1996 has
been derived from the audited Consolidated Financial Statements contained in
Annex I and other financial information contained in TDS's Annual Reports on
Form 10-K for such years. See "Where You Can Find More Information." Information
for the nine-month periods ended September 30, 1996 and 1997 has been derived
from the unaudited financial statements of the Company contained in Annex I,
which have been prepared on the same basis as the audited financial statements
of the Company, and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for such period. Operating results for
the nine-month period ended September 30, 1997 are not necessarily indicative of
the results of operations that may be expected for the year ending December 31,
1997.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED OR AT SEPTEMBER
30, YEAR ENDED OR AT DECEMBER 31,
---------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating Revenues (1).............. $1,070,371 $ 861,312 $1,186,884 $ 942,307 $ 726,036 $ 553,829 $ 432,740
Operating Income.................... 46,204 121,301 154,098 131,998 108,822 69,733 54,065
Other Income........................ 67,149 136,588 140,540 103,857 33,686 28,126 46,832
Interest Expense.................... 60,579 30,343 42,853 50,848 41,251 37,466 32,610
Income Taxes........................ 27,317 111,496 123,646 81,029 40,713 26,497 29,767
Net Income Before
Extraordinary Item and Cumulative
Effect of Accounting Changes.... 25,457 116,050 128,139 103,978 60,544 33,896 38,520
Extraordinary Item.................. -- -- -- -- -- -- (769)
Cumulative Effect of Accounting
Changes (2)....................... -- -- -- -- (723) -- (6,866)
Net Income.......................... 25,457 116,050 128,139 103,978 59,821 33,896 30,885
Net Income Available to Common...... $ 24,035 $ 115,281 $ 126,293 $ 102,044 $ 58,012 $ 31,510 $ 28,648
Weighted Average Common Shares
(000s)............................ 60,395 60,856 60,732 58,356 54,197 47,266 39,074
Earnings Per Common Share:
Before Extraordinary Item and
Cumulative Effect of Accounting
Changes......................... $ 0.40 $ 1.89 $ 2.08 $ 1.74 $ 1.07 $ 0.67 $ 0.91
Net Income........................ $ 0.40 $ 1.89 $ 2.08 $ 1.74 $ 1.06 $ 0.67 $ 0.72
Dividends Per Common and Series A
Common Share...................... $ .315 $ .30 $ .40 $ .38 $ .36 $ .34 $ .32
OTHER DATA:
Construction Expenditures........... $ 579,138 $ 347,709 $ 550,204 $ 359,996 $ 319,701 $ 200,984 $ 146,963
BALANCE SHEET DATA:
Cash and Cash Equivalents and
Temporary Investments............. $ 74,855 $ 142,273 $ 119,297 $ 80,851 $ 44,566 $ 73,385 $ 58,145
Property, Plant and Equipment
(Net)............................. 2,220,087 1,560,572 1,828,889 1,293,410 1,063,656 846,089 695,623
Total Assets........................ 4,661,071 3,933,418 4,200,969 3,469,082 2,790,127 2,259,182 1,696,486
Notes Payable....................... 451,329 98,236 160,537 184,320 98,608 6,309 46,816
Long-term Debt (including current
portion)(3)....................... 1,241,669 926,821 1,018,851 894,584 562,165 537,566 426,885
Redeemable Preferred Shares
(including current portion)....... 1,578 1,937 1,858 15,093 25,001 27,367 27,967
Common Stockholders' Equity......... $1,968,279 $2,024,386 $2,032,941 $1,684,365 $1,473,038 $1,224,285 $ 877,419
</TABLE>
- ------------
(1) Effective January 1, 1997, U.S. Cellular changed its financial reporting
presentation for certain credits given to cellular customers on their
monthly bills. Amounts for the years 1993-1996 have been reclassified to
conform to the 1997 presentation.
(2) Effective January 1, 1994, TDS adopted Statement of Financial Accounting
Standards ("SFAS") No. 112, "Employers' Accounting for Post employment
Benefits." The cumulative effect of the change on years prior to 1994 has
been reflected in 1994 net income. Prior years' financial information has
not been restated.
Effective January 1, 1993, TDS adopted SFAS 109, "Accounting for Income
Taxes." The cumulative effect of the change on years prior to 1993 did not
have a material effect on net income or earnings per share. Prior years'
financial information has not been restated.
-46-
<PAGE>
Effective January 1, 1992, TDS adopted SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The cumulative effect of the
change on years prior to 1992 has been reflected in 1992 net income. Prior
years' financial information has not been restated.
(3) Long-term Debt does not reflect (i) $150 million of Company-obligated
Mandatorily Redeemable Preferred Securities of a Subsidiary Trust holding
solely Company Subordinated Debentures, or the repayment of certain Notes
Payable with the proceeds thereof, which occurred on November 18, 1997, (ii)
$150 million of Company-obligated Mandatorily Redeemable Preferred
Securities of a Subsidiary Trust holding solely Company Subordinated
Debentures, or the repayment of certain Notes Payable with the proceeds
thereof, which occurred February 10, 1998, or (iii) borrowings of $100
million by Aerial pursuant to a private placement completed on February 5,
1998 in connection with a financing arrangement relating to its existing
vendor financing.
-47-
<PAGE>
SELECTED FINANCIAL INFORMATION OF THE UNITED STATES CELLULAR GROUP
The following table sets forth selected financial information for the
Cellular Group for each of the fiscal years in the five-year period ended
December 31, 1996 and for the nine-month periods ended September 30, 1996 and
1997. The information for each of the five years ended December 31, 1996 has
been derived from the audited Financial Statements contained in Annex II and
other financial information. Information for the nine-month periods ended
September 30, 1996 and 1997 has been derived from the unaudited financial
statements of the Cellular Group contained in Annex II, which have been prepared
on the same basis as the audited financial statements of the Company, and, in
the opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such period. Operating results for the nine-month period ended
September 30, 1997 are not necessarily indicative of the results of operations
that may be expected for the year ending December 31, 1997.
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED OR AT
SEPTEMBER 30, YEAR ENDED OR AT DECEMBER 31,
------------------------ -------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING FINANCIAL DATA:
Operating Revenues(1)(2).......... $ 634,122 $ 493,331 $ 680,068 $ 480,316 $ 327,630 $ 210,344 $ 139,929
Operating Income (Loss)........... 110,511 74,937 87,366 42,755 17,385 (8,656) (12,705)
Other Income...................... 62,288 166,299 177,314 116,766 25,808 19,097 40,981
Interest Expense.................. 20,295 17,496 23,111 27,287 21,883 33,190 20,095
Income Taxes...................... 66,122 105,158 111,640 32,492 4,917 2,692 1,987
Net Income (Loss)................. $ 86,382 $ 118,582 $ 129,929 $ 99,742 $ 16,393 $ (25,441) $ 6,194
OTHER DATA:
Construction Expenditures......... $ 247,957 $ 172,915 $ 248,123 $ 206,182 $ 168,095 $ 90,328 $ 53,325
BALANCE SHEET DATA:
Cash and Cash Equivalents and
Temporary Investments........... $ 120,894 $ 65,222 $ 14,377 $ 38,404 $ 5,800 $ 6,274 $ 4,130
Property, Plant and Equipment
(Net)........................... 792,279 614,781 650,754 530,027 368,181 246,414 158,948
Total Assets...................... 2,412,205 2,089,255 2,085,899 1,880,144 1,534,787 1,245,396 855,579
Notes Payable..................... 1,375 1,375 1,375 1,375 637 -- --
----------- ----------- ----------- ----------- ----------- ----------- ---------
Long-term Debt (including current
portion)........................ 511,465 355,805 353,761 355,747 302,219 204,455 331,317
United States Cellular Group
Equity.......................... $ 1,571,146 $ 1,464,156 $ 1,476,202 $ 1,329,454 $ 1,093,967 $ 940,128 $ 450,984
</TABLE>
- ------------
(1) Beginning on January 1, 1997, the Company changed its financial reporting
presentation for certain credits given to customers on their monthly bills.
As of that date, the Company reported the foregone revenues resulting from
these credits as a reduction of local retail revenue. Prior to that date,
these foregone revenues were reported as marketing and selling expense (for
new customers) and general and administrative expense (for current
customers). 1993-1996 amounts have been reclassified to conform to 1997
presentation.
(2) Beginning on January 1, 1994, the Company changed its financial reporting
presentation for outbound, or pass-through, roaming revenue. Pass-through
roaming revenue is now treated as an offset to the expense charged by other
cellular carriers, with the net amount included in system operations
expense. 1992-1993 amounts have been reclassified to conform to 1994
presentation.
-48-
<PAGE>
SELECTED FINANCIAL INFORMATION OF THE TDS TELECOMMUNICATIONS GROUP
The following table sets forth selected financial information for the
Telecom Group for each of the fiscal years in the five-year period ended
December 31, 1996 and for the nine-month periods ended September 30, 1996 and
1997. The information for each of the five years ended December 31, 1996 has
been derived from the audited Financial Statements contained in Annex III and
other financial information. Information for the nine-month periods ended
September 30, 1996 and 1997 has been derived from the unaudited financial
statements of the Telecom Group contained in Annex III, which have been prepared
on the same basis as the audited financial statements of the Company, and, in
the opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such period. Operating results for the nine-month period ended
September 30, 1997 are not necessarily indicative of the results of operations
that may be expected for the year ending December 31, 1997.
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS
ENDED OR AT SEPTEMBER
30, YEAR ENDED OR AT DECEMBER 31,
---------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating Revenue................... $ 338,700 $ 288,836 $ 402,629 $ 354,841 $ 306,341 $ 268,122 $ 238,095
Operating Income.................... 76,708 73,711 103,358 98,240 91,606 78,585 72,218
Other Income........................ 11,066 14,427 19,593 20,794 15,253 10,222 7,376
Interest Expense.................... 47,216 45,700 61,573 60,648 50,677 47,018 43,454
Income Taxes........................ 17,432 17,633 25,685 24,231 22,806 22,760 13,151
Net Income Before Cumulative Effect
of Accounting Changes............. 23,127 24,805 35,694 34,155 33,377 19,031 22,988
Cumulative Effect of Accounting
Changes (1)....................... -- -- -- -- 723 -- --
Net Income.......................... $ 23,127 $ 24,805 $ 35,694 $ 34,155 $ 32,654 $ 19,031 $ 22,988
OTHER DATA
Construction Expenditures........... $ 96,717 $ 91,131 $ 144,440 $ 104,372 $ 115,483 $ 80,818 $ 65,652
BALANCE SHEET DATA
Cash and Cash Equivalents
and Temporary Investments......... $ 50,685 $ 85,684 $ 72,902 $ 62,286 $ 35,430 $ 37,357 $ 48,701
PP&E--Net........................... 787,975 736,282 769,361 659,339 611,450 524,322 469,070
Total Assets........................ 1,361,181 1,317,312 1,352,929 1,238,954 1,138,242 959,582 796,088
Notes Payable....................... 28,788 21,596 27,542 28,002 16,429 13,447 21,163
Long-term debt--Including Current... 560,833 558,608 560,921 536,476 492,946 470,257 354,024
Long-term debt--affiliated.......... 230,274 237,379 237,035 231,360 223,125 226,923 222,021
TDS Telecommunications Group
Equity............................ $ 373,895 $ 321,836 $ 343,816 $ 265,387 $ 228,800 $ 107,298 $ 88,733
</TABLE>
- ------------
(1) Effective January 1, 1994, TDS adopted Statement of Financial Accounting
Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment
Benefits." The cumulative effect of the change on years prior to 1994 has
been reflected in 1994 net income. Prior years' financial information has
not been restated.
-49-
<PAGE>
SELECTED FINANCIAL INFORMATION OF THE AERIAL COMMUNICATIONS GROUP
The following table sets forth selected financial information for the Aerial
Group for each of the fiscal years in the five-year period ended December 31,
1996 and for the nine-month periods ended September 30, 1996 and 1997. The
information for each of the five years ended December 31, 1996 has been derived
from the audited Financial Statements contained in Annex IV and other financial
information. Information for the nine-month periods ended September 30, 1996 and
1997 has been derived from the unaudited financial statements of the Aerial
Group contained in Annex IV, which have been prepared on the same basis as the
audited financial statements of the Company, and, in the opinion of management,
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for such period.
Operating results for the nine-month period ended September 30, 1997 are not
necessarily indicative of the results of operations that may be expected for the
year ending December 31, 1997.
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS
ENDED OR AT SEPTEMBER
30, YEAR ENDED OR AT DECEMBER 31,
---------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING FINANCIAL DATA:
Operating Revenues.................. $ 25,791 $ -- $ -- $ -- $ -- $ -- $ --
Operating (Loss).................... (116,170) -- -- -- -- -- --
Investment and Other Income......... (21,480) (20,576) 7,924 316 (266) 2 4
Interest Expense, Net............... 13,735 1,677 2,762 1,051 50 40 15
Income Tax Expense (Benefit)........ 3,028 1,453 (867) (2,096) (742) (36) (69)
Net (Loss) to Shareholders.......... $ (154,413) $ (23,706) $ (37,921) $ (6,468) $ (1,283) $ (67) $ (134)
BALANCE SHEET DATA:
Cash and Cash Equivalents........... $ 261 $ 99,357 $ 35,284 $ 261 $ 10 $ 4 $ 17
Property, Plant and Equipment
(Net)............................. 548,191 10,201 252,423 12,087 -- 414 344
Investment in PCS Licenses (Net).... 295,333 305,676 304,354 305,818 20,401 -- --
Total Assets........................ 899,580 532,422 672,827 360,444 21,320 512 441
Long-term Debt (Revolving Credit
Agreement--TDS)................... 330,426 -- -- 60,238 22,659 650 450
Long-term Debt(1)................... 165,278 11,427 103,743 -- -- -- --
Aerial Communications Group Equity
(Deficit)......................... 284,705 451,780 437,785 281,282 (1,444) (161) (94)
Construction Expenditures........... $ 203,374 $ 70,407 $ 242,270 $ 12,134 $ -- $ -- $ --
</TABLE>
- ------------
(1) Does not reflect borrowings of $100 million by Aerial pursuant to a private
placement completed on February 5, 1998 in connection with a financing
arrangement relating to its existing vendor financing.
-50-
<PAGE>
SELECTED FINANCIAL INFORMATION OF THE TDS GROUP
The following table sets forth selected financial information for the TDS
Group for each of the fiscal years in the five-year period ended December 31,
1996 and for the nine-month periods ended September 30, 1996 and 1997. The
information for each of the five years ended December 31, 1996 has been derived
from the audited Financial Statements contained in Annex V and other financial
information. Information for the nine-month periods ended September 30, 1996 and
1997 has been derived from the unaudited financial statements of the TDS Group
contained in Annex V, which have been prepared on the same basis as the audited
financial statements of the Company, and, in the opinion of management, contain
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the results of operations for such period. Operating
results for the nine-month period ended September 30, 1997 are not necessarily
indicative of the results of operations that may be expected for the year ending
December 31, 1997.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED OR AT SEPTEMBER
30, YEAR ENDED OR AT DECEMBER 31,
---------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Income.......................... $ 51,364 $ 41,600 $ 47,539 $ 22,691 $ 26,052 $ 30,972 $ 9,914
Net Income Available to Common and
Series A Common Shares............ 49,942 40,831 45,693 20,757 24,243 28,586 7,677
OTHER DATA:
Cash and Cash Equivalents and
Temporary Investments............. $ 8,001 $ 64,270 $ 58,282 $ 19,111 $ 23,543 $ 43,944 $ 15,062
Working Capital..................... (641,042) (242,437) (243,144) (354,646) (213,893) (69,860) (98,684)
Property, Plant and Equipment,
net............................... 91,641 88,866 86,051 91,693 84,120 75,485 67,361
Total Assets........................ 1,357,120 1,116,973 1,079,975 1,006,728 1,038,484 802,280 778,906
Notes Payable-Affiliates............ 261,503 303,006 201,641 190,085 108,130 123,511 94,258
Notes Payable-Other(2).............. 449,954 95,468 159,162 182,625 97,724 6,059 46,210
Redeemable Preferred Shares,
including current portion......... 1,579 1,937 1,858 15,093 25,001 27,367 27,967
TDS Group Equity.................... 557,394 619,500 611,147 464,618 628,963 569,407 549,735
Construction Expenditures........... $ 31,091 $ 41,892 $ 44,560 $ 36,905 $ 37,737 $ 29,267 $ 26,831
</TABLE>
- ------------
(1) The TDS Group includes Telephone and Data Systems, Inc. and all of its
subsidiaries and their respective properties and assets other than (except
with respect to the Retained Interests): United States Cellular and its
subsidiaries (which are included in the United States Cellular Group), TDS
Telecom and its subsidiaries (which are included in the TDS
Telecommunications Group), Aerial and its subsidiaries (which are included
in the Aerial Communications Group) and any other assets or liabilities or
subsidiaries of Telephone and Data Systems, Inc. attributed to the United
States Cellular Group, the TDS Telecommunications Group or the Aerial
Communications Group. The TDS Group reflects primarily the TDS Group's
Retained Interest in the United States Cellular Group, the TDS Telecom Group
and the Aerial Group, the Corporate operations (including corporate
management, intercompany financing, cash management and intercompany income
tax allocation activities) and the operations of American Paging, Inc., an
82.3%-owned subsidiary.
Under the Tracking Stock Proposal, prior to the Telecom Public Offering, the
U.S. Cellular Merger, the Aerial Merger and the Distribution, the TDS Group
would have an approximately 81% Retained Interest in the Cellular Group, a
100% Retained Interest in the TDS Telecom Group, and an approximately 83%
interest in the Aerial Group. Following completion of the Tracking Stock
Proposal, it is currently anticipated that the TDS Group would have an
approximately 20% Retained Interest in each of the Groups. For purposes of
the TDS Group financial statements, the TDS Group's Retained Interest in the
equity value of the Groups has been reflected on "Investments In Affiliated
Groups." Similarly, the net income or loss of the Groups attributable to the
TDS Group Retained Interest is reflected as "Equity in Net Income of
Cellular Group, Equity in Net Income of Telecom Group and Equity in Net
(Loss) of Aerial Group" in the Statements of Operations.
(2) Does not reflect the repayment of $150 million Notes Payable--Other on
November 18, 1997 or the repayment of $150 million Notes Payable--Other on
February 10, 1998, or the issuance on such dates of such amounts of
Company-obligated Mandatorily Redeemable Preferred Securities of a
Subsidiary Trust holding solely Company Subordinated Debentures.
-51-
<PAGE>
PROPOSAL 1
TRACKING STOCK PROPOSAL
GENERAL
The Tracking Stock Proposal would, among other things, create three new
classes of common stock which are intended to separately reflect the performance
of the Company's cellular telephone, landline telephone and personal
communications services businesses, and change the state of incorporation of the
Company from Iowa to Delaware. Capitalized terms used in the following
description of the Tracking Stock Proposal and not otherwise defined have the
meanings ascribed to them elsewhere in this Proxy Statement/Prospectus. See "--
Certain Definitions" and Exhibit G--Index of Certain Defined Terms.
Under the Tracking Stock Proposal, you are being asked to approve the Merger
Agreement between the Company and TDS Delaware, which contemplates the Merger of
the Company with and into TDS Delaware, with TDS Delaware continuing as the
surviving corporation. A copy of the Merger Agreement is attached hereto as
EXHIBIT A. TDS Delaware has been organized for the sole purpose of effecting the
Merger. For purposes of the following discussion, the Company prior to the
effectiveness of the Merger (the "Effective Time") is hereinafter sometimes
referred to as "TDS Iowa." At the Effective Time, the separate existence of TDS
Iowa will cease and TDS Delaware will succeed to the business of TDS Iowa, and
TDS will cease to be subject to the Iowa Business Corporation Act ("IBCA") and
become subject to the Delaware General Corporation Law ("DGCL").
If the Tracking Stock Proposal is approved, immediately prior to the
Effective Time, the Certificate of Incorporation of TDS Delaware would be
amended and restated (the "Restated Certificate"). A copy of the proposed
Restated Certificate is attached hereto as EXHIBIT B. The Restated Certificate
would, among other things, authorize 475,000,000 shares of capital stock, and
establish the rights, limitations and preferences of such shares. The Restated
Certificate will authorize 326,664 Preferred Shares, $.01 par value ("Delaware
Preferred Shares"), representing the number of issued Preferred Shares of TDS
Iowa, and reclassify the 4,673,336 authorized but unissued Preferred Shares of
TDS Iowa as Undesignated Shares, par value $.01 per share ("Undesignated
Shares"). The authorized shares of capital stock would also include 470,000,000
shares of common stock, to consist of 100,000,000 Common Shares, $.01 par value
("Delaware Common Shares"); 25,000,000 Series A Common Shares, $.01 par value
("Delaware Series A Common Shares"); 20,000,000 Special Common Shares, $.01 par
value ("Special Common Shares"); 140,000,000 Cellular Group Shares, $.01 par
value; 90,000,000 Telecom Group Shares, $.01 par value; and 95,000,000 Aerial
Group Shares, $.01 par value.
The Cellular Group Shares, when issued, are intended to reflect the separate
performance of the Cellular Group, which consists of the Company's interest in
U.S. Cellular, a subsidiary of the Company which operates and invests in
cellular telephone companies and properties; the Telecom Group Shares, when
issued, are intended to reflect the separate performance of the Telecom Group,
which consists of the Company's interest in TDS Telecom, a subsidiary of the
Company which operates landline telephone companies and includes the notional
allocation of certain TDS debt; and the Aerial Group Shares, when issued, are
intended to reflect the separate performance of the Aerial Group, which consists
of the Company's interest in Aerial, a subsidiary of the Company which is
developing broadband personal communications services.
Except as provided below under "Dissenting Shareholders' Rights," at the
Effective Time, by virtue of the Merger, each of the Common Shares, $1.00 par
value, of TDS Iowa consists of ("Iowa Common Shares") issued and outstanding
immediately prior to the Effective Time will be converted into one fully paid
Delaware Common Share; each of the Series A Common Shares, $1.00 par value, of
TDS Iowa ("Iowa Series A Common Shares") issued and outstanding immediately
prior to the Effective Time will be converted into one fully paid Delaware
Series A Common Share, and each of the Preferred Shares of TDS Iowa, without par
value ("Iowa Preferred Shares"), issued and outstanding immediately prior to the
Effective Time will be converted into one fully paid share of a corresponding
class of Delaware Preferred Shares. At the Effective Time, certificates which
immediately prior to the Effective Time represented Iowa Common Shares, Iowa
Series A Common Shares or Iowa Preferred Shares ("Iowa Shares"), other than
certificates held by holders of Iowa Shares who have properly taken action to
perfect dissenters' rights, will be deemed for all corporate purposes to
represent the number of Delaware Common Shares, Delaware Series A Common Shares
or Delaware Preferred Shares ("Delaware Shares"), into which such Iowa Shares
shall have been converted.
IT WILL NOT BE NECESSARY FOR YOU TO EXCHANGE YOUR EXISTING STOCK
CERTIFICATES REPRESENTING IOWA SHARES FOR STOCK CERTIFICATES REPRESENTING
DELAWARE SHARES. YOU SHOULD RETAIN ALL CERTIFICATES WHICH REPRESENT SHARES OF
THE COMPANY SINCE SUCH
-52-
<PAGE>
CERTIFICATES WILL CONTINUE TO REPRESENT SHARES OF THE SAME CLASS OR SERIES OF
TDS DELAWARE FOLLOWING THE MERGER.
The reincorporation of the Company in Delaware will not result in any change
in the business, management, board of directors, assets, liabilities or net
worth of the Company, and the business of the Company will continue to be
managed from its corporate headquarters in Chicago, Illinois. It will, however,
allow the Company to benefit from Delaware's well-developed corporate laws,
which are periodically updated and revised to meet changing business needs.
Delaware courts have developed considerable expertise in dealing with corporate
issues and a substantial body of case law has been established construing
Delaware law and establishing public policies with respect to Delaware
corporations. As a consequence, a greater measure of predictability is possible
in Delaware with respect to corporate legal affairs than is available in other
states. In addition, the Company believes that Delaware law will offer clearer
guidance with respect to legal issues that may arise as a result of the
existence of separate classes of Tracking Stock.
There will be no change in control of the Company as a result of the Merger
or the related Transactions. After the Merger, the TDS Voting Trust will
continue to control the election of a majority of the Board and a majority of
the voting power of TDS Delaware. However, if the Tracking Stock Proposal is
approved, the number of directors that the TDS Voting Trust will elect will
decrease by one director, and the number of directors that will be elected by
the voting group which includes the holders of Preferred Shares issued before
October 31, 1981 and Common Shares will increase by one director.
The Merger Agreement may be amended prior to the Effective Time, either
before or after shareholder approval thereof; provided, however, that the Merger
Agreement may not be amended after such shareholder approval if such amendment
would (i) alter or change the amount or kind of shares or other consideration to
be received by shareholders in the Merger, (ii) alter or change any of the terms
and conditions of the Merger Agreement if such alteration or change would
adversely affect the shareholders or (iii) otherwise violate applicable law.
If the Tracking Stock Proposal is approved by the shareholders, the Merger
will become effective following the filing of the Certificate of Merger with the
Secretary of State of Delaware and Articles of Merger with the Secretary of
State of Iowa. Subject to the receipt of all necessary regulatory consents and
approvals, as discussed below, it is anticipated that this will take place
promptly after the Special Meeting. However, the Merger Agreement provides that
the Merger may be abandoned by the Board prior to the Effective Time, either
before or after shareholder approval.
Shareholders of the Company whose shares are not voted in favor of the
Tracking Stock Proposal and who otherwise duly take all action required by
statute will have statutory dissenter's rights under Iowa law. See "Dissenting
Shareholders' Rights." If, in the judgment of the Board, an excessive number of
shareholders assert dissenters' rights, it is contemplated that the Board may
abandon the Tracking Stock Proposal, even if it is approved by shareholders.
THE TRANSACTIONS
Subject to the approval of the Tracking Stock Proposal by shareholders and
the effectiveness of the Merger, the Board intends to effect the Transactions
discussed below. The Transactions will not require approval by shareholders of
the Company. The Transactions are subject to various conditions and there can be
no assurance that all or any of the Transactions will take place or that they
will take place in the manner currently contemplated.
TELECOM PUBLIC OFFERING. Promptly after approval of the Tracking Stock
Proposal by shareholders and the effectiveness of the Merger, the Company
intends to offer and sell Telecom Group Shares in a public offering for cash,
and to allocate the net proceeds thereof to the Telecom Group. The Company
intends to file with the SEC a registration statement on Form S-3 relating to
the registration of between 10,000,000 and 17,000,000 Telecom Group Shares. This
offering is expected to commence promptly after the approval of the Tracking
Stock Proposal by shareholders and the effectiveness of the Merger, subject to
prevailing market conditions and other factors. See "--The Telecom Group."
U.S. CELLULAR MERGER. The Company has made an offer to issue Cellular Group
Shares in exchange for all of the Common Shares of U.S. Cellular which are not
owned by the Company pursuant to a merger between a subsidiary of the Company
and U.S. Cellular. The TDS offer to the Board of Directors of U.S. Cellular
proposes to exchange 1.14613 Cellular Group Shares for each issued Common Share
of U.S. Cellular (other than shares held by the Company) in the U.S. Cellular
Merger. This merger is subject to various conditions, including approval of the
Tracking Stock Proposal by shareholders of the Company, effectiveness of the
Merger, the negotiation of the other
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terms of a merger agreement between the Company and U.S. Cellular, approval of
the U.S. Cellular Merger by a special committee of the board of directors, the
full board of directors and the shareholders of U.S. Cellular, and final
approval by the Board.
The Common Shares of U.S. Cellular are currently traded on the AMEX under
the symbol "USM." If the U.S. Cellular Merger is consummated as contemplated,
U.S. Cellular would become a wholly-owned subsidiary of the Company and such
Common Shares of U.S. Cellular would be delisted from the AMEX. In the U.S.
Cellular Merger, holders of Common Shares of U.S. Cellular would receive
Cellular Group Shares of TDS, which would be listed on the AMEX. If the U.S.
Cellular Merger does not take place for any reason, U.S. Cellular may not become
a wholly-owned subsidiary of the Company and the Common Shares of U.S. Cellular
may continue to be publicly traded. Alternatively, although the Company has no
current plans or intentions to do so, the Company may consider acquiring such
Common Shares of U.S. Cellular in an exchange offer for Cellular Group Shares or
other securities, in a tender offer for cash or through open market or private
purchases, or taking other action to acquire some or all of the shares of U.S.
Cellular not owned by the Company. See "--The Cellular Group."
AERIAL MERGER. The Company has made an offer to issue Aerial Group Shares
in exchange for all of the Common Shares of Aerial which are not owned by the
Company pursuant to a merger between a subsidiary of the Company and Aerial. The
TDS offer to the Board of Directors of Aerial proposes to exchange .91485 Aerial
Group Shares for each issued Common Share of Aerial (other than shares held by
the Company) in the Aerial Merger. This merger is subject to various conditions,
including approval of the Tracking Stock Proposal by shareholders of the
Company, effectiveness of the Merger, the negotiation of the other terms of a
merger agreement between the Company and Aerial, approval of the Aerial Merger
by a special committee of the board of directors, the full board of directors
and the shareholders of Aerial, and final approval by the Board.
The Common Shares of Aerial are currently traded on the Nasdaq National
Market under the symbol "AERL." If the Aerial Merger is consummated as
contemplated, Aerial would become a wholly-owned subsidiary of the Company and
such Common Shares of Aerial would be delisted from the Nasdaq National Market.
In the Aerial Merger, holders of Common Shares of Aerial would receive Aerial
Group Shares of TDS, which would be listed on the AMEX. If the Aerial Merger
does not take place for any reason, Aerial may not become a wholly-owned
subsidiary of the Company and the Common Shares of Aerial may continue to be
publicly traded. Alternatively, although the Company has no current plans or
intentions to do so, the Company may consider acquiring such Common Shares of
Aerial in an exchange offer for Aerial Group Shares or other securities, in a
tender offer for cash or through open market or private purchases, or taking
other action to acquire some or all of the shares of Aerial not owned by the
Company. See "--The Aerial Group."
THE DISTRIBUTION. After the completion of the Merger, the Telecom Public
Offering, the U.S. Cellular Merger and the Aerial Merger, the Board intends to
authorize the Distribution of Cellular Group Shares, Telecom Group Shares and
Aerial Group Shares in the form of a stock dividend to holders of Series A
Common Shares and Common Shares. It is currently expected that the Distribution
would take place in June 1998 or later. The Board intends to distribute one
Cellular Group Share, two-thirds of a Telecom Group Share and two-thirds of an
Aerial Group Share with respect to each Common Share and Series A Common Share
outstanding on the record date for the Distribution. The Distribution will be
made to all shareholders in proportion to the number of Common Shares and Series
A Common Shares owned on the Distribution record date. Although the Board
presently intends to make the Distribution if the Merger and the other
Transactions take place, the Board reserves the right not to effect all or any
part of the Distribution even if the Tracking Stock Proposal is approved by the
shareholders and the Merger and the other Transactions take place. In addition,
the Board reserves the right to effect all or any part of the Distribution
regardless of whether or not such other Transactions have taken place.
No fractional shares of any of the Tracking Stocks will be issued or
distributed as part of the Distribution, except as discussed below under "--
Dividend Reinvestment Plans." If the number of shares of a particular Tracking
Stock that a holder of Common Shares or Series A Common Shares is entitled to
receive as part of the Distribution should include a fraction of a whole share,
the Company will pay such holder the cash equivalent of such fractional share.
As soon as practicable after the Distribution, Harris Trust and Savings Bank,
the transfer agent for TDS, will mail to each record holder of Common Shares or
Series A Common Shares on the Distribution record date three certificates, each
representing the number of whole shares of each Tracking Stock Group, as the
case may be, to which such holder is entitled and a check for any fractional
shares.
Because the Distribution is to be made to all shareholders of common stock
in proportion to the number of Common Shares and Series A Common Shares owned on
the Distribution record date by each shareholder, the relative ownership
interest and voting power of each holder of whole Common Shares and Series A
Common
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Shares will be substantially the same immediately after effectiveness of the
Merger and the Distribution as it was immediately prior thereto, except with
respect to the election of one director. With respect to the election of
directors, the holders of Preferred Shares issued after October 31, 1981 and
Series A Common Shares as such will elect one fewer director, and the holders of
Preferred Shares issued before October 31, 1981 and Common Shares will vote in
the election of one additional director together with holders of shares of
Tracking Stock.
The shares of Tracking Stock which would be issued in the Distribution would
represent an Outstanding Interest of approximately 75% in each Tracking Group.
When considering the shares of Tracking Stock which are contemplated to be
issued in the Telecom Public Offering, the U.S. Cellular Merger and the Aerial
Merger, as well as the Distribution, the Outstanding Interest would initially
represent in the aggregate an approximately 80% interest in each Tracking Group.
Upon the completion of all of the Transactions as contemplated, the TDS Group
would have a Retained Interest of approximately 20% in each Tracking Group,
along with all other interests held by the Company. The common equity interests
in the TDS Group would be represented by the Delaware Series A Common Shares and
the Delaware Common Shares.
The distribution ratios for the Cellular Group Shares, the Telecom Group
Shares and the Aerial Group Shares were determined by the Board in consultation
with the Financial Advisors, and are based upon the desired initial trading
ranges of such shares and other factors. The amount of the Retained Interest to
be initially retained by the TDS Group with respect to each of the Tracking
Groups was also established by the Board in consultation with the Financial
Advisors, considering, among other factors, the desired initial trading range of
the Common Shares.
Since the Telecom Public Offering, the U.S. Cellular Merger and the Aerial
Merger are anticipated to precede the Distribution, after such other
Transactions but before the Distribution, the Retained Interest of the TDS Group
in each Tracking Group would initially be approximately 80% for the Telecom
Group, 81% for the Cellular Group and 83% for the Aerial Group. Assuming
completion of the Transactions as contemplated, approximately 20% of the common
equity of the Company attributable to the Telecom Group would be represented by
the Telecom Group Shares issued in the Telecom Public Offering, 19% of the
common equity of the Company attributable to the Cellular Group would be
represented by the Cellular Group Shares issued in the U.S. Cellular Merger, and
17% of the common equity of the Company attributable to the Aerial Group would
be represented by the Aerial Group Shares issued in the Aerial Merger.
In addition to the shares of each of the Tracking Stocks to be issued in the
Transactions, shares of each of the Tracking Stocks are being reserved for
issuance upon conversion, exercise or exchange subsequent to the Distribution of
certain outstanding convertible securities issued by the Company, and certain
options to purchase Common Shares that are outstanding under the Company's
existing stock incentive plans. All such convertible securities and options will
be adjusted upon the Distribution such that the security or option is
convertible, or exercisable, as the case may be, into Common Shares and shares
of each of the Cellular Group, Telecom Group and Aerial Group as if such
convertible security, or option, was converted or exercised, as the case may be,
immediately prior to the Distribution.
The following table shows the number of shares of capital stock of TDS which
would be issued in the Merger (based on shares outstanding as of November 30,
1997), the number of shares of TDS capital stock which would be issued if all of
the Transactions are completed as contemplated, the number of shares which are
expected to be reserved for issuance for certain purposes and the number of
authorized shares which would be available for other purposes.
<TABLE>
<CAPTION>
SHARES
ISSUABLE TO AUTHORIZED AVAILABLE
ISSUED IN ISSUED IN ISSUED IN OTHER THIRD FOR FOR
MERGER DISTRIBUTION TRANSACTIONS(2) PARTIES(3) ISSUANCE(4) ISSUANCE
----------- ----------- --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Preferred Shares........................ 296,664 -- -- 30,000 -- --
Undesignated Shares..................... -- -- -- -- -- 4,673,336
Common Shares........................... 53,878,129(1) -- -- 2,111,463 6,048,845 37,961,563
Series A Common Shares.................. 6,933,233 -- -- -- 175,567 17,891,200
Special Common Shares................... -- -- -- -- -- 20,000,000
Total TDS Group Shares................ 60,811,362 -- -- 2,111,463 6,224,412 75,852,763
Cellular Group.......................... -- 60,811,362 18,897,187 10,912,966 7,291,826 23,927,668
Telecom Group........................... -- 40,540,908 13,500,000 1,407,642 5,913,809 16,531,647
Aerial Group............................ -- 40,540,908 11,453,996 2,779,917 5,116,534 23,002,651
<CAPTION>
RETAINED TOTAL
INTEREST(5) AUTHORIZED
----------- ------------
<S> <C> <C>
Preferred Shares........................ -- 326,664
Undesignated Shares..................... -- 4,673,336
Common Shares........................... -- 100,000,000
Series A Common Shares.................. -- 25,000,000
Special Common Shares................... -- 20,000,000
Total TDS Group Shares................ -- 145,000,000
Cellular Group.......................... 18,158,991 140,000,000
Telecom Group........................... 12,105,994 90,000,000
Aerial Group............................ 12,105,994 95,000,000
</TABLE>
- ------------
(1) Includes 484,012 Common Shares held by a subsidiary of the Company.
(2) The other Transactions include the U.S. Cellular Merger, the Telecom Public
Offering and the Aerial Merger. See "--The Cellular Group," "--The Telecom
Group" and "--The Aerial Group" for a discussion of how these numbers were
determined.
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(3) Includes shares issuable as Committed Acquisition Shares and shares issuable
pursuant to the Pre-Distribution Convertible Securities by TDS, and shares
which would become issuable as a result of the U.S. Cellular Merger and the
Aerial Merger. See "--Certain Definitions."
(4) For further information with respect to the shares authorized for issuance,
see "--The Cellular Group," "--The Telecom Group," "--The Aerial Group" and
"--The TDS Group."
(5) Net of shares issuable from Retained Interest.
BACKGROUND AND REASONS FOR THE TRACKING STOCK PROPOSAL AND RELATED TRANSACTIONS;
RECOMMENDATION OF THE BOARD
THE BOARD HAS UNANIMOUSLY APPROVED THE TRACKING STOCK PROPOSAL AND BELIEVES
ITS ADOPTION TO BE IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS.
ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
TRACKING STOCK PROPOSAL.
TDS's management and Board have extensively studied the Tracking Stock
Proposal and the Transactions, and have consulted with financial and legal
advisors of TDS with respect to the advisability and terms of such proposal and
the related Transactions. The Board, including directors who are not trustees or
beneficiaries of the TDS Voting Trust, and directors who are not officers of
TDS, has unanimously approved the adoption of the Tracking Stock Proposal
BACKGROUND. In recent years, a number of publicly held companies have
adopted tracking stock capital structures. The Board and TDS's management have,
for several years, considered various alternatives regarding TDS's capital
structure as a means to enhance shareholder value, including the possibility of
(i) a spin-off to the Company's shareholders of all or part of one or more of
its subsidiaries, (ii) public offerings of a portion of the Company's interests
in one or more of its subsidiaries and (iii) the issuance of one or more
tracking stocks which would be defined by reference to the performance of one or
more of its subsidiaries. These deliberations resulted from the Board's and
management's concern that the historical price performance of the Common Shares
may not adequately reflect the value of the Company. The Board and management
believed that the Company was being undervalued by the capital markets, in part
because the capital markets focused primarily upon certain businesses and did
not give full value to certain other businesses held by the Company. The Board
believed that overall shareholder value could be enhanced if there was increased
recognition in the investment community of the Company's subsidiaries and their
individual lines of business and the value of the assets used in such
businesses.
Over the course of several months in 1997, management met with
representatives of several investment banking firms and considered alternatives
for enhancing shareholder value. Several investment banking firms outlined
proposals involving tracking stocks. Following these meetings, management
engaged the Financial Advisors and worked with such firms and with legal
advisors in creating the preliminary terms of the Tracking Stock Proposal. The
Telecom Public Offering, the U.S. Cellular Merger, the Aerial Merger and the
Distributions were also conceived and developed during the course of the
discussions with the Financial Advisors and legal advisors. The terms of the
Tracking Stock Proposal and the Transactions were further refined and presented
to the Board by management in October, 1997.
On October 31, 1997 and November 17, 1997, the Board of TDS, including
members of TDS's management, heard presentations from the Financial Advisors,
and considered and discussed the proposal to create three new classes of
Tracking Stock--the Cellular Group Shares, the Telecom Group Shares and the
Aerial Group Shares--as a means to enhance shareholder value as well as the
financial flexibility of TDS and its shareholders. The possibility of the
Telecom Public Offering, the U.S. Cellular Merger and the Aerial Merger were
also discussed. The terms, likely benefits and possible disadvantages of the
Tracking Stock Proposal and the related Transactions were discussed. Following
these discussions, the Board authorized TDS management to proceed with
finalizing the terms of the Tracking Stock Proposal and the related
Transactions, with the assistance of the Financial Advisors and legal advisors,
and to present such terms to the Board at a subsequent meeting.
Following these meetings, the Company's management, the Financial Advisors
and legal advisors developed the terms of the Tracking Stock Proposal and
related Transactions and proposed them to the Board. At meetings of the Board on
December 15 and December 17, 1997, the directors discussed the proposed terms of
the Tracking Stock Proposal and the related Transactions. After discussion of
the Tracking Stock Proposal and related Transactions, on December 17, 1997, the
Board determined that the Tracking Stock Proposal was the best alternative
available to TDS to enhance shareholder value and that it was in the best
interests of the Company and its shareholders. The Board, including directors
who are not trustees or beneficiaries of the TDS Voting Trust, and
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directors who are not officers of TDS, unanimously approved the Tracking Stock
Proposal and directed management to submit the proposal to the Company's
shareholders at the Special Meeting. The Board also authorized the Telecom
Public Offering, subject to approval of the Tracking Stock Proposal by the
shareholders and the effectiveness of the Merger, and certain other conditions.
In addition, the Board authorized management to make offers to U.S. Cellular and
Aerial to acquire the Common Shares of U.S. Cellular and Aerial, respectively,
which are not held by the Company pursuant to mergers between each of U.S.
Cellular and Aerial and wholly-owned subsidiaries of the Company, subject to
certain conditions, including approval by TDS shareholders of the Tracking Stock
Proposal, the effectiveness of the Merger, the negotiation of the other terms of
the merger agreements relating to such mergers and final TDS Board approval. The
U.S. Cellular Merger and Aerial Merger are also subject to approval by the
boards of directors and shareholders of U.S. Cellular and Aerial, respectively.
REASONS. The Board believes that the division of the Company's interests in
its principal businesses into the Tracking Groups would enable the Company to
benefit in a variety of ways described below, while also maintaining the
benefits of remaining a single entity, and would facilitate increased investor
understanding of the different businesses. The Board believes that a capital
structure which includes the three Tracking Stocks offers a number of potential
benefits which outweigh its disadvantages, as described below, and that adoption
of the Tracking Stock Proposal and the completion of the related Transactions is
in the best interests of TDS and all of its shareholders. The Board did not find
it practicable to, and did not, quantify or otherwise assign relative weights to
the advantages or disadvantages of the proposal, although the following factors
were considered important in its decision.
GREATER MARKET RECOGNITION. The Tracking Stock Proposal is intended to
result in greater market recognition of the value (individually and
collectively) of the Company and the Company's three principal business
groups, thereby enhancing shareholder value over the long term. The Board of
Directors believes that overall shareholder value would be enhanced if there
was increased recognition in the investment community of the Company's
individual lines of business and the value of the assets used in such
businesses. Additionally, a public market for each of TDS's three principal
business groups should make it easier for the capital markets to understand
and value the Company's businesses and assets. The Company should also be
able to reduce its cost of capital because of the improved equity valuation
that should result from the implementation of the Tracking Stock Proposal.
INCREASED LIQUIDITY FOR U.S. CELLULAR AND AERIAL. The Board considered
it important that the Tracking Stock Proposal would permit the Company to
make offers to acquire the publicly-traded common equity of the Company
attributable to U.S. Cellular and Aerial, subject to the conditions
discussed above. Management believes that the Distribution of Cellular Group
Shares and Aerial Group Shares would serve to increase the liquidity of the
publicly-traded equity related to U.S. Cellular and Aerial. In order to
maintain the benefits of consolidating U.S. Cellular and Aerial with TDS for
tax purposes, including the preservation of the ability to spin-off such
companies on a tax-free basis to shareholders, the publicly-traded Common
Shares of U.S. Cellular and Aerial have been limited to less than 20% of the
common equity of U.S. Cellular and Aerial. Management believes that the
liquidity for U.S. Cellular and Aerial has been below the liquidity for many
of their respective cellular and PCS peers and that this may have adversely
affected the public market value of their equity. The Board has been advised
by the Financial Advisors that the liquidity of the Cellular Group Shares
and Aerial Group Shares should be superior to that of the Common Shares of
U.S. Cellular and Aerial. Since the Cellular Group Shares and Aerial Group
Shares would represent approximately 80% of the Company's equity interest in
U.S. Cellular and Aerial (assuming the completion of the Transactions as
contemplated), as compared to less than 20% currently, the Cellular Group
Shares and the Aerial Group Shares should have greater liquidity than the
existing U.S. Cellular and Aerial Common Shares. The Financial Advisors have
advised the Company that this increased liquidity may increase the valuation
of the Cellular Group Shares and Aerial Group Shares as compared to the
recent public market values of the Common Shares of U.S. Cellular and
Aerial.
FINANCING FLEXIBILITY. The Tracking Stock Proposal should provide the
Company with greater flexibility in raising capital and making acquisitions,
with equity securities specifically related to the Tracking Groups. Because
the Board does not expect to declare a dividend on the Cellular Group Shares
or Aerial Group Shares for the foreseeable future, any issuance of such
stock, in connection with an acquisition or otherwise, would not reduce cash
flow that would otherwise be available for capital investments. The Tracking
Stock Proposal would provide the Company greater flexibility with regard to
raising capital or making acquisitions for a Tracking Group's businesses,
including strategic partnering transactions, independent of the other Groups
by using equity securities specifically related to one of the Tracking
Groups. The Tracking Stocks may also be used, rather than Common Shares, for
TDS's employee stock purchase plans, stock option plans and other employee
benefit plans. The listing of the Tracking Stocks on the AMEX will create a
trading market, the
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existence of which would be an important factor in assessing the value of
such stock in connection with and facilitating any such acquisition,
financing or employee plan.
SHAREHOLDER FLEXIBILITY. The issuance and sale of the Tracking Stocks
would also provide shareholders with the opportunity to continue to invest
in all of the TDS businesses through the TDS Group or any one or more of the
Tracking Groups individually, depending upon their investment objectives.
While investors currently have the opportunity to invest directly in U.S.
Cellular or Aerial, the Telecom Group Shares would offer investors the
opportunity to separately participate in the performance of TDS Telecom, as
well as U.S. Cellular and Aerial. The Tracking Stock Proposal creates
investment vehicles that meet the requirements of distinct investor
groups--those looking for yield and income of a relatively mature business,
in the case of the Telecom Group Shares; those looking for the growth
potential of a less mature business, in the case of Cellular Group Shares;
those looking to capitalize on the possible opportunities offered by new
technologies, in the case of the Aerial Group Shares; and those interested
in owning an interest in a diversified telecommunications company, in the
case of the Common Shares--which should encourage proper valuation of the
assets in each of the Groups.
CONSOLIDATED ENTERPRISE. The Tracking Stock Proposal will retain for
the Company the advantages of doing business as a single company. As part of
a single entity, each Group would be in a position to benefit from synergies
with the other, including synergies that may result from the eventual
convergence of the telecommunications and wireless industries. In addition,
by remaining a single entity, the Company will continue to enjoy certain
strategic, financial and operational benefits that would not be available if
the Groups were separate legal entities. It would also permit the Company to
retain the advantages of tax consolidation and economies of scale.
Furthermore, the Tracking Stock Proposal is not expected to have any
material adverse impact on the Company's credit rating and cost of
borrowing, which would occur if the Groups were divided into separate
entities.
ACCEPTANCE OF TRACKING STOCK CAPITAL STRUCTURES. The use by other
companies of equity securities intended to reflect separately the
performance of specific businesses has increased in the last several years
and several large, well-known companies have adopted capital structures
involving tracking stocks. The Financial Advisors have advised the Company
that, in general, the market performance of many of such securities has been
favorable and has been comparable to industry peers that are separate
companies. The market appears to value such securities based on the
performance of the underlying business, and tracking stocks are now
generally well-followed by financial analysts and accepted by investors.
TAX FACTORS. Implementation of the Tracking Stock Proposal should not
be taxable to the Company or its shareholders. In comparison to a spin-off
of the Company's shares of U.S. Cellular, TDS Telecom or Aerial to the
holders of Common Shares and Series A Common Shares, implementation of the
Tracking Stock Proposal allows for a tax-free distribution to the Company's
shareholders without the significant limitations imposed by Section 355 of
the Internal Revenue Code. Furthermore, the issuance of the Tracking Stocks
will not prevent the Company from consolidating the operating results of the
Tracking Groups for tax and accounting purposes.
FUTURE ALTERNATIVES. The Tracking Stock Proposal will not preclude
other alternatives to increase shareholder value. The Board will continue to
review other alternatives that may be available to the Company to realize
additional value from the assets attributed to each of the Groups. In
determining whether to pursue a particular alternative, the Board, in
exercising its business judgment, will consider various factors, including
market conditions, the financial and other effects of any such alternative
on the Company and the Groups, and the preservation of its ability to engage
in other restructuring options at such time as such alternatives become
desirable.
ELECTION OF DIRECTORS. The Board also considered it significant that,
as a result of the Tracking Stock Proposal, the election of one fewer
director would be determined by the TDS Voting Trust, and that holders of
Common Shares and, when issued, shares of the Tracking Stock, would be
permitted to vote in the election of such one director.
SUPPORT OF HOLDERS OF COMMON SHARES AND PREFERRED SHARES. A very
important consideration for the Board was the fact that the holders of
Common Shares, Preferred Shares issued before October 31, 1981 and Preferred
Shares issued after October 31, 1981, would each vote separately as groups
on the Tracking Stock Proposal. Therefore, the Merger and the Transactions,
including the Distribution, will not take place unless the Tracking Stock
Proposal is approved by a majority of the votes entitled to be cast by the
holders of each of the
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Common Shares, Preferred Shares issued before October 31, 1981 and Preferred
Shares issued after October 31, 1981, as well as the Series A Common Shares,
each voting as a separate group. Although the TDS Voting Trust controls a
majority of the votes of the Series A Common Shares, the TDS Voting Trust
does not own or vote any Common Shares or Preferred Shares. In addition,
management beneficially owns only about 1% of the Common Shares and owns no
Preferred Shares. As a result, the Tracking Stock Proposal will not be
approved unless it is supported by a majority of the shareholders who are
not affiliated with the TDS Voting Trust or management.
SUPPORT OF TDS VOTING TRUST. The Board also considered it important
that the Tracking Stock Proposal would have the support of the trustees of
the TDS Voting Trust which controls over 90% of the Series A Common Shares
and a majority of the voting power of the Company. The trustees of the TDS
Voting Trust have indicated to TDS's management that they would be unwilling
to vote in favor of any proposal as shareholders of TDS which could result
in the voting power of the TDS Voting Trust declining below 50%. On the
other hand, the trustees of the TDS Voting Trust have indicated that they
would support the Tracking Stock Proposal since it would enable TDS to issue
shares of Tracking Stock, or other debt or equity securities convertible
into shares of Tracking Stock, in acquisitions, public or private securities
offerings or for other purposes, without reducing the voting power of the
TDS Voting Trust below 50%.
CONTINUITY OF LONG-TERM PLANS. The adoption of the Tracking Stock
Proposal would reduce the risk of a disruption in the continuity of TDS's
long-term plans and objectives that could otherwise result if the TDS Voting
Trust should find it necessary to sell or distribute a significant block of
stock for diversification, estate tax obligations or for other reasons.
Implementation of the Tracking Stock Proposal would allow the trustees of
the TDS Voting Trust to continue to exercise control over a majority of
TDS's voting power even after the TDS Voting Trust distributes the shares of
the Tracking Stocks to the beneficiaries thereof, and would permit
additional estate planning flexibility, including the determination of the
succession of voting control through bequests of Series A Common Shares to
the heirs of beneficial holders. Thus the Tracking Stock Proposal may
provide a basis for continuity pursuant to such plans and objectives, if and
when such circumstances arise, and should reduce the risk that TDS could at
some future date be compelled to consider a potential acquisition of TDS in
an environment that could be dictated to TDS and the Board by the financial
circumstances of participants in the TDS Voting Trust or by third parties
who may be anticipating or speculating about such circumstances.
EMPLOYEE COMPENSATION AND CONTINUITY. The ability to issue shares of
one or more of the Tracking Stocks would increase TDS's flexibility in
structuring compensation plans to tailor stock incentives to employees. The
creation of three classes of stock that are intended to reflect separately
distinct businesses increases the Company's ability to focus the management
of the respective Groups and provide incentives for employees of each Group
that are tied directly to the stock price performance of the Group in which
they are employed. Implementation of the Tracking Stock Proposal may also
allow employees to continue to concentrate on their responsibilities without
undue concern that the future of TDS could be affected by real or perceived
succession issues or a change in control that could otherwise be triggered
by any substantial divestiture by the TDS Voting Trust in the future. By
reducing the uncertainty that could result if the TDS Voting Trust should
dispose of a significant block of Series A Common Shares, the Tracking Stock
Proposal may, therefore, enhance the ability of TDS to attract and retain
highly qualified key employees.
BUSINESS RELATIONSHIPS. Implementation of the Tracking Stock Proposal
may facilitate strategic partnering transactions and may enhance the
existing and potential business relationships of TDS with parties who may in
the future become concerned about changes in control of TDS in the event
that the voting power of the TDS Voting Trust is ever diluted. TDS may be
better able to attract joint venture and marketing partners willing to make
long-term plans and commitments if TDS is perceived to not be vulnerable to
a takeover or disruption due to uncertainty concerning TDS's control.
BENEFITS OF DELAWARE REINCORPORATION. The Tracking Stock Proposal also
contemplates that the Company will be reincorporated from Iowa to Delaware.
The Company's Board believes that the best interests of the Company and its
shareholders will be served by changing the Company's state of incorporation
from Iowa to Delaware. The Board believes that the General Corporation Law
of Delaware affords desirable flexibility and simplicity in the exercise of
corporate powers which are not available to corporations that are organized
under the laws of Iowa. Delaware is generally recognized as having a modern,
flexible and nationally recognized corporate statute and a well-developed
body of case law that provides predictability and certainty in business
planning. Cases involving corporate law issues are decided in a separate
Court of Chancery in Delaware,
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where judges have substantial experience and precedent in making their
decisions. Due to the importance of corporate law in Delaware, the Delaware
legislature puts a high priority on corporate law matters and is at the
forefront of keeping the Delaware corporate statutes current in the face of
changing business practices and legal developments. Corporate formalities
and administrative procedures have been designed to be relatively simple and
flexible in Delaware. Due to such factors, reincorporating in Delaware may
reduce the impediments and increase the opportunities for structuring
securities and financial transactions, which would facilitate acquisitions,
raising capital and other financing transactions. Delaware law and courts
are also more familiar to foreign investors and their advisors. As a result,
foreign investment and financing opportunities may also be facilitated by
reincorporating in Delaware. The Board therefore believes that the
activities of the Company can be carried on to better advantage if the
Company is able to operate under the corporate laws of Delaware. In
addition, the Company believes that Delaware law will offer clearer guidance
with respect to legal issues that may arise as a result of the existence of
separate classes of Tracking Stock. However, shareholders in some instances
may have fewer rights and less protection under Delaware law than under Iowa
law. See "--Description of Restated Certificate of Incorporation of TDS
Delaware" and "--Comparison of Shareholders' Rights Under Iowa and Delaware
Law."
CONSIDERATION OF POTENTIAL ADVERSE ASPECTS. While the Board has determined
that implementation of the Tracking Stock Proposal is in the best interests of
TDS and its shareholders, the Board recognizes that implementation of the
Tracking Stock Proposal may have certain potentially adverse consequences,
including the lack of assurance as to the degree to which the market price of
the Tracking Stock will reflect the separate performance of the related Tracking
Group and the uncertainty as to the impact of the proposal on the market price
of the Common Shares, as well as the fact that implementation of the Tracking
Stock Proposal will, to an extent, make the capital structure of the Company
more complex, and may give rise to occasions when the interests of the holders
of the various classes of common stock may diverge or appear to diverge. See
"Risk Factors." The Board has given extensive consideration to the Tracking
Stock Proposal and has determined that the positive aspects of the Tracking
Stock Proposal outweigh any potentially adverse aspect and believes that the
Tracking Stock Proposal would be in the best interests of TDS and its
shareholders.
OPINIONS OF FINANCIAL ADVISORS
Credit Suisse First Boston ("C.S. First Boston") and Salomon Brothers Inc
and Smith Barney Inc. (collectively doing business as "Salomon Smith Barney")
are acting as co-financial advisors to the Company in connection with the
Tracking Stock Proposal and each is assisting the Company in the solicitation of
proxies therefor (the "Financial Advisors").
Each of C.S. First Boston and Salomon Smith Barney was asked to provide
advice to the Board of Directors with respect to the effect of the Tracking
Stock Proposal on (i) the market value of the Common Shares and the shares of
Tracking Stock to be distributed in the Distribution with respect to the Common
Shares (the "Proposed Common Equity") and (ii) the ability of TDS to raise
equity capital through an offering or offerings of shares of common equity or
securities convertible into common equity ("Equity Market Access"). The Telecom
Public Offering, U.S. Cellular Merger, Aerial Merger, Distribution and Merger
are herein collectively referred to as the "Recapitalization."
Based upon and subject to the assumptions, limitations and qualifications
discussed below, the opinion of each Financial Advisor states that, assuming the
proposed Recapitalization had been effective as of the date of such opinion, the
Recapitalization would not have a material adverse effect from a financial point
of view on (i) the aggregate market value on a fully-distributed basis of the
Proposed Common Equity outstanding after such Recapitalization as compared with
the aggregate market value of the Common Shares of the Company outstanding
immediately prior to the announcement of such Recapitalization or (ii) the
Company's Equity Market Access after such Recapitalization as compared to the
Company's Equity Market Access prior to the announcement of such
Recapitalization.
The Financial Advisors assumed, with the consent of the Board, that,
immediately prior to the proposed Recapitalization, the Company's Common Shares,
the Series A Common Shares, the Preferred Shares, the U.S. Cellular Common and
Series A Common Shares and the Aerial Common and Series A Common Shares (the
"Initial Shares") will continue to be the only classes of capital stock of the
Company, U.S. Cellular and Aerial, respectively, which are outstanding; that,
other than in connection with the proposed Recapitalization, there will be no
material change in the number of Initial Shares outstanding prior to the
implementation of the proposed Recapitalization; and that, immediately after the
proposed Recapitalization, the Company Common Shares, the Series A Common
Shares, the Preferred Shares and the Tracking Stocks will be the only classes of
capital stock then outstanding. They also assumed that the U.S. Cellular Merger
and the Aerial Merger are consummated on the terms set forth in the Proxy
Statement/Prospectus. They further assumed that, prior to the proposed
Recapitalization, the Initial Shares which are currently listed will continue to
be listed on their respective exchanges or trading markets, and
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that, following the proposed Recapitalization, the Company's Common Shares and
the Tracking Stocks will be eligible for, and will be the only capital stock of
the Company listed on, the American Stock Exchange.
In arriving at their opinions, the Financial Advisors reviewed certain
publicly available business and financial information relating to the Company,
as well as the Proxy Statement/Prospectus. They also reviewed certain other
information, including financial forecasts, provided to them by the Company, and
met with the Company's management to discuss the business and prospects of the
Company and the Tracking Groups and the potential impact of changes in the
competitive environment and in the Company's and the Tracking Groups' business
plans and strategies on those forecasts, businesses and prospects.
The Financial Advisors also considered certain financial and stock market
data of the Company, and compared those data with similar data for other
publicly-held companies which have multiple classes of stock outstanding which
reflect the performance of specific lines of business, and considered the
financial terms of the different classes of stock of such companies. The
Financial Advisors also considered such other information, financial studies,
analyses and investigations, and financial, economic and market criteria which
they deemed relevant.
In connection with their review, the Financial Advisors did not assume any
responsibility for independent verification of any of the foregoing information
(including the information contained in the Proxy Statement/ Prospectus) and
relied on its being complete and accurate in all material respects. With respect
to the financial forecasts, the Financial Advisors assumed that they had been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the Company's management as to the future financial performance
of the Company and the Tracking Groups. In addition, the Financial Advisors were
not requested to make, and did not make, an independent evaluation or appraisal
of the assets or liabilities (contingent or otherwise) of the Company or the
Tracking Groups, nor were they furnished with any such evaluations or
appraisals. The Financial Advisors did not express any opinion as to what the
actual value of the Tracking Stocks will be when issued to the Company's
shareholders pursuant to the Recapitalization or the prices at which such
Tracking Stocks will trade subsequent to the Recapitalization. In addition, the
Financial Advisors did not express any opinion whatsoever as to the individual
merits of the U.S. Cellular Merger, the Aerial Merger, or the Telecom Public
Offering, or any opinion whatsoever with respect to the Reincorporation. The
opinions of the Financial Advisors do not address the Company's underlying
business decision to effect the Recapitalization and do not constitute a
recommendation to any shareholder of the Company as to how such shareholder
should vote with respect to the Recapitalization.
The opinions of the Financial Advisors state that their analyses are
necessarily based on financial, economic, market and other conditions as they
exist and can be evaluated on the date of their opinions, and assume the
Recapitalization was effective as of the date of their opinions, and they note
that such conditions may change prior to the expected date of consummation of
the Recapitalization. The opinions also state that the Recapitalization may
cause a change in perception by some investors of the future plans of the
Company or the holders of Series A Common Shares. Consequently, the opinions
assume that the market has had a reasonable opportunity to understand and
evaluate the Recapitalization. In addition, the opinions state that the Tracking
Stocks which would be issued to the public shareholders of the Company in the
proposed Distribution might trade initially at market prices below those at
which they would trade on a fully distributed basis.
The Board considered and found the assumptions, limitations and
qualifications in the opinions of the Financial Advisors to be reasonable and
appropriate under the circumstances. The Company's financial and legal advisors
also examined the prospectuses and/or proxy statements for each company which
they identified as having implemented a tracking stock capital structure.
Although most, if not all, of such companies were advised by financial advisors,
the Company and its advisors did not identify any company which requested or
received a written opinion from its financial advisors in connection with the
adoption of a tracking stock capital structure. Accordingly, the Board did not
believe that a written opinion from financial advisors was necessary or required
for the Board to approve the Tracking Stock Proposal or the related proposals.
The Board recognized the complexity of the Tracking Stock Proposal and the
related transactions and understood that there was no precedent for an opinion
from financial advisors under similar circumstances. Accordingly, the Board did
not request the Financial Advisors to deliver written opinions with regard to
all aspects of the transactions, nor did the Board believe that seeking such
opinions was necessary. Instead, the Board considered the oral advice of the
Financial Advisors regarding many aspects of the Recapitalization, in a manner
consistent with other companies which have adopted tracking stock capital
structures.
The Board determined to seek letters from the Financial Advisors for the
limited purpose of obtaining their written opinions to the effect that the
Recapitalization would not have a material adverse effect on (i) shareholder
value (as measured by the aggregate market value on a fully-distributed basis of
the Proposed Common Equity outstanding after such Recapitalization as compared
with the aggregate market value of the Company's Common Shares outstanding
immediately prior to the announcement of such Recapitalization) or (ii) the
Company's ability to obtain equity capital in the public markets (as measured by
the Company's Equity Market Access after such
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Recapitalization as compared to the Company's Equity Market Access prior to the
announcement of such Recapitalization). The Financial Advisors did not express
any opinion as to what the actual value of the Tracking Stocks will be when
issued to the Company's shareholders pursuant to the Recapitalization or the
prices at which such Tracking Stocks will trade subsequent to the
Recapitalization. In addition, the Financial Advisors did not express any
opinion whatsoever as to the individual merits of the U.S. Cellular Merger, the
Aerial Merger, or the Telecom Public Offering, or any opinion whatsoever with
respect to the Reincorporation. The opinions of the Financial Advisors do not
address the Company's underlying business decision to effect the
Recapitalization and do not constitute a recommendation to any shareholder of
the Company as to how such shareholder should vote with respect to the
Recapitalization. The Board did not ask for a written opinion with respect to
such other matters. The Board did not believe that a written opinion from the
Financial Advisors was necessary or required for such other matters. The Board
did, in connection with such matters, seek the advice of the Financial Advisors,
legal counsel and management to the extent it considered appropriate.
The opinions also state that "The Recapitalization may cause a change in
perception by some investors of the future plans of the Company or the holders
of Series A Common Shares. Consequently, [the opinions assume] that the market
has had a reasonable opportunity to understand and evaluate the
Recapitalization." This qualification in the opinion exists in part because SEC
rules do not permit the Company to communicate with shareholders regarding a
proposed transaction prior to the filing of a proxy statement with the SEC and
the delivery of the proxy statement to shareholders if such discussions would
constitute the solicitation of proxies under the SEC's rules. Accordingly, the
Company and its representatives could not communicate with shareholders relating
to the plans of the Company or the holders of Series A Common Shares as they
relate to the Recapitalization prior to the filing of this Proxy
Statement/Prospectus with the SEC. Although the Company and the Financial
Advisors considered the range of possible perceptions that existing or
prospective investors might have with respect to the Tracking Stock Proposal,
neither had any specific knowledge of the actual perceptions of such investors.
In addition, both the Company and the Financial Advisors believed that, given
the complex nature of certain aspects of the proposal, the market would require
some time for complete information on the specific aspects of the proposals to
be adequately disseminated and analyzed and for investor questions and reactions
to be addressed. Therefore, the Financial Advisors believed that it was
necessary to qualify their opinions with respect to a possible change in
investors' perception of the future plans of the Company or the holders of
Series A Common Shares and to assume that the market has had a reasonable
opportunity to understand and evaluate the Recapitalization. This Proxy
Statement/ Prospectus discloses the plans of the Company and the holders of the
Series A Common Shares to the extent such plans are material to the proposed
Recapitalization.
The opinions of the Financial Advisors also state that the Tracking Stocks
might trade initially at market prices below those at which they would trade on
a fully distributed basis. The Financial Advisors qualified their opinions in
this manner because they believed that there would be a period of up to several
months following the Distribution in which holders of Common Shares who received
Cellular Group Shares, Aerial Group Shares and Telecom Group Shares may
rebalance their portfolios based on their individual investment objectives. The
Financial Advisors believed that, during this time, sales by shareholders who
desire to reduce their holdings of Common Shares, Cellular Group Shares, Telecom
Group Shares or Aerial Group Shares could cause the market prices to be below
those at which they would trade on a fully distributed basis. The Board
understood this possibility in approving the Tracking Stock Proposal.
Nevertheless, the Board believes that this possible temporary adverse effect is
outweighed by the positive aspects of the Tracking Stock Proposal to long-term
shareholder value. See "--Reasons."
The Company has agreed to pay the Financial Advisors (i) an advisory fee of
$2,000,000, to be split equally between C.S. First Boston and Salomon Smith
Barney, and payable upon the approval of the Tracking Stock Proposal by the
Board, and public announcement thereof; (ii) an advisory fee of $2,000,000, to
be split equally between C.S. First Boston and Salomon Smith Barney, payable
upon the Distribution; and (iii) an incentive fee of no more than $3,000,000, to
be split equally between C.S. First Boston and Salomon Smith Barney, payable
4 1/2 months after the Distribution. In general, an incentive fee is payable
only if the post-Distribution value of the aggregate market value of the
publicly-traded common equity exceeds 125% of the pre-announcement aggregate
market value of the TDS Common Shares and, in such event, the amount of the fee
which is payable is equal to $120,000 for each percentage point over 125%, up to
a maximum of $3,000,000. The Company has also agreed to reimburse the Financial
Advisors for reasonable out-of-pocket expenses (including fees and expenses of
legal counsel) and has agreed to indemnify the Financial Advisors against
certain liabilities, including liabilities under the Securities Act.
C.S. First Boston and Salomon Smith Barney will also act as co-lead managers
of the Telecom Public Offering. Each of C.S. First Boston and Salomon Smith
Barney have also in the past provided services to one or more of the Company,
U.S. Cellular and/or Aerial.
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INTERESTS OF CERTAIN PERSONS
The TDS Voting Trust and its trustees and beneficiaries have an interest in
the implementation of the Tracking Stock Proposal because it may enhance the
ability of the TDS Voting Trust to retain voting control of TDS. The trustees of
the voting trust are LeRoy T. Carlson, Jr., a director and the President of TDS
and the son of LeRoy T. Carlson, Chairman of TDS; Walter C.D. Carlson, a
director of TDS and the son of LeRoy T. Carlson, Chairman of TDS, and the
brother of LeRoy T. Carlson, Jr.; Donald C. Nebergall, a director of TDS;
Letitia G.C. Carlson, a director of TDS and the daughter of LeRoy T. Carlson,
Chairman of TDS, and the sister of LeRoy T. Carlson, Jr. and Walter C.D.
Carlson; and Melanie J. Heald, the daughter of Lester O. Johnson, director
emeritus of TDS. Directors of TDS who are beneficiaries of the TDS Voting Trust
are LeRoy T. Carlson, LeRoy T. Carlson, Jr., Walter C.D. Carlson, Letitia G.C.
Carlson and Donald C. Nebergall. Walter C.D. Carlson is a partner of the law
firm of Sidley & Austin, which is counsel to the Company and is advising the
Company regarding the Tracking Stock Proposal and related matters. Donald C.
Nebergall is a consultant to TDS. In addition, certain directors may be
considered to have an interest in the Tracking Stock Proposal as officers of the
Company or its subsidiaries. Directors of the Company who are officers or
employees of the Company or its subsidiaries are: LeRoy T. Carlson (Chairman of
TDS), LeRoy T. Carlson, Jr. (President of TDS), Murray L. Swanson (Executive
Vice President--Finance of TDS); Rudolph E. Hornacek (Vice
President--Engineering of TDS); James Barr III (President of TDS Telecom); and
Donald R. Brown (Senior Vice President of TDS Telecom). Shareholders are urged
to carefully study and consider the Tracking Stock Proposal in light of the
above interests.
CHANGES TO BOARD OF DIRECTORS
The Board has designated Mr. Kevin A. Mundt, age 43, to be Board's nominee
for election as a Class II director by the Public Holders at the 1998 Annual
Meeting of Shareholders. Mr. Mundt is a co-founder, and has been a director
since 1984, of Corporate Decisions, Inc., a strategy consulting firm with 150
professionals in offices in North America and Europe. Corporate Decisions, Inc.
recently merged with Mercer Management Consulting. Mr. Mundt's management
consulting practice focuses on advising companies on strategies for profitable
growth in changing markets. Prior to his association with Corporate Decisions,
Mr. Mundt was associated with Bain and Company. Mr. Mundt holds a B.A. degree in
economics from Brown University and an M.B.A. from the Harvard Graduate School
of Business. Mr. Mundt has no current or prior relationships with the Company
and is not related to any other director of the Company.
If elected, Mr. Mundt will fill the directorship currently held by Mr. James
Barr III, whose term will expire at the 1998 Annual Meeting of Shareholders.
However, it is expected that Mr. Barr will be appointed as a director to fill a
vacancy on the Board of Directors which is expected to occur following the 1998
Annual Meeting of Shareholders. Mr. Donald R. Brown, a current Class I director
who was elected by the Series A Holders in 1997, retired as an employee of the
Company in December 1997 and has advised the Board that he intends to resign
from the Board following the 1998 Annual Meeting of Shareholders. It is expected
that the Board of Directors will appoint Mr. Barr to fill the vacancy created by
the resignation of Mr. Brown at the Board meeting which will follow the 1998
Annual Meeting of Shareholders.
For further information about Messrs. Barr and Brown and the other current
directors, and for information about director compensation and certain
relationships and related transactions involving the directors, see the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 which
is incorporated by reference herein. See "Where You Can Find More Information."
THE COMPANY
TDS is a diversified telecommunications service company with established
cellular telephone, local telephone and radio paging operations and developing
personal communications services ("PCS") operations. At September 30, 1997, the
Company, through its subsidiaries, served approximately 2.7 million customer
units in 37 states, including 1,357,000 cellular telephones, 506,600 telephone
access lines, 65,000 PCS telephones, and 792,800 pagers. For the nine months
ended September 30, 1997, cellular telephone operations provided 59% of the
Company's consolidated revenues; telephone operations provided 32%; PCS
operations provided 2%; and paging operations provided 7% of such revenues. The
Company's long-term business development strategy is to expand its existing
operations through internal growth and acquisitions and to explore and develop
other telecommunications businesses that management believes will utilize the
Company's expertise in customer-based telecommunications services. The Company
conducts substantially all of its cellular operations through its majority-owned
subsidiary U.S. Cellular (AMEX symbol "USM"), which is the eighth largest
cellular telephone company in the
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United States, based on the aggregate number of population equivalents it owns.
The Company conducts substantially all of its telephone operations through its
wholly-owned subsidiary TDS Telecom. The Company conducts substantially all of
its PCS business through its majority-owned subsidiary Aerial (NASDAQ National
Market symbol "AERL"), which launched commercial service in the first half of
1997 and expects to complete initial construction of its PCS networks by the end
of 1997.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the Groups for the purpose of preparing the combined
financial statements of the Cellular Group, the Telecom Group, the Aerial Group
and the TDS Group, the change in the capital structure of the Company
contemplated by the Tracking Stock Proposal will not affect legal title to such
assets or responsibility for such liabilities of the Company or any of its
subsidiaries, except that TDS Delaware will succeed to the assets and
liabilities of TDS Iowa. Holders of Cellular Group Shares, Telecom Group Shares,
Aerial Group Shares, Common Shares and Series A Common Shares will be common
shareholders of the Company and will be subject to risks associated with an
investment in the Company and all of its businesses, assets and liabilities. The
financial results of one or more of the Groups that affect the Company's
consolidated results of operations or financial condition could affect the
combined results of operations or financial condition of the TDS Group and the
Tracking Groups and the market price of the Common Shares, the Cellular Group
Shares, the Telecom Group Shares and the Aerial Group Shares. In addition, any
net losses of any Group, dividends or distributions on, or repurchases of, any
class of common stock, and dividends on, or certain repurchases of, Preferred
Shares, will reduce funds of the Company legally available for the payment of
dividends on all shares of common stock. Accordingly, the combined financial
statements of the TDS Group, the Cellular Group, the Telecom Group and the
Aerial Group should be read in conjunction with the consolidated financial
statements of the Company.
Reference is made to Annex I for a further description of the Company and
the consolidated financial statements of the Company.
THE CELLULAR GROUP
The Cellular Group Shares, when issued, are intended to reflect the separate
performance of the Cellular Group, which consists of the Company's interest in
U.S. Cellular, an 81%-owned subsidiary of the Company which operates and invests
in cellular telephone companies and properties. The Cellular Group would also
include such other businesses, assets and liabilities of the Company as the
Board may in the future determine to attribute to the Cellular Group and such
other businesses, assets and liabilities as the Company or any of its
subsidiaries may in the future acquire for the Cellular Group, as determined by
the Board.
The U.S. Cellular Restated Certificate of Incorporation currently provides
that U.S. Cellular may not own, invest or otherwise have an interest in, lease,
operate or manage any business other than a business engaged solely in the
construction of, the ownership of interests in and/or the management of cellular
telephone systems (the "Cellular Business"), unless it first obtains the written
consent of the Company. If U.S. Cellular becomes a wholly-owned subsidiary of
the Company, this provision is expected to be eliminated from the U.S. Cellular
Restated Certificate of Incorporation. However, the Board intends to continue
this provision as a policy with respect to the Cellular Group. Accordingly, the
Cellular Group will generally only engage in the Cellular Business, unless the
Board determines to permit the Cellular Group to pursue other opportunities.
This will be done on a case-by-case basis. It is currently the intention of the
Board that any businesses, opportunities, assets and liabilities attributed to
the Cellular Group in the future would not include businesses, opportunities,
assets and liabilities of the TDS Group, the Telecom Group or the Aerial Group.
The Company could determine to pursue future business opportunities through one
Group instead of the other Groups, or jointly through more than one of the
Groups. The decision to allocate certain resources and financial support to a
Group other than the Cellular Group may adversely affect the ability of the
Cellular Group to obtain funds sufficient to implement its business strategies.
See "--Management and Allocation Policies."
Holders of Cellular Group Shares will be subject to all of the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities. There is no assurance as to the degree to which the market
value of the Cellular Group Shares will reflect the separate performance of
either the Cellular Group or U.S. Cellular.
The Board currently intends to retain future earnings of the Cellular Group
for the development of the business of the Cellular Group, and does not
anticipate paying dividends on the Cellular Group Shares in the foreseeable
future.
As of November 30, 1997, there were issued and outstanding 87,231,658 shares
of common stock of U.S. Cellular. As of such date, the Company held 70,743,836
shares of common stock of U.S. Cellular, representing
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approximately 81.1% of the outstanding shares of common stock of U.S. Cellular,
and 16,487,822 shares of common stock of U.S. Cellular were held by persons
other than the Company.
The Company has made an offer to issue Cellular Group Shares in exchange for
all of the Common Shares of U.S. Cellular which are not owned by the Company
pursuant to a merger between a subsidiary of the Company and U.S. Cellular. The
Company has offered to exchange 1.14613 Cellular Group Shares for each
outstanding Common Share of U.S. Cellular (other than shares held by the
Company) in the U.S. Cellular Merger. This would represent an aggregate of
18,897,187 Cellular Group Shares based on Common Shares of U.S. Cellular
outstanding as of November 30, 1997. This exchange ratio was determined by
dividing (i) the sum of the number of Cellular Group Shares proposed to be
distributed in the Distribution and the Number of Shares Issuable with Respect
to Retained Interest considering only the Distribution by (ii) the number of
shares of common stock of U.S. Cellular held by the Company as of November 30,
1997.
The board of directors of U.S. Cellular has established a special committee
consisting of an independent director to consider the TDS offer and to negotiate
the terms of the merger agreement with TDS on behalf of the minority
shareholders of U.S. Cellular. The special committee has engaged independent
financial and legal advisors in connection therewith.
The U.S. Cellular Merger is subject to various conditions, including
approval of the Tracking Stock Proposal by shareholders of the Company,
effectiveness of the Merger, the negotiation of the other terms of a merger
agreement between the Company and U.S. Cellular, approval of the U.S. Cellular
Merger by the special committee of the board of directors, the full board of
directors and the shareholders of U.S. Cellular and final approval by the Board.
The Common Shares of U.S. Cellular are currently traded on the AMEX under the
symbol "USM." If the U.S. Cellular Merger is consummated as contemplated, U.S.
Cellular would become a wholly-owned subsidiary of the Company and such Common
Shares would be delisted from the AMEX. In the U.S. Cellular Merger, holders of
Common Shares of U.S. Cellular would receive Cellular Group Shares of TDS, which
would be listed on the AMEX. If the U.S. Cellular Merger does not take place for
any reason, U.S. Cellular may not become a wholly-owned subsidiary of the
Company and the Common Shares of U.S. Cellular may continue to be publicly
traded. Alternatively, although the Company has no current plans or intentions
to do so, the Company may consider acquiring such Common Shares of U.S. Cellular
in an exchange offer for Cellular Group Shares or other securities, in a tender
offer for cash or through open market or private purchases, or taking other
action to acquire some or all of the shares of U.S. Cellular not owned by the
Company.
On December 29, 1997, Airmont Plaza Associates, which claims to be a holder
of U.S. Cellular Common Shares, filed a putative class action complaint on
behalf of common stockholders of U.S. Cellular in the Court of Chancery of the
State of Delaware in New Castle County. The complaint names as defendants TDS,
U.S. Cellular, and the directors of U.S. Cellular. The complaint alleges a
breach of fiduciary duties by the defendants and seeks to have the U.S. Cellular
Merger enjoined or, if it is consummated, to have it rescinded and to recover
unspecified damages, fees and expenses. The Company intends to vigorously defend
against this lawsuit. However, there can be no assurance that such lawsuit will
not have a material adverse effect on the Company or the transactions
contemplated by the Proxy Statement/Prospectus.
Subject to the effectiveness of the Merger, and after the completion of the
Telecom Public Offering, the U.S. Cellular Merger and the Aerial Merger, the
Board intends to authorize the Distribution of Cellular Group Shares in the form
of a stock dividend to holders of Series A Common Shares and Common Shares. It
is currently expected that the Distribution would take place in July 1998 or
later. The Board intends to distribute one Cellular Group Share with respect to
each Common Share and Series A Common Share outstanding on the Distribution
record date. The Distribution will be made to shareholders in proportion to the
number of Common Shares and Series A Common Shares owned on the Distribution
record date.
The aggregate number of Cellular Group Shares proposed to be issued and
distributed pursuant to the Distribution is intended initially to represent 75%
of the common shareholders' equity value of the Company attributable to the
Cellular Group. Accordingly, considering only the Distribution, the TDS Group
would have a Retained Interest in the Cellular Group representing 25% of the
common shareholders' equity value of the Company attributable to the Cellular
Group. The number of Cellular Group Shares deemed to represent 100 percent of
the common shareholders' equity value of the Company attributable to the
Cellular Group is expected to be determined by the Board in connection with the
U.S. Cellular Merger. This will be based on the number of outstanding Common
Shares and Series A Common Shares at such time and the distribution ratio.
If all of the Transactions are completed as contemplated, the issued
Cellular Group Shares would initially reflect approximately 80% of the common
shareholders' equity value of the Company attributable to the Cellular Group.
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The remaining 20% of the common shareholders' equity value of the Company
initially attributable to the Cellular Group will be retained by the TDS Group
as a Retained Interest. See "--Retained Interests."
The Board reserves the right to effect all or any part of the Distribution
of Cellular Group Shares even if the Telecom Public Offering, the U.S. Cellular
Merger or the Aerial Merger have not been completed, or not to effect all or any
part of the Distribution even if such other Transactions have taken place. The
Board further reserves the right to modify the distribution ratio for the
Cellular Group Shares or to modify the percentage interest to be retained by TDS
through the Retained Interest in the Cellular Group.
The following table shows the Cellular Group Shares that would be issued in
connection with the U.S. Cellular Merger and the Distribution considering the
exchange ratio offered by the Company and the intended distribution ratio, and
the number of Cellular Group Shares issuable, authorized for issuance for
various purposes and available for issuance (based on shares outstanding at
November 30, 1997).
<TABLE>
<CAPTION>
PRO FORMA CELLULAR GROUP SHARES
---------------------------------------------
RETAINED
OUTSTANDING INTEREST TOTAL
-------------- ------------- --------------
<S> <C> <C> <C>
U.S. Cellular Merger................................................ 18,897,187 -- 18,897,187
Distribution........................................................ 60,811,362 20,270,454 81,081,816
-------------- ------------- --------------
Pro Forma Initial Shares...................................... 79,708,549 20,270,454 99,979,003
-------------- ------------- --------------
SHARES ISSUABLE TO THIRD PARTIES(1):
Committed Acquisition Shares...................................... 567,412 (567,412) --
Pre-Distribution Convertible Securities:
TDS Preferred Shares............................................ 969,025 (969,025) --
Existing Plans(1)............................................... 575,026 (575,026) --
-------------- ------------- --------------
Subtotal...................................................... 2,111,463 (2,111,463) --
-------------- ------------- --------------
ISSUABLE AS A RESULT OF U.S. CELLULAR MERGER:
U.S. Cellular Employee Plans...................................... 711,387 -- 711,387
U.S. Cellular LYONs............................................... 8,090,116 -- 8,090,116
-------------- ------------- --------------
Subtotal...................................................... 8,801,503 -- 8,801,503
-------------- ------------- --------------
SHARES RESERVED FOR ISSUANCE:
Existing Plans(2)................................................. 400,625 -- 400,625
1998 Long-Term Incentive Plan(3).................................. 2,888,613 -- 2,888,613
Tax-Deferred Savings Plan......................................... 70,000 -- 70,000
Acquisitions...................................................... 3,932,588 -- 3,932,588
-------------- ------------- --------------
Subtotal...................................................... 7,291,826 -- 7,291,826
-------------- ------------- --------------
PRO FORMA SHARES ISSUED, ISSUABLE AND RESERVED FOR ISSUANCE......... 97,913,341 18,158,991 116,072,332
Shares Available for Issuance....................................... 23,927,668 -- 23,927,668
-------------- ------------- --------------
Total......................................................... 121,841,009 18,158,991 140,000,000
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
- ------------
(1) These shares would be issuable from the Retained Interest.
(2) See Proposal 2.
(3) See Proposal 3.
Reference is made to Annex II for a further description of the Cellular
Group and the combined financial statements of the Cellular Group.
THE TELECOM GROUP
The Telecom Group Shares, when issued, are intended to reflect the separate
performance of the Telecom Group, which includes the Company's interest in TDS
Telecom, a wholly-owned subsidiary of the Company which operates landline
telephone companies. The Telecom Group also includes the allocation of certain
TDS debt. The Telecom Group would also include such other businesses, assets and
liabilities of the Company as the Board may in the future determine to attribute
to the Telecom Group and such other businesses, assets and liabilities as the
Company or any of its subsidiaries may in the future acquire for the Telecom
Group, as determined by the Board.
-66-
<PAGE>
The Board intends to adopt a policy providing that the Telecom Group may not
own, invest or otherwise have an interest in, lease, operate or manage any
business other than a business engaged solely in the construction of, the
ownership of interests in and/or the management of landline telephone systems
(the "Telecom Business"), unless it first obtains the consent of the Board. At
the present time, the Telecom Group operates certain businesses which are not
considered Telecom Business. The Telecom Group will initially be permitted to
continue to operate these existing businesses. Except with respect to such
existing businesses, the Telecom Group will generally only engage in the Telecom
Business, unless the Board determines to permit the Telecom Group to pursue
other opportunities. This will be done on a case-by-case basis. It is currently
the intention of the Board that any businesses, opportunities, assets and
liabilities attributed to the Telecom Group in the future would not include
businesses, opportunities, assets and liabilities of the TDS Group, the Cellular
Group or the Aerial Group. The Company could determine to pursue future business
opportunities through one Group instead of the other Groups, or jointly through
more than one of the Groups. The decision to allocate certain resources and
financial support to a Group other than the Telecom Group may adversely affect
the ability of the Telecom Group to obtain funds sufficient to implement its
business strategies. See "--Management and Allocation Policies."
Holders of Telecom Group Shares will be subject to all of the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities. There is no assurance as to the degree to which the market
value of the Telecom Group Shares will reflect the separate performance of
either the Telecom Group or TDS Telecom.
Following the Distribution, subject to the legal restrictions on the payment
of dividends described below, the Board currently intends to establish an annual
dividend on the Telecom Group Shares in an amount equal to $0.48 per share.
Based on the expected distribution ratio of two-thirds of a Telecom Group Share
for each existing Common Share and Series A Common Share, this dividend rate
would equate to a per share annual dividend of $0.32 per existing Common Share
and Series A Common Share (the "Telecom Equivalent Dividend Rate"). Following
the Distribution, the Board also currently intends to establish an annual
dividend on the Common Shares and Series A Common Shares in an amount equal to
$0.10 per share. The total of this rate and the Telecom Equivalent Dividend Rate
is equal to $0.42 per share per annum, which is the same as the current annual
dividend rate on the existing Common Shares and Series A Common Shares. The
intent is that, immediately after the Distribution, a current holder of Common
Shares and Series A Common Shares would continue to receive an aggregate
dividend which is at least equal to the aggregate dividend which such
shareholder currently receives from the Company (not considering reductions in
shares which may occur due to the payment of cash in lieu of fractional shares
in the Distribution).
TDS currently holds 100% of the issued and outstanding capital stock of TDS
Telecom.
Promptly after approval of the Tracking Stock Proposal by shareholders and
the effectiveness of the Merger, the Company intends to offer and sell Telecom
Group Shares in a public offering for cash, and to allocate the net proceeds
thereof to the Telecom Group. The Company intends to file with the SEC a
registration statement on Form S-3 relating to the registration of between
10,000,000 and 17,000,000 Telecom Group Shares. This offering is expected to
commence promptly after the approval of the Tracking Stock Proposal by
shareholders and the effectiveness of the Merger, subject to prevailing market
conditions and other factors.
Subject to the effectiveness of the Merger, after the completion of the
Merger, the Telecom Public Offering, the U.S. Cellular Merger and the Aerial
Merger, the Board intends to authorize the Distribution of Telecom Group Shares
in the form of a stock dividend to holders of Series A Common Shares and Common
Shares. The Board intends to distribute two-thirds of a Telecom Group Share with
respect to each Common Share and Series A Common Share outstanding on the
Distribution record date. The Distribution will be made to shareholders in
proportion to the number of Common Shares and Series A Common Shares owed on the
Distribution record date.
The aggregate number of Telecom Group Shares proposed to be issued and
distributed pursuant to the Distribution is intended initially to represent 75%
of the common shareholders' equity value of the Company attributable to the
Telecom Group. Accordingly, considering only the Distribution, the TDS Group
would have a Retained Interest in the Telecom Group representing 25% of the
common shareholders' equity value of the Company attributable to the Telecom
Group. The number of Telecom Group Shares deemed to represent 100 percent of the
common shareholders' equity value of the Company attributable to the Telecom
Group is expected to be determined by the Board in connection with the Telecom
Public Offering. This will be based on the number of outstanding Common Shares
and Series A Common Shares at such time and the distribution ratio.
If all of the Transactions are completed as contemplated, the issued Telecom
Group Shares would initially reflect approximately 80% of the common
shareholders' equity value of the Company attributable to the Telecom
-67-
<PAGE>
Group. The remaining 20% of the common shareholders' equity value of the Company
initially attributable to the Telecom Group will be retained by the TDS Group as
a Retained Interest. See "--Retained Interests."
The Board reserves the right to effect all or any part of the Distribution
of Telecom Group Shares even if the Telecom Public Offering, the U.S. Cellular
Merger or the Aerial Merger have not been completed, or not to effect all or any
part of the Distribution even if such other Transactions have taken place. The
Board further reserves the right to modify the distribution ratio for the
Telecom Group Shares or to modify the percentage interest to be retained by TDS
through the Retained Interest in the Telecom Group.
The following table shows the Telecom Group Shares that would be issued in
connection with the Telecom Public Offering and the Distribution considering the
number of Telecom Group Shares being offered by the Company and the intended
distribution ratio, and the number of Telecom Group Shares issuable, authorized
for various purposes and available for issuance (based on shares outstanding at
November 30, 1997).
<TABLE>
<CAPTION>
PRO FORMA TELECOM GROUP SHARES
---------------------------------------------
RETAINED
OUTSTANDING INTEREST TOTAL
-------------- ------------- --------------
<S> <C> <C> <C>
Telecom Public Offering(1).......................................... 13,500,000 -- 13,500,000
Distribution........................................................ 40,540,908 13,513,636 54,054,544
-------------- ------------- --------------
Pro Forma Initial Shares...................................... 54,040,908 13,513,636 67,554,544
-------------- ------------- --------------
SHARES ISSUABLE TO THIRD PARTIES(2):
Committed Acquisition Shares...................................... 378,275 (378,275) --
Pre-Distribution Convertible Securities
TDS Preferred Shares............................................ 646,017 (646,017) --
Existing Plans(3)............................................... 383,350 (383,350) --
-------------- ------------- --------------
Subtotal...................................................... 1,407,642 (1,407,642) --
-------------- ------------- --------------
SHARES RESERVED FOR ISSUANCE:
Existing Plans(3)................................................. 267,084 -- 267,084
1998 Long-Term Incentive Plan(4).................................. 2,500,000 -- 2,500,000
Tax-Deferred Savings Plan......................................... 175,000 -- 175,000
Acquisitions...................................................... 2,821,725 -- 2,821,725
Dividend Reinvestment Plan........................................ 150,000 -- 150,000
-------------- ------------- --------------
Subtotal...................................................... 5,913,809 -- 5,913,809
-------------- ------------- --------------
PRO FORMA SHARES ISSUED, ISSUABLE AND RESERVED FOR ISSUANCE......... 61,362,359 12,105,994 73,468,353
Shares Available for Issuance....................................... 16,531,647 -- 16,531,647
-------------- ------------- --------------
Total......................................................... 77,894,006 12,105,994 90,000,000
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
- ------------
(1) The Company intends to offer between 10,000,000 and 17,000,000 Telecom Group
Shares. For purposes of this Proxy Statement/ Prospectus, the midpoint of
this amount is assumed for all purposes.
(2) These shares would be issuable from the Retained Interest.
(3) See Proposal 2.
(4) See Proposal 3.
Reference is made to Annex III for a further description of the Telecom
Group and the combined financial statements of the Telecom Group.
-68-
<PAGE>
THE AERIAL GROUP
The Aerial Group Shares, when issued, are intended to reflect the separate
performance of the Aerial Group, which includes the Company's interest in
Aerial, a subsidiary of the Company which is developing broadband personal
communications services. The Aerial Group would also include such other
businesses, assets and liabilities of the Company as the Board may in the future
determine to attribute to the Aerial Group and such other businesses, assets and
liabilities as the Company or any of its subsidiaries may in the future acquire
for the Aerial Group, as determined by the Board.
The Aerial Restated Certificate of Incorporation currently provides that
Aerial may not own, invest or otherwise have an interest in, lease, operate or
manage any business other than a business engaged solely in the construction of,
the ownership of interests in and/or the management of personal communications
systems (the "PCS Business"), unless it first obtains the written consent of the
Company. If Aerial becomes a wholly-owned subsidiary of the Company, this
provision is expected to be eliminated from the Aerial Restated Certificate of
Incorporation. However, the Board intends to continue this provision as a policy
with respect to the Aerial Group. Accordingly, the Aerial Group will generally
only engage in the PCS Business, unless the Board determines to permit the
Aerial Group to pursue other opportunities. This will be done on a case-by-case
basis. It is currently the intention of the Board that any businesses,
opportunities, assets and liabilities attributed to the Aerial Group in the
future would not include businesses, opportunities, assets and liabilities of
the TDS Group, the Cellular Group or the Telecom Group. The Company could
determine to pursue future business opportunities through one Group instead of
the other Groups, or jointly through more than one of the Groups. The decision
to allocate certain resources and financial support to a Group other than the
Aerial Group may adversely affect the ability of the Aerial Group to obtain
funds sufficient to implement its business strategies. See "--Management and
Allocation Policies."
Holders of Aerial Group Shares will be subject to all of the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities. There is no assurance as to the degree to which the market
value of the Aerial Group Shares will reflect the separate performance of either
the Aerial Group or Aerial.
As of November 30, 1997, there were issued and outstanding 71,606,081 shares
of common stock of Aerial. As of such date, the Company held 59,086,000 shares
of common stock of Aerial, representing approximately 82.5% of the outstanding
shares of common stock of Aerial, and 12,520,081 shares of common stock of
Aerial were held by persons other than the Company.
The Company has made an offer to issue Aerial Group Shares in exchange for
all of the Common Shares of Aerial which are not owned by the Company pursuant
to a merger between a subsidiary of the Company and Aerial. The Company has
offered to exchange .91485 Aerial Group Shares for each outstanding Common Share
of Aerial (other than shares owned by the Company) in the Aerial Merger. This
would represent an aggregate of 11,453,996 Aerial Group Shares based on Common
Shares of Aerial outstanding as of November 30, 1997. This exchange ratio was
determined by dividing (i) the sum of the number of Aerial Group Shares proposed
to be issued in the Distribution and the number of Shares Issuable with Respect
to Retained Interest assuming only the Distribution by (ii) the number of shares
of common stock of Aerial held by the Company as of November 30, 1997.
The board of directors of Aerial has established a special committee
consisting of two independent directors to consider the TDS offer and to
negotiate the terms of the merger agreement with TDS on behalf of the minority
shareholders of Aerial. The special committee has engaged independent financial
and legal advisors in connection therewith.
The Aerial Merger is subject to various conditions, including approval of
the Tracking Stock Proposal by shareholders of the Company, effectiveness of the
Merger, the negotiation of the other terms of a merger agreement between the
Company and Aerial, approval of the Aerial Merger by the special committee of
the board of directors, the full board of directors and the shareholders of
Aerial and final approval by the Board. The Common Shares of Aerial are
currently traded on the Nasdaq National Market under the symbol "AERL." If the
Aerial Merger is consummated as contemplated, Aerial would become a wholly-owned
subsidiary of the Company and such Common Shares would be delisted from the
Nasdaq National Market. In the Aerial Merger, holders of Common Shares of Aerial
would receive Aerial Group Shares of TDS, which would be listed on the AMEX. If
the Aerial Merger does not take place for any reason, Aerial may not become a
wholly-owned subsidiary of the Company and the Common Shares of Aerial may
continue to be publicly traded. Alternatively, although the Company has no
current plans or intentions to do so, the Company may consider acquiring such
Common Shares of Aerial in an exchange offer for Aerial Group Shares or other
securities, in a tender offer for cash or through open market or private
purchases, or taking other action to acquire some or all of the shares of Aerial
not owned by the Company.
-69-
<PAGE>
On January 5, 1998, Richard Greenfield, who claims to be a holder of Aerial
Common Shares, filed a putative class action complaint on behalf of common
stockholders of Aerial in the Court of Chancery of the State of Delaware in New
Castle County. The complaint names as defendants TDS, Aerial, and the directors
of TDS and Aerial. The complaint alleges a breach of fiduciary duties by the
defendants and seeks to have the Aerial Merger enjoined or, if it is
consummated, to have it rescinded and to recover unspecified damages, fees and
expenses. The Company intends to vigorously defend against this lawsuit.
However, there can be no assurance that such lawsuit will not have a material
adverse effect on the Company or the transactions contemplated by the Proxy
Statement/ Prospectus.
Subject to the effectiveness of the Merger, and after the completion of the
Telecom Public Offering, the U.S. Cellular Merger and the Aerial Merger, the
Board intends to authorize the Distribution of Aerial Group Shares in the form
of a stock dividend to holders of Series A Common Shares and Common Shares. The
Board intends to distribute two-thirds of an Aerial Group Share with respect to
each Common Share and Series A Common Share outstanding on the Distribution
record date. The Distribution will be made to shareholders in proportion to the
number of Common Shares and Series A Common Shares owned on the Distribution
record date.
The aggregate number of Aerial Group Shares proposed to be issued and
distributed pursuant to the Distribution is intended initially to represent 75%
of the common shareholders' equity value of the Company attributable to the
Aerial Group. Accordingly, considering only the Distribution, the TDS Group
would have a Retained Interest in the Aerial Group representing 25% of the
common shareholders' equity value of the Company attributable to the Aerial
Group. The number of Aerial Group Shares deemed to represent 100 percent of the
common shareholders' equity value of the Company attributable to the Aerial
Group is expected to be determined by the Board in connection with the Aerial
Merger. This will be based on the number of outstanding Common Shares and Series
A Common Shares at such time and the distribution ratio.
If all of the Transactions are completed as contemplated, the issued Aerial
Group Shares would initially reflect approximately 80% of the common
shareholders' equity value of the Company attributable to the Aerial Group. The
remaining 20% of the common shareholders' equity value of the Company initially
attributable to the Aerial Group will be retained by the TDS Group as a Retained
Interest. See "--Retained Interests."
The Board reserves the right to effect all or any part of the Distribution
of Aerial Group Shares even if the Telecom Public Offering, the U.S. Cellular
Merger or the Aerial Merger have not been completed, or not to effect all or any
part of the Distribution even if such other Transactions have taken place. The
Board further reserves the right to modify the distribution ratio for the Aerial
Group Shares or to modify the percentage interest to be retained by TDS through
the Retained Interest in the Aerial Group.
The Board currently intends to retain future earnings of the Aerial Group,
if any, for the development of the Aerial Group, and does not anticipate paying
dividends on the Aerial Group Shares in the foreseeable future.
-70-
<PAGE>
The following table shows the Aerial Group Shares that would be issued in
connection with the Aerial Merger and the Distribution considering the exchange
ratio offered by the Company and the intended distribution ratio, and the number
of Aerial Group Shares issuable, authorized for various purposes and available
for issuance (based on shares outstanding at November 30, 1997).
<TABLE>
<CAPTION>
PRO FORMA AERIAL GROUP SHARES
-------------------------------------------
RETAINED
OUTSTANDING INTEREST TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Aerial Merger................................................................... 11,453,996 -- 11,453,996
Distribution.................................................................... 40,540,908 13,513,636 54,054,544
------------- ------------- -------------
Pro Forma Initial Shares.................................................. 51,994,904 13,513,636 65,508,540
------------- ------------- -------------
SHARES ISSUABLE TO THIRD PARTIES:
Committed Acquisition Shares.................................................. 378,275 (378,275) --
Pre-Distribution Convertible Securities.......................................
TDS Preferred Shares........................................................ 646,017 (646,017) --
Existing Plans(1)........................................................... 383,350 (383,350) --
------------- ------------- -------------
Subtotal.................................................................. 1,407,642 (1,407,642) --
------------- ------------- -------------
ISSUABLE AS A RESULT OF AERIAL MERGER:
Aerial Employee Plans......................................................... 1,372,275 -- 1,372,275
------------- -------------
SHARES RESERVED FOR ISSUANCE:
Existing Plans(1)............................................................. 267,084 -- 267,804
1998 Long-Term Incentive Plan(2).............................................. 1,827,725 -- 1,827,725
Tax-Deferred Savings Plan..................................................... 200,000 -- 200,000
Acquisitions.................................................................. 2,821,725 -- 2,821,725
------------- ------------- -------------
Subtotal.................................................................. 5,116,534 -- 5,116,534
------------- ------------- -------------
PRO FORMA SHARES ISSUED, ISSUABLE AND RESERVED FOR ISSUANCE..................... 59,891,355 12,105,994 71,997,349
Shares Available for Issuance................................................... 23,002,651 -- 23,002,651
------------- ------------- -------------
Total Authorized.......................................................... 82,894,006 12,105,994 95,000,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------
(1) These shares would be issuable from the Retained Interest.
(2) See Proposal 2.
(3) See Proposal 3.
Reference is made to Annex IV for a further description of the Aerial Group
and the combined financial statements of the Aerial Group.
THE TDS GROUP
Upon the completion of all of the Transactions as contemplated, the Series A
Common Shares and the Common Shares of TDS Delaware would represent an equity
interest in the TDS Group, which would have a Retained Interest of approximately
20% of the common shareholders' equity value of the Company attributable to each
Tracking Group, along with all other interests held by the Company. The TDS
Group would also include such other assets and liabilities of the Company as the
Board may in the future determine to attribute to the TDS Group and such other
businesses, assets and liabilities as the Company or any of its subsidiaries may
in the future acquire for the TDS Group, as determined by the Board.
The Board intends to adopt a policy providing that the TDS Group may own,
invest or otherwise have an interest in, lease, operate or manage any business
other than a Cellular Business, a Telecom Business or a PCS Business. At the
present time, the TDS Group owns interests in businesses which may be considered
to include such other businesses. The TDS Group will continue to be permitted to
operate these existing businesses. Except with respect to such existing
businesses, the TDS Group will generally not engage in the Cellular Business,
the Telecom Business or the PCS Business, except through the Retained Interests,
unless the Board determines to permit the TDS Group to pursue such
opportunities. This will be done on a case-by-case basis. It is currently the
intention of the Board that any businesses, opportunities, assets and
liabilities attributed to the TDS Group in the future would not include
businesses, opportunities, assets and liabilities of the Cellular Group, the
Telecom Group or the Aerial Group. The Company could determine to pursue future
business opportunities through one Group
-71-
<PAGE>
instead of the other Groups, or jointly through more than one of the Groups. The
decision to allocate certain resources and financial support to a Group other
than the TDS Group may adversely affect the ability of the TDS Group to obtain
funds sufficient to implement its business strategies. See "--Management and
Allocation Policies."
The Board expects to adopt a policy pursuant to which the benefits of tax
deductions which cannot be utilized by any Tracking Group would be allocated to
the TDS Group. The TDS Group would be required to compensate such Tracking Group
for such tax benefits at such time as such Tracking Group would be able to
utilize such tax benefits as a stand-alone entity. For example, the TDS Group
will derive the benefits of the tax losses of Aerial until such time as Aerial
would be able to utilize such tax benefits as a stand-alone entity.
In structuring the terms of the Tracking Stock Proposal, the Board
determined that the retention by the TDS Group of Retained Interests in the
Cellular Group, the Telecom Group and the Aerial Group was appropriate. In
making this determination, the Board concluded that it would be desirable for
shareholders to have the option of continuing to maintain a common equity
investment in all of the businesses of the Company and its subsidiaries by
retaining ownership of the Common Shares and Series A Common Shares. The Board
also determined that it would be desirable for the Company to have a Group which
could enter into new ventures and possibly create additional tracking stocks for
such ventures by designating series of Undesignated Shares. Such new shares of
tracking stock could be distributed to the holders of Common Shares and Series A
Common Shares upon the creation or separation of a business, sold for cash in a
public or private offering to finance a new business for the benefit of the TDS
Group or delivered in connection with the acquisition of a business by the TDS
Group. The Company has no current plans to create any additional tracking stocks
or to make any material investments in any new businesses.
Holders of Common Shares and Series A Common Shares will be subject to all
of the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. There is no assurance as to the degree to
which the market value of the Common Shares will reflect the separate
performance of either the TDS Group or its Retained Interests in the Tracking
Groups.
Following the Distribution, the Board currently intends to establish an
annual dividend on the Common Shares and Series A Common Shares in an amount
equal to $0.10 per share (the "TDS Group Dividend Rate"). Following the
Distribution, the Board also intends to establish an annual dividend on the
Telecom Group Shares in an amount equal to $0.48 per share. Based on the
expected distribution ratio of two-thirds of a Telecom Group Share for each
existing Common Share and Series A Common Share, this dividend rate would equate
to a per share annual dividend of $0.32 per existing Common Share and Series A
Common Share (the "Telecom Equivalent Dividend Rate"). The total of the TDS
Group Dividend Rate and the Telecom Equivalent Dividend Rate is equal to $0.42
per share per annum, as compared to the current annual dividend rate on the
existing Common Shares and Series A Common Shares of $0.42 per share. The intent
is that, immediately after the Distribution, a current holder of Common Shares
and Series A Common Shares would continue to receive an aggregate dividend which
is at least equal to the aggregate dividend which such shareholder currently
receives from the Company (not considering reductions in shares which may occur
due to the payment of cash in lieu of fractional shares in the Distribution).
The following table shows the TDS Group Shares that would be issued in the
Merger and the number of TDS Group Shares issuable, authorized for issuance for
various purposes and available for issuance (based on shares outstanding at
November 30, 1997).
<TABLE>
<CAPTION>
SERIES A SPECIAL TOTAL TDS
COMMON SHARES COMMON SHARES COMMON SHARES GROUP SHARES
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
To Be Issued in Merger.................................. 6,933,233 53,878,129(1) -- 60,811,362
--------------- --------------- --------------- --------------
SHARES ISSUABLE TO THIRD PARTIES:
Committed Acquisition Shares.......................... -- 567,412 -- 567,412
Pre-Distribution Convertible Securities
TDS Preferred Shares................................ -- 969,025 -- 969,025
Existing Plans...................................... -- 575,026 -- 575,026
--------------- --------------- --------------- --------------
Subtotal.......................................... -- 2,111,463 -- 2,111,463
--------------- --------------- --------------- --------------
</TABLE>
-72-
<PAGE>
<TABLE>
<CAPTION>
SERIES A SPECIAL TOTAL TDS
COMMON SHARES COMMON SHARES COMMON SHARES GROUP SHARES
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
AUTHORIZED FOR ISSUANCE(2):
Existing Plans(3)..................................... -- 400,625 -- 400,625
1998 Long Term Incentive Plan(4)...................... -- 1,800,000 -- 1,800,000
Other TDS Benefit Plans............................... -- 361,027 -- 361,027
Acquisitions.......................................... -- 1,442,235 -- 1,442,235
Issuance for Cash..................................... -- 1,580,000 -- 1,580,000
Dividend Reinvestment Plan............................ 175,567 464,958 -- 640,525
--------------- --------------- --------------- --------------
Subtotal.......................................... 175,567 6,048,845 -- 6,224,412
--------------- --------------- --------------- --------------
PRO FORMA SHARES ISSUED, ISSUABLE AND RESERVED FOR
ISSUANCE............................................... 7,108,800 62,038,437 -- 69,147,237
Shares Available for Issuance........................... 17,891,200 37,961,563 20,000,000 75,852,763
--------------- --------------- --------------- --------------
Total Authorized.................................. 25,000,000 100,000,000 20,000,000 145,000,000
--------------- --------------- --------------- --------------
--------------- --------------- --------------- --------------
</TABLE>
- ------------
(1) Includes 484,012 shares held by a subsidiary of TDS.
(2) Does not include shares authorized for issuance upon conversion of Series A
Common Shares, based on the assumption that such shares will not be
converted.
(3) See Proposal 2.
(4) See Proposal 3.
Reference is made to Annex V for a further description of the TDS Group and
the combined financial statements of the TDS Group.
EFFECT OF PRE-DISTRIBUTION CONVERTIBLE SECURITIES AND COMMITTED ACQUISITION
SHARES
After the Distribution, the Pre-Distribution Convertible Securities
outstanding will be adjusted so that such Pre-Distribution Convertible
Securities will be convertible into, or exercisable or exchangeable for, as the
case may be, immediately after the Distribution, such number of Cellular Group
Shares, Telecom Group Shares and Aerial Group Shares in addition to the Common
Shares such Pre-Distribution Convertible Securities were already convertible
into, exercisable or exchangeable for, as the case may be, as if such
conversion, exercise or exchange had occurred immediately prior to the
Distribution. In addition, pursuant to the provisions of the acquisition
agreements relating to the delivery of Committed Acquisition Shares, after the
Distribution, Common Shares that are issuable as Committed Acquisition Shares
will, immediately upon issuance and without any notice or any other action on
the part of the Company or its Board or otherwise, include Cellular Group
Shares, Telecom Group Shares and Aerial Group Shares in addition to each Common
Share issuable in such acquisition as if such acquisition had occurred
immediately prior to the Distribution. Approval of the Tracking Stock Proposal
will also constitute approval by shareholders of the full adjustment of all
Pre-Distribution Convertible Securities and obligations to deliver Committed
Acquisition Shares as described in this paragraph, including shares reserved for
issuance therefor.
The obligations to deliver shares of common stock upon the conversion,
exercise or exchange of Pre-Distribution Convertible Securities and with respect
to any pre-Distribution Committed Acquisition Shares will be attributed to the
TDS Group. As indicated above, the Pre-Distribution Convertible Securities that
are currently convertible into Common Shares will become convertible into
Cellular Group Shares, Telecom Group Shares and Aerial Group Shares, as well as
Common Shares, as a result of the Distribution, and Committed Acquisition Shares
will require the delivery of Cellular Group Shares, Telecom Group Shares and
Aerial Group Shares, as well as Common Shares, as a result of the Distribution.
If and when such Pre-Distribution Convertible Securities are converted,
exercised or exchanged, or upon the delivery of Committed Acquisition Shares,
the shares to be issued upon such conversion, exercise, exchange or delivery
will be issued from the Retained Interest of the TDS Group, or from authorized
but unissued Cellular Group Shares, Telecom Group Shares and Aerial Group
Shares, provided that if shares of any Tracking Stock are issued from authorized
but unissued shares for such purposes, the TDS Group will be charged, and such
other Groups will be credited, with an amount equal to the product of the number
of shares of Tracking Stock of such Groups which are issued upon such
conversion, exercise, exchange or delivery, and the Market Value of one share of
such Tracking Stock over the twenty-Trading Day period ending five Trading Days
prior to the issuance of such shares. The consideration received by the Company
upon the conversion, exercise or exchange of any Pre-Distribution Convertible
Securities and with respect to the issuance of Committed Acquisition Shares will
be attributed to the TDS Group. If any such consideration attributed to the TDS
Group which
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is received in connection with the delivery of pre-Distribution Committed
Acquisition Shares includes assets related to the Cellular Business, the Telecom
Business or the Aerial Business, the TDS Board may cause the TDS Group to
transfer such assets to the appropriate Tracking Group in consideration for an
increase in the Number of Shares Issuable with Respect to Retained Interest or
other consideration.
DESCRIPTION OF ARTICLES OF INCORPORATION OF TDS IOWA
The Articles of Incorporation of the Company, as amended (the "Articles"),
provide that the authorized capital stock consists of 100,000,000 Common Shares,
$1.00 par value, 25,000,000 Series A Common Shares, $1.00 par value, and
5,000,000 Preferred Shares, without par value.
PREFERRED SHARES. The Board is authorized by the Articles to issue
Preferred Shares from time to time in series and to establish as to each series
the designation and number of shares to be issued, the dividend rate, the
redemption price and terms, if any, the amount payable upon voluntary or
involuntary dissolution of TDS, sinking fund provisions, if any, voting rights,
if any, and the terms of conversion into Common Shares, if provided for. The
current number of authorized Preferred Shares is 5,000,000, of which 296,664
were issued and 30,000 shares were issuable as of November 30, 1997.
VOTING RIGHTS. The Articles provide that the Board is divided into three
classes. Each class is elected for a three-year term. With respect to the
election of directors, the holders of Common Shares, and the holders of
Preferred Shares issued before October 31, 1981 (all of which have voting
rights), voting as a group, are entitled to elect 25% of the Board of TDS,
rounded up to the nearest whole number. The holders of Series A Common Shares,
and the holders of Preferred Shares issued after October 31, 1981 which have
voting rights, voting as a group, currently elect the remaining members of the
Board of TDS. The Board currently consists of twelve directors. Accordingly, the
holders of Common Shares and the holders of Preferred Shares issued before
October 31, 1981 currently elect three directors and the holders of Series A
Common Shares and Preferred Shares issued after October 31, 1981 which have
voting rights, currently elect nine directors. There is no provision in the
Articles permitting cumulative voting.
The holders of Common Shares and all currently outstanding series of
Preferred Shares are entitled to one vote per share. The holders of Series A
Common Shares are entitled to ten votes per share. The holders of Common Shares,
Series A Common Shares and Preferred Shares which have voting rights vote as a
single class, except with respect to the election of directors as discussed
above and with respect to certain amendments to the Articles (E.G., amendments
having an effect on the holders of a class), as to which the IBCA grants class
voting rights.
If the number of Series A Common Shares issued and outstanding at any time
falls below 500,000, because of the conversion of Series A Common Shares or
otherwise, the holders of Series A Common Shares would lose the right to vote as
a separate class (with the holders of Preferred Shares issued after October 31,
1981 which have voting rights) in the election of approximately 75% of the
directors, and thereafter the holders of Series A Common Shares (with ten votes
per share) would vote with the holders of Common Shares (with one vote per
share) and all Preferred Shares which have voting rights, as a single class in
the election of directors. It is unlikely that the number of outstanding Series
A Common Shares will fall below 500,000, because more than 6,000,000 Series A
Common Shares are held in the TDS Voting Trust, and the trustees of the TDS
Voting Trust have indicated that they have no present intention of converting
Series A Common Shares into Common Shares.
DIVIDENDS. Subject to the satisfaction of all Preferred Share dividend
preference and redemption provisions, holders of Common Shares are entitled to
receive such dividends as may be declared from time to time by the Board. Unless
the same, or greater, dividends, on a per share basis, are declared and paid at
the same time on the Common Shares, no dividends may be declared or paid on the
Series A Common Shares.
SHARE DIVIDENDS. In the case of share dividends, the Articles provide that
Common Shares may be paid to holders of Common Shares and proportionately to
holders of Series A Common Shares; Series A Common Shares may be paid to holders
of Common Shares and proportionately to holders of Series A Common Shares; and
Common Shares may be paid to holders of Common Shares and Series A Common Shares
may be paid proportionately to holders of Series A Common Shares. The Board is
authorized to permit both the holders of Common Shares and Series A Common
Shares to elect to receive cash in lieu of stock.
DISTRIBUTION OF SUBSIDIARY IN DIVIDEND OR LIQUIDATION. The Articles provide
that if a TDS subsidiary has classes of capital stock with relative rights,
preferences and limitations vis-a-vis each other that, in the judgment of the
Board, are similar in all material respects to the relative rights, preferences
and limitations of the Common
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Shares vis-a-vis the Series A Common Shares, except for certain limited matters,
then the Board will distribute the subsidiary shares in a dividend or upon
liquidation to the extent practicable by distributing the subsidiary shares
which correspond to the Common Shares, to the holders of Common Shares, and the
subsidiary shares which correspond to the Series A Common Shares, to the holders
of Series A Common Shares, provided that the same number of shares of subsidiary
common stock on a combined basis must be distributed per Series A Common Share
and Common Share.
LIQUIDATION. Upon liquidation, holders of Common Shares and Series A Common
Shares are entitled to receive a pro rata share of all assets available to
shareholders after payment to holders of the Preferred Shares of the liquidation
value thereof, plus a sum equal to the amount of all accumulated and unpaid
dividends thereon at the dividend rate fixed for each series of cumulative
Preferred Shares by the Board, except as discussed above with respect to the
distribution of a subsidiary in liquidation.
PREEMPTIVE RIGHTS. The holders of Series A Common Shares have a preemptive
right to purchase any additional Series A Common Shares sold for cash, including
treasury shares. Holders of Common Shares and Preferred Shares have no
preemptive rights under the Articles.
CONVERSION RIGHTS. The Common Shares have no conversion rights. The Series
A Common Shares are convertible, on a share-for-share basis, into Common Shares.
CONSIDERATION OF COMMUNITY INTERESTS IN ACQUISITION PROPOSALS. Article IX
of the Iowa Articles provides that, when evaluating any offer of another party
to (i) make a tender or exchange offer for any equity of the Company; (ii) merge
or consolidate the Company with another corporation; or (iii) purchase or
otherwise acquire all or substantially all of the properties and assets of the
Company, the Board may, in connection with the exercise of its judgment in
determining what is in the best interests of the Company and its shareholders,
give due consideration to all factors the directors deem relevant, including,
without limitation, (a) the effects on the customers of the Company or any of
its subsidiaries, (b) not only the consideration being offered in relation to
the then current market price for the Company's outstanding shares of capital
stock, but also the Board's estimate of the future value of the Company
(including the unrealized value of its properties and assets) as an independent
going concern, and (c) the purpose of the Company and any of its subsidiaries to
provide quality products and services on a long-term basis.
DESCRIPTION OF RESTATED CERTIFICATE OF INCORPORATION OF TDS DELAWARE
The Restated Certificate will authorize 475,000,000 shares of capital stock,
to consist of 326,664 Preferred Shares, par value $0.01 per share, 4,673,336
Undesignated Shares, par value $0.01 per share, 25,000,000 Series A Common
Shares, par value $0.01 per share, 100,000,000 Common Shares, par value $0.01
per share, 20,000,000 Special Common Shares, par value $0.01 per share,
90,000,000 Telecom Group Shares, par value $0.01 per share, 140,000,000 Cellular
Group Shares, par value $0.01 per share, and 95,000,000 Aerial Group Shares, par
value $0.01 per share. The numbers of Preferred Shares and Undesignated Shares
is estimated based on the number of Iowa Preferred Shares which are issued and
issuable on November 30, 1997. The actual numbers will be based on the number of
Iowa Preferred Shares which will be outstanding shortly prior to the Merger. The
total of the Preferred Shares and Undesignated Shares will equal 5,000,000. The
following describes the terms of the capital stock under the Restated
Certificate in comparison to the Articles in general terms. In addition, the
terms of the Tracking Stock are described in greater detail below under
"--Description of Terms of Tracking Stock."
PAR VALUE. The par value per share of each class of common stock will be
changed from $1.00 under the Articles to $.01 and the par value per share of the
Preferred Shares will be changed from no par value to par value of $.01 per
share. This is being done solely for the purposes of reducing the amount of
Delaware filing fees TDS Delaware will be required to pay in connection with the
reincorporation.
AUTHORIZED SHARES. The following table shows, with respect to each class of
capital stock, the number of shares which would be issued in the Merger, the
Distribution and the other Transactions as contemplated, the number of shares
which would be reserved for issuance for certain purposes and the number of
shares which
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would be available for issuance for other proper corporate purposes, of the
shares of common stock (based on shares outstanding as of November 30, 1997).
<TABLE>
<CAPTION>
SERIES A SPECIAL CELLULAR TELECOM AERIAL
COMMON COMMON COMMON GROUP GROUP GROUP
SHARES SHARES SHARES SHARES SHARES SHARES
---------- ----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Issued in Merger............................... 6,933,233 53,878,129(1)
Issued in Distribution......................... -- -- -- 60,811,362 40,540,908 40,540,908
Issued in Other Transactions(2)................ -- -- -- 18,897,187 13,500,000 11,453,996
---------- ----------- ---------- ----------- ---------- ----------
Pro Forma Outstanding........................ 6,933,233 53,878,129 -- 79,708,549 54,040,908 51,994,904
Shares Issuable by TDS to Third Parties(3)..... -- 2,111,463 -- 2,111,463 1,407,642 1,407,642
Shares Issuable Due to Other Transactions(2)... -- -- -- 8,801,503 -- 1,372,275
Reserved for Issuance.......................... 175,567 6,048,845 -- 7,291,826 5,913,809 5,116,534
Available for Issuance......................... 17,891,200 37,961,563 20,000,000 23,927,668 16,531,647 23,002,651
Retained Interest(4)........................... -- -- -- 18,158,991 12,105,994 12,105,994
---------- ----------- ---------- ----------- ---------- ----------
Total Authorized............................. 25,000,000 100,000,000 20,000,000 140,000,000 90,000,000 95,000,000
---------- ----------- ---------- ----------- ---------- ----------
---------- ----------- ---------- ----------- ---------- ----------
</TABLE>
- ------------
(1) Includes 484,012 shares held by a subsidiary of the Company.
(2) The other Transactions include the U.S. Cellular Merger, the Aerial Merger
and the Telecom Public Offering.
(3) Represents shares issuable as Committed Acquisition Shares and pursuant to
Pre-Distribution Convertible Securities.
(4) Net of shares issuable from Retained Interest
In addition, there would be authorized and issued 326,664 Preferred Shares,
and there would be authorized and available for issuance 4,673,000 Undesignated
Shares, based on Preferred Shares issued and issuable as of November 30, 1997.
The actual number of Preferred Shares and Undesignated Shares to be included in
the Restated Certificate will be based on the number of Iowa Preferred Shares
which are outstanding shortly prior to the Merger. The total of the Preferred
Shares and Undesignated Shares will equal 5,000,000, which is the number of Iowa
Preferred Shares which are authorized under the Articles.
The shares proposed to be authorized pursuant to the Restated Certificate
are necessary to implement the Tracking Stock Proposal and the related
Transactions. Although most of the shares of Tracking Stock being authorized
would be issued in the Transactions, the Tracking Stock Proposal would authorize
a greater number of shares than is required for the Transactions as well as
authorize Special Common Shares. The Board of TDS believes that it is desirable
to have the additional authorized shares of common stock available for future
financing and acquisition transactions, for conversions and for other general
corporate purposes. Having such additional authorized shares of common stock
available for issuance in the future will give TDS greater flexibility and may
allow such shares to be issued without the expense and delay of a special
shareholders' meeting. Unissued shares of common stock could be issued in
circumstances that would serve to preserve control of TDS's then existing
management. See "Risk Factors."
The authorized but unissued shares of capital stock would be available for
issuance by the Company from time to time, as determined by the Board, for any
proper corporate purpose, which could include raising capital, payment of stock
dividends, stock splits, providing compensation or benefits to employees, or
acquiring or investing in other companies or businesses. Generally, no further
action or authorization by the shareholders would be necessary prior to the
issuance of the additional shares of the Tracking Stocks or any other shares of
capital stock authorized pursuant to the Tracking Stock Proposal unless
applicable laws or regulations would require such approval in a given instance.
The Company has no current plans to issue any shares of Tracking Stock except in
connection with the Transactions and as otherwise described herein. The Special
Common Shares are being authorized in connection with the possible future
conversion of shares of any class of Tracking Stock, as discussed herein. The
Board has no current plans or intentions to convert any shares of Tracking Stock
or to issue any Special Common Shares.
INCREASES IN AUTHORIZED SHARES. As permitted by Delaware law, the Restated
Certificate will permit the number of authorized shares of any class of capital
stock to be increased or decreased (but not below the number of shares then
outstanding in such class, respectively) by the affirmative vote of the holders
of a majority of the shares of capital stock of the Company entitled to vote
with respect to matters other than the election of directors. No similar
authority exists under Iowa law. This provision in the Restated Certificate will
give the Company increased flexibility to authorize additional shares of any
class of capital stock for use for any corporate purpose, without the need to
obtain the approval of a majority of the affected class or classes (as is the
case under Iowa law), by obtaining the approval of the holders of a majority of
the voting power of the shares of capital stock of the Company
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entitled to vote with respect to matters other than the election of directors,
voting as a single group. The TDS Voting Trust presently holds a majority of the
voting power of the Company.
This provision may allow TDS Delaware to authorize and issue shares of
capital stock under circumstances which could preserve the ability of the TDS
Voting Trust to continue to exercise control over a majority of the voting power
of TDS Delaware and, therefore, could deprive shareholders of TDS of an
opportunity to sell their shares at a premium over market prices or make it more
difficult to replace the current Board and management of TDS Delaware. See "Risk
Factors." The TDS Voting Trust has no current intention to take any action to
authorize any additional shares of capital stock, other than as described
herein.
ISSUED PREFERRED SHARES; REDESIGNATION OF AUTHORIZED BUT UNISSUED PREFERRED
SHARES. The Articles presently authorize 5,000,000 Preferred Shares, of which
326,664 are issued and issuable, and 4,673,336 are authorized but unissued and
available for issuance as of November 30, 1997. The Restated Certificate will
authorize up to 326,664 Preferred Shares, having substantially the same rights,
limitations and privileges as the issued Preferred Shares, except as described
herein. As a result of the Distribution, the outstanding Preferred Shares which
are convertible into Common Shares will be adjusted so that such convertible
Preferred Shares will be convertible into Cellular Group Shares, Telecom Group
Shares and Aerial Group Shares in addition to the Common
Shares as if such shares had been converted immediately prior to such action.
All obligations with respect to the issued Preferred Shares will be
attributed to the TDS Group. As indicated above, the Preferred Shares which are
currently convertible into Common Shares will become convertible into Cellular
Group Shares, Telecom Group Shares and Aerial Group Shares, as well as Common
Shares, as a result of the Distribution. If and when such Preferred Shares are
converted, the shares to be issued upon such conversion will be issued either
from the Retained Interest, or from authorized but unissued Cellular Group
Shares, Telecom Group Shares and Aerial Group Shares, as the case may be,
provided that, if such shares are issued from authorized but unissued shares,
the TDS Group will be charged, and such other Groups will be credited, with an
amount equal to the product of the number of shares of Tracking Stock of such
Groups which are issued upon conversion and the Market Value of one share of
such Tracking Stock over the twenty-Trading Day period ending five Trading Days
prior to the issuance of such shares.
The Restated Certificate would reclassify all of the authorized but unissued
Preferred Shares (4,673,336 as of November 30, 1997) as Undesignated Shares. The
Board would be authorized by the Restated Certificate to designate and issue
Undesignated Shares in one or more classes or series of preferred or common
stock from time to time, and to establish as to each class or series the
designation and number of shares to be issued, the dividend rate, the redemption
price and terms, if any, the amount payable upon voluntary or involuntary
dissolution of TDS, sinking fund provisions, if any, voting rights, if any, the
terms of conversion into shares of common stock, if provided for, and such other
rights, preferences or limitations as may be provided in such designation. The
Undesignated Shares will thereafter be available for designation and issuance as
common or preferred stock from time to time for any proper corporate purpose,
including issuances for cash, acquisitions, stock splits, stock dividends, stock
option plans and funding of employee benefit plans. Generally, no further action
or authorization by the shareholders would be necessary prior to the designation
or issuance of the additional Undesignated Shares authorized pursuant to the
Restated Certificate unless applicable laws or regulations would require such
approval in a given instance. Having such additional authorized shares of stock
available for designation and issuance in the future will give TDS greater
flexibility and may allow such shares to be issued without the expense and delay
of a special shareholders' meeting. Shares of common or preferred stock could be
issued in circumstances that would serve to preserve control of TDS's then
existing management. See "Risk Factors."
The reclassification of the authorized but unissued Preferred Shares as
Undesignated Shares would continue to permit classes or series of preferred
stock to be designated and issued, and would also permit classes or series of
common stock to be designated and issued to track new businesses or to separate
existing businesses by any of the Groups. For instance, shares of tracking stock
could be designated and issued for the benefit of the TDS Group. Such new shares
of tracking stock could be distributed to the holders of Common Shares and
Series A Common Shares upon the creation or separation of a business, sold for
cash in a public or private offering to finance a new business for the benefit
of the TDS Group or delivered in connection with the acquisition of a business
by the TDS Group. Undesignated Shares could also be designated with respect to
any other Group. For instance, a series of Undesignated Shares could be
designated to represent the cellular telephone markets in which U.S. Cellular
has a minority interest. These shares could then be sold for cash to obtain
additional funds for the Cellular Group or distributed on a pro rata basis to
the holders of Cellular Group Shares. The Company has no current plans to create
any additional tracking stocks or to make any material investments in any new
businesses.
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Any future designation and issuance of Undesignated Shares as preferred or
common stock will be attributed to one or more of the Groups as may be
determined by the Board at such time, taking into consideration the use of the
proceeds of the issuance of such shares and any other relevant factors.
VOTING RIGHTS. The Restated Certificate continues to provide that the Board
will be divided into three classes and that each class will be elected for a
three-year term. Each director of TDS Iowa at the time of the Merger will
continue as a director of TDS Delaware of the same class immediately following
the Merger.
In the election of directors, the holders of Preferred Shares issued before
October 31, 1981 and Common Shares would vote together with the holders of
Tracking Stocks and any issued Special Common Shares, in the election of 25% of
the directors (rounded up) plus one additional director (or four directors based
on a Board of twelve directors). The Preferred Shares issued before October 31,
1981 and Common Shares would have one vote per share in the election of such
directors and all other matters (other than the election of the directors
described in the following paragraph). Accordingly, the holders of Preferred
Shares issued before October 31, 1981 and Common Shares would have the power to
vote in the election of one additional director in addition to the directors
which they currently elect.
The Tracking Stocks would have no votes except in the election of such
directors and as otherwise required by law. In the election of such directors,
each class of Tracking Stock would initially have one vote per share.
Thereafter, the number of votes which shares of each class of Tracking Stock
would have in the election of such directors would be adjusted or "float" based
on the Market Capitalization of such class as compared to the aggregate Market
Capitalization of all shares of Tracking Stock and the Common Shares and
Preferred Shares issued before October 31, 1981, calculated over a
twenty-Trading Day period ending ten Trading Days prior to the record date for
each annual meeting of shareholders. See "--Description of Terms of Tracking
Stock--Voting Rights." After adjustment of the voting power to reflect the
relative market values, it is expected that the Cellular Group Shares would
initially have more than one vote per share and that the Telecom Group Shares
and Aerial Group Shares would have approximately one vote per share based on
presently anticipated market values, although this may change over time.
Under the Tracking Stock Proposal, the holders of Preferred Shares issued
after October 31, 1981 and Series A Common Shares would vote in the election of
75% of the directors (rounded down), less one director. Based on a Board of
twelve directors, the Series A Group would vote in the election of eight
directors, as compared to nine directors currently. Each of the currently
outstanding Preferred Shares issued after October 31, 1981 would continue to
have one vote and Series A Common Shares would continue to have ten votes per
share in the election of such directors, as well as all other matters (other
than the election of the directors elected by the voting group described in the
preceding paragraph).
If the number of Series A Common Shares issued and outstanding at any time
falls below 500,000, because of the conversion of Series A Common Shares or
otherwise, the holders of Series A Common Shares would lose the right to vote as
a separate class (with the holders of Preferred Shares issued after October 31,
1981 which have voting rights) in the election of approximately 75% of the
directors less one director, and thereafter the holders of Series A Common
Shares (with ten votes per share) would vote with the holders of all other
classes of capital stock as a single class in the election of all directors. In
such election, holders of Common Shares and any issued Special Common Shares
would have one vote per share, holders of Tracking Stock would have per share
voting rights which would float, as discussed above, and Preferred Shares would
have the voting rights specified in the Restated Certificate or designation. It
is unlikely that the number of outstanding Series A Common Shares will fall
below 500,000, because more than 6,000,000 Series A Common Shares are held in
the TDS Voting Trust, and the trustees of the TDS Voting Trust have indicated
that they have no present intention of converting Series A Common Shares into
Common Shares.
Actions submitted to a vote of shareholders other than the election of
directors will generally be voted on only by holders of Common Shares, Series A
Common Shares and series of Preferred Shares which have voting rights. Under the
Restated Certificate, except as required under the DGCL, only the affirmative
vote of the holders of a majority of the outstanding voting power of the Common
Shares, Series A Common Shares and such voting Preferred Shares, voting as a
group, will be required to amend the Restated Certificate, approve any merger or
consolidation of TDS with or into any other corporation, approve the dissolution
of TDS or approve any other matter required to be voted on by shareholders.
Under Delaware law, the holders of the outstanding shares of a class are
entitled to vote as a class upon a proposed amendment, whether or not entitled
to vote thereon by the certificate of incorporation, if the amendment would
increase or decrease the par value of the shares of such class or alter or
change the powers, preferences or
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special rights of the shares of such class so as to affect them adversely. As
discussed above, the Restated Certificate will permit the number of authorized
shares of any class of capital stock to be increased or decreased (but not below
the number of shares then outstanding in such class, respectively) by the
affirmative vote of a majority of the voting power of the shares of capital
stock entitled to vote with respect to matters other than the election of
directors, without a class vote of the affected class.
DIVIDENDS. Subject to the satisfaction of all Preferred Share dividend
preference and redemption provisions, holders of common stock are entitled to
receive such dividends as may be declared from time to time by the Board.
Dividends on each of the Common Shares, the Series A Common Shares and any
issued Special Common Shares would be payable out of the lesser of assets of the
Company legally available therefor and the Available Dividend Amount for the TDS
Group. See "--Certain Definitions." Dividends on each class of Tracking Stock
would be payable out of the lesser of assets of the Company legally available
therefor and the Available Dividend Amount related to that Tracking Group, which
is intended to be similar to the product of the Outstanding Interest Fraction
and the amount that would be legally available for the payment of dividends on
the particular Tracking Stock under the DGCL if that Tracking Group were a
separate Delaware corporation. See "--Description of Terms of Tracking Stock."
Subject to the provisions in the preceding paragraph, notwithstanding the
Available Dividend Amount for any Group, the respective amounts of prior
dividends paid on, or liquidation rights of any shares of common stock, or any
other factor, dividends may be declared and paid with respect to any class or
series of common stock in equal or unequal amounts, provided that, except as
described below, unless the same dividends, on a per share basis, are declared
and paid at the same time on any issued Special Common Shares, no dividends may
be declared or paid on the Common Shares and, unless the same, or greater,
dividends, on a per share basis, are declared and paid at the same time on the
Common Shares and any issued Special Common Shares, no dividends may be declared
or paid on the Series A Common Shares.
Any decision to pay dividends in the future will depend on the financial
condition, results of operations and business requirements of the Company as a
whole. In making a determination as to the allocation of any future dividends
among the classes or series of common stock, the Board expects to follow a
policy under which it will consider, among other factors, the relative financial
condition, results of operations and business requirements of the respective
Groups. See "Dividend Policy."
Following the Distribution, the Board currently intends to establish an
annual dividend on the Common Shares and Series A Common Shares in an amount
equal to $0.10 per share (the "TDS Group Dividend Rate"). Following the
Distribution, the Board also intends to establish an annual dividend on the
Telecom Group Shares in an amount equal to $0.48 per share. Based on the
expected distribution ratio of two-thirds of a Telecom Group Share for each
existing Common Share and Series A Common Share, this dividend rate would equate
to a per share annual dividend of $0.32 per existing Common Share and Series A
Common Share (the "Telecom Equivalent Dividend Rate"). The total of the TDS
Group Dividend Rate and the Telecom Equivalent Dividend Rate is equal to $0.42
per share per annum, which is the same as the current annual dividend rate on
the existing Common Shares and Series A Common Shares. The intent is that,
immediately after the Distribution, a current holder of Common Shares and Series
A Common Shares who retains the Telecom Group Shares received in the
Distribution would continue to receive an aggregate dividend which is at least
equal to the aggregate dividend which such shareholder currently receives from
the Company (not considering reductions in shares which may occur due to the
payment of cash in lieu of fractional shares in the Distribution).
With regard to the Cellular Group Shares and the Aerial Group Shares, the
Board currently intends to retain future earnings of the Cellular Group and
Aerial Groups, if any, for the development of the businesses of the Cellular
Group and Aerial Group, respectively, and does not anticipate paying dividends
on the Cellular Group Shares or the Aerial Group Shares in the foreseeable
future.
SHARE DISTRIBUTIONS. In the case of dividends of shares of capital stock of
the Company, the Restated Certificate provides that shares of common stock (or
in each case, Convertible Securities convertible into or exercisable or
exchangeable for such common stock) may be distributed only as follows:
(i) Common Shares may be distributed on an equal per share basis to holders
of Common Shares and holders of Series A Common Shares, and Special Common
Shares may be distributed on an equal per share basis to holders of Special
Common Shares;
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(ii) Series A Common Shares may be distributed on an equal per share basis
to holders of Common Shares and holders of Series A Common Shares, and Special
Common Shares may be distributed on an equal per share basis to holders of
Special Common Shares;
(iii) Common Shares may be distributed on an equal per share basis to
holders of Common Shares, Series A Common Shares may be distributed on an equal
per share basis to holders of Series A Common Shares and Special Common Shares
may be distributed on an equal per share basis to holders of Special Common
Shares;
(iv) Special Common Shares may be distributed on an equal per share basis to
holders of Series A Common Shares, Common Shares and Special Common Shares;
(v) shares of any class of Tracking Stock may be distributed on an equal per
share basis to the holders of Common Shares, Series A Common Shares and Special
Common Shares up to the amount of the Number of Shares Issuable with Respect to
Retained Interest in such shares of Tracking Stock;
(vi) Cellular Group Shares may be distributed pro rata to the holders of
Cellular Group Shares, in which case the Number of Shares Issuable with Respect
to Retained Interest and the Number of Shares Issuable with Respect to
Inter-Group Interest (if any) in the Cellular Group would also be
proportionately adjusted;
(vii) Telecom Group Shares may be distributed pro rata to the holders of
Telecom Group Shares, in which case the Number of Shares Issuable with Respect
to Retained Interest and the Number of Shares Issuable with Respect to
Inter-Group Interest (if any) in the Telecom Group would also be proportionately
adjusted;
(viii) Aerial Group Shares may be distributed pro rata to the holders of
Aerial Group Shares, in which case the Number of Shares Issuable with Respect to
Retained Interest and the Number of Shares Issuable with Respect to Inter-Group
Interest (if any) in the Aerial Group would also be proportionately adjusted;
(ix) shares of a new class or series of capital stock which is intended to
represent a subdivision or new business of a Group, or any assets attributed by
the Board to such Group, may be distributed on an equal per share basis to
holders of common stock representing an interest in such Group; or
(x) shares of Tracking Stock of the Tracking Group (the "Issuer Group") may
be distributed to the holders of shares of Tracking Stock of another Tracking
Group (the "Investor Group") up to the amount of the Number of Shares Issuable
with Respect to Inter-Group Interest attributed to the Investor Group in the
Issuer Group.
Holders of Tracking Stock may not receive any TDS Group Shares as a dividend
since a Tracking Group may not have an Inter-Group Interest in the TDS Group.
The Board is authorized to permit the holders of common stock to elect to
receive cash in lieu of stock.
DISTRIBUTION OF TDS GROUP SUBSIDIARY IN DIVIDEND. The Restated Certificate
provides that if the Board intends to distribute a subsidiary included in the
TDS Group to the holders of shares of the Company in a dividend, the Board
shall, to the extent practicable, distribute subsidiary shares corresponding to
Series A Common Shares to the holders of Series A Common Shares, distribute
subsidiary shares corresponding to Common Shares to the holders of Common
Shares, and distribute subsidiary shares corresponding to Special Common Shares
to the holders of Special Common Shares, provided that the same number of shares
of subsidiary common stock on a combined basis must be distributed for each
Series A Common Share, Common Share and any issued Special Common Share. Holders
of Tracking Stock will not be entitled to participate in a distribution of any
shares of a subsidiary in a dividend or otherwise which is attributable to the
TDS Group, since a Tracking Group may not hold an Inter-Group Interest in the
TDS Group.
The Restated Certificate provides that, if practicable, the Board must
recapitalize such subsidiary through an amendment to its charter or otherwise,
so that the shares of capital stock of such subsidiary substantially correspond
to the Series A Common Shares, Common Shares and Special Common Shares of the
Company, as may be determined to be necessary or appropriate in the sole
discretion of the Board, in order to permit the distribution to be effected in
the foregoing manner. The Restated Certificate provides further that, if Special
Common Shares are outstanding but the subsidiary has no shares corresponding to
Special Common Shares and it is impracticable to recapitalize the subsidiary as
provided in the preceding sentence, the Board must distribute subsidiary shares
corresponding to Common Shares to the holders of Special Common Shares.
DISTRIBUTION OF TRACKING GROUP SUBSIDIARY IN DIVIDEND. The Restated
Certificate provides that if the Board intends to distribute a subsidiary
included in a Tracking Group other than a Qualifying Subsidiary or Qualifying
Subsidiaries (See "--Certain Definitions") which hold all of the assets and
liabilities of a Tracking Group to the holders of shares of Tracking Stock of
such Tracking Group in a dividend, and if there is a Retained Interest in such
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Tracking Group, the Board shall, to the extent practicable, distribute
subsidiary shares corresponding to Special Common Shares to the holders of
Tracking Stock of such Tracking Group with respect to the outstanding shares of
such Tracking Group. Holders of TDS Group Shares and shares of any other
Tracking Stock will not be entitled to participate in such distribution of any
shares of a subsidiary in a dividend or otherwise which is attributable to
another class of Tracking Stock, except with respect to a Retained Interest by
the TDS Group or an Inter-Group Interest by another Tracking Group. The
subsidiary shares relating to any Retained Interest or Inter-Group Interest may
be retained by the Company for the benefit of the TDS Group or the other
Tracking Group, respectively, or distributed pro rata to the holders of the TDS
Group Shares or the applicable Tracking Stock, at the sole discretion of the
Board.
If the Board determines to distribute subsidiary shares with respect to such
a Retained Interest or Inter-Group Interest, it must, to the extent practicable,
distribute subsidiary shares corresponding to Special Common Shares to the
holders of Tracking Stock of another Tracking Group with respect to any such
Inter-Group Interest, and distribute subsidiary shares corresponding to Series A
Common Shares to the holders of Series A Common Shares, subsidiary shares
corresponding to Common Shares to the holders of Common Shares, and subsidiary
shares corresponding to Special Common Shares to the holders of Special Common
Shares with respect to any Retained Interest in such Tracking Group, provided
that the same number of shares of subsidiary common stock on a combined basis
must be distributed for each Series A Common Share, Common Share and any issued
Special Common Share.
The Restated Certificate provides that, if practicable, the Board must
recapitalize such subsidiary through an amendment to its charter or otherwise,
so that the shares of capital stock of such subsidiary and the relative rights,
limitations and preferences thereof substantially correspond to the Series A
Common Shares, Common Shares and Special Common Shares of the Company and their
relative rights, limitations and preferences, as may be determined to be
necessary or appropriate in the sole discretion of the Board, in order to permit
the distribution to be effected in the foregoing manner. The Restated
Certificate provides further that, if the subsidiary has no shares corresponding
to Special Common Shares and it is impracticable to recapitalize the subsidiary
as provided in the preceding sentence, the Board must distribute subsidiary
shares corresponding to Common Shares to the holders of Special Common Shares
and to holders of Tracking Stock who would otherwise be entitled to receive
subsidiary shares corresponding to Special Common Shares.
LIQUIDATION RIGHTS. Subject to the following paragraph, in the event of a
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Company and subject to the prior payment in full of the
preferential amounts to which any class or series of Preferred Shares or
Undesignated Shares is entitled, the holders of the outstanding shares of common
stock will be entitled to receive the remaining assets of the Company,
regardless of the Group to which such assets are attributed, divided among the
holders of common stock in accordance with the per share "Liquidation Units"
attributable to each class of Common Stock. Each Series A Common Share, Common
Share and Special Common Share is attributed one Liquidation Unit, each Cellular
Group Share is attributed 2.5 Liquidation Units, each Telecom Group Share is
attributed 0.9 of a Liquidation Unit and each Aerial Group Share is attributed
1.1 Liquidation Units. The Liquidation Units per share were determined by the
Board in consultation with the Financial Advisors, based on the anticipated
initial trading ranges of the shares of common stock and other factors. The
Liquidation Unit of each class or series of common stock will be adjusted by the
Board as appropriate to reflect equitably any subdivision (by stock split or
otherwise) or combination (by reverse stock split or otherwise) of such class of
common stock or any dividend or other distribution of shares with respect to
such class of common stock. Whenever a change in the Liquidation Units with
respect to any class or series of common stock occurs, the Company will prepare
and distribute a notice of such change to all holders of shares of such class or
series of common stock, together with a notice of such stock split, reverse
split, distribution or other transaction requiring such change.
Prior to the distribution of the remaining assets of the Company as set
forth in the preceding paragraph, the Board may redeem all shares of Tracking
Stock of all Tracking Groups in exchange for shares of a Qualifying Subsidiary
or Qualifying Subsidiaries holding all of the assets and liabilities of the
related Tracking Group, as described under "--Redemption in Exchange for Stock
of Subsidiary." In such event, all shares of Tracking Stock would be redeemed
immediately prior to the liquidation, dissolution or winding-up and the Series A
Common Shares, Common Shares and any issued Special Common Shares would share
pari passu in any assets remaining for distribution after such redemptions.
A consolidation, merger, or reorganization of the Company with any other
corporation or corporations, or a sale of all or substantially all of the assets
of the Company, will not be considered a dissolution, liquidation, or winding up
of the Company within the meaning of these provisions.
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CONVERSION RIGHTS. None of the Common Shares, Cellular Group Shares,
Telecom Group Shares, Aerial Group Shares nor Special Common Shares will be
convertible at the option of the holder into another class of common stock or
any other security of TDS. The Series A Common Shares will continue to be
convertible on a share-for-share basis into Common Shares at any time and will
be convertible on a share-for-share basis into Special Common Shares.
PREEMPTIVE RIGHTS. None of the Common Shares, Cellular Group Shares,
Telecom Group Shares, Aerial Group Shares nor Special Common Shares will carry
any preemptive rights enabling a holder to subscribe for or receive shares of
any class of stock of TDS or any other securities convertible into shares of any
class of stock of TDS under the Restated Certificate. The Series A Common Shares
will continue to have a preemptive right to acquire additional Series A Common
Shares for cash, including treasury shares.
MERGER CONSIDERATION. The Restated Certificate provides that in the event
of a merger or consolidation of the Company, whether or not the Company is the
surviving entity, the holders of Special Common Shares and Common Shares are
entitled to receive the same per share consideration. For this purpose, the
foregoing will be deemed to be satisfied if the consideration received by the
holders of Special Common Shares consists of securities which have relative
rights, preferences and limitations vis-a-vis the securities received by the
holders of Common Shares that, in the judgment of the Board of Directors, are
substantially similar to the relative rights, preferences and limitations of the
Special Common Shares vis-a-vis the Common Shares, respectively.
DISPOSITION OF ASSETS OF A TRACKING GROUP. The Restated Certificate
provides that, in the event of a Disposition of all or substantially all of the
properties and assets of a Tracking Group in one transaction or a series of
related transactions, other than a transaction in which the Company receives
primarily equity securities of an entity engaged or proposing to engage
primarily in a similar or complementary business, and certain other
circumstances, the Company must either:
(i) distribute to holders of the affected Tracking Stock an amount in cash,
securities or other property or any combination thereof equal to the product of
(A) the Outstanding Interest Fraction (in the case of a Disposition involving
substantially all, but not all of the assets of the Affected Tracking Group) or
the Adjusted Outstanding Interest Fraction (in the case of a Disposition
involving not less than all of the assets of the affected Tracking Group) and
(B) the Fair Value of the Net Proceeds of such Disposition, either by special
dividend or by redemption of all or part of the outstanding shares of the
affected Tracking Stock; or
(ii) convert each outstanding share of the affected Tracking Stock into a
number (or fraction) of Special Common Shares or shares of any other Tracking
Stock (or any combination thereof on a pro rata basis) equal to 110% (the
"Disposition Conversion Percentage") of the average daily ratio (calculated to
the nearest five decimal places) of the Market Value of (A) one share of
Affected Tracking Stock to (B) the Market Value of one Special Common Share or
such other share of Tracking Stock (or any combination thereof on a pro rata
basis) during a forty-Trading Day period beginning on the 11th Trading Day after
consummation of the Disposition. See "--Description of Terms of Tracking
Stocks--Disposition of Assets of Tracking Group."
The ratio of the Market Value of one share of Tracking Stock to be converted
into such Special Common Share and/or share of another class of Tracking Stock
could be influenced by many factors, including the results of operation of the
Company and each of the Groups, the regulatory environment, trading volumes,
share issuances and repurchases, and general economic and market conditions.
Such a conversion could be effected at a time when the market value of the
converted Tracking Stock or the shares issued in conversion thereof may be
considered to be overvalued or undervalued. Such conversion would also have the
effect of precluding holders of the converted Tracking Group from retaining
their investment in a security intended to reflect separately the businesses and
assets attributed to the converted Tracking Group. See "Risk Factors."
CONVERSION AT OPTION OF COMPANY. The Company may, in the sole discretion of
the Board, elect at any time to convert each outstanding share of any class of
Tracking Stock into a number (or fraction) of Special Common Shares or shares of
any other class of Tracking Stock, or any combination thereof on a pro rata
basis, equal to the Optional Conversion Percentage of the average daily ratio of
the Market Value of one share of Tracking Stock to be converted to the Market
Value of one Special Common Share or such other share of Tracking Stock,
calculated over the twenty-Trading Day period ending five Trading Days prior to
the date of notice of such conversion. The Optional Conversion Percentage will
initially be 115% and will be fixed for five years after the initial issuance
date of the applicable Tracking Stock. Beginning on the fifth anniversary of
such date, the Optional Conversion Percentage will decrease by one percent per
year, until it is equal to 110% percent on the ninth anniversary of the initial
issuance
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date and for all periods thereafter. See "--Description of Terms of Tracking
Stocks--Conversion at Option of Company."
The ratio of the Market Value of one share of Tracking Stock to be converted
to such Special Common Share or share of another class of Tracking Stock could
be influenced by many factors, including the results of operation of the Company
and each of the Groups, the regulatory environment, trading volumes, share
issuances and repurchases, and general economic and market conditions. Such a
conversion could be effected at a time when the market value of the converted
Tracking Stock or the shares issued in conversion thereof may be considered to
be overvalued or undervalued. Such conversion would also have the effect of
precluding holders of the converted Tracking Group from retaining their
investment in a security intended to reflect separately the businesses and
assets attributed to the converted Tracking Group. See "Risk Factors."
REDEMPTION IN EXCHANGE FOR STOCK OF QUALIFYING SUBSIDIARY. Subject to
certain restrictions, the Company could at any time, in the sole discretion of
the Board, redeem without premium all outstanding shares of any class of
Tracking Stock of a Tracking Group, in exchange for shares of a Qualifying
Subsidiary or Qualifying Subsidiaries which hold all of the assets and
liabilities of such Tracking Group. See "--Description of Terms of Tracking
Stocks-- Redemption in Exchange for Stock of Subsidiary."
REDEMPTION TO PROTECT LICENSES. As permitted by Delaware law, the Restated
Certificate also includes a provision permitting the Company to redeem shares of
capital stock (other than Series A Common Shares) to the extent necessary to
prevent the loss or secure the reinstatement of any license or franchise from
any governmental agency. No similar provision is included in the Articles
because of differences in Iowa law. See "--Comparison of Shareholder's Rights
Under Iowa and Delaware Law." Substantially similar provisions are included in
the current Certificates of Incorporation of each of U.S. Cellular and Aerial,
each of which is a Delaware corporation.
The Board considers this provision important in order to permit the
redemption of shares, if necessary, to avoid the loss of any franchise or
license under the Communications Act of 1934, as amended (the "Communications
Act") and the rules and regulations of the Federal Communications Commission
(the "FCC"). Failure to comply with the requirements of the Communications Act
and the FCC may result in denial or revocation of FCC licenses.
The Restated Certificate would permit TDS Delaware to redeem any shares of
capital stock (other than Series A Common Shares) from disqualified holders at
their fair market value to the extent necessary to prevent the loss of or secure
the reinstatement of, or to prevent the denial of applications for or the
renewal of any governmental license or franchise held by TDS Delaware or any of
its subsidiaries, or any person in which TDS has any direct or indirect
ownership or voting interest, if the license or franchise is conditioned upon
some or all of the holders of the corporation's stock, or persons entitled to
vote such stock, possessing prescribed qualifications or any other condition. A
disqualified holder is any holder of shares of capital stock of TDS Delaware
whose holding of such shares on behalf of such holder or on behalf of any other
person, either individually or when taken together with the holding or voting of
shares of capital stock of TDS Delaware by any other holders or persons entitled
to vote such shares, may result, in the good faith judgment of the Board, in the
loss of, or the failure to secure the reinstatement of, or the denial of
applications for or the renewal of, any license or franchise from any
governmental agency held by TDS Delaware or any of its subsidiaries, or any
person in which TDS has any direct or indirect ownership or voting interest.
The redemption price of the shares to be redeemed will be equal to the
lesser of (i) the fair market value of such shares or (ii) if such shares were
purchased by the disqualified holder within one year of the redemption date, the
disqualified holder's purchase price for such shares (the "Required Price"). The
fair market value of a share of capital stock of any class or series of TDS
Delaware means the average closing price for such a share for each of the 20
most recent days on which shares of capital stock of such class or series have
traded preceding the day on which notice of redemption is given, except that if
shares of capital stock of such class or series are not traded on any securities
exchange or in the over-the-counter market, "fair market value" will be
determined by the Board in good faith. The redemption price of such shares may
be paid in cash, securities or any combination thereof.
TDS Delaware may redeem any shares in exchange for any debt or equity
securities (other than Series A Common Shares or securities convertible into or
exchangeable for, or carrying a right to subscribe to or acquire, Series A
Common Shares) of TDS Delaware, any of its subsidiaries or any other
corporation, or any combination thereof, having such terms and conditions as may
be approved by the Board and which, together with any cash to be paid as part of
the redemption price, in the opinion of any nationally recognized investment
banking firm selected by the Board, has a value at the time of notice of
redemption at least equal to the Required Price.
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If less than all the shares held by disqualified holders are to be redeemed,
the shares to be redeemed will be selected in a manner to be determined by the
Board, which may include selection first of the most recently purchased shares
thereof, selection by lot or selection in any other manner determined by the
Board.
At least 30 days' written notice of the redemption date will be given to the
record holders of the shares selected to be redeemed (unless waived in writing
by any such holder), except that the redemption date may be the date on which
written notice is given to record holders if the cash or securities necessary to
effect the redemption is deposited in trust for the benefit of such record
holders and subject to immediate withdrawal by them upon surrender of the stock
certificates for their shares to be redeemed.
INDEMNIFICATION. The Restated Certificate provides that TDS Delaware shall
indemnify directors and officers of TDS Delaware, its consolidated subsidiaries
and certain other related entities generally in the same manner and to the
extent permitted by the DGCL, as more specifically provided in the Bylaws of TDS
Delaware. No similar provision presently exists in the Iowa Articles. However,
the indemnification provision included in the Restated Certificate is
substantially similar to a provision included in the Iowa Bylaws, which provides
that TDS shall indemnify directors and officers of TDS, its consolidated
subsidiaries and certain other related entities, generally in the same manner
and to the extent permitted by Iowa law.
The Delaware Bylaws provide for indemnification and permit the advancement
of expenses by TDS generally in the same manner and to the extent permitted by
the DGCL, subject to compliance with certain requirements and procedures
specified in the Delaware Bylaws. In general, the Delaware Bylaws require that
any person seeking indemnification must provide TDS Delaware with sufficient
documentation as described in the Bylaws and, if an undertaking to return
advances is required, to deliver an undertaking in the form prescribed by TDS
Delaware and provide security for such undertaking if considered necessary by
TDS Delaware. In addition, the Delaware Bylaws specify that, except to the
extent required by law, TDS Delaware does not intend to provide indemnification
to persons under certain circumstances, such as where the person was not acting
in the interests of TDS Delaware or was otherwise involved in a crime or tort
against TDS Delaware. For a comparison of the indemnification permitted under
Delaware law and Iowa law, see "--Comparison of Shareholder's Rights Under Iowa
and Delaware Law."
CONSIDERATION OF COMMUNITY INTERESTS IN ACQUISITION PROPOSALS. Article IX
of the Restated Certificate will include a provision similar to Article IX of
the Iowa Articles and will also address certain matters presently addressed by
Iowa law which are not addressed by Delaware Law. See "--Comparison of
Shareholder's Rights Under Iowa and Delaware Law." Article IX of the Delaware
Articles provides that, when evaluating any proposal or offer of another party
to (i) make a tender or exchange offer for any equity of the Company; (ii) merge
or consolidate the Company with another corporation; or (iii) purchase or
otherwise acquire all or substantially all of the properties and assets of the
Company, the Board may, in connection with the exercise of its judgment in
determining what is in the best interests of the Company and its shareholders,
give due consideration to all factors the directors deem relevant.
Such factors may include, without limitation, (a) the effects on the
customers of the Company or any of its subsidiaries or on such other
constituencies of the Company or its subsidiaries that the Board considers
relevant under the circumstances, (b) not only the consideration (after taking
into account corporate and shareholder taxes) being offered in relation to the
then current market price for the Company's outstanding shares of capital stock,
but also the Board's estimate of the future value of the Company (including the
unrealized value of its properties and assets) as an independent going concern,
(c) the purpose of the Company and any of its subsidiaries to provide quality
products and services on a long-term basis and (d) the long-term as well as
short-term interests of the corporation and its shareholders, including the
possibility that such interests may be best served by the continued independence
of the corporation.
If, on the basis of such factors, the Board determines that a proposal or
offer to acquire or merge the corporation, or to sell its assets, is not in the
best interests of the corporation, it may reject the proposal or offer. If the
Board determines to reject any such proposal or offer, the Board shall have no
obligation to facilitate, to remove any barriers to, or to refrain from
impeding, the proposal or offer, except as may be required by applicable law.
Except to the extent required by applicable law, the consideration of any or all
of such factors shall not be a violation of any duty of the directors to the
shareholders or a group of shareholders, even if the directors reasonably
determine that any such factor or factors outweigh the financial or other
benefits to the corporation or a shareholder or group of shareholders.
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This provision may serve to discourage or make more difficult a change in
control of the Company without the support of the Board and could, under certain
circumstances, prevent shareholders from profiting from an increase in the
market value of their shares as a result of a change in control of the Company
by delaying or preventing such change in control. See "Risk Factors."
BYLAWS. The Restated Certificate provides that, in furtherance and not in
limitation of the powers conferred by Delaware law, the Board of TDS Delaware is
expressly authorized to adopt, amend or repeal the Bylaws of TDS Delaware,
subject to any specific limitations on such power provided by any Bylaws adopted
by the shareholders. Due to differences in Delaware and Iowa law, this provision
is necessary in order to continue to permit the Company's Board to adopt, amend
or repeal the Bylaws of the Company. See "--Comparison of Shareholders' Rights
Under Iowa and Delaware Law." The Bylaws of TDS Delaware will be adopted by the
Board of TDS Delaware.
SECTION 203 OF DGCL. As permitted by Delaware law, the Restated Certificate
will provide that TDS Delaware elects not to be governed by Section 203 of the
DGCL. TDS is currently subject to a similar statute under the IBCA. See
"--Comparison of Shareholder's Rights Under Iowa and Delaware Law." Since
Section 203 will not be applicable to TDS, it may be possible for a person to
acquire the Series A Common Shares held by the TDS Voting Trust and to
immediately complete a business combination with TDS, without complying with any
of the exceptions to Section 203. The trustees of the TDS Voting Trust have
advised the Company that they have no current plans or intentions of disposing
of such Series A Common Shares.
OTHER RIGHTS. The Restated Certificate expressly permits the Board to issue
and sell shares of any class of capital stock even if the consideration which
could be obtained by issuing or selling any other class of capital stock would
be greater. The Restated Certificate also expressly permits the Board to
purchase shares of any class of capital stock, even if the consideration which
would be paid by purchasing another class of capital stock would be less.
In no event will any of the Common Shares, Series A Common Shares, or
Special Common Shares be split, subdivided or combined unless all such classes
are proportionately split, subdivided or combined.
The full text of the proposed Restated Certificate is set forth as EXHIBIT B
to this Proxy Statement/Prospectus and is incorporated herein by reference. The
above summary should be read in conjunction with, and is qualified in its
entirety by reference to, such EXHIBIT B. See also "--Description of Terms of
Tracking Stock."
Shareholder approval of the Tracking Stock Proposal will also constitute
approval of the Restated Certificate and the provisions thereof, including those
which differ from or are in addition to those which are in the Iowa Articles, as
described in this Proxy Statement/Prospectus.
DESCRIPTION OF TERMS OF TRACKING STOCK
The following summarizes certain terms of the Tracking Stock which would be
created by the Tracking Stock Proposal. See EXHIBIT F--ILLUSTRATION OF CERTAIN
TERMS, for illustrations of certain of the provisions described under this
section.
VOTING RIGHTS. In the election of directors, the holders of Tracking Stock
would vote together with the holders of Preferred Shares issued before October
31, 1981, Common Shares and any issued Special Common Shares, as well as any
issued Undesignated Shares which have been designated to vote in such group
(collectively, the "Public Holders"), in the election of 25% of the directors
plus one additional director (or four directors based on a Board of twelve
directors). Each of the Preferred Shares issued before October 31, 1981 and
Common Shares, as well as any issued Special Common Shares (the "One-Vote
Holders"), would have one vote per share in the election of such directors. In
the election of such directors, each share of Tracking Stock would initially
have one vote per share. Thereafter, the number of votes which shares of each
class of Tracking Stock would have in the election of such directors would be
adjusted or "float" in proportion to the aggregate Market Capitalization of such
class as compared to the aggregate Market Capitalization of the shares held by
the Public Holders, and would be calculated using Market Values over the
twenty-Trading Day period ending ten Trading Days prior to the record date for
each annual meeting of shareholders.
In the election of directors elected by the Public Holders, the proportion
of the total votes of the Public Holders which a class of Tracking Stock will
have would be equal to the percentage (the "Voting Percentage") equal to 100%
multiplied by the average daily ratio (calculated to three decimal places) of
the aggregate Market Capitalization of the applicable class of Tracking Stock to
the aggregate Market Capitalization of the Preferred Shares issued before
October 31, 1981, Common Shares, Cellular Group Shares, Telecom Group Shares,
Aerial Group Shares
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and Special Common Shares, if any are outstanding, and any outstanding
Undesignated Shares which have been designated to vote with the Public Holders,
calculated for the twenty-Trading Day period (the "Calculation Period") ending
ten Trading Days prior to the record date for each annual meeting of
shareholders (the "Adjustment Date"). In the election of such directors, the per
share voting power of each class of Tracking Stock will be calculated on the
basis that all shares of stock held by the One Vote Holders have one vote per
share for such purposes.
As an illustration, if on any Adjustment Date, the One-Vote Holders
represent 20% of the Market Capitalization of the Public Holders, the shares of
Tracking Stock in the aggregate would have 80% of the voting power of the Public
Holders in the election of directors elected by the Public Holders. If there
were 53,000,000 shares held by the One Vote Holders, each with one vote per
share, the total voting power of the Public Holders would be 265,000,000 votes,
determined by dividing 53,000,000 by 20%. The aggregate voting power of the
shares of Tracking Stock would be 212,000,000 votes, determined by subtracting
53,000,000 from 265,000,000. The proportion of votes which each class of
Tracking Stock would have in the aggregate would be determined by multiplying
265,000,000 by the Voting Percentage of that class of Tracking Stock. The number
of votes per share of a class of Tracking Stock would be determined by dividing
the aggregate voting power of such class, determined pursuant to the preceding
sentence, by the average number of issued and outstanding shares of that class
of Tracking Stock during the Calculation Period. Any shares held in the Retained
Interest or Inter-Group Interest would not have any votes. See "--Retained
Interest" and "--Inter-Group Interest."
Accordingly, in the election of directors elected by the Public Holders,
beginning on the first Adjustment Date prior to the record date for an annual
meeting of shareholders after issuance of the Tracking Stock, each Cellular
Group Share, Telecom Group Share and Aerial Group Share may have more or less
than one vote per share. It is expected that the Cellular Group Shares would
initially have more than one vote per share and that the Telecom Group Shares
and Aerial Group Shares would initially have approximately one vote per share
based on anticipated market values. The Market Capitalization of the classes of
stock could be influenced by many factors, including the results of operations
of the Company and each of the Groups, the regulatory environment, trading
volume, share issuances and repurchases and general economic and market
conditions. Such changes in the aggregate votes or relative voting power of the
Tracking Stock could result from the market's reaction to a decision by the
Company's management or Board that is perceived to disparately affect one class
of common stock in comparison to another. See "Risk Factors."
The periodic adjustments in the number of votes of Cellular Group Shares,
Telecom Group Shares and Aerial Group Shares will reduce the opportunity of
investors in one Tracking Stock to acquire for the same aggregate consideration
relatively greater voting power per share in the election of directors elected
by the Public Holders than investors in the other classes. Because the
adjustment of voting power will occur only annually, some disparity in the
voting power purchasable for a specified dollar amount may exist among the
Tracking Stocks from time to time.
The "Market Capitalization" of any class or series of capital stock of the
Company on any Trading Day means the product of (i) the Market Value of one
share of such class or series on such trading day and (ii) the number of shares
of such class or series outstanding on such Trading Day. The per share Market
Value of the Preferred Shares shall be the liquidation value per share. For this
purpose, if on any Adjustment Date with respect to an annual meeting, Special
Common Shares are issued and outstanding but are not listed on a stock exchange
or otherwise traded in the over-the-counter market, Special Common Shares will
be deemed to have a Market Value per share equal to the per share Market Value
of Common Shares with respect to that record date.
The Tracking Stock will not be entitled to any votes per share except in the
election of certain directors and to the extent that separate class or series
votes are required by the DGCL. Actions submitted to a vote of shareholders
other than the election of directors will generally be voted on only by holders
of Common Shares, Series A Common Shares and series of Preferred Shares which
have voting rights. Under the Restated Certificate, except as required under the
DGCL, only the affirmative vote of the holders of a majority of the outstanding
voting power of the Common Shares, Series A Common Shares and such voting
Preferred Shares, voting as a group, will be required to amend the Restated
Certificate, approve any merger or consolidation of TDS with or into any other
corporation, approve the dissolution of TDS or approve any other matter required
to be voted on by shareholders. However, under Delaware law, the holders of the
outstanding shares of a class are entitled to vote as a class upon a proposed
amendment, whether or not entitled to vote thereon by the certificate of
incorporation, if the amendment would increase or decrease the par value of the
shares of such class or alter or change the powers, preferences or special
rights of the shares of such class so as to affect them adversely.
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DIVIDENDS. Following the Distribution, subject to the legal restrictions on
the payment of dividends described below, the Board currently intends to
establish an annual dividend on the Telecom Group Shares in an amount equal to
$0.48 per share. Based on the expected distribution ratio of two-thirds of a
Telecom Group Share for each existing Common Share and Series A Common Share,
this dividend rate would equate to a per share annual dividend of $0.32 per
existing Common Share and Series A Common Share (the "Telecom Equivalent
Dividend Rate"). Following the Distribution, the Board also currently intends to
establish an annual dividend on the Common Shares and Series A Common Shares in
an amount equal to $0.10 per share. The total of this rate and the Telecom
Equivalent Dividend Rate is equal to $0.42 per share per annum, which is the
same as the current annual dividend rate on the existing Common Shares and
Series A Common Shares. The intent is that, immediately after the Distribution,
a current holder of Common Shares and Series A Common Shares would continue to
receive an aggregate dividend which is at least equal to the aggregate dividend
which such shareholder currently receives from the Company (not considering
reductions in shares which may occur due to the payment of cash in lieu of
fractional shares in the Distribution).
With regard to the Cellular Group Shares and the Aerial Group Shares, the
Board currently intends to retain future earnings, if any, for the development
of the businesses of the Cellular Group and Aerial Group, respectively, and does
not anticipate paying dividends on the Cellular Group Shares or the Aerial Group
Shares in the foreseeable future.
Any decision to pay dividends in the future will depend on the financial
condition, results of operations and business requirements of the Company as a
whole. In making a determination as to the allocation of any future dividends
between the Cellular Group Shares, the Telecom Group Shares and the Aerial Group
Shares, as well as the Common Shares, the Series A Common Shares and any issued
Special Common Shares, the Board expects to follow a policy under which it will
consider, among other factors, the relative financial condition, results of
operations and business requirements of the respective Groups.
The Company's assets consist almost entirely of investments in its
subsidiaries. Furthermore, the initial assets of each of the Tracking Groups
consist almost entirely of the Company's investment in a subsidiary (i.e., U.S.
Cellular, TDS Telecom and Aerial). As a result, the Company's ability to pay
dividends on any class of Tracking Stock is dependent in part on the earnings
of, or other funds available to, such subsidiaries and the distribution or other
payment of such earnings or other funds from such subsidiaries to the Company in
the form of dividends, loans or other advances, payment or reimbursement of
management fees and expenses and repayment of loans and advances from the
Company. Such subsidiaries are separate and distinct legal entities and have no
obligation, contingent or otherwise, to pay the dividends on any class or series
of preferred stock of the Company or to make any funds available therefor,
whether by dividends, loans or other payments. The payment of dividends or the
making of loans and advances to the Company by such subsidiaries may be subject
to statutory or regulatory restrictions, are contingent upon the earnings of
those subsidiaries and are subject to various business considerations.
Dividends on all classes of capital stock are limited to the assets of the
Company legally available for the payment of dividends. The amount of assets of
the Company legally available for the payment of dividends will be reduced by
the amount of any net losses of the Groups and any dividends or distributions
on, or repurchases of, any class of common stock, and dividends on, or certain
repurchases of, Preferred Shares. Additionally, the assets of the Company
available for the payment of dividends may be restricted by future loan
agreements to which certain subsidiaries of the Company may enter into, or
become subject to, and such loan agreements may contain provisions that restrict
or otherwise limit the amount of dividends that those companies may pay.
In addition to the limitations set forth in the foregoing paragraph,
dividends will be further limited to an amount not in excess of the applicable
Available Dividend Amount, which, in the case of a Tracking Group, is intended
to be similar to the amount that would be legally available for the payment of
dividends on a Tracking Group under the DGCL if the Tracking Group were a
separate Delaware corporation. There can be no assurance that there will be an
Available Dividend Amount with respect to any Group.
The "Available Dividend Amount" for a Tracking Group, as of any date, means
the product of the Outstanding Interest Fraction and either (i) the excess of
(a) an amount equal to the total assets of the Tracking Group less the total
liabilities (not including preferred stock) of the Tracking Group as of such
date over (b) the aggregate par value of, or any greater amount determined to be
capital in respect of, all outstanding shares of the applicable Tracking Stock,
each class or series of Preferred Shares attributed to the Tracking Group; or
(ii) in case there is no such excess, an amount equal to the Company Earnings
(Losses) attributable to the Tracking Group (if positive) for the
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fiscal year in which such date occurs and/or the preceding fiscal year. The
"Company Earnings (Losses)" attributable to the Group, for any period, means the
net earnings or losses of the Group for such period determined on a basis
consistent with the determination of the net earnings or losses of the Group for
such period as presented in the combined financial statements of the Group,
including income and expenses of the Company attributed to the operations of the
Group on a substantially consistent basis, including, without limitation,
corporate administrative costs, net interest and income taxes.
The "Available Dividend Amount," as of any date, means, with respect to the
TDS Group, the greater of (i) the amount of all surplus (as defined in the DGCL)
of the Company or, if there is no surplus, the net profits (as contemplated by
the DGCL) of the Company for the fiscal year in which such date occurs and/or
the preceding fiscal year, less the sum of the Available Dividend Amount of all
of the Tracking Groups, or (ii) an amount equal to the sum of the product of the
Retained Interest Fraction and the Available Dividend Amount (if positive) with
respect to each Tracking Group plus, without duplication, either (a) the excess
of (i) an amount equal to the total assets of the TDS Group less the total
liabilities (not including preferred stock) of the TDS Group as of such date
over (ii) the aggregate par value of, or any greater amount determined to be
capital in respect of, all outstanding Series A Common Shares, Common Shares and
any issued Special Common Shares, and each class or series of Preferred Shares
or Undesignated Shares attributed to the TDS Group or (b) in case there is no
such excess, an amount equal to Company Earnings (Losses) attributable to the
TDS Group (if positive) for the fiscal year in which such date occurs and/or the
preceding fiscal year.
At the time of any dividend or other distribution on the outstanding
Tracking Stock (including any dividend of the Fair Value of the Net Proceeds
from the Disposition of all or substantially all of the properties and assets of
a Tracking Group as described under "--Disposition of Assets of Tracking
Group"), the TDS Group (if at such time there is a Retained Interest), or
another Tracking Group (if at such time there is an Inter-Group Interest by such
other Tracking Group in the Tracking Group making the dividend or distribution),
will be credited, and the Tracking Group making the dividend or distribution be
charged (in addition to the charge for the dividend or other distribution paid
or distributed in respect of outstanding shares of Tracking Stock), with an
amount equal to the product of (i) the aggregate amount of such dividend or
distribution paid or distributed in respect of outstanding shares of Tracking
Stock times (ii) a fraction, the numerator of which is (a) the Retained Interest
Fraction or (b) any Inter-Group Interest Fraction in such Tracking Group, as the
case may be, and the denominator of which is the Outstanding Interest Fraction
for such Tracking Group, respectively.
SHARE DISTRIBUTIONS. The right of holders of any class of Tracking Stock to
receive a distribution of shares of capital stock of the Company is limited to
the right to receive a (i) distribution of shares of Tracking Stock of such
Tracking Group (or Convertible Securities convertible into or exercisable or
exchangeable for such Tracking Stock), (ii) shares of Tracking Stock of another
Tracking Group (or Convertible Securities convertible into or exercisable or
exchangeable for such Tracking Group) up to the amount of any Inter-Group
Interest in such other Tracking Group or (iii) shares of a new class or series
of capital stock which is intended to represent a subdivision or new business of
such Tracking Group or any assets attributed by the Board to such Tracking
Group. Holders of Tracking Stock may not receive any TDS Group Shares as a
dividend since a Tracking Group may not have an Inter-Group interest in the TDS
Group.
DISTRIBUTION OF TRACKING GROUP SUBSIDIARY IN DIVIDEND. The Restated
Certificate provides that if the Board intends to distribute a subsidiary
included in a Tracking Group (other than a Qualifying Subsidiary or Qualifying
Subsidiaries which hold all of the assets and liabilities of a Tracking Group)
to the holders of shares of Tracking Stock of such Tracking Group in a dividend,
and there is a Retained Interest in such Tracking Group, the Board shall, to the
extent practicable, distribute subsidiary shares corresponding to Special Common
Shares to the holders of Tracking Stock of such Tracking Group with respect to
the outstanding shares of such Tracking Group. Holders of TDS Group Shares and
shares of any other Tracking Stock will not be entitled to participate in such
distribution of any shares of a subsidiary in a dividend or otherwise which is
attributable to another class of Tracking Stock, except with respect to a
Retained Interest by the TDS Group or an Inter-Group Interest by another
Tracking Group. The subsidiary shares relating to any Retained Interest or
Inter-Group Interest may be retained by the Company for the benefit of the TDS
Group or the other Tracking Group, respectively, or distributed pro rata to the
holders of the TDS Group Shares or the applicable Tracking Stock, at the sole
discretion of the Board.
If the Board determines to distribute subsidiary shares with respect to such
a Retained Interest or Inter-Group Interest, it must, to the extent practicable,
distribute subsidiary shares corresponding to Special Common Shares to the
holders of Tracking Stock of another Tracking Group with respect to any such
Inter-Group Interest, and distribute subsidiary shares corresponding to Series A
Common Shares to the holders of Series A Common Shares, subsidiary shares
corresponding to Common Shares to the holders of Common Shares, and subsidiary
shares corresponding to Special Common Shares to the holders of Special Common
Shares with respect to any
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Retained Interest in such Tracking Group, provided that the same number of
shares of subsidiary common stock on a combined basis must be distributed for
each Series A Common Share, Common Share and any issued Special Common Share.
The Restated Certificate provides that, if practicable, the Board must
recapitalize such subsidiary through an amendment to its charter or otherwise,
so that the shares of capital stock of such subsidiary and the relative rights,
limitations and preferences thereof substantially correspond to the Series A
Common Shares, Common Shares and Special Common Shares of the Company and their
relative rights, limitations and preferences, as may be determined to be
necessary or appropriate in the sole discretion of the Board, in order to permit
the distribution to be effected in the foregoing manner. The Restated
Certificate provides further that, if the subsidiary has or will have shares
corresponding to Series A Common Shares and Common Shares but does not have and
will not have shares corresponding to Special Common Shares and it is
impracticable to recapitalize the subsidiary as provided in the preceding
sentence to create Special Common Shares, the Board must distribute subsidiary
shares corresponding to Common Shares to the holders of Special Common Shares
and to holders of Tracking Stock who would otherwise be entitled to receive
subsidiary shares corresponding to Special Common Shares.
DISTRIBUTION OF SUBSIDIARY OF TDS GROUP OR ANOTHER TRACKING GROUP. Holders
of any class of Tracking Stock will not be entitled to participate in a
distribution of any shares of a subsidiary in a dividend or otherwise which is
attributable to the TDS Group. Holders of a class of Tracking Stock may, at the
sole discretion of the Board, participate in a distribution of a subsidiary of
any other Tracking Group, up to the amount of any Inter-Group Interest in such
other Tracking Group. If there is a Retained Interest in the Tracking Group
which is distributing subsidiary shares, all holders of Tracking Stock receiving
a distribution of subsidiary shares would normally receive subsidiary shares
corresponding to Special Common Shares.
LIQUIDATION RIGHTS. Subject to the following paragraph, in the event of a
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Company and subject to the prior payment in full of the
preferential amounts to which any class or series of Preferred Shares or
Undesignated Shares is entitled, the holders of the outstanding shares of common
stock will be entitled to receive the remaining assets of the Company,
regardless of the Group to which such assets are attributed, divided among the
holders of common stock in accordance with the per share "Liquidation Units"
attributable to each class of Common Stock. Each Series A Common Share, Common
Share and Special Common Share is attributed one Liquidation Unit, each Cellular
Group Share is attributed 2.5 Liquidation Units, each Telecom Group Share is
attributed 0.9 of a Liquidation Unit and each Aerial Group Share is attributed
1.1 Liquidation Units. However, in the event of a liquidation, dissolution or
winding-up of the Company, the amount to be received by each holder of the
respective classes may not bear any relationship to the relative fair market
values or the relative voting rights of the classes. The Liquidation Units per
share were determined by the Board in consultation with the Financial Advisors,
based on the anticipated initial trading ranges of the shares as common stock
and other factors. The Liquidation Unit of each class or series of common stock
will be adjusted by the Board as appropriate to reflect equitably any
subdivision (by stock split or otherwise) or combination (by reverse stock split
or otherwise) of such class of common stock or any dividend or other
distribution of shares with respect to such class of common stock. Whenever a
change in the Liquidation Units with respect to any class or series of common
stock occurs, the Company will prepare and distribute a notice of such change to
all holders of shares of stock of such class or series of common stock, together
with a notice of such stock split, reverse split, distribution or other
transaction requiring such change.
Prior to the distribution of the remaining assets of the Company as set
forth in the preceding paragraph, the Board may redeem all shares of Tracking
Stock of all Tracking Groups in exchange for shares of a Qualifying Subsidiary
or Qualifying Subsidiaries holding all of the assets and liabilities of the
related Tracking Group, as described under "--Redemption in Exchange for Stock
of Subsidiary." In such event, all shares of Tracking Stock would be redeemed
immediately prior to the liquidation, dissolution or winding-up and the Series A
Common Shares, Common Shares and any issued Special Common Shares would share
pari passu in any assets remaining for distribution after such redemptions.
A consolidation, merger, or reorganization of the Company with any other
corporation or corporations, or a sale of all or substantially all of the assets
of the Company, will not be considered a dissolution, liquidation, or winding up
of the Company within the meaning of these provisions.
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CONVERSION AT THE OPTION OF THE HOLDER. No shares of any class of Tracking
Stock are convertible into shares of any other class of common stock by the
holder.
PREEMPTIVE RIGHTS. No holders of shares of any class of Tracking Stock will
have any preemptive right under the terms of the Restated Certificate to acquire
or subscribe for any additional shares of capital stock or other obligations
convertible into or exercisable for shares of capital stock that may hereafter
be issued by the Company.
DISPOSITION OF ASSETS OF A TRACKING GROUP. If the Company disposes of all
or substantially all of the properties and assets of a Tracking Group (defined
as 80% or more of the then current market-value (as determined by the Board) of
the properties and assets of such Tracking Group as of such date) (a
"Disposition") in one transaction or a series of related transactions with any
one or more persons, entities or groups, other than in a transaction referred to
in the following sentence, the Company is required to take one of the actions
listed in the fourth paragraph of this Section on or prior to the 90th Trading
Day following the consummation of a Disposition.
The requirement in the preceding paragraph does not apply to a Disposition
(i) in connection with the disposition by the Company of all of the Company's
properties and assets in one transaction or a series of related transactions or
in connection with the liquidation, dissolution or winding up of the Company,
(ii) by dividend, other distribution or redemption in accordance with any
provision described under "--Dividends," "--Share Distributions,"
"--Distribution of Tracking Group Subsidiary in Dividend," "--Redemption in
Exchange for Stock of Subsidiary" or "--Liquidation," (iii) to any person,
entity or group which the Company, directly or indirectly, after giving effect
to the Disposition, controls or (iv) in connection with a Related Business
Transaction. For purposes of this Section, the Tracking Group affected by the
Disposition of its assets is referred to as the "Affected Tracking Group," and
the Tracking Stock of such Affected Tracking Group is referred to as the
"Affected Tracking Stock."
The Related Business Transaction exception to the requirements in the
following paragraph would enable the Company to enter into transactions in which
the properties or assets of the Affected Tracking Group may be considered to be
"disposed of " in exchange for equity securities of an entity engaged or
proposing to engage in similar or complementary business areas to those of the
Affected Tracking Group while maintaining the capital structure and delineation
of the Tracking Stocks contemplated by the Tracking Stock Proposal. See
"--Certain Definitions" for a definition of Related Business Transaction.
Other than as described above, the Company is required to take one of the
following actions in the event of a Disposition:
(i) subject to the limitations described above under "--Dividends,"
declare and distribute a special dividend in cash, securities or other
property or any combination thereof (other than a dividend or distribution
of common stock of the Company) to the holders of the outstanding shares of
the Affected Tracking Stock, in an aggregate amount equal to the product of
the applicable Outstanding Interest Fraction as of the record date for
determining the holders entitled to receive such dividend and the Fair Value
of the Net Proceeds of such Disposition;
(ii) provided that there are assets of the Company legally available
therefor and the Available Dividend Amount for the Affected Tracking Stock
would have been sufficient to pay a dividend in lieu thereof as described in
clause (i) of this paragraph, then:
(A) if such Disposition involves all (not merely substantially all) of
the properties and assets of the Affected Tracking Group, redeem all
outstanding shares of the Affected Tracking Stock in exchange for
cash, securities or other property (other than common stock of the
Company) or any combination thereof in an aggregate amount equal to
the product of the Adjusted Outstanding Interest Fraction for the
Affected Tracking Group as of the date of such complete redemption and
the Fair Value of the Net Proceeds of such Disposition; or
(B) if such Disposition involves substantially all (but not all) of the
properties and assets of the Affected Tracking Group, apply an
aggregate amount of cash, securities or other property (other than
common stock of the Company) or any combination thereof equal to the
product of the Affected Tracking Group's Outstanding Interest Fraction
as of the date shares are selected for redemption and the Fair Value
of the Net Proceeds of such Disposition to the redemption of
outstanding shares of the Affected Tracking Stock, on a pro rata basis
or by lot; or
(iii) convert each outstanding share of the Affected Tracking Stock of
the Affected Tracking Group into a number (or fraction) of fully paid and
nonassessable Special Common Shares or shares of any other class or classes
of Tracking Stock (or any combination thereof on a pro rata basis) equal to
the Disposition Conversion
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Percentage of the average daily ratio (calculated to the nearest five
decimal places) of the Market Value of (A) one share of Affected Tracking
Stock to (B) the Market Value of one Special Common Share or share of such
other class or classes of Tracking Stock (or any combination thereof on a
pro rata basis) during a forty-Trading Day period beginning on the 11th
Trading Day after consummation of the Disposition.
In the event of conversion of the Affected Tracking Stock into Special
Common Shares or shares of another class of Tracking Stock, the Fair Value
of the Net Proceeds of such Disposition will be attributed to the Group
related to the shares which are issued upon such conversion (on a pro rata
basis if a combination of such shares are issued).
In the event there is no public market price for the Special Common
Shares, the Market Value per share will be deemed to be the same as the per
share Market Value of Common Shares.
The Company may elect to pay the dividend or redemption price referred to in
clause (i) or (ii) of the preceding paragraph either in the same form as the
proceeds of the Disposition were received or in any other combination of cash or
securities or property (other than common stock of the Company), on a pro rata
basis, that the Board determines will have an aggregate market value on a fully
distributed basis, of not less than the amount of the Fair Value of the Net
Proceeds of such Disposition.
If the dividend or redemption is paid in securities of an issuer other than
the Company (the "Successor"), and if there is a Retained Interest in the
Tracking Group at such time, the Board shall, to the extent practicable,
distribute Successor shares corresponding to Special Common Shares to the
holders of Tracking Stock of such Tracking Group with respect to the outstanding
shares of such Tracking Group. Holders of TDS Group Shares and shares of any
other Tracking Stock will not be entitled to participate in such distribution of
any shares of a Successor in a dividend or redemption which is attributable to
another class of Tracking Stock, except with respect to a Retained Interest by
the TDS Group or an Inter-Group Interest attributed to another Tracking Group.
The Successor shares relating to any Retained Interest or Inter-Group Interest
may be retained by the Company and attributed to the TDS Group or the other
Tracking Group, respectively, or distributed pro rata to the holders of the TDS
Group Shares or the applicable Tracking Stock, at the sole discretion of the
Board.
If the Board determines to distribute Successor shares with respect to such
a Retained Interest or Inter-Group Interest, it must, to the extent practicable,
distribute Successor shares corresponding to Special Common Shares to the
holders of Tracking Stock of another Tracking Group with respect to any such
Inter-Group Interest, and distribute Successor shares corresponding to Series A
Common Shares to the holders of Series A Common Shares, Successor shares
corresponding to Common Shares to the holders of Common Shares, and Successor
shares corresponding to Special Common Shares to the holders of Special Common
Shares with respect to any Retained Interest in such Tracking Group, provided
that the same number of shares of Successor common stock on a combined basis
must be distributed for each Series A Common Share, Common Share and any issued
Special Common Share.
If practicable, the Board must cause such Successor to be recapitalized
through an amendment to its charter or otherwise, so that the issued and
authorized shares of capital stock of such Successor and the relative rights,
limitations and preferences thereof substantially correspond to the Series A
Common Shares, Common Shares and Special Common Shares of the Company and their
relative rights, limitations and preferences, as may be determined to be
necessary or appropriate in the sole discretion of the Board, in order to permit
the distribution to be effected in the foregoing manner.
The option to convert the Affected Tracking Stock into Special Common Shares
or shares of another class of Tracking Stock in the event of a Disposition
provides the Company with additional flexibility by allowing the Company to
deliver consideration in the form of Special Common Shares or shares of another
class or classes of Tracking Stock rather than cash or securities or other
properties. This alternative could be used, for example, in circumstances when
the Company did not have sufficient legally available assets under the DGCL to
pay the full amount of an otherwise required dividend or redemption or when the
Company desired to retain such proceeds. In addition, under current tax laws,
the conversion of Affected Tracking Stock into Special Common Shares or shares
of another class of Tracking Stock should not be taxable to shareholders,
whereas a dividend or redemption would be taxable to shareholders. See
"--Certain Federal Income Tax Considerations."
The "Fair Value of the Net Proceeds" means the fair value of the gross
proceeds of such Disposition after payment of or provision for certain specified
costs, including taxes related to the Disposition or a dividend or
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redemption in connection therewith, transaction costs and liabilities and other
obligations (contingent or otherwise), including obligations in respect of
committed acquisitions, Preferred Shares or Convertible Securities attributed to
such Tracking Group (without duplication). See "--Certain Definitions."
The Board has complete discretion as to which option to select. However,
once the disposition option selected by the Board is publicly announced, the
selection becomes irrevocable. The Board is not required to select the
disposition option which would result in the distribution with the highest value
to the holders of the shares of the Affected Tracking Stock or with the smallest
effect on the remaining classes and series of the Company's common stock. In the
event of a Disposition, the Company is not required to make any payment or other
distributions to the holders of Common Shares, Series A Common Shares, Special
Common Shares or shares of any class of Tracking Stock other than the Affected
Tracking Stock. However, the Company may, at the option of the Board, make a
distribution to such other shareholders in respect of any Retained Interest or
any Inter-Group Interest in the Affected Tracking Group existing at the time of
a Disposition.
The Company may, at any time prior to the first anniversary of a dividend
on, or partial redemption of, a class of the Affected Tracking Stock following a
Disposition, convert each remaining outstanding share of Affected Tracking Stock
into a number (or fraction) of Special Common Shares or shares of any other
class or classes of Tracking Stock equal to the product of the Disposition
Conversion Percentage and the average daily ratio (calculated to the nearest
five decimal places) of the Market Value of one Special Common Share or share of
such other class or classes of Tracking Stock during a twenty-Trading Day period
ending on the fifth Trading Day prior to the date of notice of such conversion.
The effect of using the Adjusted Outstanding Interest Fraction, instead of
the Outstanding Interest Fraction, in the determination of amounts to be paid in
redemption of shares of the Affected Tracking Stock following a Disposition of
all of the properties and assets of the Affected Tracking Group is to allocate
to the TDS Group a portion of the Fair Value of the Net Proceeds of the
Disposition, in addition to the amount so allocated in respect of the Retained
Interest, sufficient to provide for the delivery of the portion of the
consideration deliverable by the Company with respect to Shares Issuable to
Third Parties. To the extent such Shares Issuable to Third Parties are included
in the determination of the Adjusted Outstanding Interest Fraction, the
Company's obligations in respect of such securities would not be a reduction in
the calculation of the Fair Value of the Net Proceeds.
In the event any redemption of Tracking Stock is made in circumstances in
which cash, securities or property are allocated to the TDS Group in respect of
Shares Issuable to Third Parties (such cash, securities or other property, the
"Reserved Property"), the Company will be permitted to segregate and hold such
property separate (in the case of any Reserved Property other than Special
Common Shares or shares of another class of Tracking Stock). In the event the
Reserved Property is, for any reason, not delivered with respect to the
obligations under the Shares Issuable to Third Parties, then the former holders
of Tracking Stock shall have no interest in such Reserved Property, and such
Reserved Property shall revert to the TDS Group, subject to escheat laws. In the
event of any conversion of Tracking Stock into Special Common Shares or shares
of any other Tracking Stock, the Company will reserve Special Common Shares or
shares of such other class of Tracking Stock issuable with respect to Shares
Issuable to Third Parties.
If less than substantially all of the properties and assets of a Tracking
Group are disposed of by the Company in one transaction, the Company would not
be required to pay a dividend on, redeem or convert the outstanding shares of
Tracking Stock related to such Group even if an additional transaction were
consummated at a later time in which additional properties and assets of such
Group were disposed of by the Company, which, together with the properties and
assets disposed of in the first transaction, would have constituted
substantially all of the properties and assets of such Group at the time of the
first transaction, unless such transactions constituted a series of related
transactions. The second transaction, however, could trigger such a requirement
if, at the time of the second transaction, the properties and assets disposed of
in such transaction constituted at least substantially all of the properties and
assets of such Group at such time. If less than substantially all of the
properties and assets of any Tracking Group were disposed of by the Company, the
proceeds would be allocated to such Tracking Group, but the holders of Tracking
Stock of such Group would not be entitled to receive any dividend or have their
shares redeemed or converted for Special Common Shares or shares of any other
Tracking Stock, although the Board could determine, in its sole discretion, to
pay a dividend to the holders of shares of Tracking Stock of such Group in an
amount related to the proceeds of such a disposition.
At the time of any dividend made as a result of a Disposition referred to
above, the TDS Group will be credited, and the Affected Tracking Group will be
charged (in addition to the charge for the dividend paid in respect of
outstanding shares of Affected Tracking Stock), with an amount equal to the
product of (i) the aggregate amount
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paid in respect of such dividend times (ii) a fraction the numerator of which is
the Retained Interest Fraction and the denominator of which is the Outstanding
Interest Fraction of such Group.
If any Inter-Group Interests in a Tracking Group exist at the time of any
dividend made as a result of a Disposition referred to above, the Tracking Group
holding such an Inter-Group Interest will be credited, and the Affected Tracking
Group will be charged (in addition to the charge for the dividend paid in
respect of outstanding shares of Affected Tracking Stock) with an amount equal
to the product of (i) the aggregate amount paid in respect of such dividend
times (ii) a fraction the numerator of which is the Inter-Group Interest
Fraction and the denominator of which is the Outstanding Interest Fraction of
the Affected Group.
PROCEDURES RELATING TO DISPOSITION RIGHTS. Not later than the fifth Trading
Day following the consummation of a Disposition referred to above, the Company
will announce publicly by press release (i) the Fair Value of the Net Proceeds
of such Disposition, (ii) the number of outstanding shares of Affected Tracking
Stock, (iii) information describing and indicating the Number of Shares Issuable
to Third Parties of the Affected Tracking Stock, including the number of such
shares which are issuable as Committed Acquisition Shares and the number of such
shares into or for which Convertible Securities are then convertible,
exercisable or exchangeable, and the conversion, exercise or exchange prices
thereof (and stating which, if any, of such Convertible Securities are
Pre-Distribution Convertible Securities), (iv) the Disposition Conversion
Percentage, (v) the Outstanding Interest Fraction for the Affected Tracking
Stock as of a recent date preceding the date of such notice and (vi) the
Adjusted Outstanding Interest Fraction for the Affected Tracking Stock as of a
recent date preceding the date of such notice. Not earlier than the 51st Trading
Day and not later than the 55th Trading Day following the consummation of such
Disposition, the Company will announce publicly by press release which of the
redemption options or combinations thereof described under "--Disposition of
Assets of Tracking Group" it has irrevocably determined to take. As noted under
"--Disposition of Assets of Tracking Group," the Board has complete discretion
to select which disposition option or combination thereof to employ in the event
of a Disposition.
NOTICE OF DIVIDEND FOLLOWING DISPOSITION. If the Company determines to pay
a dividend of cash, securities or other property or any combination thereof
following a Disposition, as described in clause (i) of the fourth paragraph
under "--Disposition of Assets of Tracking Group," the Company will, not earlier
than the 51st Trading Day and not later than the 55th Trading Day following the
consummation of such Disposition, cause to be sent to each holder of outstanding
shares of the Affected Tracking Stock a notice setting forth (i) the record date
for determining holders entitled to receive such dividend, which will be not
earlier than the 61st Trading Day and not later than the 65th Trading Day
following the consummation of such Disposition, (ii) the anticipated payment
date of such dividend (which will not be more than 90 Trading Days following the
consummation of such Disposition), (iii) the kind and amount of cash, securities
or property or combination thereof to be distributed in respect of each share of
the Affected Tracking Stock, (iv) the amount of the Fair Value of the Net
Proceeds of such Disposition, (v) the Outstanding Interest Fraction as of a
recent date preceding the date of such notice, and (vi) the number of
outstanding shares of the Affected Tracking Stock subject to the Disposition and
the Number of Shares Issuable to Third Parties of the Affected Tracking Stock,
including the number of such shares which are issuable as Committed Acquisition
Shares and the number of shares of the Affected Tracking Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, are Pre-Distribution Convertible Securities).
NOTICE OF REDEMPTION OF ENTIRE CLASS FOLLOWING DISPOSITION. If the Company
determines to undertake a redemption of a class of Tracking Stock following a
Disposition of all (not merely substantially all) of the properties and assets
of the Affected Tracking Group with respect to the Fair Value of the Net
Proceeds, as described in clause (ii)(A) of the third paragraph under
"--Disposition of Assets of Tracking Group," the Company will cause to be given
to each holder of outstanding shares of Tracking Stock of the Affected Tracking
Group a notice setting forth (i) a statement that all of the shares of the
Affected Tracking Stock outstanding on the redemption date will be redeemed,
(ii) the anticipated redemption date (which will not be more than 90 Trading
Days following the consummation of such Disposition), (iii) the kind and amount
of cash, securities or property or combination thereof to be paid as a
redemption price in respect of shares of the Affected Tracking Stock outstanding
on the redemption date, (iv) the amount of the Fair Value of the Net Proceeds of
such Disposition, (v) the Adjusted Outstanding Interest Fraction as of a recent
date preceding the date of such notice, (vi) the place or places where
certificates for shares of Affected Tracking Stock, properly endorsed or
assigned for transfer (unless the Company waives such requirement), are to be
surrendered for cash, securities or property or combination thereof, and (vii)
the number of outstanding shares of the Affected Tracking Stock and the Number
of Shares Issuable to Third Parties of the Affected Tracking Stock, including
the number of such shares which are issuable as Committed Acquisition Shares and
the number of shares of the Affected Tracking Stock into or for which
outstanding Convertible Securities are
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then convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof (and stating which, if any, of such Convertible
Securities are Pre-Distribution Convertible Securities). Such notice will be
sent not less than 51 Trading Days nor more than 55 Trading Days following the
consummation of the Disposition and not less than 25 Trading Days prior to the
redemption date.
NOTICE OF PARTIAL REDEMPTION FOLLOWING DISPOSITION. If the Company
determines to undertake a partial redemption of Tracking Stock following a
Disposition of substantially all (but not all) of the properties and assets of
the Affected Tracking Group, as described in clause (ii)(B) of the fourth
paragraph under "--Disposition of Assets of Tracking Group," such partial
redemption will be done on a pro rata basis or by lot. The Company will, not
earlier than the 51st Trading Day and not later than the 55th Trading Day
following the consummation of such a Disposition, cause to be given to each
holder of record of outstanding shares of the Affected Tracking Stock a notice
setting forth (i) a statement that some of the shares of the Affected Tracking
outstanding on the redemption date will be redeemed, specifying the number of
such shares or how such number will be determined, (ii) a date not earlier than
the 61st Trading Day and not later than the 65th Trading Day following the
consummation of such Disposition which will be the date on which shares of the
Affected Tracking Stock then outstanding will be selected for redemption, (iii)
the anticipated redemption date (which will not be more than 90 Trading Days
following the consummation of such Disposition), (iv) the kind and amount of
cash, securities or property or combination thereof to be paid as a redemption
price in respect of the shares of the Affected Tracking Stock, (v) the amount of
the Fair Value of the Net Proceeds of such Disposition, (vi) the Outstanding
Interest Fraction as of a recent date preceding the date of such notice, (vii)
the Number of Shares Issuable to Third Parties of the Affected Tracking Stock,
including the number of such shares which are issuable as Committed Acquisition
Shares and the number of shares of Affected Tracking Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, of such Convertible Securities are Pre-Distribution
Convertible Securities), and (viii) a statement that the Company will not be
required to register a transfer of any shares of the Affected Tracking Stock for
a period of up to 15 Trading Days next preceding the date referred to in clause
(ii) of this sentence. Promptly following the date referred to in clause (ii) of
the preceding sentence, but not earlier than the 61st Trading Day and not later
than the 65th Trading Day following the consummation of such Disposition, the
Company will cause to be given to each holder of shares of the Affected Tracking
Stock, a notice setting forth (i) the number of shares of Affected Tracking
Stock held by such holder to be redeemed, (ii) a statement that such shares of
Affected Tracking Stock will be redeemed, (iii) the redemption date (which will
not be more than 90 Trading Days following the consummation of such
Disposition), (iv) the kind and per share amount of cash, securities or property
or combination thereof to be received by such holder with respect to each share
of Affected Tracking Stock to be redeemed, including details as to the
calculation thereof, and (v) the place or places where certificates for such
shares of Affected Tracking Stock, properly endorsed or assigned for transfer
(unless the Company waives such requirement), are to be surrendered for delivery
of cash, securities or property or combination thereof.
NOTICES UPON CONVERSION FOLLOWING DISPOSITION. In the event of any
conversion following a Disposition, as described above in clause (iii) of the
fourth paragraph under "--Disposition of Assets of Tracking Group," the Company
will cause to be given to each holder of outstanding shares of the Affected
Tracking Stock a notice setting forth (i) a statement that some or all of the
outstanding shares of the Affected Tracking Stock will be converted, specifying
the number of such shares or how such number shall be determined, (ii) the
anticipated conversion date (which will not be more than 90 Trading Days
following the consummation of such Disposition), (iii) the per share number (or
fraction) of Special Common Shares or shares of another class or classes of
Tracking Stock, as applicable, to be received with respect to each share of
Affected Tracking Stock, specifying the shares or the combination of such shares
to be delivered, the Disposition Conversion Percentage and other details as to
the calculation thereof, (iv) the place or places where certificates for shares
of the Affected Tracking Stock, properly endorsed or assigned for transfer
(unless the Company waives such requirement), are to be surrendered, and (v) the
number of outstanding shares of the Affected Tracking Stock and the Number of
Shares Issuable to Third Parties of the Affected Tracking Stock, including the
number of such shares which are issuable as Committed Acquisition Shares and the
number of shares of the Affected Tracking Stock into or for which outstanding
Convertible Securities are then convertible, exercisable or exchangeable and the
conversion, exercise or exchange prices thereof (and stating which, if any, are
Pre-Distribution Convertible Securities). Such notice will be sent not less than
51 Trading Days nor more than 55 Trading Days following the consummation of the
Disposition and not less than 25 Trading Days prior to the conversion date.
Upon the Company's decision to convert all of the remaining outstanding
shares of the Affected Tracking Stock at any time prior to the first anniversary
of a dividend on, or partial redemption of, shares of Affected Tracking Stock
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following a Disposition, as described above under "--Disposition of Assets of
Tracking Group," the Company will announce publicly by press release (i) the
number of outstanding shares of Affected Tracking Stock to be converted, (ii)
the Number of Shares Issuable to Third Parties of such Tracking Stock, including
the number of such shares which are issuable as Committed Acquisition Shares and
into or for which Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, of such Convertible Securities are Pre-Distribution
Convertible Securities), (iii) the Disposition Conversion Percentage and (iv)
the Outstanding Interest Fraction for such Tracking Stock as of a recent date
preceding the date of such notice. The Company will subsequently announce
publicly by press release whether the shares of such Tracking Stock are being
converted in exchange for Special Common Shares, shares of another Tracking
Stock or a combination thereof on a pro rata basis.
In the event of any conversion at any time prior to the first anniversary of
a dividend on, or partial redemption of, shares of Affected Tracking Stock
following a Disposition, as described in the preceding paragraph, the Company
will cause to be given to each holder of outstanding shares of the Affected
Tracking Stock a notice setting forth (i) a statement that all of the
outstanding shares of the Affected Tracking Stock will be converted into a
number or fraction of Special Common Shares or shares of any other class of
Tracking Stock or combination thereof on a pro rata basis, (ii) the anticipated
conversion date (which will not be more than 90 Trading Days following the
following the press release that publicly announces such conversion), (iii) the
per share number (or fraction) of Special Common Shares or shares of another
class of Tracking Stock or combination thereof, as applicable, to be received
with respect to each share of Affected Tracking Stock, specifying such number or
fraction of shares or combination thereof, the Disposition Conversion Percentage
and other details as to the calculation thereof, (iv) the place or places where
certificates for shares of the Affected Tracking Stock, properly endorsed or
assigned for transfer (unless the Company waives such requirement), are to be
surrendered, and (v) the number of outstanding shares of the Affected Tracking
Stock and the Number of Shares Issuable to Third Parties of the Affected
Tracking Stock, including the number of such shares which are issuable as
Committed Acquisition Shares and the number of shares of the Affected Tracking
Stock into or for which outstanding Convertible Securities are then convertible,
exercisable or exchangeable and the conversion, exercise or exchange prices
thereof (and stating which, if any, are Pre-Distribution Convertible
Securities). Such notice will be sent not less than 25 Trading Days nor more
than 35 Trading Days prior to the conversion date.
CONVERSION AT OPTION OF THE COMPANY. The Company may, at the sole
discretion of the Board, at any time convert each outstanding share of any class
of Tracking Stock (the "Converted Tracking Stock"), of any Tracking Group (the
"Converted Tracking Group"), into a number of fully paid and nonassessable
Special Common Shares or shares of another class of Tracking Stock or any
combination thereof, equal to the applicable percentage set forth below (the
"Optional Conversion Percentage") on the conversion date, of the average daily
ratio (calculated to the nearest five decimal places) of the Market Value of one
share of Converted Tracking Stock to the Market Value of one Special Common
Share or share of such other class or classes of Tracking Stock (or any
combination thereof on a pro rata basis), during a twenty-Trading Day period
ending on the fifth Trading Day prior to the date of notice of such conversion:
<TABLE>
<CAPTION>
12-MONTH PERIOD PRIOR TO OPTIONAL CONVERSION
ANNIVERSARY OF INITIAL ISSUANCE DATE PERCENTAGE
- --------------------------------------------------------------------------- -------------------
<S> <C>
First through Fifth........................................................ 115%
Sixth...................................................................... 114%
Seventh.................................................................... 113%
Eighth..................................................................... 112%
Ninth...................................................................... 111%
Thereafter................................................................. 110%
</TABLE>
In the event of the conversion of any class of Tracking Stock into Special
Common Shares or shares of another class or classes of Tracking Stock, the
assets and liabilities of the Converted Tracking Group will be attributed to the
Group related to the shares which are issued upon such conversion (on a pro rata
basis if a combination of such shares are issued).
In the event there is no public market for the Special Common Shares, the
Market Value per share will be deemed to be the same as the per share Market
Value of the Common Shares.
The foregoing provisions would provide the Company the flexibility to
recapitalize the capital structure of the Company in several ways. For instance,
one Tracking Group could be combined with another Tracking Group. As an example,
the Aerial Group Shares could be converted into Cellular Group Shares, in which
case the resulting
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Cellular Group Shares would thereafter represent an equity interest in the
Cellular Business and the PCS Business. In addition, the Company could convert
any or all classes of Tracking Stock into Special Common Shares. For example, if
the Telecom Group Shares were converted into Special Common Shares, the TDS
Group would thereafter include the Telecom Business.
If all shares of Tracking Stock were converted into Special Common Shares,
the Special Common Shares, together with Common Shares and Series A Common
Shares, would thereafter represent a common equity interest in all of the
Company's businesses and all Tracking Groups would cease to exist. The optional
conversion could be exercised at any time in the future if the Board determines
that, under the circumstances, a combination of some or all of the businesses of
the Company would be in the best interests of the Company and its shareholders.
However, such conversion may be exercised by the Company at a time that is
disadvantageous to holders of one or more of the shares of capital stock of the
Company. See "Risk Factors." The Company has no current intentions or plans to
convert any of the shares of Tracking Stock into Special Common Shares or shares
of any other Tracking Stock or to combine any of the Groups.
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY. The Company, in the sole
discretion of the Board, may at any time, redeem (at no premium) all of the
outstanding shares of any class of Tracking Stock of a Tracking Group, for a
number of outstanding shares of common stock of a Qualifying Subsidiary or
Qualifying Subsidiaries that hold all of the assets and liabilities attributed
to such Tracking Group equal to the product of the Adjusted Outstanding Interest
Fraction multiplied by the number of all of the outstanding shares of the
Qualifying Subsidiaries owned directly or indirectly by the Company, on a pro
rata basis, provided that there are funds of the Company legally available
therefor. The Company may retain the balance of the outstanding shares of the
common stock of the Qualifying Subsidiaries in respect of the Retained Interest
and any Inter-Group Interest in the Tracking Stock to be redeemed, or distribute
such shares in respect thereof as discussed below.
In the event that the Board, in its sole discretion, decides to redeem all
of the outstanding shares of a class of Tracking Stock in exchange for a
proportionate interest in the outstanding shares of any one or more Qualifying
Subsidiaries that hold all of the assets and liabilities attributed to such
Tracking Group, the percentage of the stock of the Qualifying Subsidiary or
Qualifying Subsidiaries owned by the Company that is distributable in the
redemption would be based on the Adjusted Outstanding Interest Fraction for that
Tracking Stock. The effect of using the Adjusted Outstanding Interest Fraction,
instead of the Outstanding Interest Fraction, for the shares of Tracking Stock
to be redeemed, in the determination of shares of the Qualifying Subsidiaries
deliverable in such a redemption, is to allocate to the TDS Group a portion of
the shares of the Qualifying Subsidiaries, in addition to the number of such
shares so allocated in respect of the Retained Interest, sufficient to provide
for the delivery of the consideration deliverable by the Company with respect to
Shares Issuable to Third Parties of the Affected Tracking Stock.
In the event the Board determines to redeem the shares of any class of
Tracking Stock for shares of a Qualifying Subsidiary, and if there is a Retained
Interest in such Tracking Group, the Board must, to the extent practicable,
distribute Qualifying Subsidiary shares corresponding to Special Common Shares
to the holders of Tracking Stock of such Tracking Group with respect to the
Adjusted Outstanding Interest Fraction in such Tracking Group. In such event, if
the Board determines to distribute shares of such Qualifying Subsidiary to other
shareholders with respect to any Retained Interest or Inter-Group Interest must,
to the extent practicable, distribute Qualifying Subsidiary shares corresponding
to Special Common Shares to the holders of any other Tracking Stock with respect
to any such Inter-Group Interest in such Tracking Group, and distribute
Qualifying Subsidiary shares corresponding to Series A Common Shares to the
holders of Series A Common Shares, Qualifying Subsidiary shares corresponding to
Common Shares to the holders of Common Shares, and Qualifying Subsidiary shares
corresponding to Special Common Shares to the holders of Special Common Shares
with respect to any Retained Interest in such Tracking Group, provided that the
same number of shares of Qualifying Subsidiary common stock on a combined basis
must be distributed for each Series A Common Share, Common Share and any issued
Special Common Share.
If practicable, the Board must recapitalize such Qualifying Subsidiary or
Qualifying Subsidiaries through an amendment to its charter or otherwise, so
that the shares of capital stock of such subsidiary and the relative rights,
limitations and preferences thereof substantially correspond to the Series A
Common Shares, Common Shares and Special Common Shares of the Company and their
relative rights, limitations and preferences, as may be determined to be
necessary or appropriate in the sole discretion of the Board, in order to permit
the distribution to be effected in the foregoing manner. However, if the
Qualifying Subsidiary has or will have shares corresponding to Series A Common
and Common Shares but does not have and will not have shares corresponding to
Special Common Shares and it is impracticable to recapitalize the subsidiary as
provided in the preceding sentence to
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create Special Common Shares, the Board must distribute Qualifying Subsidiary
shares corresponding to Common Shares to the holders of Tracking Stock which
would otherwise be entitled to receive Qualifying Subsidiary shares
corresponding to Special Common Shares, and to the holders of Special Common
Shares in respect of any Retained Interest.
A "Qualifying Subsidiary" for this purpose is a subsidiary of the Company
that is either wholly-owned, directly or indirectly, by the Company or in which
the Company's direct or indirect ownership and voting interest is sufficient to
satisfy the requirements of the Internal Revenue Service for a distribution of
the Company's interest in such subsidiary to holders of the Company's common
stock to be tax-free to such holders, and which holds all of the assets and
liabilities attributed to a Tracking Group. A Qualifying Subsidiary for this
purpose may include an existing subsidiary of the Company that may in the future
hold all of the assets and liabilities attributed to a Tracking Group or any
future subsidiary of the Company that meets the definition of Qualifying
Subsidiary and holds such assets and liabilities, whether or not created
exclusively for such purpose.
To the extent that any Qualifying Subsidiary did not hold all assets and
liabilities attributable to the Tracking Stock to be redeemed, it is expected
that such assets and/or liabilities would be transferred to such Qualifying
Subsidiary prior to the redemption. To the extent that any such Qualifying
Subsidiary held assets and/or liabilities in addition to those attributed to a
Tracking Group, it is expected that in connection with any such redemption such
additional assets or liabilities would either be attributed to such Tracking
Group or transferred by such Qualifying Subsidiary to the TDS Group or to a
different Tracking Group. Alternatively, in any such case, any then existing
Retained Interest or Inter-Group Interest could be appropriately adjusted or
other consideration that the Board may determine in its discretion to be
appropriate could be paid by one Tracking Group to the TDS Group or such other
Tracking Group. See "--Management and Allocation Policies."
The ability of the Company to exercise its right to redeem the outstanding
shares of Tracking Stock in exchange for a proportionate interest in shares of
one or more Qualifying Subsidiaries may be limited by the tax consequences to
the Company.
PROCEDURES RELATING TO CONVERSION OR REDEMPTION OF TRACKING STOCK. Upon the
Company's decision to convert or redeem all of the outstanding shares of any
class of Tracking Stock as described under "--Conversion at the Option of the
Company" or "--Redemption in Exchange for Stock of Subsidiary," the Company will
announce publicly by press release (i) the number of outstanding shares of the
class of Tracking Stock which will be converted or redeemed, (ii) the Number of
Shares Issuable to Third Parties of such Tracking Stock, including the number of
such shares which are issuable as Committed Acquisition Shares and into or for
which Convertible Securities are then convertible, exercisable or exchangeable
and the conversion, exercise or exchange prices thereof (and stating which, if
any, of such Convertible Securities are Pre-Distribution Convertible
Securities), (iii) the Optional Conversion Percentage and details as to the
calculation thereof and (iv) the Outstanding Interest Fraction and the Adjusted
Outstanding Interest Fraction for such Tracking Stock as of a recent date
preceding the date of such notice. The Company will subsequently announce
publicly by press release whether the shares of such Tracking Stock are being
converted in exchange for Special Common Shares, shares of another class or
classes of Tracking Stock or a combination thereof, or are being redeemed for
shares of a Qualifying Subsidiary.
Unlike the conversion feature described under "--Disposition of Assets of
Tracking Group," the Company's decision to convert or redeem all of the
outstanding shares of Tracking Stock as described under "--Conversion at the
Option of the Company" or "--Redemption in Exchange for Stock of Subsidiary," is
not an irrevocable decision, nor is its decision as to which securities the
Company will use to redeem the Tracking Stock irrevocable. The conversion or
redemption of all of the shares of Tracking Stock as described under
"--Conversion at the Option of the Company" or "--Redemption in Exchange for
Stock of Subsidiary" may be abandoned or modified by the Company at any time
prior to the Company's delivery of the replacement securities in exchange for
the converted or redeemed shares of Tracking Stock.
NOTICE UPON OPTIONAL CONVERSION. If the Company determines to convert the
shares of any class of Tracking Stock into Special Common Shares or shares of
any other class or classes of Tracking Stock or any combination thereof, as
described above under "--Conversion at the Option of the Company," the Company
will promptly cause to be given to each holder of shares of Tracking Stock to be
converted a notice setting forth (i) a statement that all outstanding shares of
such class of Tracking Stock will be converted in exchange for Special Common
Shares or shares of any other class of Tracking Stock or any combination
thereof, (ii) the anticipated conversion date (which will not be more than 90
Trading Days following the press release that publicly announces such
conversion), (iii) the per share number (or fraction) of Special Common Shares,
shares of another class or classes of Tracking Stock or shares of a Qualifying
Subsidiary as applicable, to be received with respect to each share of such
Tracking Stock,
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specifying the shares or the combination of such shares to be delivered, the
Optional Conversion Percentage and other details as to the calculation thereof,
(iv) the place or places where certificates for shares of such Tracking Stock to
be redeemed, properly endorsed or assigned for transfer (unless the Company
waives such requirement), are to be surrendered for delivery of certificates for
Special Common Shares, shares of another class or classes of Tracking Stock or
combination thereof, and (v) the number of outstanding shares of such Tracking
Stock and the Number of Shares Issuable to Third Parties of such Tracking Stock,
including the number of such shares which are issuable as Committed Acquisition
Shares and the number of shares of such Tracking Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, of such Convertible Securities are Pre-Distribution
Convertible Securities). Such notice will be sent not less than 25 Trading Days
nor more than 35 Trading Days prior to the conversion date.
NOTICE UPON REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY. If the Company
determines to redeem the shares of any class of Tracking Stock Shares into
shares of a Qualifying Subsidiary as described above under "--Redemption in
Exchange for Stock of Subsidiary," the Company will promptly cause to be given
to each holder of shares of Tracking Stock to be redeemed a notice setting forth
(i) a statement that all outstanding shares of such class of Tracking Stock will
be redeemed in exchange for shares of a Qualifying Subsidiary, (ii) the
anticipated redemption date (which will not be more than 90 Trading Days
following the press release that publicly announces such redemption), (iii) the
Adjusted Outstanding Interest Fraction for such Tracking Stock as of a recent
date preceding the date of such notice, (iv) the place or places where
certificates for shares of such Tracking Stock to be redeemed, properly endorsed
or assigned for transfer (unless the Company waives such requirement), are to be
surrendered for delivery of certificates for shares of common stock of the
Qualifying Subsidiary, and (v) the number of outstanding shares of such Tracking
Stock and the Number of Shares Issuable to Third Parties of such Tracking Stock,
including the number of such shares which are issuable as Committed Acquisition
Shares and the number of shares of such Tracking Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, of such Convertible Securities are Pre-Distribution
Convertible Securities). Such notice will be sent not less than 25 Trading Days
nor more than 35 Trading Days prior to the redemption date.
GENERAL PROVISIONS RELATING TO CONVERSIONS OR REDEMPTIONS. In each case in
which a notice is required to be given to holders of outstanding shares of any
class of Tracking Stock in accordance with the "--Procedures Relating to
Disposition Rights" or "--Procedures Relating to Conversion or Redemption of
Tracking Stock" (other than a notice to holders of shares selected for a partial
redemption), notice shall also be given, within the required time period, to
each holder of Convertible Securities that are convertible into or exercisable
or exchangeable for shares of such Tracking Stock (unless provision for such
notice is otherwise made pursuant to the terms of such Convertible Securities).
Such notice shall include, in addition to all of the information set forth in
the corresponding notice to holders of shares of such Tracking Stock, a
statement to the effect that the holders of such Convertible Securities will be
entitled to receive the dividend, participate in the redemption of shares
following a Disposition with respect to such Tracking Stock or in the selection
of shares for conversion or redemption, participate in the conversion of shares
or participate in the redemption of shares only if such holder appropriately
converts, exercises or exchanges such Convertible Securities on or prior to the
record date for the dividend, redemption date, date fixed for selection of
shares to be redeemed or conversion date, as applicable, set forth in such
notice. In the case of a conversion or redemption of shares of any class of
Tracking Stock, the notice to holders of Convertible Securities shall also state
what, if anything, such holders will be entitled to receive pursuant to the
terms of such Convertible Securities if such holders convert, exercise or
exchange such Convertible Securities following the conversion date or redemption
date, as applicable.
All notices required to be given under this section and as described under
"--Procedures Relating to Disposition Rights" and "--Procedures Relating to
Conversion or Redemption of Tracking Stock," will be sent to a holder by first
class mail, postage prepaid, at the holder's address as the same appears on the
transfer books of the Company. Neither the failure to mail any notice to any
particular holder of shares of Tracking Stock or of Convertible Securities nor
any defect therein will affect the sufficiency thereof with respect to any other
holder of outstanding shares of Tracking Stock or of Convertible Securities, or
the validity of any redemption.
The Company will not be required to issue or deliver fractional shares of
any class of capital stock or any fractional securities to any holder of shares
of Tracking Stock upon any conversion or redemption, dividend or other
distribution described above. In connection with the determination of the number
of shares of any class of capital stock that is issuable or the amount of
securities that is deliverable to any holder of record upon any conversion or
redemption, dividend or other distribution (including any fractions of shares or
securities), the Company may
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aggregate the number of shares of Tracking Stock held at the relevant time by
such holder of record. If the number of shares of any class of capital stock or
the amount of securities remaining to be issued or delivered to any holder of
shares of Tracking Stock is a fraction, the Company will, if such fraction is
not issued or delivered to such holder, pay a cash adjustment in respect of such
fraction in an amount equal to the fair market value of such fraction on the
fifth Trading Day prior to the date such payment is to be made (without
interest). For purposes of the preceding sentence, "fair market value" of any
fraction will be (i) in the case of any fraction of a share of capital stock of
the Company, the product of such fraction and the Market Value of one share of
such capital stock and (ii) in the case of any other fractional security, such
value as is determined by the Board.
No adjustments in respect of dividends will be made upon the conversion or
redemption of any shares of Tracking Stock; provided, however, that if the
conversion or redemption date with respect to a class of Tracking Stock is
subsequent to the record date for the payment of a dividend or other
distribution thereon or with respect thereto, the holders of shares of such
class of Tracking Stock at the close of business on such record date will be
entitled to receive the dividend or other distribution payable on or with
respect to such shares on the date set for payment of such dividend or other
distribution, notwithstanding a conversion or redemption by the Company of such
shares or the Company's default in payment of the dividend or distribution due
on such date.
Before any holder of shares of any class of Tracking Stock will be entitled
to receive certificates representing shares of any kind of capital stock, cash,
securities or other property or combination thereof to be received by such
holder with respect to any conversion or redemption of such Tracking Stock, such
holder is required to surrender at such place as the Company will specify
certificates for such shares, properly endorsed or assigned for transfer (unless
the Company waives such requirement). The Company will as soon as practicable
after surrender of certificates representing shares of such Tracking Stock
deliver to the person for whose account such shares were so surrendered, or to
the nominee or nominees of such person, certificates representing the number of
whole shares of the kind of capital stock or cash, securities or other property
or combination thereof to which such person is entitled, together with any
payment for fractional securities referred to above. The Company will not be
required to register (i) a transfer of any shares of Tracking Stock for a period
of up to 15 Trading Days preceding the conversion or redemption date or (ii) any
shares of Tracking Stock selected for redemption.
From and after any applicable conversion or redemption date, all rights of a
holder of shares of any class of Tracking Stock that were converted or redeemed
will cease except for the right, upon surrender of the certificates representing
such Tracking Stock, to receive certificates representing shares of the kind and
amount of capital stock or cash, securities or other property or combination
thereof for which such shares of Tracking Stock were converted or redeemed,
together with any payment for fractional securities, and such holder will have
no other or further rights in respect of the Tracking Stock so converted or
redeemed, including, but not limited to, any rights with respect to any capital
stock, cash, securities or other property which are reserved or otherwise
designated by the Company as being held for the satisfaction of the Company's
obligations to pay or deliver any capital stock, cash, securities or other
property upon the conversion, exercise or exchange of any Convertible Securities
outstanding or with respect to any other Shares Issuable to Third Parties
related to the conversion or redemption of such Tracking Stock as of the date of
such redemption. No holder of a certificate that, immediately prior to the
applicable conversion or redemption date for any class of Tracking Stock,
represented shares of Tracking Stock which were converted or redeemed will be
entitled to receive any dividend or other distribution with respect to shares of
any kind of capital stock or other securities into or in exchange for which the
shares of such Tracking Stock were converted or redeemed until surrender of such
holder's certificate for a certificate or certificates representing shares of
such kind of capital stock or other securities. Upon such surrender, there will
be paid to the holder the amount of any dividends or other distributions
(without interest) which theretofore became payable with respect to a record
date after the conversion date or redemption date, as the case may be, but that
were not paid by reason of the foregoing, with respect to the number of whole
shares of the kind of capital stock or other securities represented by the
certificate or certificates issued upon such surrender.
The Company will pay any and all documentary, stamp or similar issue or
transfer taxes that may be payable in respect of the issue or delivery of any
shares of capital stock or other securities on the conversion or redemption of
any class of Tracking Stock. The Company will not, however, be required to pay
any tax that may be payable in respect of any transfer involved in the issue and
delivery of any shares of capital stock or other securities in a name other than
that in which the shares of Tracking Stock so converted or redeemed were
registered and no such issue or delivery will be made unless and until the
person requesting such issue has paid to the Company the amount of any such tax,
or has established to the satisfaction of the Company that such tax has been
paid.
EFFECT OF CONVERSION OR REDEMPTION ON SECURITIES CONVERTIBLE INTO TRACKING
STOCK. Unless the provisions of the security provide specifically to the
contrary, after any conversion or redemption date on which all outstanding
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shares of any class of Tracking Stock were converted or redeemed by the Company,
any shares of such Tracking Stock that would be issuable on conversion, exercise
or exchange of any pre-conversion or pre-redemption securities which are
convertible, exercisable or exchangeable for shares of such Tracking Stock will,
immediately upon issuance pursuant to such conversion, exercise or exchange and
without any notice or any other action on the part of the Company or its Board
or the holder of such security, be converted or redeemed in exchange for, as
applicable, the kind and amount of shares of capital stock, cash, securities or
other property that a holder of such pre-conversion or pre-redemption securities
would have been entitled to receive as a result of the conversion or redemption
had such pre-conversion or pre-redemption securities been converted, exercised
or exchanged immediately prior to such conversion or redemption.
If Convertible Securities, as well as any other obligations to deliver
shares of a class of Tracking Stock to third parties, including obligations to
deliver Committed Acquisition Shares, remain outstanding at the time of any
redemption of all outstanding shares of any one of the Tracking Stocks following
the Disposition of all (not merely substantially all) of the properties and
assets of the that Tracking Group, the proportionate interest in the Fair Value
of the Net Proceeds of the Disposition to be distributed to the holders of
Affected Tracking Stock will be determined on the basis of the Adjusted
Outstanding Interest Fraction for the Affected Tracking Group. Such
determination will result in the allocation to the TDS Group of a portion of
such Fair Value of the Net Proceeds, in addition to the portion attributable to
any Retained Interest, sufficient to provide for the post-redemption delivery of
the portion of the consideration (if any) deliverable by the Company on any
conversion, exercise, exchange or delivery of Convertible Securities, Committed
Acquisition Shares or otherwise, that is in substitution for shares of the
Affected Tracking Group that would have been issuable upon such conversion,
exercise, exchange or delivery if it had occurred prior to the redemption of all
outstanding shares of such Tracking Stock.
Similarly, if Convertible Securities, as well as any other obligations to
deliver shares of a class of Tracking Stock to third parties, including
obligations to deliver Committed Acquisition Shares, remain outstanding at the
time of any redemption of all the outstanding shares of any class of Tracking
Stock in exchange for stock of any one or more Qualifying Subsidiaries of the
Company which hold all of the assets and liabilities of the related Tracking
Group, the number of shares of such subsidiaries deliverable in redemption of
the outstanding shares of such Tracking Group will be determined on the basis of
the Adjusted Outstanding Interest Fraction for such Tracking Group, resulting in
the allocation to the TDS Group of a portion of the shares of such subsidiaries,
in addition to the number of shares so allocated in respect of any Retained
Interest, sufficient to provide for the post-redemption delivery of the portion
of the consideration (if any) deliverable by the Company upon any conversion,
exercise, or exchange or delivery of Convertible Securities, Committed
Acquisition Shares or otherwise, that is in substitution for shares of such
Tracking Stock that would have been issuable upon such conversion, exercise,
exchange or delivery if it had occurred prior to such redemption of all
outstanding shares of such Tracking Stock.
THE RETAINED INTERESTS
In structuring the terms of the Tracking Stock Proposal, the Board
determined that the retention by the TDS Group of Retained Interests in the
Cellular Group, Telecom Group and the Aerial Group was appropriate. In making
this determination, the Board concluded that it would be desirable for
shareholders to have the option of continuing to maintain a common equity
investment in all of the businesses of the Company and its subsidiaries by
retaining ownership of the Common Shares or Series A Common Shares. The Board
also determined that it would be desirable for the Company to have a Group, such
as the TDS Group, which could enter into new ventures and possibly create
additional tracking stocks for such ventures by designating series of
Undesignated Shares. Such new shares of tracking stock could be distributed to
the holders of Common Shares and Series A Common Shares, sold for cash in a
public or private offering for the benefit of the TDS Group or delivered in
connection with the acquisition of a business by the TDS Group.
If and when additional shares of one of the Tracking Stocks are issued
(E.G., a public offering), the Board will identify whether the issuance is for
the benefit of that Tracking Group or the TDS Group or both. If the issuance is
for the benefit of the Tracking Group, the proceeds would be attributed to such
Tracking Group and the shares issued would come from authorized but unissued
shares of the Tracking Group, which would proportionately dilute the existing
Outstanding Interest and the corresponding Retained Interest. If the issuance is
for the benefit of the Retained Interest, the proceeds would be attributed to
the TDS Group and the Retained Interest would be reduced accordingly. The
Retained Interest in a Tracking Group may change pursuant to such issuances as
well as any transfers of cash or other property between the TDS Group and the
Tracking Group.
With respect to transfers of cash or other property between the TDS Group
and the Tracking Groups, there are no specific criteria for determining when
such a transfer will be reflected as a borrowing or as an increase or
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reduction in a Retained Interest. The Board expects to make such determinations,
either in specific instances or by setting generally applicable policies from
time to time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of the Company, the financing needs and
objectives of the Groups, the investment objectives of the Groups, the
availability, cost and time associated with alternative financing sources,
prevailing interest rates and general economic conditions.
The Retained Interest in any Tracking Group may change pursuant to any
subsequent transfers of cash or other property from the Company to the Tracking
Group which are specifically designated by the Board as being made to alter the
Retained Interest (in contrast to transfers made for other consideration such as
transfers as loans or in purchase and sale transactions) or if outstanding
shares of a Tracking Group are retired or otherwise cease to be outstanding
following their purchase with funds attributed to the TDS Group.
The amount of the Retained Interest for a Tracking Group at any point in
time would be expressed in terms of the "Number of Shares Issuable with Respect
to Retained Interest," which is intended to provide a measure of any Retained
Interest on a basis comparable to an investment in Tracking Stock. The full
definition of "Number of Shares Issuable with Respect to Retained Interest" is
set forth in "--Certain Definitions."
The Retained Interest will not be represented by issued and outstanding
shares of Tracking Stock. None of the Number of Shares Issuable with Respect to
Retained Interest would be represented by outstanding Tracking Stock and,
therefore, would not be entitled to any voting rights. Accordingly, the Company
will not have any voting rights with respect to any Retained Interest, and the
outcome of any vote of any class of Tracking Stock would be determined by the
holders of the outstanding shares of such Tracking Stock. In addition,
outstanding shares of Tracking Stock that are held by majority-owned
subsidiaries of the Company (as to which the Company owns a majority of the
shares entitled to vote in the election of directors) would not, in accordance
with the DGCL, be entitled to vote on matters presented to shareholders or be
counted for quorum purposes.
The Board could, in its sole discretion, determine from time to time to have
the Company contribute cash or other property as additional equity to any
Tracking Group, and have this be reflected as an increase in the Number of
Shares Issuable with Respect to Retained Interest. In such event, the Retained
Interest Fraction with respect to such Tracking Group will increase and the
related Outstanding Interest Fraction will decrease accordingly. The Board
could, in its sole discretion, also determine from time to time to transfer cash
or other property of a Tracking Group to the TDS Group and have such transfer
reflected as a reduction in the Retained Interest, in which case the Number of
Shares Issuable with Respect to Retained Interest would be decreased. In such
event, such Retained Interest Fraction would decrease and the related
Outstanding Interest Fraction would increase accordingly. The Board could, in
its sole discretion, determine to make contributions or other transfers referred
to in this paragraph after consideration of such factors as it deems relevant,
including, without limitation, the needs of the Company, the financing needs and
objectives of each of the Groups, the investment objectives of the Groups, the
availability, cost and time associated with alternative financing sources,
prevailing interest rates and general economic conditions.
In general, if the Retained Interest is increased by a transfer of funds or
other assets from the TDS Group to a Tracking Group, the Number of Shares
Issuable with Respect to Retained Interest would be increased by an amount
determined by dividing the amount of funds or value of assets transferred by the
Market Value of a share of Tracking Stock of such Group as of the date of such
transfer. Any transfer of funds or other assets from a Tracking Group to the TDS
Group in respect of a decrease in the Number of Shares Issuable with Respect to
Retained Interest would be similarly calculated. To the extent outstanding
shares of Tracking Stock are retired or otherwise cease to be outstanding
following their purchase with funds attributed to the TDS Group, the Number of
Shares Issuable with Respect to Retained Interest would increase on a
share-for-share basis. Tracking Stock purchased with funds attributed to the TDS
Group which remain outstanding (as a result of being held by a subsidiary
included in the TDS Group) would not increase the Retained Interest but would
represent an outstanding interest in the common shareholders' equity value of
the TDS Group attributable to such Tracking Group. The Number of Shares Issuable
with Respect to Retained Interest, if any, would also (i) be adjusted from time
to time as appropriate to reflect (a) subdivisions (by stock split or otherwise)
and combinations (by reverse stock split or otherwise) of any Tracking Stock,
(b) dividends or distributions payable in shares of Tracking Stock to holders of
such Tracking Stock and (c) reclassifications of Tracking Stock and (ii) be
decreased by the number of shares of Tracking Stock (a) issued upon conversion,
exercise or exchange of Convertible Securities that are attributed to the TDS
Group or (b) issued by the Company as a dividend or distribution or by
reclassification or exchange to holders of Common Shares, Series A Common Shares
or Special Common Shares.
For financial reporting purposes, shares of Tracking Stock acquired by
subsidiaries of the TDS Group which remain outstanding following such
acquisition would be combined with the Number of Shares Issuable with
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Respect to Retained Interest, if any, and reported as part of the TDS Group's
interest in the related Tracking Group. Any differences between such reported
interest and any then existing Retained Interest would be reconcilable by adding
to any then existing Retained Interest the number of outstanding shares of
Tracking Stock held by subsidiaries of the TDS Group. Because these shares would
still be outstanding for purposes of the receipt of dividends and payment of
redemption or liquidation amounts, the TDS Group would obtain substantially the
same economic benefits from such outstanding shares as it would have received
had such shares been retired or otherwise ceased to be outstanding following
their purchase and added to the Number of Shares Issuable with Respect to
Retained Interest.
The authorized shares of Tracking Stock in excess of the total number of
shares outstanding will be available for issuance or sale without further
approval by the Company's shareholders and may be issued at any time at prices
that would dilute the value of the outstanding shares of Tracking Stock.
Whenever shares of Tracking Stock are subsequently issued or sold by the
Company, the Company will identify (i) the number of shares of Tracking Stock
issued and sold that represent a Retained Interest, if any, the sale of which
shares will reduce the Number of Shares Issuable with Respect to Retained
Interest on a share-for-share basis and the net proceeds of which sale will be
reflected entirely in the combined financial statements of the TDS Group, and
(ii) the number of such shares that represent an additional equity interest in
the Tracking Group, the sale of which shares will reduce the available shares of
Tracking Stock and the net proceeds of which sale will be reflected entirely in
the combined financial statements of the applicable Tracking Group. The Board
expects to make such determination, in its sole discretion, after consideration
of such factors as it deems relevant, including, without limitation, the needs
of the Company, the financing needs and objectives of the Groups, the investment
objectives of the Groups, the availability, cost and time associated with
alternative financing sources, prevailing interest rates and general economic
conditions.
In the event of any dividend or other distribution paid or distributed in
respect of the outstanding shares of any class of Tracking Stock (other than in
shares of Tracking Stock, which will result in the adjustment to the Number of
Shares Issuable with Respect to Retained Interest ), the TDS Group's combined
financial statements would be credited, and the related Tracking Group's
combined financial statements would be charged (in addition to the charge for
such dividend or other distribution paid upon outstanding shares of Tracking
Stock), with an amount equal to the product of (i) the aggregate amount of such
dividend or other distribution paid or distributed in respect of outstanding
shares of Tracking Stock (including any dividend related to the Fair Value of
the Net Proceeds from the Disposition of all or substantially all of the assets
and properties of a Tracking Group), times (ii) a fraction, the numerator of
which is the Retained Interest Fraction and the denominator of which is the
Outstanding Interest Fraction for such Tracking Group.
If shares of Tracking Stock are retired or otherwise cease to be outstanding
following their purchase with funds attributed to the TDS Group, the Number of
Shares Issuable with Respect to Retained Interest would increase on a
share-for-share basis and the related Retained Interest Fraction would increase
and the related Outstanding Interest Fraction would decrease accordingly. If the
purchase of shares of Tracking Stock were made with funds attributed to the
Tracking Group, the Number of Shares Issuable with Respect to Retained Interest
would not be increased, but the Retained Interest Fraction would increase and
the Outstanding Interest Fraction would decrease accordingly. The Board would,
in its sole discretion, determine whether purchases of Tracking Stock should be
made with consideration attributed to the TDS Group or one of the Tracking Stock
Groups, by considering such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives of the
Groups, the investment objectives of the Groups, the availability, cost and time
associated with alternative financing sources, prevailing interest rates and
general economic conditions.
If the Number of Shares Issuable with Respect to Retained Interest is
reduced to zero as a result of any combination of one or more of issuances or
sales of shares of Tracking Stock for the benefit of the TDS Group or other
events, shares of Tracking Stock could no longer be issued or sold by the
Company for the benefit of the TDS Group unless a further Retained Interest is
subsequently created or some other appropriate allocation is made. See
"--Management and Allocation Policies." If the net proceeds of any issuance or
sale by the Company of Tracking Stock are allocated to a Tracking Group, the
Number of Shares Issuable with Respect to Retained Interest would not be
reduced, but the Retained Interest Fraction would decrease and the Outstanding
Interest Fraction would increase accordingly.
The "Outstanding Interest Fraction" represents the percentage interest in
the common shareholders' equity value of the Company attributable to a Tracking
Group that is represented at any time by the outstanding shares of Tracking
Stock, and the "Retained Interest Fraction" represents any remaining percentage
interest in the common shareholders' equity value of the Company attributable to
a Tracking Group that is attributed to the TDS Group by virtue of a Retained
Interest. Assuming no Inter-Group Interest Fractions, the sum of the Outstanding
Interest
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Fraction and the Retained Interest Fraction for a Tracking Group will always
equal 100%. Should an Inter-Group Interest Fraction exist, the sum of such
Inter-Group Interest Fraction(s), the Outstanding Interest Fraction and the
Retained Interest Fraction, if any, for a Tracking Group will always equal 100%.
See "-- Certain Definitions."
INTER-GROUP INTERESTS
Initially, it is contemplated that no Tracking Group would have an
Inter-Group Interest in any other Tracking Group. It is possible that one or
more Inter-Group Interests could develop at some time in the future. For
example, as the result of an inter-Group transfer of assets from the Cellular
Group to the Aerial Group, the Cellular Group could acquire an interest in the
Aerial Group. In such a hypothetical event, the Cellular Group would have an
Inter-Group Interest in the Aerial Group for the benefit of the holders of the
Cellular Group Shares. A Tracking Group may not have an Inter-Group Interest in
the TDS Group.
An Inter-Group Interest in a Tracking Group would be created only if a
transfer of cash or other property from one of the Tracking Groups to another
Tracking Group is specifically designated by the Board as being made to create
an Inter-Group Interest (in contrast to transfers made for other consideration,
such as cash transfers representing borrowings or in cash purchase or sale
transactions) or if outstanding shares of a Tracking Group are retired or
otherwise cease to be outstanding following their purchase with funds attributed
to one of the Tracking Groups.
With respect to transfers of cash or other property between the Tracking
Groups, there are no specific criteria for determining when such a transfer will
be reflected as an increase or reduction in borrowings between Tracking Groups
or as a creation of, or an increase or reduction in, an Inter-Group Interest.
The Board expects to make such determinations, either in specific instances or
by setting generally applicable policies from time to time, after consideration
of such factors as it deems relevant, including, without limitation, the needs
of the Company, the financing needs and objectives of the Tracking Groups, the
investment objectives of the Tracking Groups, the availability, cost and time
associated with alternative financing sources, prevailing interest rates and
general economic conditions.
For illustrative purposes hereof, the Tracking Group acquiring an
Inter-Group Interest in one of the other Groups will be referred to as the
"Investor Group" and the Tracking Group in which an Inter-Group Interest is
being acquired will be referred to as the "Issuer Group."
The amount of any Inter-Group Interest of the Investor Group in the Issuer
Group (the "Inter-Group Interest in Issuer Group") at any point in time would be
expressed in terms of the "Number of Shares Issuable with Respect to Inter-Group
Interest" in the Issuer Group, which is intended to provide a measure of any
Inter-Group Interest of the Investor Group in the Issuer Group on a basis
comparable to an investment in shares of Tracking Stock of the Issuer Group (the
"Issuer Group Shares").
The Board could, in its sole discretion, determine from time to time to have
the Company contribute cash or other property of the Investor Group as
additional equity to the Issuer Group, which would increase the Number of Shares
Issuable with Respect to Inter-Group Interest in Issuer Group as described
below. In such event, the Inter-Group Interest Fraction will increase and the
Issuer Group Outstanding Interest Fraction will decrease accordingly. The Board
could, in its sole discretion, also determine from time to time to transfer cash
or other property of the Issuer Group from the Issuer Group to the Investor
Group in respect of a reduction in its Inter-Group Interest in Issuer Group, in
which case the Number of Shares Issuable with Respect to the Inter-Group
Interest would be decreased as described below. In such event, the Inter-Group
Interest Fraction would decrease and the Issuer Group Outstanding Interest
Fraction would increase accordingly. The Board could, in its sole discretion,
determine to make contributions or other transfers referred to in this paragraph
after consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives of the
each of Groups, the investment objectives of the Groups, the availability, cost
and time associated with alternative financing sources, prevailing interest
rates and general economic conditions.
If an Inter-Group Interest in Issuer Group is created by a transfer of funds
or other assets from the Investor Group to the Issuer Group, the Number of
Shares Issuable with Respect to Inter-Group Interest in Issuer Group would be
increased by an amount determined by dividing the amount of funds or value of
assets transferred by the Market Value of an Issuer Group Share as of the date
of such transfer. In the event a subsequent transfer of funds or other assets
from the Investor Group to the Issuer Group is determined by the Board to be
made in respect of an increase in the Inter-Group Interest in Issuer Group, the
Number of Shares Issuable with Respect to Inter-Group Interest in Issuer Group
would be increased by an amount determined by dividing the amount of the
additional funds or value of the additional assets transferred by the Market
Value of an Issuer Group Share as of the date of
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such transfer. Any decrease in the Number of Shares Issuable with Respect to
Inter-Group Interest in the Issuer Group resulting from a transfer of funds or
other assets from the Issuer Group to the Investor Group determined by the Board
to be made in respect of such a transfer would be similarly calculated.
To the extent outstanding Issuer Group Shares are retired or otherwise cease
to be outstanding following their purchase with funds attributed to the Investor
Group, the Number of Shares Issuable with Respect to Inter-Group Interest in the
Issuer Group would increase on a share-for-share basis. Issuer Group Shares
purchased with funds attributed to the Investor Group which remain outstanding
(as a result of being held by a subsidiary included in the Investor Group) would
not create an Inter-Group Interest or increase any then existing Inter-Group
Interest in the Issuer Group but would represent an outstanding interest in the
common shareholders' equity value of the Company attributable to the Issuer
Group.
The Number of Shares Issuable with Respect to Inter-Group Interest in the
Issuer Group, if any, would also (i) be adjusted from time to time as
appropriate to reflect (a) subdivisions (by stock split or otherwise) and
combinations (by reverse stock split or otherwise) of the Issuer Group Shares,
(b) dividends or distributions payable in Issuer Group Shares to holders of
Issuer Group Shares and (c) reclassifications of Issuer Group Shares and (ii) be
decreased by the number of shares of Issuer Group Shares (a) issued upon
conversion, exercise or exchange of Convertible Securities that are attributed
to the Investor Group or (b) issued by the Company as a dividend or distribution
or by reclassification or exchange to holders of Investor Group Shares. The
Inter-Group Interest in the Issuer Group, if any, would not be represented by
outstanding Issuer Group Shares and would have no voting rights.
For financial reporting purposes, shares of Tracking Stock acquired by
subsidiaries of the Company included in an Investor Group which remain
outstanding following such acquisition would be combined with the Investor
Group's Number of Shares Issuable with Respect to Inter-Group Interest in the
Issuer Group, if any, and reported as the Investor Group's interest in the
Issuer Group. Any differences between such reported interest and any then
existing Inter-Group Interest in the Issuer Group Shares would be reconcilable
by adding to any then existing Inter-Group Interest the number of outstanding
Issuer Group Shares held by the consolidated subsidiaries of the Company
included in the Investor Group. Because these shares would still be outstanding
for purposes of the receipt of dividends and payment of redemption or
liquidation amounts, the Investor Group would obtain substantially the same
economic benefits from such outstanding shares as it would have received had
such shares been retired or otherwise ceased to be outstanding following their
purchase and added to the Investor Group's Number of Shares Issuable with
Respect to Inter-Group Interest in the Issuer Group.
The authorized Issuer Group Shares in excess of the total number of shares
outstanding will be available for issuance or sale without further approval by
the Company's shareholders and may be issued at any time at prices that would
dilute the value of the outstanding Issuer Group Shares. If there is an
Inter-Group Interest in the future, whenever Issuer Group Shares are
subsequently issued or sold by the Company, the Company will identify (i) the
number of Issuer Group Shares issued and sold that represent the Inter-Group
Interest, if any, the sale of which shares will reduce the Number of Shares
Issuable with Respect to Inter-Group Interest in Issuer Group on a share-
for-share basis and the net proceeds of which sale will be reflected entirely in
the combined financial statements of the Investor Group, and (ii) the number of
such shares that represent an additional equity interest in the Issuer Group,
the sale of which shares will reduce the available shares of the Issuer Group
and the net proceeds of which sale will be reflected entirely in the combined
financial statements of the Issuer Group. The Board expects to make such
determination, in its sole discretion, after consideration of such factors as it
deems relevant, including, without limitation, the needs of the Company, the
financing needs and objectives of the Groups, the investment objectives of the
Groups, the availability, cost and time associated with alternative financing
sources, prevailing interest rates and general economic conditions.
In the event of any dividend or other distribution paid or distributed in
respect of the outstanding Issuer Group Shares, (other than in Issuer Group
Shares, which will result in the adjustment to the Number of Shares Issuable
with Respect to Retained Interest in the Issuer Group ), an Investor Group's
combined financial statements would be credited, and the Issuer Group's combined
financial statements would be charged (in addition to the charge for such
dividend or other distribution paid upon outstanding Issuer Group Shares), with
an amount equal to the product of (i) the aggregate amount of such dividend or
other distribution paid or distributed in respect of outstanding Issuer Group
Shares (including any dividend related to the Fair Value of the Net Proceeds
from the Disposition of all or substantially all of the assets and properties of
the Issuer Group), times (ii) a fraction, the numerator of which is the
Inter-Group Interest Fraction in the Issuer Group and the denominator of which
is the Issuer Group Outstanding Interest Fraction.
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If Issuer Group Shares are retired or otherwise cease to be outstanding
following their purchase with funds attributed to the Investor Group, the Number
of Shares Issuable with Respect to Inter-Group Interest in the Issuer Group
would increase on a share-for-share basis and the Issuer Group Inter-Group
Interest Fraction would increase and the Issuer Group Outstanding Interest
Fraction would decrease accordingly. If the purchase of Issuer Group Shares were
made with funds attributed to the Issuer Group, the Number of Shares Issuable
with Respect to Inter-Group Interest in the Issuer Group would not be increased,
but the Issuer Group Inter-Group Interest Fraction would increase and the Issuer
Group Outstanding Interest Fraction would decrease accordingly. The Board would,
in its sole discretion, determine whether purchases of Tracking Stock of one
Group should be made with consideration attributed to such Group, the TDS Group
or one of the other Tracking Groups, by considering such factors as it deems
relevant, including, without limitation, the needs of the Company, the financing
needs and objectives of the Groups, the investment objectives of the Groups, the
availability, cost and time associated with alternative financing sources,
prevailing interest rates and general economic conditions.
If the Number of Shares Issuable with Respect to Inter-Group Interest is
reduced to zero as a result of any combination of one or more issuances or sales
of Issuer Group Shares for the benefit of the Investor Group, Issuer Group
Shares could no longer be issued or sold by the Company for the account of the
Investor Group unless a further Inter-Group Interest in the Issuer Group is
subsequently created or unless some other appropriate allocation is made. If the
net proceeds of any issuance or sale by the Company of Issuer Group Shares are
allocated to the Issuer Group, the Number of Shares Issuable with Respect to
Inter-Group Interest in the Issuer Group would not be reduced, but the
Inter-Group Interest Fraction in the Issuer Group would decrease and the Issuer
Group Outstanding Interest Fraction would increase accordingly.
The "Issuer Group Outstanding Interest Fraction" represents the percentage
interest in the common shareholders' equity value of the Company attributable to
the Issuer Group that is represented at any time by the outstanding Issuer Group
Shares, and the "Issuer Group Inter-Group Interest Fraction" represents any
percentage interest in the common shareholders' equity value of the Company
attributable to the Issuer Group that is attributed to the Investor Group by
virtue of an Inter-Group Interest. The sum of: (i) the Issuer Group Retained
Interest, if any, (ii) Issuer Group Outstanding Interest Fraction and (iii) the
Issuer Group Inter-Group Interest Fractions, would always equal 100% for any
Issuer Group. See "--Certain Definitions."
MANAGEMENT AND ALLOCATION POLICIES
If the Tracking Stock Proposal is approved by shareholders, the Company will
prepare and include in its filings with the SEC under the Exchange Act,
consolidated financial statements of the Company and financial statements of the
Cellular Group (for so long as shares of the Cellular Group are outstanding),
the Telecom Group (for so long as shares of the Telecom Group are outstanding),
the Aerial Group (for so long as shares of the Aerial Group are outstanding) and
the TDS Group (for so long as any shares of Tracking Stock are outstanding).
Except for the financial statements included in this Proxy Statement/Prospectus,
the Company does not intend to provide separate financial statements for the TDS
Group, Cellular Group, Telecom Group and Aerial Group until Cellular Group
Shares, Telecom Group Shares or Aerial Group Shares are first issued, as
applicable. The financial statements of each Group, taken together and after
giving effect to inter-Group eliminations, would effectively comprise the
consolidated financial statements of the Company. The financial statements of
each Group will principally reflect the financial position, results of
operations and cash flows of the businesses attributed thereto. Consistent with
the Restated Certificate and applicable policies, the Group financial
information could also include allocated portions of individual assets and
liabilities that are not separately identified with the operations of a specific
Group. Notwithstanding allocations of assets and liabilities for the purpose of
preparing each Group's financial statements, holders of each series of common
stock would continue to be subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities.
Subject to the consummation of the U.S. Cellular Merger and the Aerial
Merger, or other transactions pursuant to which U.S. Cellular or Aerial become
wholly-owned subsidiaries of the Company, the Company intends to terminate
certain intercompany agreements between the Company and U.S. Cellular and
Aerial, respectively. Thereafter, all of the relationships between the Company
and such subsidiaries would be determined solely under the management and
allocation policies described herein, similarly to TDS Telecom, which is
currently a wholly-owned subsidiary of TDS. Many of such policies would continue
substantially the same arrangements which presently exist between the Company
and U.S. Cellular or Aerial pursuant to the intercompany agreements, but the
Company would have no contractual obligation to continue such policies after the
intercompany agreements have been terminated.
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If the Tracking Stock Proposal is approved by shareholders, upon initial
issuance of the Cellular Group Shares, Telecom Group Shares or Aerial Group
Shares, cash management, taxes and allocation of principal corporate activities
among the Groups would be based upon methods that management of the Company
believes to be reasonable and would be reflected in the respective Group
financial information as follows:
DEBT OR PREFERRED STOCK. Any debt incurred or preferred stock issued by
the Company would be attributed to a Group by the Board based on the use of
proceeds thereof and other factors. All debt incurred or preferred stock
issued by the Company's subsidiaries would (unless the Board otherwise
provides) be specifically attributed to and reflected on the financial
statements of the Group that includes the entity which incurred the debt or
issued the preferred stock. The Board could, however, determine from time to
time that debt incurred or preferred stock issued by entities included in a
Group should be specifically attributed to and reflected on the financial
statements of one of the other Groups to the extent that the debt is
incurred or the preferred stock is issued for the benefit of such other
Group.
ISSUANCE OF TRACKING STOCK. After the initial issuance of shares of
Tracking Stock, (a) all financial impacts of issuances of additional shares
of stock, the proceeds of which are attributed to the applicable Group, will
be to such extent reflected in the financial statements of such Group, and
(b) all financial impacts of issuances of stock, the proceeds of which are
attributed to the TDS Group or one of the other Groups in respect of a
reduction in any Retained Interest or Inter-Group Interest of another
Tracking Group will be to such extent reflected in the financial statements
of the TDS Group or such other Group, as the case may be. Financial impacts
of dividends or other distributions on shares of a class of common stock
will be attributed entirely to the Group making the dividend or
distribution, except that dividends or other distributions will (if at the
time there is a Retained Interest or an Inter-Group Interest in the Group
making the dividend or distribution) result in the TDS Group or the Group
with the Retained Interest or Inter-Group Interest, as the case may be,
being credited, and the Group making the dividend or distribution being
charged (in addition to the charge for the dividend or other distribution
paid on the outstanding Tracking Stock), with an amount equal to the product
of (x) the aggregate amount of such dividend or other distribution paid or
distributed in respect of outstanding common stock and (y) a fraction, the
numerator of which is the Retained Interest Fraction or the Inter-Group
Interest Fractions (if any), as the case may be, and the denominator of
which is the Outstanding Interest Fraction for such common stock. Financial
impacts of repurchases of stock the consideration for which is charged to
the related Group will be to such extent reflected in the financial
statements of such Group, and financial impacts of repurchases of stock the
consideration for which is charged to the TDS Group or another Group will be
to such extent reflected in the financial statements of the TDS Group or
such other Group and will result in the creation of a, or an increase in any
then existing, Retained Interest or Inter-Group Interest, as the case may
be, in such other Group.
CASH TRANSFERS. To the extent cash needs of one Group exceed cash
provided by such Group, one of the other Groups may transfer funds to such
Group. The Company has provided and will continue to provide centralized
cash management functions under which cash receipts of certain entities
attributed to the other Groups will be remitted to the TDS Group and certain
cash disbursements of the other Groups will be funded by the TDS Group on a
daily basis. Such transfers of funds among the Groups will be reflected as
borrowings or, if determined by the Board, reflected as the creation of a,
or an increase in any then existing, Retained Interest or an Inter-Group
Interest of the TDS Group or such other Group, as the case may be, in such
recipient Group or, in the case of a reverse transfer from such recipient
Group, reflected as a reduction in the Retained Interest or Inter-Group
Interest in such recipient Group. There are no specific criteria for
determining when a transfer will be reflected as borrowings or as an
increase or reduction in a Retained Interest or an Inter-Group Interest. The
Board expects to make such determinations, either in specific instances or
by setting generally applicable policies from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives of
the Groups, the investment objectives of the Groups, the availability, cost
and time associated with alternative financing sources, prevailing interest
rates and general economic conditions.
LOANS. Loans from one Group to another Group would bear interest at such
rates and have such repayment schedules and other terms as are established
from time to time by, or pursuant to procedures established by, the Board.
The Board expects to make such determinations, either in specific instances
or by setting generally applicable policies from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives of
the Groups, the investment objectives of the Groups, the availability, cost
and time associated with alternative financing sources, prevailing interest
rates and general economic conditions.
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RETAINED INTEREST OR INTER-GROUP INTEREST. In the event of a transfer of
funds or other assets from one Group to another Group that the Board has
determined to reflect as creating or increasing the Retained Interest or an
Inter-Group Interest of such other Group, the Number of Shares Issuable with
Respect to Retained Interest in such Tracking Group or the applicable
Inter-Group Interest in the Issuer Group would be increased by an amount
determined by dividing the amount of funds or the value of the assets
transferred by the Market Value of an Issuer Group Share as of the date of
such transfer, and the applicable Retained Interest Fraction or the
applicable Inter-Group Interest Fraction, as the case may be, would be
increased and the applicable Outstanding Interest Fraction would be
decreased accordingly. In the event of a transfer of funds or other assets
from one Group to another Group that the Board has determined to reflect as
a decrease in the Retained Interest or an Inter-Group Interest of such other
Group, the Number of Shares Issuable with Respect to Retained Interest or
the applicable Inter-Group Interest in the Issuer Group would be decreased
by an amount determined by dividing the amount of funds or the value of the
assets transferred by the Market Value of an Issuer Group Share as of the
date of such transfer, and the applicable Retained Interest Fraction or the
applicable Inter-Group Interest Fraction, as the case may be, would be
decreased and the applicable Outstanding Interest Fraction would be
increased accordingly.
FINANCIAL STATEMENT PRESENTATION. The balance sheets of each Group would
reflect any net loans to or borrowings from the other Groups based on actual
or estimated costs. Similarly, the respective statements of operations of
each of the Groups would reflect interest income or expense, as the case may
be, associated with any such loans or borrowings and the respective
statements of cash flows of each of the Groups would reflect changes in the
amounts of any such loans or borrowings deemed outstanding. Amounts borrowed
by a Group from another Group, will be reflected on that Group's financial
statements as indebtedness to the applicable lender.
SERVICES BY TDS GROUP. Certain corporate general and administrative
costs (including, but not limited to, certain corporate, legal, finance,
accounting, tax, data processing, employee benefit and insurance costs)
would be charged to the Tracking Groups at rates set at the beginning of
each year based on projected utilization for that year, based on actual
costs incurred or based on another reasonable method of allocation. The
balance of such costs would be reflected in the financial statements of the
TDS Group. The utilization-based or other allocation-based charges would be
set at levels that corporate management believes to be reasonable, taking
into account relevant factors, including the costs that the Groups might
incur for comparable services on a stand-alone basis. Certain other
corporate general and administrative costs related specifically to
management of a Group would be allocated entirely to such Group. The scope
of the services charged to the Groups on an allocated basis could be
adjusted from time to time depending on various factors, including the
extent to which it is determined that services should instead be performed
directly by employees of entities attributed to such Group or by outside
vendors.
INTER-GROUP SERVICES. Certain companies with operations that would be
attributed to one Group may from time to time provide services to companies
attributed to one or more other Groups, and certain companies attributed to
one Group may provide use of facilities to companies attributed to one or
more other Group. Generally, services and rights to use facilities provided
pursuant to contractual arrangements to which a member of one Group that is
not a wholly-owned subsidiary of the Company is a party will continue to be
provided in accordance with the terms of such arrangements. Charges for
other services and rights to use facilities will be allocated at levels that
corporate management believes to be reasonable, taking into account relevant
factors, including the costs that the Groups might incur for comparable
services on a stand-alone basis.
TAXES. The Company has entered into Tax Allocation Agreements with each
of U.S. Cellular and Aerial pursuant to which the Company and each of U.S.
Cellular and Aerial have agreed to join in the filing of consolidated
Federal income tax returns with TDS and its subsidiaries which are part of
the TDS affiliated Group for tax purposes. Under such agreements, at the
present time TDS does not reimburse U.S. Cellular or Aerial on a current
basis for their respective losses or credits, if any, used by the TDS
affiliated group. Instead, TDS is required to compensate (by an offset to
amounts U.S. Cellular or Aerial would otherwise be required to reimburse TDS
for Federal income taxes) for TDS's use of such tax benefits at such time as
U.S. Cellular or Aerial could utilize such benefits as a stand-alone entity.
After all loss and credit carryforwards have either been utilized or
expired, U.S. Cellular and Aerial are required to reimburse TDS for Federal
income taxes paid by the TDS affiliated group in an amount equal to the
greater of the Federal income tax liability of U.S. Cellular or Aerial, as
the case may be, calculated as if it were a separate affiliated group, or
the tax calculated using the average tax rate (before taking into account
tax credits) of the TDS affiliated group.
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Under the Tax Allocation Agreements, if U.S. Cellular or Aerial ceases
to be a member of the TDS affiliated group, and for a subsequent year U.S.
Cellular or Aerial or its subsidiaries are required to pay a greater amount
of federal income tax than they would have paid if they had not been members
of the TDS group, after June 30, 1987 in the case of U.S. Cellular and after
December 31, 1995 in the case of Aerial, TDS must reimburse U.S. Cellular or
Aerial, as the case may be, for the excess amount of tax, without interest.
In determining the amount of reimbursement, any profits or losses from new
business activities acquired by either U.S. Cellular or Aerial or its
subsidiaries after either U.S. Cellular or Aerial leaves the TDS group would
be disregarded. No reimbursement will be required on account of the income
of any subsidiary of U.S. Cellular or Aerial if more than 50% of the voting
power of such subsidiary is held by a person or group other than a person or
group owning more than 50% of the voting power of TDS. Rules similar to
those described above are applied to any state or local franchise or income
tax liabilities to which TDS and either U.S. Cellular or Aerial and its
subsidiaries are subject and which are required to be determined on a
unitary, combined or consolidated basis.
These Tax Allocation Agreements will continue unless and until U.S.
Cellular or Aerial become wholly-owned subsidiaries of TDS, in which event
they may be terminated or amended. In any event, the terms of such
agreements are expected to be continued to be followed as agreements or
policies on substantially similar terms, except to the extent of changes in
circumstances, or as otherwise determined to be appropriate by the Board.
The benefits of tax deductions and the obligations to compensate such
subsidiaries at such times as such subsidiaries are able to utilize tax
benefits as a stand-alone entity, will be attributed to the TDS Group.
The Board expects to follow a policy with respect to the Telecom Group
which is similar to the policies which are expected to be followed for U.S.
Cellular and Aerial based on the existing Tax Allocation Agreements. Under
this policy, in general, TDS Telecom would continue to join in the filing of
consolidated income tax returns with TDS and its subsidiaries which are part
of the TDS affiliated group for tax purposes. Provided that the Telecom
Group continues to have taxable income, the Telecom Group will be required
to reimburse the TDS Group for Federal income taxes paid by the TDS
affiliated group in an amount equal to the greater of the Federal income tax
liability of the Telecom Group calculated as if it were a separate
affiliated group, or the tax calculated using the average tax rate (before
taking into account tax credits) of the TDS affiliated group. In the event
that the Telecom Group incurs any tax losses which it cannot utilize, the
tax benefits of such losses would be allocated to the TDS Group, and the TDS
Group would be required to reimburse the Telecom Group at such time that it
would be able to utilize such tax benefits as a stand-alone entity.
The Board expects to determine, either in specific instances or by setting
generally applicable policies from time to time, whether to allocate resources
and financial support to or pursue business opportunities or operational
strategies through one Group or one or more of the other Groups, after
consideration of such factors as it deems relevant.
Notwithstanding the policies described above, determinations with respect to
the transfer of funds from one Group to one of the other Groups would be made at
the discretion of the Board, except to the extent that the Company is
contractually obligated to make a transfer of funds to an entity included in a
Group. Nothing in the foregoing policies (as opposed to any such contractual
obligation) obligates the Board to cause a Group to provide funds to one of the
other Groups if the Board determines that it is in the best interests of the
Company not to do so.
The above management and allocation policies could be modified or rescinded
by the Board, in its sole discretion, without approval of shareholders, although
there is no present intention to do so. The Board could also adopt additional
policies depending upon the circumstances. The Board intends that any
determination it might make to modify or rescind such policies, or to adopt
additional policies, including any such decision that could have disparate
effects upon holders of different classes or series of common stock, would be
made by the Board considering the best interests of the Company and its
shareholders.
Any determinations made by the Board under any provision described above
will be final and binding on all shareholders of the Company, except as may
otherwise be required by law. Such a determination would not be binding only if
it were established that the determination was made in breach of a fiduciary
duty of the Board.
COMPARISON OF SHAREHOLDER'S RIGHTS UNDER IOWA AND DELAWARE LAW
In addition to the differences in the charter documents described above, the
rights of shareholders under Delaware law and the Restated Certificate and
Bylaws of TDS Delaware will differ in a number of respects from the rights of
shareholders under Iowa law and the Articles and the Bylaws of TDS Iowa.
Although it is impracticable to compare all of the aspects in which the rights
of the shareholders of TDS Iowa and TDS Delaware will differ, the following is a
summary of significant differences, as well as similarities, in such rights.
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VOTING TRUST. The TDS Voting Trust, which became effective on June 30,
1989, provides by its terms that it will expire on June 30, 2009, unless
extended. The TDS Voting Trust is presently governed by Iowa law. Under the
current IBCA, a voting trust may not be established for more than ten years,
unless extended. In connection with the Reincorporation, the TDS Voting Trust
will be amended to be governed by Delaware law. After the Merger, it will be
possible to amend the TDS Voting Trust to provide for a longer term or no
expiration date since Delaware law does not have any limitation on the term of a
voting trust. The trustees of the TDS Voting Trust have informed the Company
that no decisions have been made with respect to the term thereof subsequent to
the Merger. Although the Board was cognizant of this potential change, it was
not one of the purposes of the Tracking Stock Proposal.
BOARD OF DIRECTORS. Both Iowa and Delaware law permit the Board to be
divided into up to three classes with staggered terms of office. Like the
Articles, the Restated Certificate divides the Board into three classes, with
staggered terms of office. Immediately after the Merger, the Board of TDS
Delaware, like the Board of TDS Iowa, will consist of twelve members divided
into three classes with terms of three years each. After the Merger, the Board
of TDS Delaware will consist of the same persons who are directors of TDS Iowa
at the time of the Merger. The initial terms of the directors of TDS Delaware
will expire at the same time that the terms of such directors would have expired
if the Reincorporation had not taken place.
ELECTION OF DIRECTORS. Under Iowa law, the election of a director of TDS
Iowa requires the affirmative vote of a majority of votes cast by Iowa Shares
entitled to vote with respect to such matter. Iowa law provides that
shareholders do not have a right to cumulate their votes for directors unless
the articles of incorporation so provide. The Articles do not provide for
cumulative voting in the election of directors.
The election of a director of TDS Delaware will require the affirmative vote
of a plurality of the voting power of the Delaware Shares present in person or
represented by proxy at the meeting and entitled to vote on the election of such
director. Under Delaware law, cumulative voting in the election of directors is
not required unless provided in the certificate of incorporation. The Restated
Certificate does not provide for cumulative voting.
REMOVAL OF DIRECTORS. Under Iowa law, the shareholders may remove one or
more directors, with or without cause, unless the articles of incorporation
provide that directors may be removed only for cause. The Articles do not
provide that directors may be removed only for cause. However, if a director of
an Iowa corporation is elected by a voting group of shareholders, only the
shareholders of that voting group may participate in the vote to remove that
director.
Under Delaware law, unless the certificate of incorporation provides
otherwise, shareholders may remove directors of a corporation with a classified
board only for cause. The Restated Certificate provides that directors may be
removed with cause by a vote of holders of a majority of the voting power of
shares entitled to vote in the election of such directors, and may be removed
without cause only by a vote of holders of at least 80% of the voting power of
the shares entitled to vote in the election of such directors.
PERSONAL LIABILITY OF DIRECTORS. Both the IBCA and the DGCL permit
corporations to adopt provisions in their certificates of incorporation to
eliminate or limit the personal liability of corporate directors to the
corporation or its shareholders for monetary damages for violations of their
fiduciary duty. However, neither the Iowa statute nor the Delaware statute
permits a corporation to eliminate or limit the liability of a director for any
act or omission occurring before the effectiveness of the liability limitation
provision and, thereafter, for any breach of the director's duty of loyalty, for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of a law, for any transaction from which the director derived
an improper personal benefit or for approving an unlawful distribution by the
corporation.
In order to continue to give the directors substantially the same protection
as they presently have under Iowa law, the Restated Certificate contains the
provisions permitted by Delaware law as described in the preceding paragraph,
which are substantially the same as the provisions included in the Articles.
MEETINGS OF SHAREHOLDERS. Under Iowa law, special meetings of the
shareholders of certain corporations, including TDS, may be called by the board
of directors, a person or persons so authorized by the articles of incorporation
or bylaws, or by holders of at least fifty percent of the votes entitled to be
cast on any issue proposed to be considered at the special meeting. The TDS Iowa
Bylaws authorize the principal executive officer to call special meetings of
shareholders. Under Delaware law, special meetings of the shareholders may be
called by the board of directors or such other person as may be authorized by
the certificate of incorporation or the bylaws. The Delaware Bylaws will provide
that special meetings of shareholders may be called by the Chairman or
President, or by holders of at least fifty percent of the votes entitled to be
cast thereat.
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SHAREHOLDER ACTION BY WRITTEN CONSENT. Under Iowa law, unless otherwise
provided in the articles of incorporation, any action required or permitted to
be taken at a shareholders' meeting may be taken without a meeting or vote, if
one or more written consents, describing the action taken, are signed by the
holders of outstanding shares having not less than 90% of the votes entitled to
be cast at a meeting at which all shares entitled to vote on the action were
present and voted. The Iowa Articles do not modify this provision. In addition,
prior notice of the action is not required, unless Iowa law requires that notice
of any proposed action be given to shareholders not entitled to vote, in which
case written notice must be given to all shareholders at least ten days before
the action is taken.
Under Delaware law, unless otherwise provided in the certificate of
incorporation, any action which may be taken or is required to be taken at any
annual meeting or special meeting of shareholders, may be taken without a
meeting, without prior notice and without a vote, if one or more written
consents, setting forth the action so taken, are signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. The Restated Certificate does
not limit the ability of shareholders to take action by consent. As a result,
Delaware law may provide greater flexibility for TDS shareholders to take action
by consent, subject to SEC and AMEX requirements.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER PROPOSALS AND SHAREHOLDER
NOMINATIONS OF DIRECTORS. The Bylaws of TDS Iowa include an advance notice
procedure for shareholders to make nominations of candidates for election to the
board of directors or to bring other business before an annual meeting of
shareholders of TDS Iowa. The Bylaws of TDS Delaware will contain a
substantially similar provision.
PROXIES. Under Iowa law, a proxy is not valid after eleven months from its
date unless a longer period is expressly provided in the form of proxy. Under
Delaware law, a proxy is not valid after three years from its date, unless such
proxy provides for a longer period. However, the Delaware Bylaws provide that a
proxy will not be valid after eleven months from its date unless such proxy
provides for a longer period.
PREEMPTIVE RIGHTS. Under Iowa law, the shareholders of a corporation do not
have a preemptive right to acquire unissued shares of the corporation, except to
the extent the articles of incorporation so provide. The Iowa Articles provide
that the holders of Series A Common Shares have a preemptive right to acquire
additional Series A Common Shares for cash.
Delaware law provides that no shareholder has any preemptive right to
subscribe to additional shares of stock unless and except to the extent that
such right is expressly granted in the certificate of incorporation. The
Restated Certificate provides that the holders of Series A Common Shares will
have the same preemptive rights as are currently provided under the Iowa
Articles.
AMENDMENTS TO CHARTER. Unless the IBCA or the articles of incorporation
require a greater vote or a vote by voting groups, an amendment to the Articles
must be approved by the affirmative vote of a majority of the votes entitled to
be cast on the amendment by any voting group with respect to which the amendment
would create dissenters' rights and the affirmative vote of a majority of the
votes cast for or opposing the action by every other voting group entitled to
vote on the amendment. Under the IBCA, shareholders of a class of capital stock
are entitled to vote as a separate class (even such shares are nonvoting) on a
proposed amendment to the Articles if such amendment would: (i) increase or
decrease the aggregate number of authorized shares of the class; (ii) effect an
exchange or reclassification of all or part of the shares of the class into
shares of another class; (iii) effect an exchange or reclassification, or create
the right of exchange, of all or part of the shares of another class into shares
of that class; (iv) change the designation, rights, preferences or limitations
of all or part of the shares of the class; (v) change the shares of all or part
of the class into a different number of shares of the same class; (vi) create a
new class of shares having rights or preferences with respect to distributions
or to dissolution that are prior, superior or substantially equal to, the shares
of the class; (vii) increase the rights, preferences or number of authorized
shares of any class that, after giving effect to the amendment, have rights or
preferences with respect to distributions or to dissolution that are prior,
superior or substantially equal to the shares of the class; (viii) limit or deny
an existing preemptive right of all or part of the shares of the class; or (ix)
cancel or otherwise affect rights to distributions or dividends that have
accumulated but not yet been declared on all or part of the shares of the class.
As a result, in the case of an amendment to the Articles on any matter which
falls into one of the foregoing categories, the holders of the Common Shares,
Series A Common Shares and Preferred Shares, as the case may be, are entitled to
vote as a class or voting group.
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Amendments to the Restated Certificate require the approval of the holders
of a majority of the voting power of all outstanding Delaware Shares. In
addition, under Delaware law, the holders of the outstanding shares of a class
are entitled to vote as a class upon a proposed amendment, whether or not
entitled to vote thereon by the certificate of incorporation, if the amendment
would increase or decrease the par value of the shares of such class or alter or
change the powers, preferences or special rights of the shares of such class so
as to affect them adversely. As permitted by Delaware law, the Restated
Certificate will permit the number of authorized shares of any class of capital
stock to be increased or decreased (but not below the number of shares then
outstanding in such class, respectively) by the affirmative vote of a majority
of the voting power of the shares of capital stock entitled to vote with respect
to matters other than the election of directors.
SHARE EXCHANGES, MERGERS AND CONSOLIDATIONS. Iowa law permits share
exchanges and mergers but does not provide for consolidations. In general, under
Iowa law, unless the articles of incorporation require a greater vote or a vote
by voting groups, a share exchange or merger must be approved by each voting
group entitled to vote separately on the plan by a majority of all the votes
entitled to be cast on the plan by the voting group. Separate voting by voting
groups is required on a plan of merger if the plan contains a provision that, if
contained in a proposed amendment to articles of incorporation, would require
action by one or more separate voting groups on the proposed amendment and, on a
plan of share exchange, by each class or series of shares included in the
exchange, with each class or series constituting a separate voting group. Under
Iowa law, action by the shareholders of the surviving corporation on a plan of
merger is not required if all of the following apply: (i) the articles of
incorporation of the surviving corporation will not differ from its articles
before the merger; (ii) each shareholder of the surviving corporation whose
shares were outstanding immediately before the effective date of the merger will
hold the same number of shares, with identical designations, preferences,
limitations and relative rights, immediately after; (iii) the number of shares
entitled to vote unconditionally in the election of directors outstanding
immediately after the merger, plus the number of such voting shares issuable as
a result of the merger, will not exceed by more than 20% the total number of
such voting shares of the surviving corporation outstanding immediately before
the merger; and (iv) the number of shares entitled to participate without
limitation in distributions outstanding immediately after the merger, plus the
number of such participating shares issuable as a result of the merger, will not
exceed by more than twenty percent the total number of such participating shares
outstanding immediately before the merger.
Delaware law permits mergers and consolidations but does not provide for
share exchanges as permitted by Iowa law. Under Delaware law, the approval of
the holders of a majority of the voting power of the outstanding Delaware Shares
entitled to vote with respect to such matter would be required to authorize
mergers and consolidations. Unlike Iowa law, separate voting by class or voting
group is not required for the approval of a merger under the DGCL. Under
Delaware law, unless required by its certificate of incorporation, no vote of
shareholders of the surviving corporation is necessary to approve a merger if
all of the following apply: (i) the agreement of merger does not amend the
certificate of incorporation of the surviving corporation; (ii) each share of
stock of the surviving corporation outstanding immediately prior to the merger
is to be an identical share of the surviving corporation after the merger; and
(iii) either no shares or securities convertible into shares of common stock of
the surviving corporation are to be issued under the plan of merger, or the
shares of the common stock of the surviving corporation to be issued under the
plan of merger or upon conversion of any other securities to be issued under
such plan do not exceed 20% of the shares of common stock of the surviving
corporation outstanding immediately prior to the merger.
SALES OF ASSETS. Under Iowa law, unless the articles of incorporation
require a greater vote or a vote by voting groups, a sale of substantially all
assets not in the ordinary course of business must be approved by a majority of
all the votes entitled to be cast on the transaction.
Under Delaware law, the approval of the holders of a majority of the voting
power of the outstanding Delaware Shares entitled to vote with respect to such
matter would be required to authorize the sale of all or substantially all of
the property or assets of TDS Delaware.
DISSOLUTIONS. Under Iowa law, unless the articles of incorporation require
a greater vote or a vote by voting groups, a proposal to dissolve must be
approved by a majority of all the votes entitled to be cast on that proposal.
Under Delaware law, the approval of the holders of a majority of the voting
power of the outstanding Delaware Shares entitled to vote with respect to such
matter would be required to authorize a dissolution.
APPRAISAL RIGHTS. Under Iowa law, a shareholder is entitled to dissent
from, and obtain payment of the fair value of the shareholder's shares in the
event of, any of the following corporate actions: (i) consummation of a plan
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of merger to which the corporation is a party if either (a) shareholder approval
is required for the merger under Iowa law or the articles of incorporation and
the shareholder is entitled to vote on the merger or (b) the corporation is a
subsidiary that is merged with its parent under the short-form merger provisions
of Iowa law; (ii) consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan; (iii) consummation of a sale or
exchange of all, or substantially all, of the property of the corporation other
than in the usual and regular course of business, if the shareholder is entitled
to vote on the sale or exchange, including a sale in dissolution, but not
including a sale pursuant to a court order or a sale for cash pursuant to which
all or substantially all of the net proceeds of the sale will be distributed to
the shareholders within one year after the date of sale; (iv) an amendment of
the articles of incorporation that materially and adversely affects rights in
respect of a dissenter's shares because it does any or all of (a) alters or
abolishes a preferential right of the shares, (b) creates, alters or abolishes a
right in respect of redemption, including a provision respecting a sinking fund
for the redemption or repurchase of the shares, (c) alters or abolishes a
preemptive right of the holder of the shares to acquire shares or other
securities, (d) excludes or limits the right of the shares to vote on any matter
or to cumulate votes, other than a limitation by dilution through issuance of
shares or other securities with similar voting rights, or (e) reduces the number
of shares owned by the shareholder to a fraction of a share if the fractional
share so created is to be acquired for cash; or (v) any corporate action taken
pursuant to a shareholder vote to the extent the articles of incorporation,
bylaws or a resolution of the board of directors provides that voting or
nonvoting shareholders are entitled to dissent and obtain payment for their
shares.
Under Delaware law, appraisal rights will be generally available for the
shares of any class of stock of TDS Delaware only in connection with a merger or
consolidation, provided that no appraisal rights will be available for the
shares of any class or series of stock which, at the record date for the meeting
held to approve such transaction, were either (i) listed on a national
securities exchange or a national market system or (ii) held of record by more
than 2,000 shareholders. However, if the shares of any class or series of stock
meet the requirements of clause (i) or (ii) above, appraisal rights will be
available for such class or series if the holders thereof receive in the merger
or consolidation anything except: (i) shares of stock of the corporation
surviving or resulting from such merger or consolidation; (ii) shares of stock
of any other corporation which at the effective date of the merger or
consolidation is either listed on a national securities exchange or a national
market system or held of record by more than 2,000 shareholders; (iii) cash in
lieu of fractional shares; or (iv) any combination of the foregoing. However,
appraisal rights are not available if the corporation is the surviving
corporation and no vote of its shareholders is required for the merger.
ANTI-TAKEOVER LAW. The IBCA currently has a provision which restricts the
completion of certain unsolicited or hostile business combinations. Under Iowa
law, a corporation is prohibited from engaging in any "business combination"
(which is broadly defined in the statute) with an "interested shareholder"
(defined as a person beneficially owning 15% or more of a corporation's voting
stock) for a period of three years following the time that such person became an
interested shareholder unless: (i) before such person became an interested
shareholder, the board of directors approved the transaction in which the
shareholder became an interested shareholder; (ii) upon consummation of the
transaction which resulted in the shareholder becoming an interested
shareholder, the interested shareholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced (excluding
shares owned by directors and officers or employee stock ownership plans that do
not provide for confidential voting by plan participants); or (iii) at or
following the time such person became an interested shareholder, the business
combination is approved by the board of directors and authorized at a meeting of
shareholders by the affirmative vote of the holders of 66 2/3% of the
outstanding voting stock of the corporation not owned by the interested
shareholder.
Section 203 of the DGCL is substantially similar to the Iowa statute, as
described above. However, as permitted by Delaware law, the Restated Certificate
will provide that TDS Delaware elects not to be governed by such provision.
Since Section 203 will not be applicable to TDS, it may be possible for a person
to acquire the Series A Common Shares held by the TDS Voting Trust and to
immediately complete a business combination with TDS, without complying with any
of the exceptions to Section 203. The trustees of the TDS Voting Trust have
advised the Company that they have no current plans or intentions of disposing
of such Series A Common Shares.
DIVIDENDS AND STOCK REPURCHASES. No distribution, including a purchase,
redemption or other acquisition of the corporation's shares, may be made by an
Iowa corporation if, after giving it effect, the corporation would not be able
to pay its debts as they become due in the usual course of business, or the
corporation's total assets would be less than the sum of its total liabilities
plus, unless the articles of incorporation permit otherwise, the amount that
would be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution.
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A Delaware corporation may pay dividends out of any surplus and, if it has
no surplus, out of any net profits for the fiscal year in which the dividend was
declared or for the preceding fiscal year (provided that such payment may not
reduce capital below the amount of capital represented by all classes of shares
having a preference upon the distribution of assets). Under Delaware law, a
corporation may purchase or redeem shares of its own stock only when its capital
is not impaired and such purchase or redemption would not cause any impairment
of the capital of the corporation, except that a corporation may purchase or
redeem out of capital any of its preferred shares if such shares will be retired
upon their acquisition and the capital of the corporation will be reduced in
accordance with Delaware law. Under Delaware law, a corporation may not purchase
any of its redeemable shares for more than the price at which they may then be
redeemed.
TRANSACTIONS INVOLVING OFFICERS OR DIRECTORS. Under Iowa law, a conflict of
interest transaction is not voidable by the corporation solely because of the
director's interest in the transaction if any one of the following is true: (i)
the material facts of the transaction and the director's interest were disclosed
or known to the board of directors or a committee of the board of directors, and
the board of directors or committee authorized, approved or ratified the
transaction; (ii) the material facts of the transaction and the director's
interest were disclosed or known to the shareholders entitled to vote and they
authorized, approved or ratified the transaction; or (iii) the transaction was
fair to the corporation. A conflict of interest transaction can be authorized,
approved or ratified by the affirmative vote of a majority of the directors on
the board of directors or on the committee, who have no direct or indirect
interest in the transaction, but a transaction may not be authorized, approved
or ratified by a single director. A conflict of interest transaction may also be
authorized, approved or ratified if it receives the vote of a majority of the
shares entitled to be counted under Iowa law. Shares owned or voted under the
control of a director who has a direct or indirect interest in the transaction,
and shares owned by or voted under the control of an entity in which an
interested director has an interest may not be counted in a vote of shareholders
to determine whether to authorize, approve or ratify a conflict of interest
transaction.
Under Delaware law, a corporation may make loans to, guarantee the
obligations of or otherwise assist its officers or employees and those of its
subsidiaries (including directors who are also officers or employees) without
shareholder approval when such action, in the judgment of the directors, may
reasonably be expected to benefit the corporation. With respect to any other
contract or transaction between the corporation and one or more of its directors
or officers, such contracts or transactions are neither void nor voidable if the
material facts as to the director's or officer's interest are made known to the
disinterested directors or the shareholders of the corporation, who thereafter
approve the contract or transaction in good faith, or the contract or
transaction is fair to the corporation as of the time it is approved or ratified
by the board of directors, a committee thereof or the shareholders. Such a
contract or transaction may be approved by only one disinterested director and
all shares may be counted in a vote to approve such contract or transaction. As
a result, TDS Delaware will have greater flexibility to approve contracts and
other transactions with directors under Delaware law.
BYLAWS. Under Iowa law, a corporation's board of directors may generally
adopt, amend or repeal the corporation's bylaws unless the articles of
incorporation reserve such power exclusively to the shareholders. The Iowa
Articles do not reserve such power to the shareholders. As a result, the
Company's Bylaws may be amended or repealed by the Board. Nevertheless, Iowa law
provides further that a corporation's shareholders may amend or repeal the
corporation's bylaws even though the bylaws may also be amended or repealed by
its board of directors.
Delaware law provides that the original bylaws of a corporation may be
adopted, amended or repealed by the incorporators, by the initial directors if
they were named in the certificate of incorporation or by the directors before a
corporation has received any payment for any of its stock. After a corporation
has received any payment for any of its stock, the power to adopt, amend or
repeal bylaws is conferred on the shareholders entitled to vote, provided that a
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. Therefore, the Restated Certificate
must expressly confer power upon the directors in order to permit the directors
to amend or repeal the Bylaws of TDS Delaware. However, Delaware law provides
that the fact that such power has been conferred upon the directors does not
divest the shareholders of the power, nor limit their power, to adopt, amend or
repeal bylaws. As a result, the Restated Certificate provides that, in
furtherance and not in limitation of the powers conferred by Delaware law, the
Board of TDS Delaware is expressly authorized to adopt, amend or repeal the
Bylaws of TDS Delaware, subject to any specific limitations on such power
provided by any Bylaws adopted by the shareholders. See "--Description of
Restated Certificate of Incorporation of TDS Delaware."
REDEMPTION TO PROTECT LICENSES. The DGCL expressly states that any stock of
a corporation which holds (directly or indirectly) a license or franchise from a
governmental agency to conduct its business or is a member of a
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national securities exchange, which license, franchise or membership is
conditioned upon some or all of the holders of its stock possessing prescribed
qualifications, may be made subject to redemption by the corporation to the
extent necessary to prevent the loss of such license, franchise or membership or
to reinstate it. The IBCA has no similar provisions. As permitted by Delaware
law, the Restated Certificate includes a provision permitting the Company to
redeem shares of capital stock (other than Series A Common Shares) to the extent
necessary to prevent the loss or secure the reinstatement of any license or
franchise from any governmental agency. See "--Description of Restated
Certificate of Incorporation of TDS Delaware."
INDEMNIFICATION. Under Iowa law, a corporation may indemnify an individual
made a party to a proceeding because the individual is or was a director,
against liability incurred in the proceeding if the individual acted in good
faith and reasonably believed that the individual's conduct was in or not
opposed to the corporation's best interests and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the individual's
conduct was unlawful. Nevertheless, a corporation may not indemnify a director
in a derivative action (as defined below) in which the director was adjudged
liable to the corporation, or in any other proceeding in which the director was
adjudged liable, on the basis that a personal benefit was improperly received.
Indemnification permitted in connection with a derivative action is limited to
reasonable expenses incurred in connection with the proceeding.
Iowa law also provides that, unless limited by its articles of
incorporation, a corporation must indemnify a director or officer who was wholly
successful on the merits or otherwise against reasonable expenses incurred in
defending the proceedings. Iowa law provides that a court may order
indemnification if the court determines that a director or officer is fairly and
reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not the director or officer met the standard of
conduct required or was adjudged liable, except that if the director or officer
was adjudged liable, indemnification is limited to reasonable expenses incurred.
Iowa law further permits a corporation to advance reasonable expenses
incurred by a director, officer, employee or agent of a corporation if, among
other things, such person undertakes to repay the advance if it is determined
that such person did not meet the standard of conduct required for
indemnification.
An Iowa corporation may purchase and maintain insurance on individuals
against liability arising from the individual's capacity as a director, officer,
employee or agent, whether or not the corporation would have the power to
indemnify that individual against the same liability. The Company has directors'
and officers' liability insurance which provides, subject to certain policy
limits, deductible amounts and exclusions, coverage for all persons who have
been, are or may in the future be, directors or officers of the Company, against
amounts which such persons must pay resulting from claims against them by reason
of their being such directors or officers during the policy period for certain
breaches of duty, omissions or other acts done or wrongfully attempted or
alleged.
The indemnification and advancement of expenses permitted by Iowa law is not
exclusive of any other rights which a person may have under the articles of
incorporation, bylaws, agreements or otherwise, provided that an Iowa
corporation may not provide indemnification for any breach of the director's
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of a law, for approving a
distribution which was unlawful, or for any transaction from which the director
derived an improper personal benefit.
Under the DGCL, directors and officers, as well as other employees or
persons, may be indemnified against judgments, fines and amounts paid in
settlement in connection with specified actions, suits or proceedings, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation--a "derivative action"), and against expenses
(including attorney's fees) in any action (including a derivative action), if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful. However, in the case of a derivative action, a person cannot be
indemnified for expenses in respect of any matter as to which the person is
adjudged to be liable to the corporation unless and to the extent a court
determines that such person is fairly and reasonably entitled to indemnity for
such expenses.
Delaware law also provides that, to the extent a director or officer of a
corporation has been successful on the merits or otherwise in defense of any
action or matter, the corporation must indemnify such party against expenses
(including attorneys' fees) actually and reasonably incurred by such party in
connection therewith.
Expenses incurred by a director or officer in defending any action may be
paid by a Delaware corporation in advance of the final disposition of the action
upon receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it is ultimately determined that such party is not entitled
to be indemnified by the corporation.
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The DGCL provides that the indemnification and advancement of expenses
provided thereby are not exclusive of any other rights granted by bylaws,
agreements or otherwise, and provides that a corporation shall have the power to
purchase and maintain insurance on behalf of any person, whether or not the
corporation would have the power to indemnify such person under Delaware law.
TDS Delaware will continue the existing directors' and officers' liabilities
policy of TDS Iowa.
The Restated Certificate provides that TDS Delaware shall indemnify
directors and officers of TDS Delaware, its consolidated subsidiaries and
certain other related entities generally in the same manner and to the extent
permitted by the DGCL, as more specifically provided in the Bylaws of TDS
Delaware. See "--Description of Restated Certificate of Incorporation of TDS
Delaware."
CONSIDERATION OF COMMUNITY INTERESTS IN ACQUISITION PROPOSALS. Under Iowa
law, in determining what is in the best interest of the corporation when
considering a tender offer or proposal of acquisition, merger, consolidation or
similar proposal, the board of directors may consider, in addition to
considering the effects of any action on the shareholders, (i) the effects of
the action on the corporation's employees, suppliers, creditors and customers;
(ii) the effects of the action on the communities in which the corporation
operates and/or (iii) the long-term as well as short-term interests of the
corporation and its shareholders, including the possibility that such interests
may be best served by the continued independence of the corporation. If, on the
basis of such community interest factors, the board of directors determines that
a proposal or offer to acquire or merge the corporation is not in the best
interests of the corporation, it may reject the proposal or offer. If the board
of directors determines to reject any such proposal or offer, the board of
directors has no obligation to facilitate, to remove any barriers to, or to
refrain from impeding, the proposal or offer. Under Iowa law, the consideration
of any or all of the community interest factors is not a violation of the
business judgment rule or of any duty of the directors to the shareholders, or a
group of shareholders, even if the directors reasonably determine that a
community interest factor or factors outweigh the financial or other benefits to
the corporation or a shareholder or group of shareholders. Delaware law has no
similar provision. However, the Restated Certificate includes a provision which
includes substantially the provisions included under Iowa law. See
"--Description of Restated Certificate of Incorporation of TDS Delaware."
DISSENTING SHAREHOLDERS' RIGHTS
Under Iowa law, all shareholders are entitled to assert dissenters' rights
with respect to the Merger. However, even if the shareholders approve the
Merger, the Board of TDS reserves the right not to effect the Merger if, in its
sole determination, the number of dissenting shareholders is excessive so as to
make the Merger inadvisable. In such event, the Tracking Stock Proposal would
not be adopted and TDS would remain an Iowa corporation.
The trustees of the TDS Voting Trust have advised the Company that they do
not intend to exercise dissenters' rights with respect to the Merger. The TDS
Voting Trust holds over 90% of the Series A Common Shares.
A holder of Iowa Shares who dissents from the Merger and exercises
dissenter's rights will be generally required to treat the difference between
the tax basis of the Iowa Shares held by such shareholder and the amount
received through the exercise of such appraisal rights as capital gain or loss,
although depending on the holder's particular circumstances, the amount received
through the exercise of such rights might be dividend income to the extent of
TDS Iowa's current and accumulated earnings and profits.
Any shareholder who wishes to assert dissenters' rights must (i) deliver to
the Company before the vote on the actions proposed in this Proxy
Statement/Prospectus is taken, written notice of the shareholder's intent to
demand payment for the shareholder's shares if the proposed actions are
effectuated and (ii) not vote his or her shares in favor of the proposal
entitling such shareholder to the fair value of his or her shares.
Within ten days after the proposed corporate action is authorized by the
shareholders, the Company must send a written dissenters' notice to each
dissenting shareholder who has delivered to the Company written notice of the
shareholder's intent to demand payment for such shareholder's shares and who has
not voted his or her shares in favor of the proposal. The written dissenters'
notice must (i) state where the payment demand must be sent and where and when
certificates for certificated shares must be deposited, (ii) inform holders of
uncertificated shares of the extent to which transfer of the shares will be
restricted after the payment demand is received, (iii) supply a form for
demanding payment that meets statutory requirements, (iv) set a date by which
the Company must receive the payment demand, which date shall not be fewer than
30 nor more than 60 days after the Company delivered the written dissenters'
notice to the dissenting shareholder and (v) be accompanied by a copy of the
Iowa statute pertaining to dissenters' rights.
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Any shareholder sent a dissenters' notice must (i) demand payment, (ii)
certify whether the shareholder acquired beneficial ownership of the shares
before the date set forth in the dissenters' notice and (iii) deposit the
shareholder's certificates in accordance with the terms of the notice. Except as
otherwise required by law, as soon as the proposed action is taken by the
Company, or upon receipt of a payment demand, whichever is later, the Company
shall pay each dissenter who demanded payment the amount the Company estimates
to be the fair value of the dissenter's shares, plus accrued interest. The
payment by the Company must be accompanied by (i) the Company's financial
statements for the latest fiscal year, as well as the Company's latest available
interim statements, (ii) a statement of the Company's estimate of the fair value
of the shares, (iii) an explanation of how the interest was calculated, (iv) a
statement of the dissenter's right to demand payment under Iowa code section
490.1328 and (v) a copy of the IBCA section which sets forth the procedure to be
followed by a shareholder in the event that such shareholder is dissatisfied
with the Company's payment or offer.
A dissenter may notify the Company within 30 days of the Company's offer for
payment for the dissenter's shares in writing of the dissenter's own estimate of
the fair value of the dissenter's shares and amount of interest due, and demand
payment of the dissenter's estimate less any payment made by the Company or
reject the Company's previously made offer and demand payment of the fair value
of the dissenter's shares and interest due if (i) the dissenter believes that
the amount paid or offered by the Company is less than the fair value of the
dissenter's shares or that the interest due was incorrectly calculated, (ii) the
Company fails to make payment within 60 days of the date set for demanding
payment or (iii) the Company, having failed to take the proposed action, does
not return deposited certificates or uncertificated shares within 60 days after
the date set for demanding payment.
If the Company and any dissenting shareholder are unable to agree on a fair
value for such dissenting shareholder's shares, the Company shall commence a
proceeding in the district court of Wapello County, Iowa asking for a judicial
determination of the fair value of such shares and accrued interest. Such
proceeding must be commenced by the Company within 60 days after receiving the
dissenter's demand for payment of the dissenter's estimated fair value of such
dissenter's shares. The Company shall notify all dissenters and make such
dissenters, whether or not residents of the State of Iowa, whose demands remain
unsettled, parties to the proceeding. Each dissenter made a party to the
proceeding is generally entitled to judgment for the amount, if any, by which
the court finds the fair value of the dissenter's shares, plus interest, exceeds
the amount paid by the Company.
The foregoing description of the rights of dissenting shareholders is
qualified in its entirety by reference to the applicable provisions of the IBCA
attached as EXHIBIT E to this Proxy Statement/Prospectus, which the shareholders
are encouraged to carefully review.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal
income tax consequences of the Merger and the Distribution. The discussion does
not address all aspects of federal taxation that may be relevant to particular
shareholders of the Company, and it may not be applicable to shareholders who,
for federal income tax purposes, are subject to special tax treatment, such as
insurance companies, corporations subject to the alternative minimum tax, banks,
dealers in securities, tax-exempt organizations or, except as specifically
discussed below, foreign persons or to shareholders who acquired their shares
pursuant to the exercise of employee stock options or otherwise as compensation.
The discussion does not address the effect of any applicable state, local or
foreign laws or any federal tax laws other than those pertaining to the income
tax. EACH SHAREHOLDER OF THE COMPANY SHOULD CONSULT SUCH SHAREHOLDER'S OWN TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO SUCH SHAREHOLDER OF THE MERGER
AND THE DISTRIBUTION.
The discussion is based on the Internal Revenue Code, regulations and
rulings now in effect or proposed thereunder, current administrative rulings and
practice, and judicial precedent, all of which are subject to change. Any such
change, which may or may not be retroactive, could alter the tax consequences to
shareholders of the Company discussed herein. This discussion is also based on
certain assumptions regarding the factual circumstances that will exist at the
Effective Time of the Merger and at the time of the Distribution, including
certain representations made or to be made by the Company. This discussion
assumes that shareholders of the Company hold their Preferred Shares, Series A
Common Shares and Common Shares of the Company as capital assets within the
meaning of Section 1221 of the Internal Revenue Code, and, except as
specifically discussed below, assumes that such shareholders will not exercise
appraisal rights as described above under "Dissenting Shareholders' Rights."
THE MERGER. In the opinion of Sidley & Austin, counsel to the Company, for
United States federal income tax purposes:
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(i) The Merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, and the Company and TDS
Delaware will each be a party to the reorganization;
(ii) no gain or loss will be recognized by the Company or TDS Delaware
as a result of the Merger;
(iii) no gain or loss will be recognized by the shareholders of the
Company upon the conversion of their Preferred Shares, Series A Common
Shares and Common Shares of the Company into Preferred Shares, Series A
Common Shares and Common Shares of TDS Delaware, respectively, pursuant to
the Merger;
(iv) the aggregate tax bases of the Preferred Shares, Series A Common
Shares and Common Shares of TDS Delaware received in exchange for Preferred
Shares, Series A Common Shares and Common Shares of the Company,
respectively, pursuant to the Merger will be the same as the aggregate tax
bases of such Preferred Shares, Series A Common Shares and Common Shares of
the Company, respectively; and
(v) the holding periods for Preferred Shares, Series A Common Shares and
Common Shares of TDS Delaware issued in exchange for Preferred Shares,
Series A Common Shares and Common Shares of the Company, respectively,
pursuant to the Merger will include the holder's holding periods for such
Preferred Shares, Series A Common Shares and Common Shares of the Company,
respectively.
A shareholder of the Company who exercises appraisal rights as described
above under "Dissenting Shareholders' Rights" should, in general, treat the
difference between the tax basis of the Preferred Shares, the Series A Common
Shares and Common Shares of the Company held by such shareholder with respect to
which such rights are exercised and the amount received through the exercise of
such rights (other than any interest awarded by a court with respect to such
rights) as capital gain or loss for federal income tax purposes although,
depending on the shareholder's particular circumstances, the amount received
through the exercise of such rights (other than any interest awarded by a court
with respect to such rights) might be treated for federal income tax purposes as
dividend income. Any interest awarded by a court to a shareholder of the Company
with respect to exercised appraisal rights generally will be includable in such
shareholder's income as ordinary income.
A shareholder of the Company that, for federal income tax purposes, is a
non-resident alien individual, a foreign corporation, a foreign partnership or a
foreign estate or trust (a "Non-U.S. Shareholder") generally will not be subject
to federal income tax (by withholding or otherwise) on any gain realized on the
receipt of Preferred Shares, Series A Common Shares or Common Shares of TDS
Delaware in exchange for Preferred Shares, Series A Common Shares or Common
Shares of the Company pursuant to the Merger.
THE DISTRIBUTION. In the opinion of Sidley & Austin, counsel to the
Company, for United States federal income tax purposes:
(i) the Distribution will not result in income, gain or loss to the
Company;
(ii) the Distribution will not result in income, gain or loss to any
shareholder of the Company, except with respect to cash, if any, received in
lieu of fractional Cellular Group Shares, Telecom Group Shares or Aerial
Group Shares;
(iii) a shareholder's tax basis for Series A Common Shares prior to the
Distribution will be allocated after the Distribution among such
shareholder's Series A Common Shares and Cellular Group Shares, Telecom
Group Shares and Aerial Group Shares (including fractional shares, if any,
for which cash is received) received in the Distribution (pursuant to a
deemed exchange for Series A Common Shares) in proportion to their relative
fair market values at the time of the Distribution;
(iv) a shareholder's tax basis for Common Shares prior to the
Distribution will be allocated after the Distribution among such
shareholder's Common Shares and Cellular Group Shares, Telecom Group Shares
and Aerial Group Shares (including fractional shares, if any, for which cash
is received) received in the Distribution (pursuant to a deemed exchange for
Common Shares) in proportion to their relative fair market values at the
time of the Distribution;
(v) a shareholder's holding period for Cellular Group Shares, Telecom
Group Shares and Aerial Group Shares received in the Distribution (pursuant
to a deemed exchange for Series A Common Shares) will include such
shareholder's holding period for the Series A Common Shares deemed
surrendered therefor;
(vi) a shareholder's holding period for Cellular Group Shares, Telecom
Group Shares and Aerial Group Shares received in the Distribution (pursuant
to a deemed exchange for Common Shares) will include such shareholder's
holding period for the Common Shares deemed surrendered therefor;
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(vii) a shareholder who receives cash in lieu of a fractional share will
recognize gain or loss equal to the difference, if any, between such
shareholder's basis in the fractional share (determined under clause (iii)
or (iv) above) and the amount of cash received; and
(viii) neither Cellular Group Shares, Telecom Group Shares nor Aerial
Group Shares will be "section 306 stock" within the meaning of the Internal
Revenue Code.
The Internal Revenue Service (the "Service") announced in 1987 that it was
studying and would not issue advance rulings on the classification of an
instrument that has certain voting and liquidation rights in an issuing
corporation but the dividend rights of which are determined by reference to the
earnings of a segregated portion of the issuing corporation's assets, including
assets held by a subsidiary. In 1995 the Service withdrew such stock from its
list of matters under consideration and reiterated that it would not issue
advance rulings regarding such stock. There are no court decisions or other
authorities that bear directly on transactions similar to the Distribution. It
is possible, therefore, that the Service could assert that the Cellular Group
Shares, Telecom Group Shares and Aerial Group Shares represent property other
than stock of the Company. If such shares were treated as property other than
stock of the Company, the Company or its subsidiaries (i) would recognize a
significant taxable gain on the Distribution of the Cellular Group Shares,
Telecom Group Shares and Aerial Group Shares in an amount equal to the excess of
the fair market value of the distributed property over its federal income tax
basis to the Company or its subsidiaries and (ii) the Company could lose its
ability to file consolidated federal income tax returns with U.S. Cellular, TDS
Telecom and Aerial (one consequence being that dividends paid or deemed to be
paid by U.S. Cellular, TDS Telecom or Aerial to the Company would be taxable to
the Company, subject to any applicable dividends received deduction).
Furthermore, the receipt of Cellular Group Shares, Telecom Group Shares or
Aerial Group Shares by a shareholder of the Company might be treated as a fully
taxable dividend to such shareholder in an amount equal to the fair market value
of such stock (subject, in the case of shareholders of the Company that are
corporations, to any applicable dividends received deduction). As indicated
above, however, it is the opinion of counsel that the Service would not prevail
in any such assertion.
Dividend payments received by a Non-U.S. Shareholder of Cellular Group
Shares, Telecom Group Shares or Aerial Group Shares with respect to such shares
will be subject to the withholding of United States federal income tax in the
same manner as dividends received by such Non-U.S. Shareholder on Series A
Common Shares and Common Shares. A Non-U.S. Shareholder will generally be
subject to federal income tax on any gain realized on the taxable sale or
exchange of Cellular Group Shares, Telecom Group Shares or Aerial Group Shares
if (i) the gain is effectively connected with the conduct of a trade or business
of the Non-U.S. Shareholder within the United States, (ii) the gain is derived
from sources within the United States and the Non-U.S. Shareholder is a
non-resident alien individual who is present in the United States for 183 days
or more in the taxable year of such sale or exchange, (iii) the Non-U.S.
Shareholder is subject to tax pursuant to the provisions of federal tax law
applicable to certain United States expatriates, or (iv) the Company is a
"United States real property holding corporation" under the Foreign Investment
in Real Property Tax Act of 1980 and the Non-U.S. Shareholder has owned,
directly or indirectly, more than five percent of the value of all outstanding
shares of the Tracking Group in question at any time during the five-year period
ending at the time of the sale or exchange. The Company does not believe that it
is a United States real property holding corporation as of the date hereof,
although it has not determined or established whether it will be a United States
real property holding corporation in the future.
Certain non-corporate holders of Cellular Group Shares, Telecom Group Shares
or Aerial Group Shares might be subject to backup withholding at a rate of 31%
on the payment of dividends on such stock. Backup withholding will apply only if
the shareholder (i) fails to furnish his, her or its Taxpayer Identification
Number ("TIN") which, for an individual, is his or her Social Security number,
(ii) furnishes an incorrect TIN, (iii) is notified by the Service that he, she
or it has failed properly to report payments of interest or dividends, or (iv)
under certain circumstances, fails to certify under penalties of perjury that
he, she or it has furnished a correct TIN and has not been notified by the
Service that he, she or it is subject to backup withholding for failure to
report payments of interest or dividends. Shareholders should consult their tax
advisors regarding their qualifications for an exemption from backup withholding
and the procedure for obtaining such an exemption if applicable. The amount of
any backup withholding from a payment to a holder of Cellular Group Shares,
Telecom Group Shares or Aerial Group Shares will be allowed as a credit against
such shareholder's federal income tax liability and may entitle such shareholder
to a refund, provided that the required information is furnished to the Service.
The foregoing is for general information only. Shareholders should consult
their own tax advisors as to the federal, state, local and foreign tax
consequences of the Merger and the Distribution and of the holding of Cellular
Group Shares, Telecom Group Shares and Aerial Group Shares.
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SECURITIES LAW CONSEQUENCES OF THE MERGER
The Company has been advised by its counsel, Sidley & Austin, that
shareholders who hold Iowa Shares which may be sold without registration under
the Securities Act of 1933, as amended (the "Securities Act") before the Merger
will have, after the Merger, Delaware Shares which may be sold without
registration under the Securities Act. Shareholders holding restricted Iowa
Shares, and affiliates of TDS Delaware (as defined in the Securities Act), will
have Delaware Shares which are subject to the same restrictions on transfer as
those to which their Iowa Shares are presently subject. For purposes of
computing compliance with the holding period requirements of Rule 144 under the
Securities Act, shareholders will be deemed to have acquired their Delaware
Shares on the date they acquired their Iowa Shares.
Cellular Group Shares, Telecom Group Shares and Aerial Group Shares received
in the Distribution, other than any shares received by affiliates of TDS within
the meaning of the Securities Act, may be offered for sale and sold without
registration under the Securities Act in the same manner as the Common Shares or
Series A Common Shares with respect to which they were distributed. Holders of
restricted shares and affiliates of TDS, as defined in the Securities Act,
including the TDS Voting Trust, will continue to be subject to the restrictions
specified in Rule 144 under the Securities Act with respect to shares of
Tracking Stock received in the Distribution.
Executive officers, directors and holders of more than 10% of any class of
registered equity securities of the Company will continue to be subject to the
short-swing profit prohibitions and reporting obligations contained in Section
16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
is the case presently with respect to the Common Shares, and the Series A Common
Shares since they can be converted into Common Shares. Furthermore, because the
Cellular Group Shares, Telecom Group Shares, Aerial Group Shares and Special
Common Shares would be entitled to vote in the election of directors, holders of
Cellular Group Shares, Telecom Group Shares, Aerial Group Shares and any issued
Special Common Shares will be subject to Section 13(d) of the Exchange Act and
the rules thereunder, which generally require public disclosure of acquisitions
of more than five percent of a class of voting equity securities that is
registered under the Exchange Act. Common Shares (and Series A Common Shares,
since they are convertible into Common Shares) will continue to be subject to
Section 13(d). Persons or groups who are not now subject to the requirements of
Section 16 or 13(d) may, after the Distribution, become subject to such
requirements with respect to the ownership of Cellular Group Shares, Telecom
Group Shares, Aerial Group Shares or Special Common Shares, if and when issued.
After the Merger, TDS Delaware will continue to be a publicly held company
and its Common Shares, Cellular Group Shares, Telecom Group Shares and Aerial
Group Shares will be registered under the Exchange Act with the SEC. TDS
Delaware will file periodic reports and other documents with the SEC and provide
to its shareholders the same types of information that TDS Iowa has previously
filed and provided, as well as additional financial and other information
related to the Groups.
LISTING ON THE AMEX
The Common Shares of TDS Iowa are listed on the AMEX under the symbol "TDS"
and the Common Shares of TDS Delaware as the surviving company will continue to
be listed on the AMEX immediately following the Merger under the symbol "TDS."
Application is also being made to list each of the Tracking Stocks on the AMEX.
STOCK TRANSFER AGENT AND REGISTRAR
The Harris Trust and Savings Bank will continue to act as transfer agent and
registrar for the Preferred Shares, Common Shares and Series A Common Shares and
will also act as transfer agent for shares of Tracking Stock upon issuance
thereof.
ACCOUNTING TREATMENT
For financial reporting purposes, the historical financial statements and
accounts of TDS Iowa will be carried forward to TDS Delaware as a result of the
Merger. The financial statements of TDS appearing elsewhere in this Proxy
Statement/Prospectus have been restated to reflect the effects of the Tracking
Stock Proposal.
REGULATORY APPROVALS AND CONSENTS
The Merger requires the consent of, or notice to, the FCC, several state
utility regulatory commissions and certain other third parties. The Merger is
expected to be consummated as soon as practicable after shareholder approval and
following receipt of all regulatory approvals and other consents which are
necessary for the transfer of
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all material licenses, permits or franchises or other rights of the Company and
its subsidiaries. Due to the fact that the Merger simply represents a change in
the Company's state of incorporation rather than a change in control of the
Company, it is expected that the Company will duly receive all necessary
regulatory approvals and other consents. However, the Board reserves the right
to abandon the Merger if, in the judgment of the Board, circumstances arise
which make proceeding with the Merger inadvisable, such as the imposition of
unacceptable conditions to the receipt of such approvals or consents.
DIVIDEND REINVESTMENT PLANS
The Company's Common Share Automatic Dividend Reinvestment and Stock
Purchase Plan ("Common Share DRIP") and the Series A Common Share Automatic
Dividend Reinvestment Plan ("Series A DRIP") will be adopted and continued by
TDS Delaware on the effective date of the Merger. Shareholders then
participating in such plans will automatically become participants in the
corresponding TDS Delaware plans. TDS Delaware will adopt a similar dividend
reinvestment plan for the holders of Telecom Group Shares ("Telecom DRIP") since
the Board intends to pay dividends on the Telecom Group Shares. Shareholders
participating in the Common Share DRIP or the Series A DRIP at the time of the
Distribution will automatically become participants in the Telecom DRIP with
respect to the Telecom Group Shares distributed to participants of such plans.
Since the Board does not currently intend to pay dividends on the Cellular
Group Shares or the Aerial Group Shares, no dividend reinvestment plans for such
shares are expected to be adopted at this time. However, TDS Delaware has
requested the Transfer Agent to create a bookkeeping entry facility for the
Cellular Group Shares and the Aerial Group Shares so that Shareholders
participating in the Common Share DRIP or the Series A DRIP will not be required
to take possession of certificates for such shares received in the Distribution
with respect to shares distributed under the Common Share DRIP or the Series A
DRIP.
Accordingly, shareholders receiving shares of Tracking Stock in the
Distribution with respect to shares held in the Common Share DRIP or the Series
A DRIP will automatically have all whole and fractional Telecom Group Shares
credited to the Telecom DRIP and will have all whole and fractional Cellular
Group Shares and Aerial Group Shares credited in bookkeeping entry form.
Shareholders will be permitted to receive certificates representing whole shares
plus cash in lieu of fractional shares at any time after the Distribution upon
request to the Transfer Agent.
EMPLOYEE BENEFIT PLANS
The Company's 1996 Employee Stock Purchase Plan, 1988 Stock Option and Stock
Appreciation Rights Plan, 1994 Long-Term Incentive Plan and certain Stock Option
and Appreciation Rights Agreements were previously approved by shareholders.
Each such TDS benefit plan and agreement, as amended, as well as all other
employee benefit plans and agreements of TDS Iowa, will be assumed and adopted
by TDS Delaware upon the effectiveness of the Merger. Approval of the Tracking
Stock Proposal will also constitute approval by the shareholders of the adoption
of such plans and agreements by TDS Delaware, including all shares reserved for
issuance thereunder. In connection with the Merger, Shareholders are also being
asked to approve the amendment and adjustment of certain of such plans and
agreements to reflect the effects of the Tracking Stock Proposal and the
Distribution, and to adopt a new plan which will permit the grant of stock
awards relating to shares of Tracking Stock. See "Proposal 2" and "Proposal 3."
CERTAIN DEFINITIONS
As used in this Proxy Statement/Prospectus, unless the context requires
otherwise, the following terms have the meanings specified below:
"ADJUSTED OUTSTANDING INTEREST FRACTION," as of any date, means, with
respect to a particular class of Tracking Stock, a fraction the numerator of
which is the aggregate number of shares of such class of Tracking Stock
outstanding on such date and the denominator of which is the sum of (a) such
aggregate number of outstanding shares, (b) the Number of Shares Issuable with
Respect to Retained Interest for such class of Tracking Stock as of such date,
(c) the aggregate Number of Shares Issuable with Respect to Inter-Group Interest
by all other Tracking Groups in such Tracking Stock, if any, and (d) the Number
of Shares Issuable to Third Parties with respect to such Tracking Stock.
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"ADJUSTMENT DATE," means the date which is ten Trading Days before the
record date for each annual meeting of shareholders of the Company.
"AERIAL" means Aerial Communications, Inc., a Delaware corporation.
"AERIAL GROUP" means, as of any date that any shares of Aerial Group Shares
have been issued and continue to be outstanding: (a) the interest of the Company
or of any of its subsidiaries in Aerial and its subsidiaries (including any
successor thereto by merger, consolidation or sale of all or substantially all
of its assets, whether or not in connection with a Related Business Transaction)
and their businesses, assets and liabilities, (b) all businesses, assets and
liabilities of the Company or any of its subsidiaries to the extent attributed
to the Aerial Group by the Board, whether or not such businesses, assets or
liabilities are businesses, assets and liabilities of Aerial or its subsidiaries
(or a successor as described in clause (a) of this sentence), (c) all
businesses, assets and liabilities contributed or otherwise transferred to the
Aerial Group from the TDS Group or any of the other Tracking Groups, (d) the
interest of the Company or any of its subsidiaries in the businesses, assets and
liabilities acquired by the Company or any of its subsidiaries for the Aerial
Group, as determined by the Board, (e) a proportionate undivided interest in
each and every business, asset and liability attributed to another Tracking
Group equal to the Inter-Group Interest Fraction, if any, of the Aerial Group in
such other Tracking Group and (f) such adjustments to the foregoing as may be
contemplated by the Restated Certificate or which may be determined in good
faith by the Board.
"AERIAL MERGER" means the proposed merger between Aerial and a wholly-owned
subsidiary of TDS pursuant to which Aerial Group Shares would be issued in
exchange for all outstanding Common Shares of Aerial not owned by TDS and Aerial
would become a wholly-owned subsidiary of TDS.
"AFFECTED TRACKING GROUP" means a Tracking Group which is affected by a
Disposition of all or substantially all of its assets, as provided under
"--Disposition of Assets of Tracking Group."
"AFFECTED TRACKING STOCK" means a class of Tracking Stock which is affected
by a Disposition of all or substantially all of the assets of the related Group,
as provided under "--Disposition of Assets of Tracking Group."
"AMEX" means the American Stock Exchange.
"AVAILABLE DIVIDEND AMOUNT," as of any date, means, with respect to any
Tracking Group, the product of the Outstanding Interest Fraction of such
Tracking Group and either (a) the excess of (i) an amount equal to the total
assets of such Tracking Group less the total liabilities (not including
preferred stock) of such Tracking Group as of such date over (ii) the aggregate
par value of, or any greater amount determined to be capital in respect of, all
outstanding shares of such class of Tracking Stock and each class or series of
Preferred Shares or Undesignated Shares attributed to such Tracking Group or (b)
in case there is no such excess, an amount equal to Company Earnings (Losses)
attributable to such Tracking Group (if positive) for the fiscal year in which
such date occurs and/ or the preceding fiscal year. The Available Dividend
Amount is intended to be similar to an amount equal to the product of the
Outstanding Interest Fraction and the amount that would be legally available for
the payment of dividends on shares of Tracking Stock under Delaware law if the
related Tracking Group were a separate Delaware corporation. The "Available
Dividend Amount" as of any date, means, with respect to the TDS Group, the
greater of (x) the amount of all surplus (as defined in the DGCL) of the Company
or, if there is no surplus, the net profits (as contemplated by the DGCL) of the
Company for the fiscal year in which such date occurs and/or the preceding
fiscal year (if positive), less the sum of the Available Dividend Amounts of all
of the Tracking Groups, or (y) an amount equal to the sum of the Retained
Interest Available Dividend Amounts (if positive) with respect to all of the
Tracking Groups, plus, without duplication, either (a) the excess of (i) an
amount equal to the total assets of the TDS Group less the total liabilities
(not including preferred stock) of the TDS Group as of such date over (ii) the
aggregate par value of, or any greater amount determined to be capital in
respect of, all outstanding Series A Common Shares, Common Shares and any issued
Special Common Shares, and each class or series of Preferred Shares or
Undesignated Shares attributed to the TDS Group or (b) in case there is no such
excess, an amount equal to Company Earnings (Losses) attributable to the TDS
Group (if positive) for the fiscal year in which such date occurs and/or the
preceding fiscal year.
"BOARD" means the Board of Directors of the Company.
"CELLULAR GROUP" means, as of any date that any shares of Cellular Group
Shares have been issued and continue to be outstanding: (a) the interest of the
Company or of any of its subsidiaries in U.S. Cellular and its subsidiaries
(including any successor thereto by merger, consolidation or sale of all or
substantially all of its assets, whether or not in connection with a Related
Business Transaction) and their respective businesses, assets and
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liabilities, (b) all businesses, assets and liabilities of the Company or any of
its subsidiaries to the extent attributed to the Cellular Group by the Board,
whether or not such businesses, assets or liabilities are businesses, assets and
liabilities of U.S. Cellular or any of its subsidiaries (or a successor as
described in clause (a) of this sentence), (c) all businesses, assets and
liabilities contributed or otherwise transferred to the Cellular Group from the
TDS Group or any of the other Tracking Groups, (d) the interest of the Company
or any of its subsidiaries in the businesses, assets and liabilities acquired by
the Company or any of its subsidiaries for the Cellular Group, as determined by
the Board, (e) a proportionate undivided interest in each and every business,
asset and liability attributed to another Tracking Group equal to the
Inter-Group Interest Fraction, if any, of the Cellular Group in such other
Tracking Group and (f) such adjustments to the foregoing as may be contemplated
by the Restated Certificate or which may be determined in good faith by the
Board.
"COMMITTED ACQUISITION SHARES" as of any date, means (a) Common Shares that
the Company had, prior to such date, agreed to issue in connection with
acquisitions, but as of such date had not been issued, and (b) Common Shares
that are issuable upon conversion, exercise or exchange of Convertible
Securities that the Company had, prior to such date, agreed to issue in
connection with acquisitions, but as of such date had not been issued, in each
case including obligations of the Company to issue Cellular Group Shares,
Telecom Group Shares and Aerial Group Shares as a result of the Distribution
pursuant to anti-dilution provisions in the acquisition agreements providing for
the issuance of Common Shares or Convertible Securities which are convertible
into or exercisable or exchangeable for Common Shares, without duplication of
any Common Shares issuable upon conversion, exercise or exchange of Convertible
Securities.
"COMMON SHARES" means the Common Shares, par value $1.00 per share, of TDS
Iowa, which will be converted into Common Shares, par value $.01 per share, of
TDS Delaware in the Merger.
"COMMON STOCK" means shares of capital stock of the Company designated as
common stock, including Series A Common Shares, Common Shares, Special Common
Shares, Cellular Group Shares, Telecom Group Shares and Aerial Group Shares.
"COMPANY" means Telephone and Data Systems, Inc., an Iowa corporation, and
unless the context requires otherwise, its successor, Telephone and Data
Systems, Inc., a Delaware Corporation.
"COMPANY EARNINGS (LOSS)" for any period, with respect to any Group, means
the net earnings or loss of such Group for such period determined on a basis
consistent with the determination of the net earnings or loss of such Group for
such period as presented in the combined financial statements of such Group for
such period, including income and expenses of the Company attributed to the
operations of such Group on a substantially consistent basis, including without
limitation, corporate, general and administrative costs, net interest and income
taxes.
"CONVERTED TRACKING STOCK" means a class of Tracking Stock which has been
selected for conversion by the Company as provided under "--Optional Conversion
by the Company."
"CONVERTIBLE SECURITIES" means any securities of the Company, including
preferred stock, options and other rights (other than common stock), that are
convertible into, exchangeable for or evidence the right to purchase any shares
of any series of common stock, whether upon conversion, exercise or exchange,
pursuant to anti-dilution provisions of such securities or otherwise.
"DGCL" means the Delaware General Corporation Law.
"DISPOSITION" means the sale, transfer, assignment or other disposition
(whether by merger, consolidation, sale or contribution of assets or stock or
otherwise) of all or substantially all of the properties or assets of a Tracking
Group, as described under "--Disposition of Assets of a Tracking Group."
"DISTRIBUTION" means the contemplated distribution of all or any part of the
Cellular Group Shares, Telecom Group Shares and/or Aerial Group Shares to be
made to the holders of Common Shares and Series A Shares, as described in this
Proxy Statement/Prospectus.
"FAIR VALUE OF NET PROCEEDS" means, as of any date, with respect to any
Disposition of any of the business, assets and liabilities of a Tracking Group,
an amount, if any, equal to the fair value of the gross proceeds of such
Disposition less any payment of, or reasonable provision for, (a) any taxes
related to the Disposition or in respect of any resulting dividend or
redemption, including deferred taxes, but not including any deductions or other
offsets which may be available to the Company which are not attributed to such
Tracking Group, (b) any transaction costs, including, without limitation, any
legal, investment banking and accounting fees and expenses and (c) any
liabilities
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and other obligations (contingent or otherwise) of, or attributed to, that
Tracking Group, including, without limitation, obligations with respect to
committed acquisitions and Convertible Securities attributed to the Tracking
Group, any indemnity or guarantee obligations incurred in connection with the
Disposition or any liabilities for future purchase price adjustments, and any
preferential amounts plus any accumulated and unpaid dividends and other
obligations in respect of Preferred Shares attributed to such Tracking Group
(without duplication). For purposes of this definition, any businesses, assets
and liabilities of the affected Tracking Group which the Board determines to
retain after such Disposition shall be deemed to constitute "reasonable
provision" for such amount of taxes, costs and liabilities (contingent or
otherwise). To the extent the proceeds of any Disposition include any securities
or other property other than cash, the Board shall determine the fair value of
such securities or property, including for the purpose of determining comparable
value thereof if the Board determines to pay a dividend or redemption price in
cash or securities or other property as provided under the terms of the Tracking
Stock.
"GROUP" means the Aerial Group, the Cellular Group, the Telecom Group and
the TDS Group and any other Group so designated by the Board.
"IBCA" means the Iowa Business Corporation Act.
"INTER-GROUP INTEREST," as of any date, means that part of the Company's
equity interest in a Tracking Group which is retained (or subsequently acquired)
by the Company and attributed to a Group other than the TDS Group.
"INTER-GROUP INTEREST FRACTION," as of any date, with respect to any
Investor Group, means a fraction the numerator of which is the Number of Shares
Issuable with Respect to Inter-Group Interest in an Issuer Group by such
Investor Group as of such date, and the denominator of which is the sum of (a)
the aggregate Number of Shares Issuable with Respect to Inter-Group Interest in
such Issuer Group by all Investor Groups as of such date, (b) the aggregate
number of shares of Tracking Stock of such Issuer Group outstanding as of such
date and (c) the Number of Shares Issuable with Respect to Retained Interest in
such Issuer Group as of such date.
"ISSUER GROUP" means a Tracking Group in which there is an Inter-Group
Interest by an Investor Group.
"INVESTOR GROUP" means a Tracking Group which holds an Inter-Group Interest
in an Issuer Group.
"LIQUIDATION UNIT" means the number or fraction associated with each share
of common stock which determines the proportionate amount of assets such share
is entitled to upon the liquidation, dissolution or winding-up of the Company as
described under "--Description of Restated Certificate of Incorporation of TDS
Delaware-- Liquidation Rights."
"MARKET CAPITALIZATION" of any class or series of capital stock of the
Company on any Trading Day means the product of (a) the Market Value of one
share of such class or series on such Trading Day and (b) the number of shares
of such class or series outstanding on such Trading Day.
"MARKET VALUE" of a share of any class or series of capital stock of the
Company on any day means the average of the high and low reported sale prices
regular way of a share of such class or series on such day (if such day is a
Trading Day, and if such day is not a Trading Day, on the Trading Day
immediately preceding such day) or in case no such reported sale takes place on
such Trading Day the average of the reported closing bid and asked prices
regular way of a share of such class or series on such Trading Day, in either
case on the American Stock Exchange or such other national securities exchange
or the Nasdaq National Market on which such class or series is listed, or if the
shares of such class or series are not quoted on the American Stock Exchange or
any other national securities exchange or the Nasdaq National Market on such
Trading Day, the average of the closing bid and asked prices of a share of such
class or series in the over-the-counter market on such Trading Day as furnished
by any New York Stock Exchange member firm selected from time to time by the
Company, or if such closing bid and asked prices are not made available by any
such New York Stock Exchange member firm on such Trading Day, the market value
of a share of such class or series as determined by the Board; provided, that if
the Special Common Shares or Series A Common Shares are not trading on a
national securities exchange or the Nasdaq National Market, and if bid and asked
prices are not available for the Special Common Shares or the Series A Common
Shares, the Market Value of a Special Common Share or a Series A Common Share,
as applicable, shall be deemed to be the same as a Common Share for purposes of
determining Market Value under "Description of Terms of Tracking Stock--Voting
Rights,--Dispositions of Assets of a Tracking Group,--Conversion at Option of
the Company and--Liquidation"; and provided further, that for purposes of
determining Market Values under "Description of Terms of Tracking Stock--Voting
Rights,--Disposition of Assets of a Tracking Group,--Conversion at Option of the
Company and-- Liquidation," (a) the "Market Value" of a share of any series of
common stock on any day prior to the "ex" date or
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any similar date for any dividend or distribution paid or to be paid with
respect to such series of common stock will be reduced by the fair market value
of the per share amount of such dividend or distribution as determined by the
Board and (b) the "Market Value" of a share of any series of common stock on any
day prior to (i) the effective date of any subdivision (by stock split or
otherwise) or combination (by reverse stock split or otherwise) of outstanding
shares of such series of common stock or (ii) the "ex" date or any similar date
for any dividend or distribution with respect to any such series of common stock
in shares of such series of common stock, will be appropriately adjusted to
reflect such subdivision, combination, dividend or distribution.
"MERGER" means the proposed merger of TDS Iowa with and into TDS Delaware,
with TDS Delaware as the surviving corporation, pursuant to which the Company
would be reincorporated from Iowa to Delaware.
"MERGER AGREEMENT" means the Agreement and Plan of Merger between TDS Iowa
and TDS Delaware, with respect to the Merger.
"NUMBER OF SHARES ISSUABLE WITH RESPECT TO INTER-GROUP INTEREST" means, with
respect to any Tracking Group (for purposes of this definition, the "Issuer
Group"), the number of Issuer Group Shares (the "Issuer Group Shares") which are
attributed to, and that could be issued or sold by the Company for the benefit
of, another Tracking Group (for purposes of this definition, the "Investor
Group"). Initially, the Number of Shares Issuable with Respect to Inter-Group
Interest in each Tracking Group shall be zero, and shall from time to time
thereafter, as applicable, be:
(a) adjusted as appropriate to reflect subdivisions (by stock split or
otherwise) and combinations (by reverse stock split or otherwise) of the
Issuer Group Shares and dividends or distributions of Issuer Group Shares to
the holders thereof and other reclassifications of the Issuer Group Shares
and similar transactions;
(b) decreased (but not to less than zero) by (i) the aggregate number of
Issuer Group Shares issued or sold by the Company, for cash, securities or
other property, the proceeds of which are attributed to the Investor Group,
(ii) the aggregate number of Issuer Group Shares issued or delivered upon
conversion, exercise or exchange of Convertible Securities (other than
Pre-Distribution Convertible Securities), the proceeds of which are
attributed to the Investor Group, (iii) the aggregate number of Issuer Group
Shares issued or delivered by the Company as a dividend or distribution to
holders of shares of the Investor Group, (iv) the aggregate number of Issuer
Group Shares issued or delivered upon the conversion, exercise or exchange
of any Convertible Securities (other than Pre-Distribution Convertible
Securities) issued or delivered by the Company as a dividend or distribution
or by reclassification or exchange to holders of shares of the Investor
Group, and (v) the aggregate number of Issuer Group Shares (rounded, if
necessary, to the nearest whole number), equal to the aggregate fair value
(as determined by the Board) of assets or properties attributed to the
Issuer Group that are transferred from the Issuer Group to the Investor
Group in consideration of a reduction in the Number of Shares Issuable with
Respect to Inter-Group Interest by the Investor Group in the Issuer Group,
divided by the Market Value of one Issuer Group Share as of the date of such
transfer;
(c) increased by (i) the aggregate number of any Issuer Group Shares
which are retired or otherwise cease to be outstanding following their
purchase with funds attributed to the Investor Group and (ii) a number
(rounded, if necessary, to the nearest whole number) equal to the fair value
(as determined by the Board) of assets or properties theretofore attributed
to the Investor Group that are contributed to the Issuer Group in
consideration of an increase in the Number of Shares Issuable with Respect
to Inter-Group Interest in the Issuer Group by the Investor Group, divided
by the Market Value of one Issuer Group Share as of the date of such
contribution; and
(d) adjusted as may be appropriate to reflect other transactions between
the Issuer Group and the Investor Group, as determined in good faith by the
Board.
Whenever a change in the Number of Shares Issuable with Respect to
Inter-Group Interest with respect to any Group occurs, the Company shall
prepare and file a statement of such change with the Secretary of the
Company.
"NUMBER OF SHARES ISSUABLE WITH RESPECT TO RETAINED INTEREST" means the
number of shares of a class of Tracking Stock of a Tracking Group (for purposes
of this definition, the "Issuer Group") that are attributed to, and could be
issued or sold by the Company for the account of, the TDS Group in respect of a
Retained Interest by the TDS Group in such Issuer Group. The Number of Shares
Issuable with Respect to Retained Interest shall initially be determined by the
Board, and shall from time to time thereafter, as applicable, be:
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(a) adjusted as appropriate to reflect subdivisions (by stock split or
otherwise) and combinations (by reverse stock split or otherwise) of the
Issuer Group Shares, and dividends or distributions of Issuer Group Shares
to the holders thereof and other reclassifications of Issuer Group Shares
and similar transactions;
(b) decreased (but not to less than zero) by (i) the aggregate number of
Issuer Group Shares issued or sold by the Company, for cash, securities or
other property, the proceeds of which are attributed to the TDS Group, (ii)
the aggregate number of Issuer Group Shares issued or delivered upon
conversion, exercise or exchange of Convertible Securities (including
Pre-Distribution Convertible Securities), the proceeds of which are
attributed to the TDS Group, (iii) the aggregate number of Issuer Group
Shares issued or delivered by the Company as a dividend or distribution to
holders of Common Shares, Series A Shares or Special Common Shares, (iv) the
aggregate number of Issuer Group Shares issued or delivered upon the
conversion, exercise or exchange of any Convertible Securities issued or
delivered by the Company as a dividend or distribution or by
reclassification or exchange to holders of shares of Common Shares, Series A
Shares or Special Common Shares, and (v) the aggregate number of Issuer
Group Shares (rounded, if necessary, to the nearest whole number), equal to
the aggregate fair value (as determined by the Board) of assets or
properties attributed to the Issuer Group that are transferred from the
Issuer Group to the TDS Group in consideration of a reduction in the Number
of Shares Issuable with Respect to Retained Interest in the Issuer Group,
divided by the Market Value of one Issuer Group Share as of the date of such
transfer;
(c) increased by (i) the aggregate number of any Issuer Group Shares
which are retired or otherwise cease to be outstanding following their
purchase with funds attributed to the TDS Group and (ii) a number (rounded,
if necessary, to the nearest whole number) equal to the fair value (as
determined by the Board) of assets or properties theretofore attributed to
the TDS Group that are contributed to the Issuer Group in consideration of
an increase in the Number of Shares Issuable with Respect to Retained
Interest in the Issuer Group, divided by the Market Value of one Issuer
Group Share as of the date of such contribution; and
(d) adjusted as may be appropriate to reflect other transactions between
the Issuer Group and the TDS Group, as determined in good faith by the
Board.
Whenever a change in the Number of Shares Issuable with Respect to
Retained Interest in any Tracking Group occurs, the Company shall prepare
and file a statement of such change with the Secretary of the Company.
"NUMBER OF SHARES ISSUABLE TO THIRD PARTIES" means, as of any date, the
number of shares of any class of common stock which represent Shares Issuable to
Third Parties, as may be determined in good faith by the Board, considering any
relevant factors, including whether the holders of Convertible Securities would
receive an economic benefit from the conversion, exercise or exchange of such
Convertible Securities which exceeds the economic cost thereof, or the economic
benefit of not converting, exercising or exchanging such Convertible Securities.
"OUTSTANDING INTEREST," as of any date, means, with respect to any class of
Tracking Stock, that part of the Company's interest in a Tracking Group which is
represented by outstanding shares of such Tracking Stock.
"OUTSTANDING INTEREST FRACTION," as of any date, shall mean, with respect to
any class of Tracking Stock, a fraction the numerator of which is the aggregate
number of shares of such class of Tracking Stock outstanding on such date and
the denominator of which is the sum of (a) such aggregate number of shares, (b)
the Number of Shares Issuable with Respect to Retained Interest of such class of
Tracking Stock as of such date and (c) the aggregate Number of Shares Issuable
with Respect to Inter-Group Interest by all other Tracking Groups in such
Tracking Stock, if any.
"PRE-DISTRIBUTION CONVERTIBLE SECURITIES" means Convertible Securities that
are outstanding on the record date for the Distribution and are, prior to such
date, convertible into or exercisable or exchangeable for either Common Shares
or Series A Common Shares, assuming the record date for the Distribution of
Cellular Group Shares, Telecom Group Shares and Aerial Group shares is the same
date. If the record date for any such shares is not the same date, the Board
shall determine which Convertible Securities issued after the first record date
relating to any part of the Distribution shall represent Pre-Distribution
Convertible Securities.
"PREFERRED SHARES" means the Preferred Shares, without par value per share,
of TDS Iowa, which will be converted into Preferred Shares, par value $.01 per
share, of TDS Delaware in the Merger.
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"QUALIFYING SUBSIDIARY" or "QUALIFYING SUBSIDIARIES" means a Subsidiary or
Subsidiaries of the Company (a) in which (i) the Company's ownership and voting
interest is sufficient to satisfy the requirements of the Internal Revenue
Service for a distribution of the Company's interest in such Subsidiary to the
holders of common stock of the Company that is tax-free to such holders or (ii)
the Company owns, directly or indirectly, all of the issued and outstanding
capital stock and (b) which currently or at any time in the future hold(s) all
of the assets and liabilities attributed to a Tracking Group.
"RELATED BUSINESS TRANSACTION" means any Disposition of all or substantially
all of the properties and assets of a Tracking Group in which the Company
receives as proceeds of such Disposition primarily equity securities (including,
without limitation, capital stock, convertible securities, partnership or
limited partnership interests and other types of equity securities, without
regard to the voting power or contractual or other management or governance
rights related to such equity securities) of the purchaser or acquiror of such
assets and properties of such Tracking Group, any entity which succeeds (by
merger, formation of a joint venture enterprise or otherwise) to such assets and
properties of such Tracking Group or a third party issuer, which purchaser,
acquiror or other issuer is engaged or proposes to engage primarily in one or
more businesses similar or complementary to the businesses conducted by such
Tracking Group prior to such Disposition, as determined in good faith by the
Board.
"RESTATED CERTIFICATE" means the Restated Certificate of Incorporation of
TDS Delaware.
"RETAINED INTEREST," as of any date, means that part of the Company's equity
interest in a Tracking Group, which is retained (or subsequently acquired) by
the Company and attributed to the TDS Group for the benefit of the Common
Shares, Series A Common Shares and any issued Special Common Shares.
"RETAINED INTEREST AVAILABLE DIVIDEND AMOUNT," as of any date, means, with
respect to any Tracking Group, an amount (not less than zero) which is equal to
the product of (a) a fraction, the numerator of which is the Retained Interest
Fraction and the denominator of which is the Outstanding Interest Fraction with
respect to such Tracking Group multiplied by (b) the Available Dividend Amount
of such Tracking Group.
"RETAINED INTEREST FRACTION," as of any date, means, with respect to any
class of Tracking Stock, a fraction the numerator of which is the Number of
Shares Issuable with Respect to Retained Interest of such class of Tracking
Stock as of such date and the denominator of which is the sum of (a) such Number
of Shares Issuable with Respect to Retained Interest as of such date, (b) the
aggregate Number of Shares Issuable with Respect to Inter-Group Interest by all
other Tracking Groups in such Tracking Stock, if any, and (c) the aggregate
number of shares of such class of Tracking Stock outstanding as of such date.
"SERIES A COMMON SHARES" means the Series A Common Shares, par value $1.00
per share, of TDS Iowa, which will be converted into Series A Common Shares, par
value $.01 per share, of TDS Delaware in the Merger.
"SHARES ISSUABLE TO THIRD PARTIES" means, as of any date, shares of any
class of common stock which are issuable (a) as Committed Acquisition Shares,
(b) pursuant to the conversion, exercise or exchange of Convertible Securities
or (c) otherwise.
"SUBSIDIARY" means, with respect to any person or entity, any corporation or
partnership 50% or more of whose outstanding voting securities or partnership
interests, as the case may be, are directly or indirectly owned by such person
or entity.
"TDS" or "TDS IOWA" means Telephone and Data Systems, Inc., an Iowa
corporation.
"TDS DELAWARE" means Telephone and Data Systems, Inc., a Delaware
corporation and wholly-owned subsidiary of the Company.
"TDS GROUP" means, as of any date that any shares of any class of Tracking
Stock have been issued and continue to be outstanding: (a) the interest of the
Company and all of its subsidiaries, (including any successors thereto by
merger, consolidation or sale of all or substantially all of its assets) and
their respective businesses, assets and liabilities, other than (except as
provided in clause (e) of this definition) the interest of the Company and its
subsidiaries in Aerial and its subsidiaries, TDS Telecom and its subsidiaries,
U.S. Cellular and its subsidiaries, and any other subsidiaries attributed by the
Board to a Group other than the TDS Group (including any successors thereto by
merger, consolidation or sale of all or substantially all of its assets, whether
or not in connection with a Related Business Transaction) and their respective
businesses, assets and liabilities; (b) all businesses, assets and liabilities
of the Company or any of its subsidiaries to the extent attributed to the TDS
Group by the Board, whether or not such businesses, assets or liabilities are
businesses, assets and liabilities of the TDS Group or any of its
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subsidiaries (or a successor as described in clause (a) of this sentence); (c)
all businesses, assets and liabilities contributed or otherwise transferred to
the TDS Group from any of the Tracking Groups; (d) the interest of the Company
or any of its subsidiaries in the businesses, assets and liabilities acquired by
the Company or any of its subsidiaries for the TDS Group, as determined by the
Board; (e) a proportionate undivided interest in each and every business, asset
and liability attributed to a Tracking Group equal to the Retained Interest
Fraction of the TDS Group in such other Tracking Group; and (f) such other
businesses, assets and liabilities and such adjustments to the foregoing as may
be contemplated hereby or which may be approved by the Board.
"TDS GROUP SHARES" means the Series A Common Shares, Common Shares and any
issued Special Common Shares of the Company and any other shares designated as
TDS Group Shares by the Board.
"TDS TELECOM" means TDS Telecommunications Corporation, a Delaware
corporation.
"TDS VOTING TRUST" means the voting trust which expires June 30, 2009, that
controls a majority of the voting power of TDS in the election of directors and
all other matters.
"TELECOM GROUP" means, as of any date that any shares of Telecom Group Stock
have been issued and continue to be outstanding: (a) the interest of the Company
or of any of its subsidiaries in TDS Telecom, and its subsidiaries (including
any successor thereto by merger, consolidation or sale of all or substantially
all of its assets, whether or not in connection with a Related Business
Transaction) and their respective businesses, assets and liabilities, (b) all
businesses, assets and liabilities of the Company or any of its subsidiaries to
the extent attributed to the Telecom Group by the Board, whether or not such
businesses, assets or liabilities are businesses, assets and liabilities of TDS
Telecom or any of its subsidiaries (or a successor as described in clause (a) of
this sentence), (c) all businesses, assets and liabilities contributed or
otherwise transferred to the Telecom Group from the TDS Group or any other
Tracking Group, (d) the interest of the Company or any of its subsidiaries in
the businesses, assets and liabilities acquired by the Company or any of its
subsidiaries for the Telecom Group, as determined by the Board, (e) a
proportionate undivided interest in each and every business, asset and liability
attributed to another Tracking Group equal to the Inter-Group Interest Fraction,
if any, of the Telecom Group in such other Tracking Group and (f) such
adjustments to the foregoing as may be contemplated by the Restated Certificate
or which may be determined in good faith by the Board.
"TRACKING GROUP" means the Aerial Group, the Cellular Group and the Telecom
Group, and any other business group designated as a Tracking Group by the Board.
"TRACKING STOCK" means the Aerial Group Shares, the Cellular Group Shares
and the Telecom Group Shares, and any other shares of capital stock of the
Company which the Board designates as Tracking Stock.
"TRACKING STOCK PROPOSAL" means the proposal to reincorporate the Company
from Iowa to Delaware and to authorize a capital structure which will permit the
issuance of shares of Tracking Stock.
"TRADING DAY" means each weekday other than a day on which the relevant
class of common stock of the Company is not traded on any national securities
exchange or quoted on the Nasdaq National Market or on the over-the-counter
market.
"TRANSACTIONS" means the Aerial Merger, the Distribution, the Telecom Public
Offering and the U.S. Cellular Merger.
"UNDESIGNATED SHARES" means the Undesignated Shares, par value $.01 per
share, of TDS Delaware to be authorized by the Restated Certificate.
"U.S. CELLULAR" means United States Cellular Corporation, a Delaware
corporation.
"U.S. CELLULAR MERGER" means the proposed merger between U.S. Cellular and a
wholly-owned subsidiary of TDS pursuant to which Cellular Group Shares would be
issued in exchange for all outstanding Common Shares of U.S. Cellular not owned
by TDS and U.S. Cellular would become a wholly-owned subsidiary of TDS.
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PROPOSAL 2
AMENDMENT AND ADJUSTMENT OF EMPLOYEE STOCK PLANS
Subject to the approval of the Tracking Stock Proposal by the shareholders,
the Board of Directors recommends approval of amendments and adjustments to the
Company's employee stock plans and a stock option agreement (the "Existing
Plans") to conform the Existing Plans to the changes in the Company's capital
structure being made by the Tracking Stock Proposal.
The amendments and adjustments to the Existing Plans would provide that
options and stock appreciation rights granted under the Existing Plans would be
adjusted so that, as a result of the Distribution, participants who are entitled
to acquire one Common Share pursuant to the Existing Plans will be entitled to
acquire one Common Share and such number or fraction of shares of Tracking Stock
as were distributed with respect to each Common Share (the "Distribution Ratio")
at the original exercise price. In order to permit the issuance of Tracking
Stock pursuant to the Existing Plans, it is also necessary to authorize a
proportionate amount of Tracking Stock for the Existing Plans.
If this proposal is approved, in the event of the Distribution, shares of
Tracking Stock will be authorized under the Existing Plans in an amount equal to
the number of unissued Common Shares authorized under the Existing Plans times
the Distribution Ratio. The amendments and adjustments to the Existing Plans
will not make any changes to the terms of the Existing Plans except to authorize
the issuance of Cellular Group Shares, Telecom Group Shares and Aerial Group
Shares in addition to the Common Shares previously authorized.
The following table shows the number of Common Shares currently reserved for
issuance under the Existing Plans, and the number of Cellular Group Shares,
Telecom Group Shares and Aerial Group Shares proposed to be authorized for
issuance pursuant to the Existing Plans based on the expected Distribution Ratio
for such shares.
<TABLE>
<CAPTION>
CURRENTLY
AUTHORIZED
BUT PROPOSED TO BE AUTHORIZED
UNISSUED -------------------------------
----------- CELLULAR TELECOM AERIAL
COMMON GROUP GROUP GROUP
SHARES SHARES SHARES SHARES
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
1994 Long-Term Incentive Plan:
Issuable.................................................................... 396,776 396,776 264,517 264,517
Authorized.................................................................. 400,625 400,625 267,084 267,084
----------- --------- --------- ---------
Subtotal.................................................................. 797,401 797,401 531,601 531,601
Issuable Pursuant to 1988 Stock Option and Stock Appreciation Rights Plan..... 124,250 124,250 82,833 82,833
Issuable Pursuant to Stock Option Agreement................................... 54,000 54,000 36,000 36,000
----------- --------- --------- ---------
Total..................................................................... 975,651 975,651 650,434 650,434
----------- --------- --------- ---------
----------- --------- --------- ---------
Distribution Ratio 1 2/3 2/3
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE AMENDMENTS
AND ADJUSTMENTS TO THE EMPLOYEE STOCK PLANS AND AGREEMENTS.
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PROPOSAL 3
APPROVAL OF 1998 LONG-TERM INCENTIVE PLAN
Subject to the approval by shareholders of the Tracking Stock Proposal and
the effectiveness of the merger of TDS Iowa into TDS Delaware, the Board has
determined that it is in the best interest of the Company and the shareholders
to approve the Telephone and Data Systems, Inc. 1998 Long-Term Incentive Plan
(the "Plan"). The purposes of the Plan are (i) to align the interests of the
shareholders of the Company and selected employees of the Company and certain of
its affiliates who receive awards under the Plan by increasing the interest of
such employees in the Company's growth and success, (ii) to advance the
interests of the Company by attracting and retaining key executive and
management employees of the Company and certain of its affiliates, and (iii) to
motivate such employees to act in the long-term best interests of the Company's
shareholders The Plan was adopted by the Board of Directors on December 17,
1997.
DESCRIPTION OF THE PLAN
GENERAL. Under the Plan, the Company may grant incentive stock options
("ISOs") and nonqualified options, stock appreciation rights ("SARs"), bonus
stock awards which are vested upon grant, stock awards which may be subject to a
restriction period or specified performance measures or both, performance shares
and Employer match awards for deferred bonus payments, as described below. A
total of 2,000,000 Common Shares, 3,200,000 Aerial Communications Group Common
Shares, 3,600,000 United States Cellular Group Common Shares and 2,500,000 TDS
Telecommunications Group Common Shares (collectively, "Plan Stock") have been
reserved for issuance under the Plan, subject to adjustment in the event of a
stock split, stock dividend or other changes in capital structure. No grants may
be made under the Plan after ten years after its effective date. Certain
employees of the Company and of affiliates of the Company who are selected by
the Committee are eligible to participate in the Plan. The maximum number of
shares of Plan Stock with respect to which options, SARs, bonus stock awards,
stock awards and performance shares may be granted during any three-calendar
year period to any participant in the Plan is 500,000.
ADMINISTRATION. The Plan is administered by a committee (the "Committee")
made up of two or more members of the Board of Directors, each of whom may be an
"outside director" within the meaning of Section 162(m) of the Internal Revenue
Code of 1986, as amended and a "Non-Employee Director" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended. Subject to the
terms of the Plan, the Committee is authorized to select employees for
participation in the Plan and to determine the form, amount and timing of each
grant of an award and, if applicable, the number of shares of Plan Stock subject
to each award granted thereunder, the purchase price or base price per share of
Plan Stock upon the exercise of the award, the time and conditions of exercise
or settlement of the award, and all other terms and conditions of such award.
The Committee may establish performance measures that must be attained (i)
during a performance period in order for an employee eligible to participate in
the Plan to be granted a performance stock option, (ii) during the applicable
restriction period or performance period as a condition to the award recipient's
receipt of shares of Plan Stock subject to the award in the case of a restricted
stock award or receipt of shares of Plan Stock or cash in the case of
performance share award, or (iii) as a condition to exercisability of all or a
portion of an option or SAR. The performance measures are one or more of the
following: the attainment by a share of stock of a specified fair market value
for a specified period of time, earnings per share, return on equity, return on
capital, earnings on investments, cash flows, revenues, sales, costs, market
share, attainment of cost reduction goals, customer count, attainment of
business efficiency measures (I.E., cost per gross or net customer addition,
revenue per customer, customer turnover rate, ratios of employees to volume
measures of business, and population in licensed or operating markets),
financing costs, ratios of capital spending and investment to volume of business
measures and customer satisfaction survey results. In the case of an option or
SAR granted at fair market value on the date of grant, such performance measures
also may include the attainment of individual performance objectives, or any
other criteria and objectives established by the Committee or any combination
thereof.
The Committee may delegate some or all of its power and authority under the
Plan to the Chairman of the Board and Chief Executive Officer or other executive
officer of the Company as it deems appropriate; provided, however, that such
Committee may not delegate its power and authority regarding (A) the selection
for participation in the Plan of (i) the Chief Executive Officer of the Company
(or any employee who is acting in such capacity), one of the four highest
compensated officers of the Company (other than the Chief Executive Officer), or
any other person deemed to be a "covered employee" within the meaning of section
162(m) of the Code or who, in the Committee's judgment, is likely to be a
covered employee at any time during the exercise period of the option to be
granted to such employee, or (ii) an officer or other person subject to section
16 of the Exchange Act, or (B) decisions concerning the timing, pricing or
number of shares subject to an award granted to such an employee, officer or
other person who is, or who in the Committee's judgment is likely to be, a
covered employee.
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EFFECTIVE DATE, TERMINATION AND AMENDMENT. The Plan will become effective
as of the effective date of the merger of TDS Iowa into TDS Delaware and will
terminate ten years thereafter, unless terminated earlier by the Board of
Directors. The Board of Directors generally may amend the Plan at any time
except that, without the approval of the shareholders of the Company, no
amendment may, among other things, (i) increase the number of shares of any
class of Plan Stock available under the Plan, or (ii) reduce the minimum
purchase price of a share of Plan Stock subject to an option or base price of an
SAR.
EMPLOYEE STOCK OPTIONS. The Plan provides for the grant of ISOs and
nonqualified stock, and that the Committee will determine the exercise period
and the purchase price of shares of Plan Stock at the time of grant, provided
that the purchase price per shares of Plan Stock subject to an ISO is not less
than 100% of the fair market value of such shares of stock on the date of grant.
The exercise of an option entitles the optionee thereof to receive (subject to
withholding tax) whole shares of Plan Stock (which may be restricted stock). The
aggregate fair market value (determined as of the date the option is granted) of
the stock with respect to which ISOs are exercisable for the first time by the
optionee in any calendar year (under the Plan and any other incentive stock
option plan of the Company) may not exceed $100,000. ISOs granted under the Plan
may not be exercised after ten years from the date of grant. In the case of any
eligible employee who owns or is deemed to own stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or any of
its subsidiaries, the exercise price of any ISOs granted under the Plan may not
be less than 110% of the fair market value of the stock on the date of grant,
and the exercise period may not exceed five years from the date of grant. ISOs
granted under the Plan are not transferable other than pursuant to a beneficiary
designation effective on the award recipient's death. Nonqualified options
granted under the Plan are not transferable by the optionee other than (a)
pursuant to a beneficiary designation effective on the award recipient's death,
(b) pursuant to a court order entered in connection with a dissolution of
marriage or child support, or (c) to the extent permitted under (i) securities
laws relating to the registration of securities subject to employee benefit
plans and (ii) the agreement evidencing the grant of such award, by transfer to
a permitted transferee (determined under the terms of the Plan). All stock
options will become immediately exercisable upon certain changes of control of
the Company.
STOCK APPRECIATION RIGHTS. The Plan provides for the grant of SARs. The
number of shares of Plan Stock subject to an SAR, the period for the exercise of
an SAR, the base price of an SAR and any performance measures applicable to an
SAR will be determined by the Committee, provided that the base price per share
of Plan Stock subject to an SAR shall not be less than 100% of the fair market
value of a share of stock on the date of grant. The exercise of an SAR entitles
the holder thereof to receive (subject to withholding taxes) whole shares of
Plan Stock (which may be restricted stock), cash or a combination thereof with a
value equal to the difference between the fair market value of the stock on the
exercise date and the base price of the SAR, multiplied by the number of shares
of Plan Stock with respect to which such SAR is issued. SARs granted under the
Plan are not transferable by the award recipient other than (a) pursuant to a
beneficiary designation effective on the award recipient's death, (b) pursuant
to a court order entered in connection with a dissolution of marriage or child
support or (c) to the extent permitted under (i) securities laws relating to the
registration of securities subject to employee benefit plans and (ii) the
agreement evidencing the grant of such award, by transfer to a permitted
transferee (determined under the terms of the Plan). All SARs will become
immediately exercisable upon certain changes of control of the Company.
BONUS STOCK AND RESTRICTED STOCK AWARDS. The Plan provides for the grant of
bonus stock awards, which are vested upon grant. The Plan also provides for
stock awards which may be subject to a restriction period ("restricted stock").
An award of restricted stock may be subject to specified performance measures
for the applicable restriction period. The terms of restricted stock, the
restriction period and any performance measures will be determined by the
Committee. Shares of restricted stock will be subject to forfeiture if the
holder does not remain continuously in the employment of the Company or any
affiliate or during the restriction period or, if the restricted stock is
subject to performance measures, if such performance measures are not attained
during the restriction period. Stock awards granted under the Plan are not
transferable by the award recipient other than (a) pursuant to a beneficiary
designation effective on the award recipient's death, (b) pursuant to a court
order entered in connection with a dissolution of marriage or child support or
(c) to the extent permitted under (i) securities laws relating to the
registration of securities subject to employee benefit plans and (ii) the
agreement evidencing the grant of such award, by transfer to a permitted
transferee (determined under the terms of the Plan). Subject to the change in
control provisions of the Plan and unless otherwise specified in the agreement
with respect to a particular restricted stock award, (i) in the event of a
termination of employment by reason of disability, retirement after age 65,
resignation with prior consent of the board of directors of the award
recipient's employer or death, any applicable restriction period will terminate
and any applicable performance measures will be deemed satisfied at the target
level and (ii) in the event of a termination of employment for any other reason,
the portion of a restricted stock award which is then subject to a restriction
period will be forfeited and canceled. All restriction periods applicable to
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restricted stock awards will lapse and any performance measures will be deemed
satisfied at the target level upon certain changes of control of the Company.
PERFORMANCE SHARE AWARDS. The Plan provides for the grant of performance
share awards. Each performance share is a right, contingent upon the attainment
of performance measures within a specified performance period, to receive shares
of Plan Stock, which may be a restricted stock, or the fair market value of such
shares in cash or a combination thereof, as specified by the agreement
evidencing the award. The number of shares of Plan Stock subject to a
performance award, the applicable performance measures and performance period,
and the terms of a performance share award will be determined by the Committee.
If the specified performance measures are not attained during the applicable
performance period, then the award recipient forfeits all rights to receive the
shares of Plan Stock subject to the performance share award. Performance share
awards granted under the Plan are not transferable by the award recipient other
than (a) pursuant to a beneficiary designation effective on the award
recipient's death, (b) pursuant to a court order entered in connection with a
dissolution of marriage or child support or (c) to the extent permitted under
(i) securities laws relating to the registration of securities subject to
employee benefit plans and (ii) the agreement evidencing the grant of such
award, by transfer to a permitted transferee (determined under the terms of the
Plan). Subject to the change in control provisions of the Plan and unless
otherwise specified in the agreement with respect to a performance share award,
(i) in the event of a termination of employment by reason of disability,
retirement after age 65, resignation with prior consent of the board of
directors of the award recipient's employer or death, any applicable performance
period will terminate and any applicable performance measures will be deemed
satisfied at the target level and (ii) in the event of a termination of
employment for any other reason, the portion of a performance share award which
is then subject to a performance period will be forfeited and canceled. All
performance periods applicable to performance share awards will lapse and any
performance measures will be deemed satisfied at the target level upon certain
changes of control of the Company.
EMPLOYER MATCH AWARDS. The Plan permits an employee selected by the
Committee to elect to defer all or a portion of his annual bonus under the Plan
to a deferred compensation account, provided, however, that the amount subject
to such deferral election with respect to any year shall not exceed $250,000. If
a selected employee elects to defer all or a portion of his annual bonus under
the Plan, an Employer match award will be allocated to the employee's deferred
compensation account in an amount equal to a percentage specified by the
Committee of the employee's deferred annual bonus amount, provided that such
percentage shall not exceed 33 1/3%. An employee will be fully vested in the
deferred bonus amounts credited to his deferred compensation account. One-third
of the Employer match awards credited to the employee's deferred compensation
account shall become vested on each of the first three anniversaries of the last
day of the year for which the applicable bonus is payable, provided that such
employee is an employee of the Company or an affiliate on such date and the
amount credited to his deferred compensation account has not been distributed
before such date. An employee's deferred compensation account will be deemed to
be invested in phantom shares of the class of Plan Stock which reflects the
performance of his employer at the time the employee earned the annual bonus.
An employee will receive an amount equal to his vested deferred compensation
account balance when he terminates employment with the Company and all of its
affiliates, provided, however, that an employee may elect to receive all or a
portion of his deferred annual bonus, any related vested Employer match awards
and all deemed investment earnings on such amounts at an earlier date if (i)
such election is made at the time the employee elects to defer the bonus amount
and (ii) such earlier date is at least two years after the date of his deferral
election. In addition, the Committee may approve a distribution of all or a
portion of an employee's vested deferred compensation account in the event of an
unforeseeable emergency causing severe financial hardship. Amounts credited to
an employee's deferred compensation account under the Plan are not transferable
by the award recipient other than (a) pursuant to a beneficiary designation
effective on the award recipient's death or (b) pursuant to a court order
entered in connection with a dissolution of marriage or child support. Subject
to the change in control provisions of the Plan and unless otherwise specified
in the agreement with respect to an Employer match award, (i) in the event of a
termination of employment by reason of disability, retirement after age 65,
resignation with prior consent of the board of directors of the award
recipient's employer or death, any Employer match award will become vested and
(ii) in the event of a termination of employment for any other reason, any
unvested Employer match award will be forfeited. All Employer match awards will
become fully vested upon certain changes of control of the Company.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of the U.S. federal income tax consequences
of awards made under the Plan.
STOCK OPTIONS. An award recipient will not recognize any income upon the
grant of a stock option. An award recipient will recognize compensation taxable
as ordinary income (and subject to income tax withholding) upon exercise of a
nonqualified stock option equal to the excess of the fair market value of the
shares purchased over
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<PAGE>
their exercise price, and the Company will be entitled to a corresponding
deduction. An award recipient will not recognize income (except for purposes of
the alternative minimum tax) upon exercise of an ISO. If the shares acquired by
exercise of an ISO are held for the longer of two years from the date the option
was granted and one year from the date the shares were transferred, any gain or
loss arising from a subsequent disposition of such shares will be taxed as
long-term capital gain or loss, and the Company will not be entitled to any
deduction. If, however, such shares are disposed of within such two or one year
periods, then in the year of such disposition the award recipient generally will
recognize compensation taxable as ordinary income equal to the excess of the
lesser of (i) the amount realized upon such disposition and (ii) the fair market
value of such shares on the date of exercise over the exercise price, and the
Company will be entitled to a corresponding deduction, except to the extent the
limit of Section 162(m) of the Code applies.
SARS. An award recipient will not recognize any taxable income upon the
grant of an SAR. An award recipient will recognize compensation taxable as
ordinary income (and subject to income tax withholding) upon exercise of an SAR
equal to the fair market value of any unrestricted shares of Plan Stock
delivered and the amount of cash paid by the Company upon such exercise, and the
Company will be entitled to a corresponding deduction, except to the extent the
limit of Section 162(m) of the Code applies. If restricted stock is delivered
upon exercise of an SAR, the tax consequences associated with such restricted
stock shall be determined in accordance with the section below titled
"Restricted Stock".
BONUS STOCK. An award recipient will recognize compensation taxable as
ordinary income (and subject to income tax withholding) in respect of an award
of shares of bonus stock at the time such shares are awarded in an amount equal
to the then fair market value of such shares and the Company will be entitled to
a corresponding deduction, except to the extent the limit of Section 162(m) of
the Code applies.
RESTRICTED STOCK. An award recipient will not recognize taxable income at
the time of an award of shares of restricted stock, and the Company will not be
entitled to a tax deduction at such time, unless the award recipient makes an
election to be taxed at the time restricted stock is granted. If such election
is made, the award recipient will recognize compensation taxable as ordinary
income at the time of the grant equal to the excess of the fair market value of
the shares at such time over the amount, if any, paid for such shares. If such
election is not made, the award recipient will recognize compensation taxable as
ordinary income at the time the restrictions lapse in an amount equal to the
excess of the fair market value of the shares at such time over the amount, if
any, paid for such shares. The Company is entitled to a corresponding deduction
at the time the ordinary income is recognized by the award recipient, except to
the extent the limit of Section 162(m) of the Code applies. In addition, an
award recipient receiving dividends with respect to restricted stock for which
the above-described election has not been made and prior to the time the
restrictions lapse will recognize taxable compensation (subject to income tax
withholding), rather than dividend income, in an amount equal to the dividends
paid, and the Company will be entitled to a corresponding deduction, except to
the extent the limit of Section 162(m) of the Code applies.
PERFORMANCE SHARES. An award recipient will not recognize taxable income
upon the grant of performance shares and the Company will not be entitled to a
tax deduction at such time. Upon the settlement of performance shares in the
form of unrestricted shares of Plan Stock or cash or a combination of both, the
award recipient will recognize compensation taxable as ordinary income (and
subject to income tax withholding) in an amount equal to the fair market value
of any shares delivered and any cash paid by the Company, and the Company will
be entitled to a corresponding deduction, except to the extent the limit of
Section 162(m) of the Code applies. Upon the settlement of performance shares in
the form of restricted stock, the tax consequences associated with such
restricted stock shall be determined in accordance with the immediately
preceding section titled "Restricted Stock".
DEFERRAL OF ANNUAL BONUS AMOUNT AND EMPLOYER MATCH AWARD. An award
recipient will not recognize taxable income (i) on any annual bonus amount which
he elects not to receive currently by deferring such amount into a deferred
compensation account or (ii) upon the grant of an Employer match award, and the
Company will not be entitled to a tax deduction at such time. At the time the
award recipient receive a distribution from his deferred compensation account,
the award recipient will recognize the distributed amount as compensation
taxable as ordinary income (and subject to income tax withholding), and the
Company will be entitled to a corresponding deduction, except to the extent the
limit of Section 162(m) of the Code applies.
AWARDS GRANTED TO EXECUTIVES, EMPLOYEES AND EMPLOYEE GROUPS. No awards have
been made under the Plan. It is anticipated that nonqualified stock option
awards will be granted in 1998 to certain executives and employees of the
Company based on the achievement of certain individual performance measures in
1997. It is also anticipated that Employer match awards will be made to
executives' and employees' deferred compensation accounts as described above.
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<PAGE>
BENEFICIAL OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth at December 31, 1997, the number of Common
Shares and Series A Common Shares beneficially owned, and the percentage of the
outstanding shares of each such class so owned by each director and nominee for
director of the Company, by the principal executive officer and the other four
most highly compensated executive officers and by all directors and executive
officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME OF INDIVIDUAL OR BENEFICIAL PERCENT OF PERCENT OF
NUMBER OF PERSONS IN GROUP TITLE OF CLASS OWNERSHIP(1) CLASS VOTING POWER
- ------------------------------------------------------ ------------------------------ ------------- ----------- ---------------
<S> <C> <C> <C> <C>
LeRoy T. Carlson, Jr.,
Walter C.D. Carlson,
Letitia G.C. Carlson,
Donald C. Nebergall and
Melanie J. Heald(2)................................... Series A Common Shares 6,337,187 91.4% 51.4%
LeRoy T. Carlson, Jr.,
C. Theodore Herbert and
Michael G. Hron(3).................................... Common Shares % %
Series A Common Shares % %
LeRoy T. Carlson, Jr.,
C. Theodore Herbert and
Michael G. Hron(4).................................... Common Shares * *
LeRoy T. Carlson(5)................................... Common Shares 62,407 * *
Series A Common Shares 51,975 * *
LeRoy T. Carlson, Jr. (6)(12)......................... Common Shares 157,760 * *
Walter C.D. Carlson(7)................................ Common Shares 405 * *
Letitia G.C. Carlson(8)............................... Common Shares 138 * *
Murray L. Swanson(9)(12).............................. Common Shares 47,324 * *
Series A Common Shares 2,506 * *
Rudolph E. Hornacek(10)............................... Common Shares 22,410 * *
Series A Common Shares 1,669 * *
James Barr III(12).................................... Common Shares 19,958 * *
Donald C. Nebergall(11)............................... Common Shares 1,463 * *
Donald R. Brown(9).................................... Common Shares 4,001 * *
Series A Common Shares 4,735 * *
Herbert S. Wander..................................... Common Shares 334 * *
George W. Off......................................... Common Shares 1,127 * *
Martin L. Solomon..................................... Common Shares 15,000 * *
Kevin A. Mundt........................................ -- -- -- --
H. Donald Nelson...................................... Common Shares 4,098 * *
Series A Common Shares 5,308 * *
Donald W. Warkentin(12)............................... Common Shares 29,566 * *
Terrence T. Sullivan.................................. -- -- -- --
All directors, director nominee and executive officers
as a group (25 persons)(12)........................... Common Shares % %
Series A Common Shares % %
</TABLE>
- ------------
* Less than 1%
(1) The nature of beneficial ownership for shares in this column is sole voting
and investment power, except as otherwise set forth in these footnotes.
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<PAGE>
(2) The shares listed are held by the persons named as trustees under a voting
trust which expires June 30, 2009, created to facilitate longstanding
relationships among the trust certificate holders. Under the terms of the
voting trust, the trustees hold and vote the Series A Common Shares held in
the trust. If the voting trust were terminated, the following persons would
each be deemed to own beneficially more than 5% of the outstanding Series A
Common Shares: Margaret D. Carlson (wife of LeRoy T. Carlson), LeRoy T.
Carlson, Jr., Walter C.D. Carlson, Prudence E. Carlson, Letitia G.C. Carlson
(children of LeRoy T. Carlson and Margaret D. Carlson) and Donald C.
Nebergall, as trustee under certain trusts for the benefit of the heirs of
LeRoy T. and Margaret D. Carlson and an educational institution.
(3) Voting and investment control is shared by the persons named as members of
the investment management committee of the Telephone and Data Systems, Inc.
Employees' Pension Trust I. Such members disclaim beneficial ownership of
such shares, which are held for the benefit of plan participants.
(4) Voting and investment control with respect to Company-match shares is shared
by the persons named as members of the investment management committee of
the Telephone and Data Systems, Inc. Tax-Deferred Savings Trust. Does not
include shares acquired by trust employee contributions for which
voting and investment control is passed-through to plan participants.
(5) Includes 51,975 Series A Common Shares held by Mr. Carlson's wife. Mr.
Carlson disclaims beneficial ownership of such shares. Does not include
252,668 Series A Common Shares held for the benefit of LeRoy T. Carlson,
630,525 Series A Common Shares held for the benefit of Mr. Carlson's wife or
50,526 Series A Common Shares held for the benefit of certain grandchildren
of Mr. Carlson (an aggregate of 933,719 shares, or 13.5% of class) in the
voting trust described in footnote (2). Beneficial ownership is disclaimed
as to Series A Common Shares held for the benefit of his wife and
grandchildren in such voting trust.
(6) Does not include 1,068,186 Series A Common Shares (15.4% of class) held in
the voting trust described in footnote (2), of which 1,037,084 shares are
held for the benefit of LeRoy T. Carlson, Jr. Beneficial ownership is
disclaimed with respect to an aggregate of 31,102 Series A Common Shares
held for the benefit of his wife, his children and others in such voting
trust.
(7) Does not include 1,087,366 Series A Common Shares (15.7% of class) held in
the voting trust described in footnote (2), of which 1,058,143 shares are
held for the benefit of Walter C.D. Carlson. Beneficial ownership is
disclaimed with respect to an aggregate of 29,223 Series A Common Shares
held for the benefit of his wife and children in such voting trust.
(8) Does not include 1,070,127 Series A Common Shares (15.4% of class) held in
the voting trust described in footnote (2), of which 1,061,477 shares are
held for the benefit of Letitia G.C. Carlson. Beneficial ownership is
disclaimed with respect to an aggregate of 8,650 Series A Common Shares held
for the benefit of her husband and child in such voting trust.
(9) Includes shares as to which voting and/or investment power is shared, and/or
shares held by spouse and/or children.
(10) Does not include Series A Common Shares held as custodian for his children,
for which beneficial ownership is disclaimed.
(11) Does not include 641,540 Series A Common Shares (9.2% of class) held as
trustee under trusts for the benefit of the heirs of LeRoy T. and Margaret
D. Carlson and an educational institution, or 31 Series A Common Shares held
for the benefit of Donald C. Nebergall, which are included in the voting
trust described in footnote (2).
(12) Includes the following number of Common Shares that may be purchased
pursuant to stock options and/or stock appreciation rights which are
currently exercisable or exercisable within 60 days: Mr. LeRoy T. Carlson,
55,978 shares; Mr. LeRoy T. Carlson, Jr., 152,297 shares; Mr. Swanson,
28,541 shares; Mr. Barr, 16,000 shares; Mr. Hornacek, 14,551 shares; Mr.
Warkentin, 29,026 shares; all other executive officers, 151,508 shares; and
all directors and officers as a group, 431,901 shares.
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<PAGE>
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
In addition to persons listed in the preceding table and the footnotes
thereto, the following table sets forth as of December 31, 1997, information
regarding each person who is known to the Company to beneficially own more than
5% of any class of voting securities of TDS, based on publicly available
information and the Company's stock records as of such date. The nature of
beneficial ownership in this table is sole voting and investment power except as
otherwise set forth in footnotes thereto.
<TABLE>
<CAPTION>
SHAREHOLDER'S NAME AND SHARES OF PERCENT OF PERCENT OF
ADDRESS TITLE OF CLASS CLASS OWNED CLASS VOTING POWER
- ------------------------- ---------------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
The Equitable Companies
Inc.(1)
787 Seventh Avenue
New York, New York 10019 Common Shares % %
Franklin Mutual Advisers,
Inc. (2)
51 John F. Kennedy
Parkway
Short Hills, New Jersey
07078 Common Shares % %
Massachusetts Financial
Services Company (3)
500 Boylston Street
Boston, Massachusetts
02116 Common Shares % %
William and Betty
McDaniel
160 Stowell Road
Salkum, Washington 98582 Preferred Shares 46,666 14.4% *
Bennet R. Miller
1212 Wea Avenue
Lafayette, Indiana 47905 Preferred Shares 30,000 9.2% *
The Peterson Revocable
Living Trust
Kenneth M. & Audrey M.
Peterson, Trustees
108 Avocado Lane
Weslaco, Texas 78596 Preferred Shares 20,637 6.4% *
Roland G. and Bette B.
Nehring
5253 North Dromedary
Road
Phoenix, Arizona 85018 Preferred Shares 20,012 6.2% *
</TABLE>
- ------------
* Less than 1%
(1) Based on the most recent Schedule 13G (Amendment No. ) filed with the SEC.
Includes shares held by the following affiliates: The Equitable Life
Assurance Society of the United States-- shares; Alliance Capital
Management, L.P.-- shares; Wood, Struthers & Winthrop Management
Corp.-- shares; and Donaldson Lufkin & Jenrette Securities
Corporation-- shares. In such Schedule 13G, Equitable reported sole
voting power with respect to shares, shared voting power with respect
to shares, sole dispositive power with respect to shares and
shared dispositive power with respect to shares. Alpha Assurance
I.A.R.D. Mutuelle, Alpha Assurances Vie Mutuelle, AXA Assurances I.A.R.D.
Mutuelle, AXA Assurances Vie Mutuelle, Uni Europe Assurance Mutuelle and
AXA, corporations organized under the laws of France, are affiliates of The
Equitable Companies, Inc.
(2) Based on the most recent Schedule 13D filed with the SEC (Amendment No. ).
Such Schedule 13D reports that Franklin Mutual Advisers, Inc. exercised sole
voting and investment power with respect to all such shares. Such Schedule
13D is also filed on behalf of Franklin Resources, Inc., the parent holding
company of Franklin Mutual Advisers, Inc., and by Charles B. Johnson and
Rupert H. Johnson, Jr., principal shareholders of such parent holding
company. Subsequent to February 28, 1998, Franklin Mutual Advisers, Inc.
filed an amendment to such Schedule 13D to report, among other things, that
an advisory contract with one of its advisory clients who owned Common
Shares terminated as of March 10, 1997.
(3) Based on a Schedule 13G filed with the SEC. Such Schedule 13G reported that
Massachusetts Financial Services Company exercised sole voting and
investment power with respect to all such shares.
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<PAGE>
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the 1998 Special
Meeting of Shareholders were required to have been received by the Company at
its principal executive offices not later than December 19, 1997 for inclusion
in the Company's proxy statement and form of proxy relating to that meeting.
SOLICITATION OF PROXIES
Your proxy is solicited by the Board of Directors and its agents and the
cost of solicitation will be paid by the Company. Officers, directors and
regular employees of the Company, acting on its behalf, may also solicit proxies
by telephone, telegraph or personal interview. The Company has also retained
MacKenzie Partners, Inc. to assist in the solicitation of proxies for a fee of
$25,000 plus out-of-pocket expenses. The Company will, at its expense, request
brokers and other custodians, nominees and fiduciaries to forward proxy
soliciting material to the beneficial owners of shares held of record by such
persons.
The Company anticipates that certain employees of the Financial Advisors may
communicate in person, by telephone or otherwise with certain institutions or
other persons who are shareholders or representatives of shareholders of the
Company for the purpose of assisting in the solicitation of proxies by the Board
of Directors. The Financial Advisors will not receive any fees for or in
connection with such solicitation apart from the fees they are otherwise
entitled to receive as described above.
EXPENSES
The cost of adopting and implementing the Tracking Stock Proposal is
estimated to be approximately $ , and such costs have been or will be
charged against TDS's pre-tax earnings. The costs include the fees and expenses
of the Financial Advisors, MacKenzie Partners, Inc., legal fees, AMEX listing
fees, transfer agent fees, printing costs, stock certificate engraving, mailing
costs, and FCC and state filing fees and taxes.
EXPERTS
The audited consolidated financial statements of TDS and the audited
financial statements of each of the Cellular Group, the Telecom Group, the
Aerial Group and the TDS Group included in this Proxy Statement/ Prospectus have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports included herein. The financial statements referred to
above have been included in reliance upon the authority of such firm as an
expert in accounting and auditing in giving said reports.
LEGAL MATTERS
Certain matters of Delaware law relating to the legality of the shares of
common stock of TDS Delaware and certain United States federal income taxation
matters will be passed upon by Sidley & Austin, Chicago. Walter C.D. Carlson, a
director of TDS and a beneficiary and trustee of the voting trust which controls
TDS, is a partner of Sidley & Austin. Michael G. Hron and William S. DeCarlo,
the Secretary and Assistant Secretary of TDS and certain TDS subsidiaries,
respectively, and Stephen P. Fitzell and Sherry S. Treston, the Secretary and
Assistant Secretary of certain TDS subsidiaries, respectively, are partners of
Sidley & Austin.
OTHER BUSINESS
It is not anticipated that any action will be asked of the shareholders
other than that set forth above, but if other matters properly are brought
before the Special Meeting, the persons named in the proxy will vote in
accordance with their best judgment.
By order of the Board of Directors
Michael G. Hron
SECRETARY
ALL SHAREHOLDERS ARE URGED TO SIGN, DATE AND MAIL THEIR PROXIES PROMPTLY.
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<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C> <C> <C>
EXHIBIT A -- Agreement and Plan of Merger................................................... A-1
EXHIBIT B -- Proposed Restated Certificate of Incorporation of TDS Delaware................. B-1
EXHIBIT C-1 -- Opinion of Credit Suisse First Boston.......................................... C1-1
EXHIBIT C-2 -- Opinion of Salomon Smith Barney................................................ C2-1
EXHIBIT D -- 1998 Long-Term Incentive Plan.................................................. D-1
EXHIBIT E -- Dissenters' Rights Under Iowa Law.............................................. E-1
EXHIBIT F -- Illustration of Certain Terms.................................................. F-1
EXHIBIT G -- Index of Certain Defined Terms................................................. G-1
</TABLE>
INDEX TO ANNEXES
<TABLE>
<S> <C> <C> <C>
ANNEX I -- THE COMPANY
Description of the Company's Business.......................................... I-1
Management's Discussion and Analysis for Three Years Ended December 31, 1996... I-37
Consolidated Financial Statements for Three Years Ended December 31, 1996...... I-51
Management's Discussion and Analysis for Nine Months Ended September 30, 1997
and 1996....................................................................... I-81
Financial Statements for Nine Months Ended September 30, 1997 and 1996......... I-89
Recent Developments............................................................ I-100
ANNEX II -- THE CELLULAR GROUP
Description of Cellular Business............................................... II-1
Management's Discussion and Analysis for Three Years Ended December 31, 1996... II-16
Financial Statements for Three Years Ended December 31, 1996................... II-24
Management's Discussion and Analysis for Nine Months Ended September 30, 1997
and 1996....................................................................... II-47
Financial Statements for Nine Months Ended September 30, 1997 and 1996......... II-55
Recent Developments............................................................ II-64
ANNEX III -- THE TELECOM GROUP
Description of Telecom Business................................................ III-1
Management's Discussion and Analysis for Three Years Ended December 31, 1996... III-9
Financial Statements for Three Years Ended December 31, 1996................... III-16
Management's Discussion and Analysis for Nine Months Ended September 30, 1997
and 1996....................................................................... III-35
Financial Statements for Nine Months Ended September 30, 1997 and 1996......... III-39
Recent Developments............................................................ III-47
ANNEX IV -- THE AERIAL GROUP
Description of Aerial Business................................................. IV-1
Management's Discussion and Analysis for Three Years Ended December 31, 1996... IV-10
Financial Statements for Three Years Ended December 31, 1996................... IV-14
Management's Discussion and Analysis for Nine Months Ended September 30, 1997
and 1996....................................................................... IV-30
Financial Statements for Nine Months Ended September 30, 1997 and 1996......... IV-34
Recent Developments............................................................ IV-41
ANNEX V -- THE TDS GROUP
Description of TDS Group....................................................... V-1
Management's Discussion and Analysis for Three Years Ended December 31, 1996... V-8
Financial Statements for Three Years Ended December 31, 1996................... V-13
Management's Discussion and Analysis for Nine Months Ended September 30, 1997
and 1996....................................................................... V-35
Financial Statements for Nine Months Ended September 30, 1997 and 1996......... V-39
Recent Developments............................................................ V-46
</TABLE>
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<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, dated as of , 1998 (the
"Merger Agreement"), between Telephone and Data Systems, Inc., an Iowa
corporation ("TDS Iowa"), and Telephone and Data Systems, Inc., a Delaware
corporation ("TDS Delaware"), (collectively, the "Constituent Corporations");
W I T N E S S E T H:
WHEREAS, the Board of Directors of each of the Constituent Corporations
deems it advisable and in the best interests of such corporation and its
shareholders that TDS Iowa be merged with and into TDS Delaware, with TDS
Delaware being the surviving corporation (the "Merger"); and, except as set
forth herein, that in such Merger all outstanding shares of capital stock of TDS
Iowa be converted into corresponding shares of capital stock of TDS Delaware as
hereinafter provided; and
WHEREAS, the Board of Directors of each of the Constituent Corporations has
approved this Merger Agreement;
NOW, THEREFORE, in consideration of the premises and of mutual covenants and
agreements set forth herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The effective time of the Merger (the "Effective Time") shall
occur at the latest of (i) the time and date that a certificate of merger is
duly filed with the Secretary of State of the State of Delaware with respect to
the Merger or such later date and time as is set forth therein and (ii) the time
and date that articles of merger are duly filed with the Secretary of State of
the State of Iowa with respect to the Merger or such later date and time as is
set forth herein.
SECTION 1.2 At the Effective Time, TDS Iowa shall be merged with and into
TDS Delaware, with TDS Delaware being the surviving corporation of the Merger
(the "Surviving Corporation"). At the Effective Time, the corporate existence of
TDS Iowa shall cease and TDS Delaware, as the Surviving Corporation, shall
succeed to all the business, properties, assets and liabilities of TDS Iowa and
TDS Delaware. The Merger shall have the effect set forth in Section 259(a) of
the Delaware General Corporation Law; the Surviving Corporation shall possess
all assets and property of every description, and every interest in the assets
and property, wherever located, and the rights, privileges, immunities, powers,
franchises and authority, of a public as well as a private nature, of each of
the Constituent Corporations, and all obligations belonging to or due each of
the Constituent Corporations, all of which shall be vested in the Surviving
Corporation without further act or deed; title to any real estate or any
interest in the real estate vested in either Constituent Corporation shall not
revert or in any way be impaired by reason of the Merger; the Surviving
Corporation shall thenceforth be liable for all the pre-existing obligations of
each Constituent Corporation, including liabilities to dissenting shareholders.
SECTION 1.3 From and after the Effective Time, the Certificate of
Incorporation of TDS Delaware, as in effect immediately prior to the Effective
Time, shall be the Certificate of Incorporation of the Surviving Corporation
until altered, amended or repealed in accordance with the laws of the State of
Delaware and the Certificate of Incorporation of the Surviving Corporation.
SECTION 1.4 From and after the Effective Time, the Bylaws of TDS Delaware,
as in effect immediately prior to the Effective Time, shall be the Bylaws of the
Surviving Corporation, until altered, amended or repealed in accordance with the
laws of the State of Delaware and the Certificate of Incorporation and Bylaws of
the Surviving Corporation.
SECTION 1.5 The number of directors in each class of directors of TDS Iowa
immediately prior to the Effective Time shall be the number of directors in each
class of directors of TDS Delaware from and after the Effective Time until such
number is altered in accordance with the laws of the State of Delaware and the
Certificate of Incorporation
A-1
<PAGE>
and Bylaws of the Surviving Corporation. The directors of TDS Iowa immediately
prior to the Effective Time shall be the directors of TDS Delaware from and
after the Effective Time and shall hold office from and after the Effective Time
in the same classes as in effect immediately prior to the Effective Time in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation until their respective successors are duly appointed or elected and
qualified.
SECTION 1.6 The officers of TDS Iowa immediately prior to the Effective
Time shall be the officers of the Surviving Corporation from and after the
Effective Time and shall hold the same offices from and after the Effective Time
in accordance with the Bylaws of the Surviving Corporation until their
respective successors are duly appointed or elected and qualified.
SECTION 1.7 At the Effective Time, each agreement, option or other right to
acquire shares of capital stock of TDS Iowa outstanding immediately prior to the
Effective Time shall, automatically and without further act of TDS Iowa, TDS
Delaware or any holder thereof, become an agreement, option or such other right
to acquire shares of capital stock of TDS Delaware, as the Surviving
Corporation, subject to the same terms and conditions and the same price
applicable to such agreement, option or other right immediately prior to the
Effective Time.
SECTION 1.8 Except as contemplated herein, the assets, liabilities,
reserves and accounts of TDS Iowa and TDS Delaware shall be taken up or
continued on the books of the Surviving Corporation in the amounts at which such
assets, liabilities, reserves and accounts shall have been carried on the books
of TDS Iowa and TDS Delaware immediately prior to the Effective Time, subject to
such adjustments, and such elimination of intercompany items, as may be
appropriate to give effect to the Merger, including any Dissenting Shares (as
hereinafter defined).
SECTION 1.9 The Surviving Corporation hereby consents to be sued and served
with process in the State of Iowa in any proceeding in the State of Iowa to
enforce against the Surviving Corporation any obligation of TDS Iowa, or to
enforce the rights of a dissenting shareholder of TDS Iowa, and the Surviving
Corporation hereby irrevocably appoints the Secretary of the State of Iowa as
its agent to accept service of process in any such proceeding in the State of
Iowa.
ARTICLE II
CONVERSION OF SHARES
SECTION 2.1 At the Effective Time, all of the shares of capital stock of
TDS Delaware issued or outstanding immediately prior to the Effective Time
shall, automatically and without further act of TDS Iowa, TDS Delaware or any
holder thereof, be cancelled and cease to exist, without any consideration being
payable therefor.
SECTION 2.2 At the Effective Time and as a result of the Merger, each
issued share of capital stock (including any such share held as a treasury
share) of TDS Iowa shall, automatically and without further act of either of the
Constituent Corporations or of the holder thereof, be extinguished and converted
into corresponding issued shares of capital stock of the Surviving Corporation
as follows:
<TABLE>
<CAPTION>
EACH SHARE OF TDS IOWA SHARES OF SURVIVING CORPORATION
- ------------------------------- -------------------------------------
<S> <C>
Common Share One Common Share
Series A Common Share One Series A Common Share
Series A Preferred Share One Series A Preferred Share
Series B Preferred Share One Series B Preferred Share
Series D Preferred Share One Series D Preferred Share
Series G Preferred Share One Series G Preferred Share
Series H Preferred Share One Series H Preferred Share
Series N Preferred Share One Series N Preferred Share
Series O Preferred Share One Series O Preferred Share
Series S Preferred Share One Series S Preferred Share
Series U Preferred Share One Series U Preferred Share
Series BB Preferred Share One Series BB Preferred Share
Series DD Preferred Share One Series DD Preferred Share
Series EE Preferred Share One Series EE Preferred Share
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
EACH SHARE OF TDS IOWA SHARES OF SURVIVING CORPORATION
- ------------------------------- -------------------------------------
<S> <C>
Series GG Preferred Share One Series GG Preferred Share
Series HH Preferred Share One Series HH Preferred Share
Series II Preferred Share One Series II Preferred Share
Series JJ Preferred Share One Series JJ Preferred Share
Series KK Preferred Share One Series KK Preferred Share
Series LL Preferred Share One Series LL Preferred Share
Series QQ Preferred Share One Series QQ Preferred Share
Series RR Preferred Share One Series RR Preferred Share
Series SS Preferred Share One Series SS Preferred Share
Series TT Preferred Share One Series TT Preferred Share
</TABLE>
SECTION 2.3 (a) Each person who, as a result of the Merger holds one or
more certificates which theretofore represented one or more shares of TDS Iowa
shall surrender such certificate to the Surviving Corporation (or to any agent
designated for such purpose by it) and, upon such surrender, the Surviving
Corporation shall, within a reasonable time, deliver to such person in
substitution and exchange therefor one or more certificates evidencing the
number of shares of any class of capital stock of the Surviving Corporation
which such person is entitled to receive in accordance with the terms of this
Merger Agreement in substitution for the number of shares of TDS Iowa
theretofore represented by each certificate so surrendered; PROVIDED, HOWEVER,
that such holders shall not be required to surrender any such certificates until
such certificates would normally be surrendered for transfer on the books of the
issuing corporation in the ordinary course of business.
(b) If there be delivered to the Surviving Corporation (or to an agent
designated for such purpose by it) by any person who is unable to produce a
certificate for surrender to the Surviving Corporation in accordance with
Section 2.3(a):
(i) evidence to the satisfaction of the Surviving Corporation that such
certificate has been lost, wrongfully taken or destroyed, and
(ii) such security or indemnity as may be requested or required by the
Surviving Corporation to save it harmless, and
(iii) evidence to the satisfaction of the Surviving Corporation that
such person was the owner of the shares theretofore represented by each
certificate claimed by him to be lost, wrongfully taken or destroyed and
that he is the person who would be entitled to present such certificate for
exchange pursuant to this Merger Agreement,
then the Surviving Corporation, in the absence of actual notice to it that any
shares of TDS Iowa theretofore represented by any such certificate have been
acquired by a bona fide purchaser, may deliver to such person one or more
certificates evidencing the share of the Surviving Corporation, that such person
would have been entitled to receive upon surrender of each such lost, wrongfully
taken or destroyed certificate.
(c) If one or more shares of the Surviving Corporation, issuable as provided
in this Merger Agreement upon surrender of a certificate formerly representing
shares of TDS Iowa, are to be issued to a person other than the person in whose
name such surrendered certificate was registered on the books of TDS Iowa at the
Effective Time, it shall be a condition precedent to the issuance of each such
share of the Surviving Corporation that such surrendered certificate shall be
properly endorsed and otherwise in proper form for transfer and accompanied by
such documents as may be required by the Surviving Corporation, in its
discretion, and that the person surrendering such certificate pay to the
Surviving Corporation (or to any agent designated for such purpose by it) any
transfer or other taxes required by reason of issuance of one or more shares of
the Surviving Corporation to a person other than the registered holder of such
surrendered certificate, or establish to the satisfaction of the Surviving
Corporation (or of such agent) that such tax has been paid or is not payable.
SECTION 2.4 The provisions of Sections 2.1 through 2.3 inclusive shall not
apply to TDS Iowa Shares (the "Dissenting Shares") held by TDS Iowa shareholders
who do not vote such TDS Iowa Shares in favor of the approval and adoption of
this Merger Agreement and the Merger and who deliver a written notice to TDS
Iowa in the manner required by Division XIII of the Iowa Business Corporation
Act, stating the intention to demand payment of
A-3
<PAGE>
the fair value of such TDS Iowa Shares if the Merger is effected, and if such
holders of TDS Iowa Shares take all other action required in the manner provided
in Division XIII of the Iowa Business Corporation Act. Such holders shall be
entitled to payment for such TDS Iowa Shares in accordance with the provisions
of Division XIII of the Iowa Business Corporation Act if applicable.
ARTICLE III
TERMINATION AND ABANDONMENT; AMENDMENT
SECTION 3.1 The Merger contemplated by this Merger Agreement may be
terminated and abandoned by the Board of Directors of either of the Constituent
Corporations at any time prior to the Effective Time and for any reason, without
notice of such action to the other Constituent Corporation, notwithstanding
approval of this Merger Agreement by the stockholders of one or both of the
Constituent Corporations.
SECTION 3.2 From time to time and at any time prior to the Merger Date, the
Merger Agreement may be amended by an agreement in writing executed in the same
manner as this Merger Agreement, after authorization of such action by the
Boards of Directors of the Constituent Corporations, but no such amendment made
subsequent to the adoption of this Merger Agreement by the stockholders of
either of the Constituent Corporations shall (a) alter or change the amount or
kind of shares or other consideration to be received by the stockholders in the
Merger, (b) alter or change any of the terms and conditions of this Merger
Agreement if such alternation or change would adversely affect the holders of
any class or series of stock of such Constituent Corporation or (c) otherwise
violate applicable law.
ARTICLE IV
MISCELLANEOUS
SECTION 4.1 EXPENSES OF MERGER. From and after the Effective Time, TDS
Delaware shall pay all unpaid expenses of carrying this Merger Agreement into
effect and accomplishing the Merger.
SECTION 4.2 FURTHER ASSURANCES. If, at any time from and after the
Effective Time, TDS Delaware shall consider or be advised that if any further
assignment or assurance in law is necessary or desirable to vest in TDS Delaware
the title to any property or rights of TDS Iowa, the proper officers of TDS
Delaware are hereby authorized, in the name of TDS Iowa, to execute and make all
such proper assignments and assurances in law, and to do all other things
necessary or proper to vest such property or rights in TDS Delaware and
otherwise to carry out the purposes of this Merger Agreement.
SECTION 4.3 APPROVAL. This Merger Agreement shall be submitted for approval
by the shareholders of TDS Iowa at an annual or special meeting of shareholders.
A-4
<PAGE>
IN WITNESS WHEREOF, this Merger Agreement has been executed on behalf of the
Constituent Corporations by their duly authorized officers on this day of
, 1998.
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC.,
an Iowa corporation
<S> <C> <C> <C>
By:
-------------------------------------------
LeRoy T. Carlson
Chairman
Attest:
By:
-------------------------------------------
Michael G. Hron
Secretary
TELEPHONE AND DATA SYSTEMS, INC.
a Delaware corporation
By:
-------------------------------------------
LeRoy T. Carlson, Jr.
President
Attest:
By:
-------------------------------------------
Michael G. Hron
Secretary
</TABLE>
SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER BETWEEN
TDS IOWA AND TDS DELAWARE
A-5
<PAGE>
EXHIBIT B
RESTATED CERTIFICATE OF INCORPORATION
OF
TELEPHONE AND DATA SYSTEMS, INC.
Telephone and Data Systems, Inc., a corporation organized and existing under
and pursuant to the provisions of the General Corporation Law of the State of
Delaware (the "Corporation"), does hereby certify as follows:
FIRST: The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on December 12, 1997.
The Corporation hereby restates and integrates and further amends the
Certificate of Incorporation of the Corporation by revising such document in its
entirety as follows:
ARTICLE I
The name of the Corporation is Telephone and Data Systems, Inc.
ARTICLE II
The period of its duration is perpetual.
ARTICLE III
The Corporation shall have unlimited power to engage in, and to do any
lawful act concerning, any and all lawful business for which corporations may be
organized under the Delaware General Corporation Law above mentioned.
ARTICLE IV
A. AUTHORIZED SHARES
1. Subject to paragraph 3 of this Section A and Section B.1, the aggregate
number of shares of capital stock which the Corporation is authorized to issue
is 475,000,000 shares, and the designation of each class or series, the number
of shares of each class or series and the par value of the shares of each class
or series, are as follows:
<TABLE>
<CAPTION>
CLASS SERIES NO. OF SHARES PAR VALUE
- ------------------------------------- ------------------- -------------- -----------------
<S> <C> <C> <C>
Common Shares None 100,000,000 $.01 per share
Series A Common Shares None 25,000,000 $.01 per share
Special Common Shares None 20,000,000 $.01 per share
United States Cellular Group Common None 140,000,000 $.01 per share
Shares
TDS Telecommunications Group Common None 90,000,000 $.01 par value
Shares
Aerial Communications Group Common None 95,000,000 $.01 par value
Shares
Undesignated Shares See Section B.1 4,673,336 $.01 par value
Preferred Shares See below 326,664 $.01 par value
</TABLE>
THE FOLLOWING SERIES OF PREFERRED SHARES ORIGINALLY ISSUED BY TDS IOWA (AS
DEFINED IN SECTION B.19 OF THIS ARTICLE IV) BEFORE OCTOBER 31, 1981 ARE REFERRED
TO AS THE "PRE-81 PREFERRED SHARES"
<TABLE>
<CAPTION>
SERIES NO. OF SHARES
- --------- ---------------
<S> <C>
A 1,395
B 1,955
D 646
G 1,368
H 1,188
N 3,134
</TABLE>
B-1
<PAGE>
THE FOLLOWING SERIES OF PREFERRED SHARES ORIGINALLY ISSUED BY TDS IOWA AFTER
OCTOBER 31, 1981 ARE REFERRED TO AS THE "POST-81 PREFERRED SHARES"
<TABLE>
<CAPTION>
SERIES NO. OF SHARES
- --------- -------------
<S> <C>
O 684
S 1,209
U 1,100
BB 18,500
DD 47,940
EE 8,667
GG 35,247
HH 2,627
II 3,946
JJ 1,310
KK 1,403
LL 1,487
QQ 8,368
RR 29,490
SS 125,000
TT 30,000
</TABLE>
2. As of the effective date of this Restated Certificate of Incorporation,
the series of Preferred Shares set forth above shall have the preferences,
qualifications, limitations, restrictions and rights set forth in this Restated
Certificate of Incorporation, including Attachment I hereto, which Attachment is
incorporated herein and made a part hereof.
3. The number of authorized Common Shares, Series A Common Shares, Special
Common Shares, Cellular Group Common Shares, Telecom Group Common Shares, Aerial
Group Common Shares or Undesignated Shares may be increased or decreased at any
time or from time-to-time (but not below the number of such shares then
outstanding in such class, respectively) by the affirmative vote of the holders
of a majority of the voting power of shares of capital stock of the Corporation
entitled to vote on all matters (not including shares entitled to vote only in
the election of directors or as otherwise required by law, including Section
242(b)(2) of the DGCL) pursuant to paragraph 8(c) of Section B of this Article
IV.
4. The Board shall have the authority to designate, prior to the time of
the first issuance of shares of any class or series of Tracking Stock (as
defined in Section B.19), the number of such shares which shall initially
constitute the Number of Shares Issuable with Respect to Retained Interest and
the Number of Shares Issuable with Respect to Inter-Group Interest, if any.
5. As of the first date of issuance of any class of Tracking Stock, the
outstanding series of Preferred Shares shall be attributed entirely to the TDS
Group. After the first date of issuance of any class of Tracking Stock, any
series of Undesignated Shares which are designated and issued, as preferred or
common stock, shall be attributed entirely to one Group or among two or more
Groups, as may be determined by the Board, taking into consideration the use of
proceeds from and purposes for such issuance and other factors.
6. As of the first date of issuance of any class of Tracking Stock, all
Pre-Distribution Convertible Securities (as defined in Section B.19) shall be
attributed entirely to the TDS Group. After the first date of issuance of any
class of Tracking Stock, any Convertible Securities which are issued shall be
attributed entirely to one Group or among two or more Groups, as may be
determined by the Board, taking into consideration the use of proceeds from and
purposes for such issuance and other factors.
7. As of the first date of issuance of any class of Tracking Stock, any
Committed Acquisition Shares shall be attributed entirely to the TDS Group.
After the first date of issuance of any class of Tracking Stock, any Committed
Acquisition Shares shall be attributed entirely to one Group or among two or
more Groups, as may be determined by the Board, taking into consideration the
use of proceeds from and purposes for such issuance and other factors.
B. PREFERENCES, QUALIFICATIONS, LIMITATIONS, RESTRICTIONS AND RIGHTS OF
SHARES. The preferences, qualifications, limitations, restrictions, and the
special or relative rights of the Common, Series A Common, Special Common,
Cellular Group Common, Telecom Group Common, Aerial Group Common, Undesignated
and Preferred Shares are:
B-2
<PAGE>
1. ISSUE OF UNDESIGNATED SHARES IN SERIES. Authority is hereby vested in
the Board to divide any or all of the Undesignated Shares into one or more
classes or series of common or preferred stock, and to further divide any of
those classes or series, and to fix and determine by resolution as to each class
or series so established:
(a) the designation of such class or series, the number of shares to
constitute such class or series and par value or stated value thereof;
(b) the rate of dividend and the terms thereof;
(c) the price at and terms and conditions by which shares may be
redeemed;
(d) the amount payable upon shares in event of voluntary or involuntary
liquidation;
(e) sinking fund provisions for the redemption or purchase of shares;
(f) the terms and conditions on which shares may be converted, if the
shares of any series are issued with the privilege of, or subject to
mandatory, conversion;
(g) voting rights, if any, but in no event more than ten votes per share
in connection with any matter; and
(h) such other designations, preferences and relative, participating,
optional or other special rights, and qualifications or restrictions
thereof, as shall be stated and expressed in a resolution or resolutions
providing for the issuance of such stock adopted by the Board. Any of the
voting powers, designations, preferences, rights and qualifications,
limitations or restrictions of any such class or series of stock may be made
dependent upon facts ascertainable outside this Restated Certificate of
Incorporation or of any amendment thereto, or outside the resolution or
resolutions providing for the issue of such stock adopted by the Board
pursuant to the foregoing authority vested in it by this Restated
Certificate of Incorporation, provided that the manner in which such facts
shall operate upon the voting powers, designations, preferences, rights and
qualifications, limitations or restrictions of such class or series is
clearly and expressly set forth in the resolution or resolutions providing
for the issue of such stock adopted by the Board. The term "facts" as used
in this paragraph includes, but is not limited to, the occurrence of any
event, including a determination or action by any person or body, including
the Corporation.
2. DIVIDENDS.
(a) Except as otherwise set forth in Attachment I hereto or as otherwise
provided in any designation of a class or series of Undesignated Shares at
the time that such class or series is originally established: (i) the
holders of Preferred Shares and of each class or series of Undesignated
Shares which has been designated as preferred stock shall be entitled to
receive, when and as declared by the Board, dividends at the rate fixed for
such series, and no more, payable in quarterly installments on the first
days of March, June, September and December in each year; (ii) dividends on
all series of Preferred Shares and all classes and series of Undesignated
Shares which have been designated as preferred stock shall be cumulative
from and after the respective dates of issuance; (iii) no dividends shall be
declared on the shares of any series of Preferred Shares or any class or
series of Undesignated Shares which have been designated as preferred stock
for any dividend period unless the full dividend for all prior dividend
periods shall have been declared or shall be declared at the same time upon
all Preferred Shares, and all classes and series of Undesignated Shares
which have been designated as preferred stock, outstanding during such prior
dividend periods; (iv) no dividends shall be declared on the shares of any
series of Preferred Shares, or any class or series of Undesignated Shares
which have been designated as preferred stock, unless a dividend for the
same period shall be declared at the same time upon all series of Preferred
Shares and all classes and series of Undesignated Shares which have been
designated as preferred stock, outstanding during said period, in like
proportion to the dividend rate upon such shares; and (v) no dividends shall
be paid on any shares of Common Stock unless full dividends on all series of
Preferred Shares, and all classes and series of Undesignated Shares which
have been designated as preferred stock, for all past dividend periods and
for the current dividend period, shall have been declared and the
Corporation shall have paid such dividends or shall have set apart a sum
sufficient for the payment thereof.
(b) Dividends on any class or series of Common Stock may be declared and
paid only out of the lesser of (i) assets of the Company legally available
therefor and (ii) the Available Dividend Amount (as defined in paragraph 19
of this Section B) with respect to such class or series. Subject to the
foregoing, the Board shall have the authority to declare and pay dividends
on all or less than all of the classes or series of Common Stock in equal or
unequal amounts, notwithstanding the amount of assets available for
dividends on any class or series, the respective voting and liquidation
rights of any class or series, the amount of prior dividends declared on any
class or series or any other factor; PROVIDED, HOWEVER, that no dividends
shall be declared or paid on the
B-3
<PAGE>
Series A Common Shares unless the same, or greater, dividends, on a per
share basis, are declared and paid at the same time on the Common Shares and
the Special Common Shares, and if dividends shall be declared or paid on the
Common Shares or the Special Common Shares, the same dividends, on a per
share basis, shall be declared and paid at the same time on the Special
Common Shares and the Common Shares, respectively, except, in each case, as
otherwise expressly provided in this Restated Certificate of the
Corporation.
3. SHARE DISTRIBUTIONS. Notwithstanding anything to the contrary herein,
if at any time a dividend or other distribution is to be paid in shares of
Common Stock on shares of Common Stock, such dividend or other distribution
shall be paid as only as follows (including, in each case, Convertible
Securities which are exercisable for or convertible or exchangeable into such
shares to be distributed):
(a) Common Shares may be distributed on an equal per share basis to
holders of Common Shares, Series A Common Shares may be distributed on an
equal per share basis to holders of Series A Common Shares, and Special
Common Shares may be distributed on an equal per share basis to holders of
Special Common Shares (if any are then outstanding);
(b) Common Shares may be distributed on an equal per share basis to
holders of Common Shares and Series A Common Shares, and Special Common
Shares may be distributed on an equal per share basis to holders of Special
Common Shares (if any are then outstanding);
(c) Series A Common Shares may be distributed on an equal per share
basis to holders of Common Shares and Series A Common Shares, and Special
Common Shares may be distributed on an equal per share basis to holders of
Special Common Shares (if any are then outstanding);
(d) Special Common Shares may be distributed on an equal per share basis
to holders of Common Shares, Series A Common Shares and Special Common
Shares (if any are then outstanding);
(e) shares of a class or series of Tracking Stock may be distributed on
an equal per share basis to holders of that class or series of Tracking
Stock;
(f) shares of a new class or series of capital stock which is intended
to represent a subdivision or new business of a Group, or any assets
attributed by the Board to such Group, may be distributed on an equal per
share basis to holders of common stock representing an interest in such
Group;
(g) shares of any class or series of Tracking Stock of a Tracking Group
may be distributed on an equal per share basis to holders of Common Shares,
Series A Common Shares and Special Common Shares (if any are then
outstanding), but only if the sum of (i) the number of shares of such class
or series of Tracking Stock to be so distributed (or the number of such
shares which would be issuable at such time upon the exercise, conversion or
exchange of any Convertible Securities to be so distributed) and (ii) the
Number of Shares Issuable to Third Parties related to such class or series
of Tracking Stock which are then are attributable to the TDS Group, is less
than or equal to the Number of Shares Issuable with Respect to Retained
Interest in such Tracking Group; and
(h) shares of any class or series of Tracking Stock of a Tracking Group
(for this purpose, the "Issuer Group"), may be distributed on an equal per
share basis to holders of a class or series of Tracking Stock of any other
Tracking Group (for this purpose, the "Investor Group"), but only if the sum
of (i) the number of shares of such class or series of Tracking Stock of the
Issuer Group to be so distributed (or the number of such shares which would
be issuable at such time upon the exercise, conversion or exchange of any
Convertible Securities to be so distributed) and (ii) the Number of Shares
Issuable to Third Parties related to the class or series of Tracking Stock
of the Issuer Group which are then are attributable to the Investor Group,
is less than or equal to the Number of Shares Issuable with Respect to
Inter-Group Interest in the Issuer Group by the Investor Group.
In the case of any such share dividend the Board may permit the holders of
Common Stock to elect to receive cash in lieu of shares of stock. In any
dividend or distribution of Common Stock, the same number of shares of Common
Stock on a per share basis shall be distributed with respect to Common Shares,
Series A Common Shares and Special Common Shares.
4. DISTRIBUTION OF TDS GROUP SUBSIDIARY IN DIVIDEND. Subject to paragraph
2(b) of Section B of Article IV, if at any time a distribution is to be made of
shares of capital stock of a subsidiary included in the TDS Group (for this
purpose, a "TDS Group Subsidiary"), such TDS Group Subsidiary shares may only be
distributed to the holders of Series A Common Shares, Common Shares and any
issued Special Common Shares and, in such event, the Board shall, to the extent
practicable, distribute TDS Group Subsidiary shares corresponding to Series A
Common Shares
B-4
<PAGE>
to the holders of Series A Common Shares, distribute TDS Group Subsidiary shares
corresponding to Common Shares to the holders of Common Shares, and distribute
TDS Group Subsidiary shares corresponding to Special Common Shares to the
holders of Special Common Shares, if any are then outstanding; PROVIDED,
HOWEVER, that the same number of shares of common stock of the TDS Group
Subsidiary must be distributed with respect to each Series A Common Share,
Common Share and any issued Special Common Share. If practicable, the Board
shall recapitalize such TDS Group Subsidiary through an amendment to its charter
or otherwise, such that the relative rights, limitations and preferences of the
shares of capital stock of such TDS Group Subsidiary substantially correspond to
the Series A Common Shares, Common Shares and Special Common Shares of the
Corporation and their relative rights, limitations and preferences, as may be
determined to be necessary or appropriate in the sole discretion of the Board,
in order to permit the distribution to be effected in the foregoing manner;
PROVIDED, HOWEVER, that if Special Common Shares are then outstanding and the
TDS Group Subsidiary has or will have shares corresponding to Series A Common
Shares and Common Shares but does not and will not have shares corresponding to
Special Common Shares and the Board determines that it is impracticable to
recapitalize the subsidiary as provided in this sentence to create shares
corresponding to Special Common Shares, the Board shall distribute TDS Group
Subsidiary shares corresponding to Common Shares of such TDS Group Subsidiary to
the holders of Special Common Shares.
5. DISTRIBUTION OF TRACKING GROUP SUBSIDIARY IN DIVIDEND. Subject to
paragraph 2(b) of Section B of Article IV, if at any time a distribution is to
be made of shares of capital stock of a subsidiary (for this purpose, a Non-
Qualifying Subsidiary") included in a Tracking Group (for this purpose, the
"Distributing Group"), other than a Qualifying Subsidiary or Qualifying
Subsidiaries holding all of the assets and liabilities of a Tracking Group, and
if there is a Retained Interest in such Distributing Group, the Board shall, to
the extent practicable, distribute Non-Qualifying Subsidiary shares
corresponding to Special Common Shares to the holders of Tracking Stock of such
Distributing Group equal to the product of the Outstanding Interest Fraction
multiplied by the number of all of the outstanding shares of the Non-Qualifying
Subsidiary owned directly or indirectly by the Corporation, on a pro rata basis.
The Board, in its sole discretion, may cause the Corporation to retain the
balance of the outstanding shares of the common stock of the Non-Qualifying
Subsidiaries in respect of the Retained Interest and any Inter-Group Interest in
the Distributing Group or, in the sole discretion of the Board, Non-Qualifying
Subsidiary shares may be distributed to the holders of TDS Group Shares or
shares of any other Tracking Stock as follows: (a) if the Board determines to
distribute Non-Qualifying Subsidiary shares to the holders of TDS Group Shares
with respect to the Retained Interest, it shall, to the extent practicable,
distribute Non-Qualifying Subsidiary shares corresponding to Series A Common
Shares to the holders of Series A Common Shares, subsidiary shares corresponding
to Common Shares to the holders of Common Shares, and subsidiary shares
corresponding to Special Common Shares to the holders of Special Common Shares
with respect to any Retained Interest in such Tracking Group, PROVIDED, that the
same number of shares of Non-Qualifying Subsidiary common stock must be
distributed with respect to each Series A Common Share, Common Share and any
issued Special Common Share and (b) if the Board determines to distribute
Non-Qualifying Subsidiary shares to the holders of any class or series of
Tracking Stock of a Tracking Group other than the Distributing Group with
respect to any Inter-Group Interest by such Tracking Group in the Distributing
Group, it must, to the extent practicable, distribute Non-Qualifying Subsidiary
shares corresponding to Special Common Shares to the holders of Tracking Stock
of such other Tracking Group with respect to any such Inter-Group Interest in
the Distributing Group. If practicable, the Board shall recapitalize such
Non-Qualifying Subsidiary through an amendment to its charter or otherwise, such
that the relative rights, limitations and preferences of the shares of capital
stock of the Non-Qualifying Subsidiary substantially correspond to the Series A
Common Shares, Common Shares and Special Common Shares of the Corporation and
their relative rights, limitations and preferences, as may be determined to be
necessary or appropriate in the sole discretion of the Board, in order to permit
the distribution to be effected in the foregoing manner; PROVIDED, that if the
Non-Qualifying Subsidiary has or will have shares corresponding to Series A
Common Shares and Common Shares but does not have and will not have shares
corresponding to Special Common Shares and the Board determines that it is
impracticable to recapitalize such subsidiary as provided in this sentence to
create shares corresponding to Special Common Shares, the Board shall distribute
Non-Qualifying Subsidiary shares corresponding to Common Shares to the holders
of Special Common Shares and to holders of any class of Tracking Stock who would
otherwise be entitled to receive subsidiary shares corresponding to Special
Common Shares.
6. CERTAIN PROVISIONS RELATING TO LIQUIDATION.
(a) Subject to paragraph 6(b) of this Section B, in the event of a
liquidation, dissolution or winding up of the Corporation, whether voluntary
or involuntary, after payment or provision for payment of the debts and
other liabilities of the Corporation and subject to the prior payment in
full of the preferential amounts to which any class or series of Preferred
Shares or Undesignated Shares is entitled, the holders of the outstanding
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shares of Common Stock shall be entitled to receive the remaining assets of
the Corporation, regardless of the Group to which such assets are attributed
in accordance with this Article IV, divided among the holders of Common
Stock in accordance with the per share "Liquidation Units" attributable to
each class of Common Stock. Each Series A Common Share, Common Share and
Special Common Share is hereby attributed one Liquidation Unit, each
Cellular Group Common Share is hereby attributed 2.5 Liquidation Units, each
Telecom Group Common Share is hereby attributed .9 of a Liquidation Unit and
each Aerial Group Common Share is hereby attributed 1.1 Liquidation Units.
The Liquidation Unit of each class or series of Common Stock shall be
adjusted by the Board as appropriate to reflect equitably any subdivision
(by stock split or otherwise) or combination (by reverse stock split or
otherwise) of such class of Common Stock or any dividend or other
distribution of shares or similar transaction with respect to such class of
Common Stock. Whenever a change in the Liquidation Units with respect to any
class or series of Common Stock occurs, the Corporation shall prepare and
file a statement of such change with the Secretary of the Corporation and
distribute a notice of such change to all holders of shares of such class or
series of Common Stock, together with a notice of such stock split, reverse
split, distribution or other transaction requiring such change.
(b) Prior to the distribution of the remaining assets of the Corporation
as set forth in paragraph 6(a) of this Section B, the Board may redeem all
shares of Tracking Stock of all Tracking Groups in exchange for shares of a
Qualifying Subsidiary or Qualifying Subsidiaries holding all of the assets
and liabilities of the related Tracking Group pursuant to paragraph 13 of
this Section B.
(c) A consolidation, merger, or reorganization of the Corporation with
any other corporation or corporations, or a sale of all or substantially all
of the assets of the Corporation, shall not be considered a dissolution,
liquidation, or winding up of the Corporation within the meaning of these
provisions.
7. PREEMPTIVE RIGHTS. No holder of shares of any class or series of the
Corporation shall have any preemptive right pursuant to this Restated
Certificate of Incorporation to subscribe for or acquire any unissued or
treasury shares or other securities of the Corporation of the same or any other
class or series, whether such shares or securities be hereby or hereafter
authorized, except that holders of Series A Common Shares shall have a
preemptive right to acquire unissued or treasury Series A Common Shares or
securities convertible into or exchangeable for Series A Common Shares or
carrying a right to subscribe to or acquire Series A Common Shares; PROVIDED,
HOWEVER, that no preemptive right shall exist to acquire any Series A Common
Shares sold otherwise than for cash.
8. VOTING.
(a) With respect to the election of directors, the holders of (i) Pre-81
Preferred Shares, (ii) Common Shares, (iii) Special Common Shares, (iv)
shares of all classes or series of Tracking Stock and (v) any series of
Undesignated Shares which, at the time such series of Undesignated Shares
was originally established, provided that the holders of such series shall
vote in the election of directors together with the holders of Pre-81
Preferred Shares, Common Shares, Special Common Shares and shares of
Tracking Stock (for this purpose, the "Public Holders"), voting together as
one group, shall be entitled to elect at each annual meeting that number of
directors which (together with all directors whose terms do not expire at
the time of such meeting and who were previously elected by such holders)
constitutes 25% of the total number of directors of the Corporation (rounded
up to the nearest whole number), plus one director, and for this purpose the
total number of directors of the Corporation shall be determined without
regard to any director(s) whom the holders of one or more classes or series
of Undesignated Shares have elected or have the right to elect (without
regard to this Section B.8), and in such election each holder of Common
Shares and Special Common Shares shall be entitled to one vote for each
share of such stock standing in the name of the holder on the books of the
Corporation, the holders of Tracking Stock shall have the votes set forth in
paragraph 8(d) of this Section B, the holders of series of Pre-81 Preferred
Shares shall have the voting rights set forth on Attachment I hereto and the
holders of any class or series of Undesignated Shares shall have the voting
rights fixed and determined by the Board at the time such series of
Undesignated Shares was originally established.
(b) The holders of (i) Post-81 Preferred Shares, (ii) Series A Common
Shares and (iii) any class or series of Undesignated Shares which, at the
time such class or series of Undesignated Shares was originally established,
provided that the holders of such class or series shall vote in the election
of directors together with the holders of Post-81 Preferred Shares and
Series A Common Shares (for this purpose, the "Series A Holders"), voting
together as one group, shall be entitled to elect at each annual meeting
that number of directors which (together with all directors whose terms do
not expire at the time of such meeting and who were previously elected by
such holders) are not elected by the Public Holders, as provided in
paragraph 8(a) of this
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Section B, subject to the rights, if any, of the holders of any class or
series of Undesignated Shares to elect one or more directors (without regard
to this Section B.8), and in such election each holder of Series A Common
Shares shall be entitled to ten votes for each share of such stock standing
in the name of the holder on the books of the Corporation, the holders of
series of Post-81 Preferred Shares shall have the voting rights set forth on
Attachment I hereto and the holders of any class or series of Undesignated
Shares shall have the voting rights fixed and determined by the Board at the
time such class or series of Undesignated Shares was originally established.
(c) With respect to all matters other than the election of directors,
each holder of a series of Pre-81 Preferred Shares or Post-81 Preferred
Shares shall have the voting rights set forth on Attachment I hereto, each
holder of Common Shares shall be entitled to one vote for each share of such
stock standing in the name of the holder on the books of the Corporation,
each holder of Series A Common Shares shall be entitled to ten votes for
each share of such stock standing in the name of the holder on the books of
the Corporation and the holders of any class or series of Undesignated
Shares shall have the voting rights fixed and determined by the Board at the
time such class or series of Undesignated Shares was originally established.
Neither the holders of Special Common Shares nor the holders of shares of
any class of Tracking Stock shall be entitled to vote with respect to any
matter other than the election of directors as set forth in subparagraph (a)
of this paragraph 8, unless such holders must vote as required by the DGCL
or other applicable law or regulation.
(d) Upon the first issuance of shares of any class or series of Tracking
Stock, each of such shares shall be entitled to one vote per share in the
election of directors elected by the Public Holders; PROVIDED, HOWEVER, if
shares of a class of Tracking Stock have been traded on a national
securities exchange or the Nasdaq Stock Market, or traded in the
over-the-counter market, for at least 25 Trading Days immediately prior to
any Adjustment Date (as hereinafter defined), the votes per share which each
share of a class of Tracking Stock shall have in the election of directors
at each annual meeting of shareholders pursuant to paragraph 8(a) of this
Section B shall be equal to the quotient (calculated to three decimal
places) determined by dividing the Aggregate Votes (as hereinafter defined)
of such class of Tracking Stock on the Adjustment Date for such annual
meeting, by the average daily number of outstanding shares of such class of
Tracking Stock during the Calculation Period (as hereinafter defined) for
such Adjustment Date. The Aggregate Votes of a class of Tracking Stock on an
Adjustment Date shall be equal to the product of the Market Capitalization
Percentage (as hereinafter defined) of such class of Tracking Stock
multiplied by the Aggregate Public Holder Votes (as hereinafter defined) on
the Adjustment Date for such annual meeting. The Aggregate Public Holder
Votes shall be equal to the quotient (calculated to the nearest whole
number) determined by dividing the sum of the average daily number of
outstanding Pre-81 Preferred Shares, Common Shares and Special Common Shares
(the "One-Vote Shares") during the Calculation Period, by the Market
Capitalization Percentage of the One-Vote Shares. The Market Capitalization
Percentage of any class of Tracking Stock and of the One-Vote Shares shall
be equal to the average daily ratio (represented as a percentage calculated
to three decimal places) of the Market Capitalization of such class of
Tracking Stock or the aggregate Market Capitalization of the One-Vote
Shares, as the case may be, to the aggregate Market Capitalization of all
shares held by the Public Holders, calculated for the twenty-Trading Day
period (the "Calculation Period") ending ten Trading Days prior to the
record date for each annual meeting of shareholders (the "Adjustment Date").
The number of votes per share to which shares of classes of Tracking Stock
shall be entitled at any time in connection with the election or removal of
directors by the Public Holders shall be such number of votes per share that
were determined on the last preceding Adjustment Date relating to an annual
meeting of shareholders of the Corporation, and such number of votes per
share to which shares of Tracking Stock shall be entitled shall not be
changed until the next succeeding Adjustment Date for the next succeeding
annual meeting of shareholders of the Corporation.
(e) In the event the number of issued and outstanding Series A Common
Shares at any time falls below 500,000, then with respect to the election of
directors at the next annual meeting and at each annual meeting thereafter,
the holders of all outstanding Preferred Shares, Common Shares, Series A
Common Shares, Special Common Shares, Cellular Group Common Shares, Telecom
Group Common Shares and Aerial Group Common Shares, and any class or series
of Undesignated Shares which, at the time such class or series of
Undesignated Shares was originally established, provided that the holders of
such class or series shall vote in the election of directors with the Public
Holders or the Series A Holders, shall be entitled to elect all of the
directors of the Corporation standing for election at any meeting of
shareholders, subject to the rights, if any, of the holders of one or more
classes or series of Undesignated Shares to elect one or more directors
(without regard to this Section B.8), and in each such election of directors
each holder of Pre-81 Preferred Shares or Post-81 Preferred Shares shall
have the voting rights set forth on Attachment I hereto, each holder of
Common Shares and each holder of Special Common Shares shall be entitled to
one vote for each share of such stock
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standing in the name of the holder on the books of the Corporation, each holder
of Series A Common Shares shall be entitled to ten votes for each share of such
stock standing in the name of the holder on the books of the Corporation, the
holders of Tracking Stock shall have the votes set forth in paragraph 8(f) of
this Section B and the holders of any class or series of Undesignated Shares
shall have the voting rights fixed and determined by the Board at the time such
class or series of Undesignated Shares was originally established.
(f) In the event the number of issued and outstanding Series A Common
Shares at any time falls below 500,000, the votes per share which each share
of a class of Tracking Stock shall have in the election of directors at each
annual meeting of shareholders shall be equal to the quotient (calculated to
three decimal places) determined by dividing the Adjusted Aggregate Votes
(as hereinafter defined) of such class of Tracking Stock on the Adjustment
Date for such annual meeting by the average daily number of outstanding
shares of such class of Tracking Stock during the Calculation Period for
such Adjustment Date. The Adjusted Aggregate Votes of a class of Tracking
Stock on an Adjustment Date shall be equal to the product of the Adjusted
Market Capitalization Percentage (as hereinafter defined) of such class of
Tracking Stock multiplied by the Aggregate Director Votes (as hereinafter
defined) on the Adjustment Date for such annual meeting. The Aggregate
Director Votes shall be equal to the quotient (calculated to the nearest
whole number) determined by dividing (i) the sum of (A) the average daily
number of One-Vote Shares and (B) the product of 10 and the average daily
number of Series A Common Shares, in each case during the Calculation
Period, by (ii) the Aggregate Market Capitalization Percentage of the
One-Vote Shares and the Series A Common Shares. The Aggregate Market
Capitalization Percentage of the One-Vote Shares and the Series A Common
Shares shall be equal to the average daily ratio (expressed as a percentage
calculated to three decimal places) of the aggregate Market Capitalization
of the One-Vote Shares and the Series A Common Shares to the aggregate
Market Capitalization of all shares of capital stock which are entitled to
vote in the election of directors pursuant to paragraph 8(e) of this Section
B, calculated during the Calculation Period ending on the Adjustment Date
for an annual meeting. The Adjusted Market Capitalization Percentage of any
class of Tracking Stock shall be equal to the average daily ratio (expressed
as a percentage calculated to three decimal places) of the Market
Capitalization of such class of Tracking Stock to the aggregate Market
Capitalization of all shares of capital stock which are entitled to vote in
the election of directors pursuant to paragraph 8(e) of this Section B,
calculated during the Calculation Period ending on the Adjustment Date for
an annual meeting. The number of votes per share to which shares of classes
of Tracking Stock shall be entitled at any time in connection with the
election or removal of directors shall be such number of votes per share
that were determined on the last preceding Adjustment Date relating to an
annual meeting of shareholders of the Corporation, and such number of votes
per share to which shares of Tracking Stock shall be entitled shall not be
changed until the next succeeding Adjustment Date for the next succeeding
annual meeting of shareholders of the Corporation.
9. CONVERSION AT THE OPTION OF THE HOLDER. Each outstanding Series A
Common Share shall be convertible into one Common Share or one Special Common
Share at any time at the holder's choice. Any such conversion shall be effected
by the presentation and surrender of the certificates representing the Series A
Common Shares to be converted at the office of the Corporation or at such other
place as may from time to time be designated by the Corporation, in such form
and accompanied by all transfer taxes (or proof of payment thereof), if any, as
shall be required for such transfer, and upon such surrender, the holder of such
stock shall be entitled to receive in exchange therefor certificates for fully
paid and non-assessable Common Shares or Special Common Shares, as the case may
be, of the Corporation at the rate aforesaid, and such holder shall be
registered as the holder of such Common Shares or Special Common Shares, as the
case may be.
10. DISPOSITION OF ASSETS OF A TRACKING GROUP.
(a) If the Corporation disposes of all or substantially all of the
properties and assets of a Tracking Group (defined as 80% or more of the
then current market-value (as determined by the Board) of the properties and
assets of such Tracking Group as of such date), whether by sale, transfer,
assignment, merger, consolidation, contribution of assets or stock or
otherwise (a "Disposition"), in one transaction or a series of related
transactions with any one or more persons, entities or groups, other than in
a transaction referred to in the following sentence, the Corporation shall
take one of the actions listed in paragraph 10(b) of this Section B on or
prior to the 90th Trading Day following the consummation of a Disposition.
This requirement shall not apply to a Disposition (i) in connection with the
disposition by the Corporation of all of the Corporation's properties and
assets in one transaction or a series of related transactions or in
connection with the liquidation, dissolution or winding up of the
Corporation, (ii) by dividend, other distribution or redemption in
accordance with any provision described under paragraphs 2, 3, 4, 5, 6 or 13
of this Section B, (iii) to any person, entity or group which the
Corporation, directly or indirectly, after giving effect to the Disposition,
controls (as determined by the
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Board) or (iv) in connection with a Related Business Transaction. For
purposes of this paragraph 10, the Tracking Group affected by the
Disposition of its assets is referred to as the "Affected Tracking Group"
and the Tracking Stock of such Affected Tracking Group is referred to as the
"Affected Tracking Stock."
(b) Other than as described in paragraph (a), the Corporation shall take
one of the following actions in the event of a Disposition:
(i) subject to paragraph 2(b) of this Section B, declare and
distribute a special dividend in cash, securities or other property
(other than a dividend or distribution of Common Stock of the
Corporation) or any combination thereof to the holders of the outstanding
shares of the Affected Tracking Stock, in an aggregate amount equal to
the product of the Outstanding Interest Fraction of the Affected Tracking
Group as of the record date for determining the holders entitled to
receive such dividend and the Fair Value of the Net Proceeds of such
Disposition, such dividend to be distributed equally on a share-for-share
basis to all outstanding shares of the Affected Tracking Stock, except as
provided in paragraph 2(d) of this Section B;
(ii) provided that there are assets of the Corporation legally
available therefor and the Available Dividend Amount for the Affected
Tracking Stock would have been sufficient to pay a dividend in lieu
thereof as described in subparagraph (i) of this paragraph, then:
(A) if such Disposition involves all (not merely substantially
all) of the properties and assets of the Affected Tracking Group,
redeem all outstanding shares of the Affected Tracking Stock in
exchange for cash, securities or other property (other than Common
Stock of the Corporation) or any combination thereof on a pro rata
basis in an aggregate amount equal to the product of the Adjusted
Outstanding Interest Fraction for the Affected Tracking Group as of
the date of such complete redemption and the Fair Value of the Net
Proceeds of such Disposition, such aggregate amount to be allocated on
a pro rata basis to all outstanding shares of the Affected Tracking
Stock, except as provided in paragraph 2(d) of this Section B; or
(B) if such Disposition involves substantially all (but not all)
of the properties and assets of the Affected Tracking Group, apply an
aggregate amount of cash, securities or other property (other than
Common Stock of the Corporation) or any combination thereof equal to
the product of the Affected Tracking Group's Outstanding Interest
Fraction as of the date shares are selected for redemption and the
Fair Value of the Net Proceeds of such Disposition to the redemption
of outstanding shares of the Affected Tracking Stock, such aggregate
amount to be allocated on a pro rata basis or by lot (except as
provided in paragraph 2(d) of this Section B) to the shares of the
Affected Tracking Stock to be redeemed in a manner such that there
shall be redeemed the number of whole shares of Affected Tracking
Stock which have in the aggregate an average Market Value during the
forty-Trading Day period beginning on the 11th Trading Day following
the consummation of the Disposition closest to the product of the
Outstanding Interest Fraction as of the date such shares are selected
for redemption multiplied by the Fair Value of the Net Proceeds of
such Disposition (but in no event more than all of the shares of
Affected Tracking Stock then outstanding); or
(iii) convert each outstanding share of the Affected Tracking Stock
of the Affected Tracking Group into a number (or fraction) of fully paid
and non-assessable Special Common Shares or shares of any other class or
classes of Tracking Stock (or any combination thereof on a pro rata
basis) equal to 110% (the "Disposition Conversion Percentage") of the
average daily ratio (calculated to the nearest five decimal places) of
the Market Value of (y) one share of Affected Tracking Stock to (z) the
Market Value of one Special Common Share or share of such other class or
classes of Tracking Stock (or any combination thereof on a pro rata
basis) during a forty-Trading Day period beginning on the 11th Trading
Day after consummation of the Disposition.
In the event of the conversion of the Affected Tracking Stock
into Special Common Shares or shares of another class or classes of
Tracking Stock, the Fair Value of the Net Proceeds of such Disposition
shall be attributed to the Group related to the shares which are issued
upon such conversion (on a pro rata basis if a combination of such shares
are issued).
(c) The Corporation may elect to pay the dividend or redemption price
referred to in subparagraph (i) or (ii) of paragraph 10(b) of this Section B
either in the same form as the proceeds of the Disposition were received or
in any other combination of cash or securities or property (other than
Common Stock of the Corporation)
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that the Board determines will have an aggregate market value on a fully
distributed basis of not less than the amount equal to:
(i) in the case of subparagraph (i) or clause (B) of subparagraph
(ii) of this paragraph 10(b), the product of the applicable Outstanding
Interest Fraction and the Fair Value of the Net Proceeds of such
Disposition; or
(ii) in the case of clause (A) of subparagraph (ii) of this
paragraph 10(b), the product of the applicable Adjusted Outstanding
Interest Fraction and the Fair Value of the Net Proceeds of such
Disposition.
(d) If the dividend or redemption referred to in paragraph 10(b) of
Section B is paid in securities of an issuer other than the Corporation (the
"Successor"), and if there is a Retained Interest in the Affected Tracking
Group at such time, the Board shall, to the extent practicable, distribute
Successor shares corresponding to Special Common Shares to the holders of
shares of the Affected Tracking Stock. In the event of a Disposition, the
Corporation shall not be required to make any payment or other distributions
to the holders of TDS Group Shares or shares of any class of Tracking Stock
other than the Affected Tracking Stock. The Successor shares relating to any
Retained Interest or Inter-Group Interest at the time of the Disposition may
be retained by the Corporation and attributed to the TDS Group or the other
Tracking Group, respectively, or some or all of such shares may be
distributed pro rata to the holders of the TDS Group Shares or the
applicable Tracking Stock, respectively, in the sole discretion of the
Board. If the Board determines to distribute Successor shares with respect
to such a Retained Interest or Inter-Group Interest, it shall, to the extent
practicable, distribute Successor shares corresponding to Special Common
Shares to the holders of Tracking Stock of another Tracking Group with
respect to any such Inter-Group Interest, and distribute Successor shares
corresponding to Series A Common Shares to the holders of Series A Common
Shares, Successor shares corresponding to Common Shares to the holders of
Common Shares, and Successor shares corresponding to Special Common Shares
to the holders of Special Common Shares with respect to any Retained
Interest in such Tracking Group; PROVIDED that the same number of shares of
Successor common stock on a combined basis must be distributed for each
Series A Common Share, Common Share and any issued Special Common Share. If
practicable, the Board shall cause such Successor to be recapitalized
through an amendment to its charter or otherwise, such that the shares of
capital stock of such Successor and the relative rights, limitations and
preferences thereof substantially correspond to the Series A Common Shares,
Common Shares and Special Common Shares of the Corporation and their
relative rights, limitations and preferences, as may be determined to be
necessary or appropriate in the sole discretion of the Board, in order to
permit the distribution to be effected in the foregoing manner.
(e) Subject to the terms of paragraph 10(b) of this Section B, the Board
shall have complete discretion as to which option in paragraph 10(b) to
select; PROVIDED, HOWEVER, that once the disposition option selected by the
Board is publicly announced pursuant to paragraph 11 of this Section B, the
selection shall be irrevocable. The Board shall not be required to select
the option which results in the distribution with the highest value to the
holders of the shares of the Affected Tracking Stock or with the smallest
effect on the remaining classes and series of the Corporation's Common
Stock. In the event of a Disposition, the Corporation shall not be required
to make any payment or other distributions to the holders of Common Shares,
Series A Common Shares, Special Common Shares or shares of any class of
Tracking Stock other than the Affected Tracking Stock; PROVIDED, HOWEVER,
the Corporation may, in the sole discretion of the Board, make a
distribution to such other shareholders in respect of any Retained Interest
or any Inter-Group Interest in the Affected Tracking Group existing at the
time of a Disposition; PROVIDED FURTHER, that if the dividend or redemption
referred to in paragraph 10(b) of this Section B is paid in securities of a
Successor, and if there is a Retained Interest in the Affected Tracking
Group at such time, the Board shall make any such distribution in the manner
provided pursuant to paragraph 10(d) of this Section B.
(f) The Corporation may, in the sole discretion of the Board, at any
time prior to the first anniversary of a dividend on, or partial redemption
of, shares of Affected Tracking Stock following a Disposition, convert each
remaining outstanding share of Affected Tracking Stock into a number (or
fraction) of Special Common Shares or shares of any other class or classes
of Tracking Stock (or combination thereof on a pro rata basis) equal to the
product of the Disposition Conversion Percentage and the average daily ratio
(calculated to the nearest five decimal places) of the Market Value of one
Special Common Share or share of such other class or classes of Tracking
Stock (or any combination thereof on a pro rata basis) during a
twenty-Trading Day period ending on the fifth Trading Day prior to the date
of notice of such conversion.
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(g) To the extent that any Shares Issuable to Third Parties are included
in the determination of the Adjusted Outstanding Interest Fraction, the
Corporation's obligations in respect of such securities shall not be a
reduction in the calculation of the Fair Value of the Net Proceeds. In the
event any redemption of Tracking Stock is made in circumstances in which
cash, securities or property are allocated to the TDS Group in respect of
Shares Issuable to Third Parties (such cash, securities or other property
being referred to herein as the "Reserved Property"), the Corporation shall
be permitted to segregate and hold such property separate (in the case of
any Reserved Property other than Special Common Shares or shares of another
class of Tracking Stock). In the event the Reserved Property is, for any
reason, not delivered with respect to the obligations relating to such
Shares Issuable to Third Parties, such Reserved Property shall revert to the
TDS Group, subject to escheat laws, and the former holders of the Affected
Tracking Stock shall have no interest in such Reserved Property. In the
event of any conversion of Tracking Stock into Special Common Shares or
shares of any other class or classes of Tracking Stock, the Corporation
shall duly reserve Special Common Shares or shares of such other class or
classes of Tracking Stock or combination thereof issuable with respect to
Shares Issuable to Third Parties of the Affected Tracking Stock.
(h) At the time of any dividend made as a result of a Disposition, the
TDS Group shall be credited, and the Affected Tracking Group shall be
charged (in addition to the charge for the dividend paid in respect of
outstanding shares of Affected Tracking Stock), with an amount equal to the
product of (i) the aggregate amount paid in respect of such dividend times
(ii) a fraction the numerator of which is the Retained Interest Fraction and
the denominator of which is the Outstanding Interest Fraction of such
Tracking Group.
(i) If any Inter-Group Interests in a Tracking Group exist at the time
of any dividend made as a result of a Disposition, each Tracking Group
holding such an Inter-Group Interest in the Affected Tracking Group shall be
credited, and the Affected Tracking Group shall be charged (in addition to
the charge for the dividend paid in respect of outstanding shares of
Affected Tracking Stock) with an amount equal to the product of (i) the
aggregate amount paid in respect of such dividend times (ii) a fraction the
numerator of which is the Inter-Group Interest Fraction and the denominator
of which is the Outstanding Interest Fraction of the Affected Tracking
Group.
(j) In the case of a Disposition in a series of related transactions,
the Disposition shall be deemed to have been consummated upon the
consummation of the last of the series of related transactions.
(k) The Board shall determine the redemption date or conversion date
pursuant to Section B.11 hereof.
11. PROCEDURES RELATING TO DISPOSITION RIGHTS.
(a) Not later than the fifth Trading Day following the consummation of a
Disposition referred to above, the Corporation shall announce publicly by
press release (i) the Fair Value of the Net Proceeds of such Disposition,
(ii) the number of outstanding shares of Affected Tracking Stock, (iii)
information describing and indicating the number of Shares Issuable to Third
Parties of the Affected Tracking Stock, including the number of such shares
which are issuable as Committed Acquisition Shares and the number of such
shares into or for which Convertible Securities are then convertible,
exercisable or exchangeable, and the conversion, exercise or exchange prices
thereof (and stating which, if any, of such Convertible Securities are
Pre-Distribution Convertible Securities), (iv) the Disposition Conversion
Percentage, (v) the Outstanding Interest Fraction for the Affected Tracking
Stock as of a recent date preceding the date of such notice and (vi) the
Adjusted Outstanding Interest Fraction for the Affected Tracking Stock as of
a recent date preceding the date of such notice. Not earlier than the 51st
Trading Day and not later than the 55th Trading Day following the
consummation of such Disposition, the Corporation shall announce publicly by
press release which of the redemption options thereof described in paragraph
10(b) of this Section B it has irrevocably determined to take and the kind
of capital stock or cash, securities or other property or combination
thereof to be delivered pursuant to the option selected.
(b) If the Corporation determines to pay a dividend of cash, securities
or other property or combination thereof following a Disposition, as
described in subparagraph (i) of paragraph 10(b) of Section B, the
Corporation shall, not earlier than the 51st Trading Day and not later than
the 55th Trading Day following the consummation of such Disposition, cause
to be sent to each holder of outstanding shares of the Affected Tracking
Stock a notice setting forth (i) the record date for determining holders
entitled to receive such dividend, which shall be not earlier than the 61st
Trading Day and not later than the 65th Trading Day following the
consummation of such Disposition, (ii) the anticipated payment date of such
dividend (which shall not be more than 90 Trading Days following the
consummation of such Disposition), (iii) the kind and amount of cash, other
securities or property or combination thereof to be distributed in respect
of each share of the Affected Tracking
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<PAGE>
Stock, (iv) the amount of the Fair Value of the Net Proceeds of such
Disposition, (v) the Outstanding Interest Fraction as of a recent date
preceding the date of such notice, and (vi) the number of outstanding shares
of the Affected Tracking Stock subject to the Disposition and the Number of
Shares Issuable to Third Parties of the Affected Tracking Stock, including
the number of such shares which are issuable as Committed Acquisition Shares
and the number of shares of the Affected Tracking Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, are Pre-Distribution Convertible Securities).
(c) If the Corporation determines to undertake a redemption of a class
of Tracking Stock following a Disposition of all (not merely substantially
all) of the properties and assets of the Affected Tracking Group with
respect to the Fair Value of the Net Proceeds, as described in clause (A) of
subparagraph (ii) of paragraph 10(b) of this Section B, the Corporation
shall cause to be given to each holder of outstanding shares of Tracking
Stock of the Affected Tracking Group a notice setting forth (i) a statement
that all of the shares of the Affected Tracking Stock outstanding on the
redemption date shall be redeemed, (ii) the anticipated redemption date
(which shall not be more than 90 Trading Days following the consummation of
such Disposition), (iii) the kind and amount of cash, securities or property
or combination thereof to be paid as a redemption price in respect of shares
of the Affected Tracking Stock outstanding on the redemption date, (iv) the
amount of the Fair Value of the Net Proceeds of such Disposition, (v) the
Adjusted Outstanding Interest Fraction as of a recent date preceding the
date of such notice, (vi) the place or places where certificates for shares
of Affected Tracking Stock, properly endorsed or assigned for transfer
(unless the Corporation waives such requirement), are to be surrendered for
delivery of cash, securities or property, and (vii) the number of
outstanding shares of the Affected Tracking Stock and the Number of Shares
Issuable to Third Parties of the Affected Tracking Stock, including the
number of such shares which are issuable as Committed Acquisition Shares and
the number of shares of the Affected Tracking Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, of such Convertible Securities are Pre-Distribution
Convertible Securities). Such notice shall be sent not less than 51 Trading
Days nor more than 55 Trading Days following the consummation of such
Disposition and not less than 25 Trading Days prior to the redemption date.
(d) If the Corporation determines to undertake a partial redemption of
Tracking Stock following a Disposition of substantially all (but not all) of
the properties and assets of the Affected Tracking Group as described in
clause (B) of subparagraph (ii) of paragraph 10(b)of this Section B, such
partial redemption shall be done on a pro rata basis or by lot. The
Corporation shall, not earlier than the 51st Trading Day and not later than
the 55th Trading Day following the consummation of such a Disposition, cause
to be given to each holder of record of outstanding shares of the Affected
Tracking Stock a notice setting forth (i) a statement that some of the
shares of the Affected Tracking Stock outstanding on the redemption date
shall be redeemed, specifying the number of such shares or how such number
shall be determined, (ii) a date not earlier than the 61st Trading Day and
not later than the 65th Trading Day following the consummation of such
Disposition which shall be the date on which shares of the Affected Tracking
Stock then outstanding shall be selected for redemption, (iii) the
anticipated redemption date (which shall not be more than 90 Trading Days
following the consummation of such Disposition), (iv) the kind and amount of
cash, securities or property or combination thereof to be paid as a
redemption price in respect of the shares of the Affected Tracking Stock,
(v) the amount of the Fair Value of the Net Proceeds of such Disposition,
(vi) the Outstanding Interest Fraction as of a recent date preceding the
date of such notice, (vii) the Number of Shares Issuable to Third Parties of
the Affected Tracking Stock, including the number of such shares which are
issuable as Committed Acquisition Shares and the number of shares of
Affected Tracking Stock into or for which outstanding Convertible Securities
are then convertible, exercisable or exchangeable and the conversion,
exercise or exchange prices thereof (and stating which, if any, of such
Convertible Securities are Pre-Distribution Convertible Securities), and
(viii) a statement that the Corporation shall not be required to register a
transfer of any shares of the Affected Tracking Stock for a period of up to
15 Trading Days next preceding the date referred to in clause (ii) of this
sentence. Promptly following the date referred to in clause (ii) of the
preceding sentence, but not earlier than the 61st Trading Day and not later
than the 65th Trading Day following the consummation of such Disposition,
the Corporation shall cause to be given to each holder of shares of the
Affected Tracking Stock, a notice setting forth (i) the number of shares of
Affected Tracking Stock held by such holder to be redeemed, (ii) a statement
that such shares of Affected Tracking Stock shall be redeemed, (iii) the
anticipated redemption date (which shall not be more than 90 Trading Days
following the consummation of such Disposition), (iv) the kind and amount of
cash, other securities or property to be received by such holder with
respect to each share of Affected Tracking Stock to be redeemed, including
details as to the calculation thereof, and (v) the place or places where
certificates for such
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<PAGE>
shares of Affected Tracking Stock, properly endorsed or assigned for
transfer (unless the Corporation waives such requirement), are to be
surrendered for delivery of such cash, other securities or property or
combination thereof.
(e) In the event of any conversion following a Disposition, as described
in subparagraph (iii) of paragraph 10(b) of this Section B, the Corporation
shall cause to be given to each holder of outstanding shares of the Affected
Tracking Stock a notice setting forth (i) a statement that all of the
outstanding shares of the Affected Tracking Stock shall be converted into a
number or fraction of Special Common Shares or shares of any other class of
Tracking Stock or combination thereof on a pro rata basis, and the
calculation pursuant to which such number or fraction was determined or will
be determined, (ii) the anticipated conversion date (which shall not be more
than 90 Trading Days following the consummation of such Disposition), (iii)
the per share number (or fraction) of Special Common Shares or shares of
another class of Tracking Stock or combination thereof, as applicable, to be
received with respect to each share of Affected Tracking Stock, specifying
such number or fraction of shares or combination thereof, the Disposition
Conversion Percentage and other details as to the calculation thereof, (iv)
the place or places where certificates for shares of the Affected Tracking
Stock, properly endorsed or assigned for transfer (unless the Corporation
waives such requirement), are to be surrendered, and (v) the number of
outstanding shares of the Affected Tracking Stock and the Number of Shares
Issuable to Third Parties of the Affected Tracking Stock, including the
number of such shares which are issuable as Committed Acquisition Shares and
the number of shares of the Affected Tracking Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, are Pre-Distribution Convertible Securities). Such
notice shall be sent not less than 51 Trading Days nor more than 55 Trading
Days following the consummation of the Disposition and not less than 25 days
prior to the conversion date.
(f) Upon the Corporation's decision to convert all of the remaining
outstanding shares of the Affected Tracking Stock as described in paragraph
10(f), the Corporation shall announce publicly by press release (i) the
number of outstanding shares of Affected Tracking Stock to be converted,
(ii) the Number of Shares Issuable to Third Parties of such Tracking Stock,
including the number of such shares which are issuable as Committed
Acquisition Shares and into or for which Convertible Securities are then
convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof (and stating which, if any, of such Convertible
Securities are Pre-Distribution Convertible Securities), (iii) the
Disposition Conversion Percentage and (iv) the Outstanding Interest Fraction
for such Tracking Stock as of a recent date preceding the date of such
notice. The Corporation shall subsequently announce publicly by press
release whether the shares of such Tracking Stock are being converted in
exchange for Special Common Shares, shares of another Tracking Stock or a
combination thereof on a pro rata basis.
(g) In the event of any conversion as described paragraph 10(f) of this
Section B, the Corporation shall cause to be given to each holder of
outstanding shares of the Affected Tracking Stock a notice setting forth (i)
a statement that all of the outstanding shares of the Affected Tracking
Stock shall be converted into a number or fraction of Special Common Shares
or shares of any other class of Tracking Stock or combination thereof on a
pro rata basis, specifying the shares or combination thereof, (ii) the
anticipated conversion date (which shall not be more than 90 Trading Days
following the press release that publicly announces such conversion), (iii)
the per share number (or fraction) of Special Common Shares or shares of
another class of Tracking Stock or combination thereof, as applicable, to be
received with respect to each share of Affected Tracking Stock, specifying
such number or fraction of shares or combination thereof, the Disposition
Conversion Percentage and other details as to the calculation thereof, (iv)
the place or places where certificates for shares of the Affected Tracking
Stock, properly endorsed or assigned for transfer (unless the Corporation
waives such requirement), are to be surrendered, and (v) the number of
outstanding shares of the Affected Tracking Stock and the Number of Shares
Issuable to Third Parties of the Affected Tracking Stock, including the
number of such shares which are issuable as Committed Acquisition Shares and
the number of shares of the Affected Tracking Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, are Pre-Distribution Convertible Securities). Such
notice shall be sent not less than 25 Trading Days nor more than 35 Trading
Days prior to the conversion date.
12. CONVERSION AT OPTION OF THE CORPORATION. The Corporation may, in the
sole discretion of the Board, at any time convert each outstanding share of any
class of Tracking Stock (the "Converted Tracking Stock") of any Tracking Group
(the "Converted Tracking Group") into a number (or fraction) of fully paid and
non-assessable Special Common Shares or shares of another class or classes of
Tracking Stock or any combination thereof on a
B-13
<PAGE>
pro rata basis, equal to the product of the applicable percentage set forth
below (the "Optional Conversion Percentage") on a conversion date selected by
the Board pursuant to Section B.14 hereof, and the average daily ratio
(calculated to the nearest five decimal places) of the Market Value of one share
of Converted Tracking Stock to the Market Value of one Special Common Share or
share of such other class of Tracking Stock or any combination thereof on a pro
rata basis, during a twenty-Trading Day period ending on the fifth Trading Day
prior to the date of notice of such conversion, on a pro rata basis:
<TABLE>
<CAPTION>
12-MONTH PERIOD PRIOR TO OPTIONAL CONVERSION
ANNIVERSARY OF INITIAL ISSUANCE DATE PERCENTAGE
- ------------------------------------------------------------------------------------- -------------------
<S> <C>
First through Fifth.................................................................. 115%
Sixth................................................................................ 114%
Seventh.............................................................................. 113%
Eighth............................................................................... 112%
Ninth................................................................................ 111%
Thereafter........................................................................... 110%
</TABLE>
In the event of the conversion of any class of Tracking Stock into Special
Common Shares or shares of another class or classes of Tracking Stock, the
assets and liabilities of the Converted Tracking Group shall be attributed to
the Group related to the shares which are issued upon such conversion (on a pro
rata basis if a combination of such shares are issued).
13. REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY.
(a) Subject to paragraph 2(b) of this Section B, the Corporation, in the
sole discretion of the Board, may at any time redeem (at no premium) all of
the outstanding shares of any class of Tracking Stock (the "Redeemed
Tracking Stock") of a Tracking Group (the "Redeemed Tracking Group"), for a
number of outstanding shares of common stock of a Qualifying Subsidiary or
Qualifying Subsidiaries holding all of the assets and liabilities attributed
to the Redeemed Tracking Group equal to the product of the Adjusted
Outstanding Interest Fraction of the Redeemed Tracking Group multiplied by
the number of all of the outstanding shares of the Qualifying Subsidiaries
owned directly or indirectly by the Corporation, on a pro rata basis. The
Corporation shall retain the balance of the outstanding shares of the common
stock of the Qualifying Subsidiaries as (i) Reserved Property with respect
to the obligations related to the Number of Shares Issuable to Third Parties
used in calculating such Adjusted Outstanding Interest Fraction, or (ii) in
respect of the Retained Interest and any Inter-Group Interest in the
Converted Tracking Group; PROVIDED, HOWEVER, in the sole discretion of the
Board, shares of common stock of the Qualifying Subsidiaries retained in
respect of the Retained Interest and any Inter-Group Interest in such
Tracking Group may be distributed as provided in paragraph 13(b) of this
Section B.
(b) In the event the Board determines to redeem the shares of any class
of Tracking Stock for shares of a Qualifying Subsidiary, and if there is a
Retained Interest in such Tracking Group, the Board shall, to the extent
practicable, distribute Qualifying Subsidiary shares corresponding to
Special Common Shares to the holders of Tracking Stock of such Tracking
Group with respect to the Adjusted Outstanding Interest Fraction in such
Tracking Group and, if the Board determines to distribute shares of such
Qualifying Subsidiary to other shareholders with respect to any Retained
Interest or Inter-Group Interest shall, to the extent practicable,
distribute Qualifying Subsidiary shares corresponding to Special Common
Shares to the holders of any other Tracking Stock with respect to any such
Inter-Group Interest in such Tracking Group, and distribute Qualifying
Subsidiary shares corresponding to Series A Common Shares to the holders of
Series A Common Shares, Qualifying Subsidiary shares corresponding to Common
Shares to the holders of Common Shares, and Qualifying Subsidiary shares
corresponding to Special Common Shares to the holders of Special Common
Shares with respect to any Retained Interest in such Tracking Group,
provided that the same number of shares of Qualifying Subsidiary common
stock on a combined basis shall be distributed for each Series A Common
Share, Common Share and any issued Special Common Share. If practicable, the
Board shall recapitalize such Qualifying Subsidiary or Qualifying
Subsidiaries through an amendment to its charter or otherwise, such that the
shares of capital stock of such subsidiary and the relative rights,
limitations and preferences thereof substantially correspond to the Series A
Common Shares, Common Shares and Special Common Shares of the Corporation
and their relative rights, limitations and preferences, as may be determined
to be necessary or appropriate in the sole discretion of the Board, in order
to permit the distribution to be effected in the foregoing manner; PROVIDED
that, if the Qualifying Subsidiary has or will have shares corresponding to
Series A Common Shares and Common Shares but does not and will not have
shares corresponding to Special Common Shares
B-14
<PAGE>
and it is impracticable to recapitalize the subsidiary as provided in this
sentence to create shares corresponding to Special Common Shares, the Board
shall distribute Qualifying Subsidiary shares corresponding to Common Shares
to the holders of Tracking Stock which would otherwise be entitled to
receive Qualifying Subsidiary shares corresponding to Special Common Shares,
and shall distribute Qualifying Subsidiary shares corresponding to Common
Shares to the holders of Special Common Shares in respect of the Retained
Interest.
14. PROCEDURES RELATING TO CONVERSION OR REDEMPTION OF TRACKING STOCK.
(a) Upon the Corporation's decision to convert or redeem all of the
outstanding shares of any class of Tracking Stock as described in paragraphs
12 or 13 of this Section B, the Corporation shall announce publicly by press
release (i) the number of outstanding shares of the class of Tracking Stock
which will be converted or redeemed, (ii) the Number of Shares Issuable to
Third Parties of such Tracking Stock, including the number of such shares
which are issuable as Committed Acquisition Shares and into or for which
Convertible Securities are then convertible, exercisable or exchangeable and
the conversion, exercise or exchange prices thereof (and stating which, if
any, of such Convertible Securities are Pre-Distribution Convertible
Securities), (iii) the Optional Conversion Percentage and other details as
to the calculation thereof, and (iv) the Outstanding Interest Fraction and
the Adjusted Outstanding Interest Fraction for such Tracking Stock as of a
recent date preceding the date of such notice. The Corporation shall
subsequently announce publicly by press release whether the shares of such
Tracking Stock are being converted in exchange for Special Common Shares,
shares of another Tracking Stock or a combination thereof on a pro rata
basis, or are being redeemed for shares of a Qualifying Subsidiary. A notice
by the Corporation that the Corporation is considering a conversion or
redemption or is seeking a ruling from the Internal Revenue Service relating
to a possible conversion or redemption shall not constitute an announcement
of a decision with respect to a redemption or conversion pursuant to this
paragraph 14.
(b) The Corporation's decision to convert or redeem all of the
outstanding shares of Tracking Stock as described in paragraphs 12 or 13 of
this Section B shall be revocable, and the determination of the Board with
respect to which securities the Corporation shall use to convert or redeem
such Tracking Stock shall be revocable, and any such conversion or
redemption may be abandoned or modified by the Corporation, in the sole
discretion of the Board, at any time prior to the Corporation's delivery of
the replacement securities in exchange for the converted or redeemed shares
of Tracking Stock.
(c) If the Corporation determines to convert the shares of any class of
Tracking Stock into Special Common Shares or shares of any other class or
classes of Tracking Stock or any combination thereof, as described in
paragraph 12 of this Section B, the Corporation shall promptly cause to be
given to each holder of shares of Tracking Stock to be converted a notice
setting forth (i) a statement that all outstanding shares of such class of
Tracking Stock shall be converted in exchange for Special Common Shares or
shares of any other class of Tracking Stock or any combination thereof on a
pro rata basis, specifying the shares or combination thereof, (ii) the
anticipated conversion date (which shall not be more than 90 Trading Days
following the press release that publicly announces such a conversion),
(iii) the per share number (or fraction) of Special Common Shares or shares
of another class of Tracking Stock or combination thereof, as applicable, to
be received with respect to each share of the Converted Tracking Stock,
specifying such number or fraction of shares or combination thereof, the
Optional Conversion Percentage and other details as to the calculation
thereof, (iv) the place or places where certificates for shares of such
Tracking Stock to be redeemed, properly endorsed or assigned for transfer
(unless the Corporation waives such requirement), are to be surrendered for
delivery of certificates for Special Common Shares, shares of another class
of Tracking Stock or both, and (v) the number of outstanding shares of such
Tracking Stock to be redeemed and the Number of Shares Issuable to Third
Parties of such Tracking Stock, including the number of such shares which
are issuable as Committed Acquisition Shares and the number of shares of
such Tracking Stock into or for which outstanding Convertible Securities are
then convertible, exercisable or exchangeable and the conversion, exercise
or exchange prices thereof (and stating which, if any, of such Convertible
Securities are Pre-Distribution Convertible Securities). Such notice shall
be sent not less than 25 Trading Days nor more than 35 Trading Days prior to
the conversion date.
(d) If the Corporation determines to redeem the shares of any class of
Tracking Stock Shares into shares of a Qualifying Subsidiary as described in
paragraph 13 of this Section B, the Corporation shall promptly cause to be
given to each holder of shares of Tracking Stock to be redeemed a notice
setting forth (i) a statement that all outstanding shares of such class of
Tracking Stock shall be redeemed in exchange for shares of a Qualifying
Subsidiary, (ii) the anticipated redemption date (which shall not be more
than 90 Trading Days following the
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<PAGE>
press release that publicly announces such a redemption), (iii) the Adjusted
Outstanding Interest Fraction for such Tracking Stock as of a recent date
preceding the date of such notice, (iv) the place or places where
certificates for shares of such Tracking Stock are to be redeemed, properly
endorsed or assigned for transfer (unless the Corporation waives such
requirement), are to be surrendered for delivery of certificates for shares
of common stock of the Qualifying Subsidiary, and (v) the number of
outstanding shares of such Tracking Stock and the Number of Shares Issuable
to Third Parties of such Tracking Stock, including the number of such shares
which are issuable as Committed Acquisition Shares and the number of shares
of such Tracking Stock into or for which outstanding Convertible Securities
are then convertible, exercisable or exchangeable and the conversion,
exercise or exchange prices thereof (and stating which, if any, of such
Convertible Securities are Pre-Distribution Convertible Securities). Such
notice shall be sent not less than 25 Trading Days nor more than 35 Trading
Days prior to the redemption date.
15. GENERAL PROVISIONS RELATING TO CONVERSIONS AND REDEMPTIONS.
(a) In each case in which a notice is required to be given to holders of
outstanding shares of any class of Tracking Stock in accordance with
paragraphs 11 or 14 (other than a notice to holders of shares selected for a
partial redemption), notice shall also be given, within the required time
period, to each holder of Convertible Securities that are convertible into
or exercisable or exchangeable for shares of such Tracking Stock (unless
provision for such notice is otherwise made pursuant to the terms of such
Convertible Securities), which notice shall include, in addition to all of
the information set forth in the corresponding notice to holders of shares
of such Tracking Stock, a statement to the effect that the holders of such
Convertible Securities shall be entitled to receive the dividend,
participate in the redemption of shares following a Disposition with respect
to such Tracking Stock or in the selection of shares for conversion or
redemption, participate in the conversion of shares or participate in the
redemption of shares in exchange for stock of the Qualifying Subsidiaries
only if such holder appropriately converts, exercises or exchanges such
Convertible Securities on or prior to the record date for the dividend,
redemption date, date fixed for selection of shares to be redeemed or
conversion date, as applicable, set forth in such notice. In the case of a
conversion or redemption of shares of any class of Tracking Stock, the
notice to holders of Convertible Securities shall also state what, if
anything, such holders shall be entitled to receive pursuant to the terms of
such Convertible Securities if such holders convert, exercise or exchange
such Convertible Securities following the conversion date or redemption
date, as applicable.
(b) All notices required to be given in accordance with this paragraph
15 or paragraphs 11 or 14 shall be sent to a holder by first class mail,
postage prepaid, at the holder's address as the same appears on the transfer
books of the Corporation. Neither the failure to mail any notice to any
particular holder of shares of Tracking Stock or of Convertible Securities
nor any defect therein shall affect the sufficiency thereof with respect to
any other holder of outstanding shares of Tracking Stock or of Convertible
Securities, or the validity of any conversion or redemption.
(c) The Corporation shall not be required to issue or deliver fractional
shares of any class of capital stock or any fractional securities to any
holder of shares of Tracking Stock upon any conversion or redemption,
dividend or other distribution described in paragraphs 10, 12 or 13 of this
Section B. In connection with the determination of the number of shares of
any class of capital stock that is issuable or the amount of securities that
is deliverable to any holder of record upon any conversion or redemption,
dividend or other distribution (including any fractions of shares or
securities), the Corporation may aggregate the number of shares of Tracking
Stock held at the relevant time by such holder of record. If the number of
shares of any class of capital stock or the amount of securities remaining
to be issued or delivered to any holder of shares of Tracking Stock is a
fraction, the Corporation shall, if such fraction is not issued or delivered
to such holder, pay a cash adjustment in respect of such fraction in an
amount equal to the fair market value of such fraction on the fifth Trading
Day prior to the date such payment is to be made (without interest). For
purposes of the preceding sentence, "fair market value" of any fraction
shall be (i) in the case of any fraction of a share of capital stock of the
Corporation, the product of such fraction and the Market Value of one share
of such capital stock and (ii) in the case of any other fractional security,
such value as is determined by the Board.
(d) No adjustments in respect of dividends shall be made upon the
conversion or redemption of any shares of Tracking Stock; PROVIDED, HOWEVER,
that if the conversion or redemption date with respect to a class of
Tracking Stock is subsequent to the record date for the payment of a
dividend or other distribution thereon or with respect thereto, the holders
of shares of such class of Tracking Stock at the close of business on such
record date shall be entitled to receive the dividend or other distribution
payable on or with respect to such shares on the date set for payment of
such dividend or other distribution, notwithstanding a conversion or
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<PAGE>
redemption by the Corporation of such shares or the Corporation's default in
payment of the dividend or distribution due on such date.
(e) Before any holder of shares of any class of Tracking Stock shall be
entitled to receive certificates representing shares of any kind of capital
stock or cash, securities or other property or combination thereof to be
received by such holder with respect to any conversion or redemption of such
Tracking Stock, such holder shall be required to surrender at such place as
the Corporation shall specify certificates for such shares, properly
endorsed or assigned for transfer (unless the Corporation waives such
requirement). The Corporation shall as soon as practicable after surrender
of certificates representing shares of such Tracking Stock deliver to the
person for whose account such shares were so surrendered, or to the nominee
or nominees of such person, certificates representing the number of whole
shares of the kind of capital stock or cash, securities or other property or
combination thereof to which such person is entitled, together with any
payment for fractional securities referred to above. The Corporation shall
not be required to register (i) a transfer of any shares of Tracking Stock
for a period of up to 15 Trading Days preceding the conversion date or
redemption date or (ii) any shares of Tracking Stock selected for
redemption.
(f) From and after any applicable conversion or redemption date, all
rights of a holder of shares of any class of Tracking Stock that were
converted or redeemed shall cease except for the right, upon surrender of
the certificates representing such Tracking Stock, to receive certificates
representing shares of the kind and amount of capital stock or cash,
securities or other property or combination thereof for which such shares of
Tracking Stock were converted or redeemed, together with any payment for
fractional securities, and such holder shall have no other or further rights
in respect of the Tracking Stock so converted or redeemed, including, but
not limited to, any rights with respect to any shares of capital stock or
cash, securities or other property or combination thereof which are reserved
or otherwise designated by the Corporation as being held for the
satisfaction of the Corporation's obligations to pay or deliver any shares
of capital stock, cash, securities or other property or combination thereof
upon the conversion, exercise or exchange of any outstanding Convertible
Securities or with respect to any other Shares Issuable to Third Parties
related to the conversion or redemption of such Tracking Stock as of the
date of such conversion or redemption. No holder of a certificate that,
immediately prior to the applicable conversion or redemption date for any
class of Tracking Stock, represented shares of Tracking Stock which were
converted or redeemed shall be entitled to receive any dividend or other
distribution with respect to shares of any kind of capital stock or other
securities into or in exchange for which the shares of such Tracking Stock
were converted or redeemed until surrender of such holder's certificate for
a certificate or certificates representing shares of such kind of capital
stock or other securities. Upon such surrender, there shall be paid to the
holder the amount of any dividends or other distributions (without interest)
which theretofore became payable with respect to a record date after the
conversion date or redemption date, as the case may be, but that were not
paid by reason of the foregoing, with respect to the number of whole shares
of the kind of capital stock or other securities represented by the
certificate or certificates issued upon such surrender.
(g) The Corporation shall pay any and all documentary, stamp or similar
issue or transfer taxes that may be payable in respect of the issue or
delivery of any shares of capital stock or other securities on the
conversion or redemption of any class of Tracking Stock. The Corporation
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issue and delivery of any shares of capital stock
or other securities in a name other than that in which the shares of
Tracking Stock so converted or redeemed were registered and no such issue or
delivery shall be made unless and until the person requesting such issue has
paid to the Corporation the amount of any such tax, or has established to
the satisfaction of the Corporation that such tax has been paid.
16. EFFECTS ON CONVERTIBLE SECURITIES.
(a) The following provisions with respect to Convertible Securities
shall apply only to the extent that the terms of such Convertible Securities
do not provide for adjustments in the event of a conversion or redemption
described in paragraphs 10, 12 or 13 of this Section B.
(b) After any conversion date or redemption date on which all
outstanding shares of any class of Tracking Stock were converted or
redeemed, any share of such class of Tracking Stock that is to be issued on
conversion, exchange or exercise of any Convertible Security shall,
immediately upon such conversion, exchange or exercise and without any
notice or any other action on the part of, the Corporation or its Board or
the holder of such Convertible Security:
B-17
<PAGE>
(i) in the event the shares of such class of Tracking Stock
outstanding on such conversion date were converted into Special Common
Shares or shares of another class or classes of Tracking Stock or
combination thereof pursuant to the provisions described in subparagraph
(iii) of paragraph 10(b), paragraph 10(f) or paragraph 12 of this Section
B, be converted into the number of Special Common Shares or shares of
another class or classes of Tracking Stock or combination thereof that
the number of shares of such class of Tracking Stock, that were to be
issued upon such conversion, exchange or exercise, would have received
had such shares been outstanding on such conversion date; or
(ii) in the event the shares of such class of Tracking Stock
outstanding on such redemption date were redeemed pursuant to the
provisions described in subparagraph (ii)(A) of paragraph 10(b) of this
Section B or redeemed for shares of capital stock of a Qualifying
Subsidiary or Qualifying Subsidiaries pursuant to paragraph 13 of this
Section B, be redeemed, to the extent of funds of the Corporation legally
available therefor, for the kind and amount of cash, securities or
property or any combination thereof, or shares of capital stock of a
Qualifying Subsidiary or Qualifying Subsidiaries, that the number of
shares of such class of Tracking Stock, that were to be issued upon such
conversion, exchange or exercise, would have received had such shares
been outstanding on such redemption date.
(c) If determined to be appropriate in the sole discretion of the Board,
any such capital stock or cash, securities or property or any combination
thereof to be delivered upon such conversion or redemption may be
irrevocably transferred in trust for the benefit of holders of such
Convertible Securities.
17. OTHER PROVISIONS.
(a) The Board shall have the power to issue or sell any class or series
of stock herein or hereafter authorized, for such consideration as the Board
shall from time to time, in its discretion, determine, whether or not
greater consideration could be received upon the issue or sale of shares of
another class or series, and as otherwise permitted by law.
(b) The Board shall have the power to purchase any class or series of
stock herein or hereafter authorized for such consideration as the Board
shall from time to time, in its discretion, determine, whether or not lesser
consideration could be paid upon the purchase of shares of another class or
series, and as otherwise permitted by law.
(c) If the Corporation shall in any manner split, subdivide or combine
the outstanding Common Shares, Series A Common Shares or Special Common
Shares, all outstanding Common Shares, Series A Common Shares and Special
Common Shares shall be proportionally split, subdivided or combined in the
same manner and on the same basis.
(d) In the event of a merger or consolidation of the Corporation with or
into another entity (whether or not the Corporation is the surviving
entity), the holders of Special Common Shares and Common Shares shall be
entitled to receive the same consideration per share as a result of such
merger or consolidation; provided, that this requirement shall be deemed to
be satisfied if the consideration received by the holders of Special Common
Shares consists of securities which have relative rights, preferences and
limitations vis-a-vis the securities received by the holders of Common
Shares that, in the judgment of the Board, are substantially similar in all
material respects to the relative rights, preferences and limitations of the
Special Common Shares vis-a-vis the Common Shares, respectively.
(e) Every reference in this Restated Certificate of Incorporation or
under Delaware law to a majority or other proportion of shares of capital
stock shall, to the extent permitted under Delaware law, refer to a majority
or such other proportion of the votes entitled to be cast by such shares of
capital stock.
(f) In accordance with Section 203(b)(3) of the DGCL, the Corporation
expressly elects not be governed by Section 203 of the DGCL.
(g) Advance notice of shareholder nominations for election of directors
and other business to be brought by shareholders before a meeting of
shareholders shall be given in the manner provided in the Bylaws of the
Corporation.
18. REDEMPTION TO PROTECT LICENSES.
(a) Notwithstanding any other provision of this Restated Certificate of
Incorporation, as amended, to the contrary, any outstanding shares of stock
of the Corporation (other than Series A Common Shares) shall be subject to
redemption by the Corporation, by action of the Board, if in the judgment of
the Board such action
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should be taken, pursuant to Section 151(b)(2) of the Delaware General
Corporation Law or any other applicable provision of law, to the extent
necessary to prevent the loss or secure the reinstatement of, or to prevent
the denial of applications for or the renewal of, any license or franchise
from any governmental agency held by the Corporation or any of its
Subsidiaries, or of any person in which the Corporation has any ownership or
voting interest, direct or indirect, to conduct any portion of the business
of the Corporation or any of its Subsidiaries, or any person in which the
Corporation has any ownership or voting interest, direct or indirect, which
license or franchise is conditioned upon some or all of the holders of the
Corporation's stock, or any other person with the right to vote such stock
or on whose behalf such stock is owned or voted, possessing prescribed
qualifications or any other condition. The terms and conditions of such
redemption shall be as follows:
(i) The redemption price of the shares to be redeemed pursuant to
this paragraph 18 shall be equal to the lesser of (A) the Fair Market
Value of such shares or (B) if such shares were purchased by such
Disqualified Holder within one year of the Redemption Date, such
Disqualified Holder's purchase price for such shares;
(ii) The redemption price of such shares may be paid in cash,
Redemption Securities or any combination thereof;
(iii) If less than all the shares held by Disqualified Holders are
to be redeemed, the shares to be redeemed shall be selected in such
manner as shall be determined by the Board, which may include selection
first of the most recently purchased shares thereof, selection by lot or
selection in any other manner determined by the Board;
(iv) At least 30 days' written notice of the Redemption Date shall
be given to the record holders of the shares selected to be redeemed
(unless waived in writing by any such holder); PROVIDED that the
Redemption Date may be the date on which written notice shall be given to
record holders if the cash or Redemption Securities necessary to effect
the redemption shall have been deposited in trust for the benefit of such
record holders and subject to immediate withdrawal by them upon surrender
of the stock certificates for their shares to be redeemed;
(v) From and after the Redemption Date, any and all rights of
whatever nature, which may be held by the owners of shares selected for
redemption (including without limitation any rights to vote or
participate in dividends declared on stock of the same class or series as
such shares), shall cease and terminate and they shall thenceforth be
entitled only to receive the cash or Redemption Securities payable upon
redemption; and
(vi) Such other terms and conditions as the Board shall determine.
(b) For purposes of this paragraph 18:
"DISQUALIFIED HOLDER" shall mean any holder of shares of stock of the
Corporation whose holding of such stock on behalf of such holder or on
behalf of any other person involving any beneficial or other indirect
ownership interest or voting power with respect to such stock, either
individually or when taken together with the holding or voting of shares of
stock of the Corporation by any other holders or persons entitled to vote
such stock, may result, in the good faith judgment of the Board, in the loss
of, or the failure to secure the reinstatement of, or the denial of
applications for or the renewal of, any license or franchise from any
governmental agency held by the Corporation or any of its Subsidiaries or of
any person in which the Corporation has any ownership or voting interest to
conduct any portion of the business of the Corporation or any of its
Subsidiaries or of any person in which the Corporation has any ownership or
voting interest, direct or indirect.
"FAIR MARKET VALUE" of a share of the Corporation's stock of any class
or series shall mean the average Closing Price for such a share for each of
the 20 most recent days on which shares of stock of such class or series
shall have been traded preceding the day on which notice of redemption shall
be given pursuant to this paragraph 18; PROVIDED, HOWEVER, that if shares of
stock of such class or series are not traded on any securities exchange or
in the over-the-counter market, "Fair Market Value" shall be determined by
the Board in good faith. "Closing Price" on any day means the reported
closing sales price or, in case no such sale takes place, the average of the
reported closing bid and asked prices on the principal United States
securities exchange registered under the Securities Exchange Act of 1934 on
which such stock is listed, or, if such stock is not listed on any such
exchange, the highest closing sales price or bid quotation for such stock on
the Nasdaq Stock Market or any system then in use, or if no such prices or
quotations are available, the fair market value on the day in question as
determined by the Board in good faith.
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<PAGE>
A "PERSON" shall mean an individual, a corporation, a partnership, a
joint venture, a trust or unincorporated organization, a joint stock company
or similar organization, a government or any political subdivision thereof,
or any other legal entity.
"REDEMPTION DATE" shall mean the date fixed by the Board for the
redemption of shares of stock of the Corporation pursuant to this paragraph
18.
"REDEMPTION SECURITIES" shall mean any debt or equity securities (other
than Series A Common Shares or securities convertible into or exchangeable
for, or carrying a right to subscribe to or acquire, Series A Common Shares)
of the Corporation, any of its Subsidiaries or any other corporation, or any
combination thereof, having such terms and conditions as shall be approved
by the Board and which, together with any cash to be paid as part of the
redemption price, in the opinion of any nationally recognized investment
banking firm selected by the Board (which may be a firm which provides other
investment banking, brokerage or other services to the Corporation), has a
value, at the time notice of redemption is given pursuant to subparagraph
(a)(iv) of this paragraph 18, at least equal to the price required to be
paid pursuant to subparagraph (a)(i) of this paragraph 18 (assuming, in the
case of Redemption Securities to be publicly traded, such Redemption
Securities were fully distributed and subject only to normal trading
activity).
19. DEFINITIONS. In addition to the definitions set forth above in this
Restated Certificate of Incorporation, unless the context requires otherwise,
the following terms shall have the meanings specified below:
"ADJUSTED OUTSTANDING INTEREST FRACTION," as of any date, shall mean, with
respect to a particular class of Tracking Stock, a fraction the numerator of
which is the aggregate number of shares of such class of Tracking Stock
outstanding on such date and the denominator of which is the sum of (a) such
aggregate number of outstanding shares, (b) the Number of Shares Issuable with
Respect to Retained Interest for such class of Tracking Stock as of such date,
(c) the aggregate Number of Shares Issuable with Respect to Inter-Group Interest
by all other Tracking Groups in such Tracking Stock, if any, as of such date and
(d) the Number of Shares Issuable to Third Parties with respect to such Tracking
Stock as of such date.
"AERIAL" shall mean Aerial Communications, Inc., a Delaware corporation.
"AERIAL GROUP" shall mean, as of any date that any Aerial Group Common
Shares have been issued and continue to be outstanding:
(a) the interest of the Corporation or any of its subsidiaries in Aerial
and its subsidiaries (including any successor thereto by merger,
consolidation or sale of all or substantially all of its assets, whether or
not in connection with a Related Business Transaction) and their respective
businesses, assets and liabilities, except any of such businesses, assets or
liabilities which have been attributed by the Board to another Group;
(b) all businesses, assets and liabilities of the Corporation or any of
its subsidiaries to the extent attributed to the Aerial Group by the Board,
whether or not such businesses, assets or liabilities are businesses, assets
and liabilities of Aerial or any of its subsidiaries (or a successor as
described in clause (a) of this sentence);
(c) all businesses, assets and liabilities contributed or otherwise
transferred to the Aerial Group from the TDS Group or any of the other
Tracking Groups;
(d) the interest of the Corporation or any of its subsidiaries in the
businesses, assets and liabilities acquired by the Corporation or any of its
subsidiaries for the Aerial Group, as determined by the Board;
(e) a proportionate undivided interest in each and every business, asset
and liability attributed to another Tracking Group equal to the Inter-Group
Interest Fraction, if any, of the Aerial Group in such other Tracking Group;
and
(f) such other businesses, assets and liabilities and such adjustments
to the foregoing as may be contemplated hereby or which may be determined in
good faith by the Board.
If a Retained Interest in the Aerial Group is then existing and if the
Corporation shall pay a dividend or make any other distribution with respect to
Aerial Group Common Shares payable in cash, securities or other property of the
Corporation attributed to the Aerial Group, other than Aerial Group Common
Shares, the TDS Group shall be deemed to hold an amount or fair value thereof
(as determined in good faith by the Board) of such cash, securities or other
property equal to the amount or fair value so distributed multiplied by a
fraction the numerator of which is the Aerial Group's Retained Interest Fraction
and the denominator of which is the Aerial Group's Outstanding Interest Fraction
in effect immediately prior to the record date for such dividend or other
distribution and, to the extent interest or dividends are paid or other
distributions are made on any securities other than Aerial Group
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<PAGE>
Common Shares so distributed to the holders of Aerial Group Common Shares, the
Aerial Group shall no longer include a corresponding ratable amount or fair
value of the kind of assets paid as such interest or dividends or other
distributions in respect of such securities deemed to be held by the TDS Group.
If an Inter-Group Interest in the Aerial Group is then existing and if the
Corporation shall pay a dividend or make any other distribution with respect to
Aerial Group Common Shares payable in cash, securities or other property of the
Corporation attributed to the Aerial Group other than Aerial Group Common
Shares, the Tracking Group(s) holding the Inter-Group Interest(s) in the Aerial
Group shall be deemed to hold an amount or fair value thereof (as determined in
good faith by the Board) of such cash, securities or other property equal to the
amount or fair value so distributed multiplied by a fraction the numerator of
which is the Inter-Group Interest Fraction in the Aerial Group in effect
immediately prior to the record date for such dividend or other distribution and
the denominator of which is equal to the Aerial Group's Outstanding Interest
Fraction in effect immediately prior to the record date for such dividend or
other distribution and, to the extent interest or dividends are paid or other
distributions are made on any securities other than Aerial Group Common Shares
so distributed to the holders of Aerial Group Common Shares, the Aerial Group
shall no longer include a corresponding ratable amount or fair value of the kind
of assets paid as such interest or dividends or other distributions in respect
of such securities deemed to be held by the Tracking Group holding the
Inter-Group Interest in the Aerial Group.
From and after any transfer of cash, securities or other property from the
Aerial Group to the TDS Group or to another Tracking Group, the Aerial Group
shall no longer include the cash, securities or other property so transferred
and the TDS Group or such other Tracking Group, as the case may be, shall
include such cash, securities or other property, and from and after any transfer
of cash, securities or other property from the TDS Group or another Tracking
Group to the Aerial Group, the TDS Group or such other Tracking Group, as the
case may be, shall no longer include the cash, securities or other property so
transferred and the Aerial Group shall include such cash, securities or other
property.
"AERIAL GROUP COMMON SHARES," shall mean the Aerial Communications Group
Common Shares, par value $0.01 per share.
"AVAILABLE DIVIDEND AMOUNT," as of any date, shall mean, with respect to any
Tracking Group, the product of the Outstanding Interest Fraction of such
Tracking Group and either (a) the excess of (i) an amount equal to the total
assets of such Tracking Group less the total liabilities (not including
preferred stock) of such Tracking Group as of such date over (ii) the aggregate
par value of, or any greater amount determined to be capital in respect of, all
outstanding shares of such class of Tracking Stock of such Tracking Group and
each class or series of Preferred Shares or Undesignated Shares attributed to
such Tracking Group or (b) in case there is no such excess, an amount equal to
Corporation Earnings (Losses) attributable to such Tracking Group (if positive)
for the fiscal year in which such date occurs and/or the preceding fiscal year.
The Available Dividend Amount for a Tracking Group is intended to be similar to
an amount equal to the product of the Outstanding Interest Fraction and the
amount that would be legally available for the payment of dividends on shares of
Tracking Stock under Delaware law if the related Tracking Group were a separate
Delaware corporation. The "Available Dividend Amount" as of any date, shall
mean, with respect to the TDS Group, the greater of (x) the amount of all
surplus (as defined in the DGCL) of the Corporation or, if there is no surplus,
the net profits (as contemplated by the DGCL) of the Corporation for the fiscal
year in which such date occurs and/or the preceding fiscal year (if positive),
less the sum of the Available Dividend Amounts of all of the Tracking Groups, or
(y) an amount equal to the sum of the Retained Interest Available Dividend
Amounts (if positive) with respect to all of the Tracking Groups, plus, without
duplication, either (a) the excess of (i) an amount equal to the total assets of
the TDS Group less the total liabilities (not including preferred stock) of the
TDS Group as of such date over (ii) the aggregate par value of, or any greater
amount determined to be capital in respect of, all outstanding Series A Common
Shares, Common Shares and any issued Special Common Shares, and each class or
series of Preferred Shares or Undesignated Shares attributed to the TDS Group or
(b) in case there is no such excess, an amount equal to Corporation Earnings
(Losses) attributable to the TDS Group (if positive) for the fiscal year in
which such date occurs and/or the preceding fiscal year.
"BOARD" shall mean the Board of Directors of the Corporation.
"CELLULAR GROUP" shall mean, as of any date that any shares of Cellular
Group Stock have been issued and continue to be outstanding:
(a) the interest of the Corporation or any of its subsidiaries in U.S.
Cellular and its subsidiaries (including any successor thereto by merger,
consolidation or sale of all or substantially all of its assets, whether or
not in connection with a Related Business Transaction) and their respective
businesses, assets and liabilities, except any of such businesses, assets or
liabilities which have been attributed by the Board to another Group;
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<PAGE>
(b) all businesses, assets and liabilities of the Corporation or any of
its subsidiaries to the extent attributed to the Cellular Group by the
Board, whether or not such businesses, assets or liabilities are businesses,
assets and liabilities of U.S. Cellular or any of its subsidiaries (or a
successor as described in clause (a) of this sentence);
(c) all businesses, assets and liabilities contributed or otherwise
transferred to the Cellular Group from the TDS Group or any of the other
Tracking Groups;
(d) the interest of the Corporation or any of its subsidiaries in the
businesses, assets and liabilities acquired by the Corporation or any of its
subsidiaries for the Cellular Group, as determined by the Board;
(e) a proportionate undivided interest in each and every business, asset
and liability attributed to another Tracking Group equal to the Inter-Group
Interest Fraction, if any, of the Cellular Group in such other Tracking
Group; and
(f) such other businesses, assets and liabilities and such adjustments
to the foregoing as may be contemplated hereby or which may be determined in
good faith by the Board.
If a Retained Interest in the Cellular Group is then existing and if the
Corporation shall pay a dividend or make any other distribution with respect to
Cellular Group Common Shares payable in cash, securities or other property of
the Corporation attributed to the Cellular Group, other than Cellular Group
Common Shares, the TDS Group shall be deemed to hold an amount or fair value
thereof (as determined in good faith by the Board) of such cash, securities or
other property equal to the amount or fair value so distributed multiplied by a
fraction the numerator of which is the Cellular Group's Retained Interest
Fraction and the denominator of which is the Cellular Group's Outstanding
Interest Fraction in effect immediately prior to the record date for such
dividend or other distribution and, to the extent interest or dividends are paid
or other distributions are made on any securities other than Cellular Group
Common Shares so distributed to the holders of Cellular Group Common Shares, the
Cellular Group shall no longer include a corresponding ratable amount or fair
value of the kind of assets paid as such interest or dividends or other
distributions in respect of such securities deemed to be held by the TDS Group.
If an Inter-Group Interest in the Cellular Group is then existing and if the
Corporation shall pay a dividend or make any other distribution with respect to
Cellular Group Common Shares payable in cash, securities or other property of
the Corporation attributed to the Cellular Group other than Cellular Group
Common Shares, the Tracking Group holding the Inter-Group Interest in the
Cellular Group shall be deemed to hold an amount or fair value thereof (as
determined in good faith by the Board) of such cash, securities or other
property equal to the amount or fair value so distributed multiplied by a
fraction the numerator of which is the Inter-Group Interest Fraction in the
Cellular Group in effect immediately prior to the record date for such dividend
or other distribution and the denominator of which is equal to the Cellular
Group's Outstanding Interest Fraction in effect immediately prior to the record
date for such dividend or other distribution and, to the extent interest or
dividends are paid or other distributions are made on any securities other than
Cellular Group Common Shares so distributed to the holders of Cellular Group
Common Shares, the Cellular Group shall no longer include a corresponding
ratable amount or fair value of the kind of assets paid as such interest or
dividends or other distributions in respect of such securities deemed to be held
by the Tracking Group holding the Inter-Group Interest in the Cellular Group.
From and after any transfer of cash, securities or other property from the
Cellular Group to the TDS Group or to another Tracking Group, the Cellular Group
shall no longer include the cash, securities or other property so transferred
and the TDS Group or such other Tracking Group, as the case may be, shall
include such cash, securities or other property, and from and after any transfer
of cash, securities or other property from the TDS Group or another Tracking
Group to the Cellular Group, the TDS Group or such other Tracking Group, as the
case may be, shall no longer include the cash, securities or other property so
transferred and the Cellular Group shall include such cash, securities or other
property.
"CELLULAR GROUP COMMON SHARES" means the United States Cellular Group Common
Shares, par value $0.01 per share.
"COMMITTED ACQUISITION SHARES" as of any date, shall mean (a) Common Shares
that the Corporation had, prior to such date, agreed to issue in connection with
acquisitions, but as of such date had not been issued, and (b) Common Shares
that are issuable upon conversion, exercise or exchange of Convertible
Securities that the Corporation had, prior to such date, agreed to issue in
connection with acquisitions, but as of such date had not been issued, in each
case including obligations of the Corporation to issue Cellular Group Common
Shares, Telecom Group Common Shares and Aerial Group Common Shares as a result
of the Distribution pursuant to anti-dilution provisions in the acquisition
agreements providing for the issuance of Common Shares or Convertible Securities
which are convertible into or exercisable or exchangeable for Common Shares,
without duplication of any Common Shares issuable upon conversion, exercise or
exchange of Convertible Securities.
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"COMMON STOCK" shall mean shares of capital stock of the Corporation
designated as common stock, including Series A Common Shares, Common Shares,
Special Common Shares, Cellular Group Common Shares, Telecom Group Common Shares
and Aerial Group Common Shares.
"CORPORATION EARNINGS (LOSS)" for any period, with respect to any class of
Common Stock, shall mean the net earnings or loss of the related Group for such
period determined on a basis consistent with the determination of the net
earnings or loss of such Group for such period as presented in the combined
financial statements of such Group for such period, including income and
expenses of the Corporation attributed to the operations of such Group on a
substantially consistent basis, including without limitation, corporate, general
and administrative costs, net interest and income taxes.
"CONVERTIBLE SECURITIES" shall mean any securities of the Corporation,
including preferred stock, options and other rights (other than Common Stock),
that are convertible into, exchangeable for or evidence the right to purchase
any shares of any class or series of Common Stock, whether upon conversion,
exercise or exchange, pursuant to anti-dilution provisions of such securities or
otherwise.
"DGCL" shall mean the Delaware General Corporation Law.
"DISTRIBUTION" shall mean the contemplated initial distribution of Cellular
Group Shares, Telecom Group Shares and/or Aerial Group Shares or any part
thereof to be made to the holders of Common Shares and Series A Common Shares.
"FAIR VALUE OF NET PROCEEDS" shall mean, as of any date, with respect to any
Disposition of any of the businesses, assets and liabilities of a Tracking
Group, an amount, if any, equal to the fair value of the gross proceeds of such
Disposition less any payment of, or reasonable provision for, (a) any taxes
related to such Disposition or in respect of any resulting dividend or
redemption, including deferred taxes, but not including any deductions or other
offsets which may be available to the Corporation which are not attributed to
such Tracking Group, (b) any transaction costs, including, without limitation,
any legal, investment banking and accounting fees and expenses and (c) any
liabilities and other obligations (contingent or otherwise) of, or attributed
to, that Tracking Group, including, without limitation, obligations with respect
to committed acquisitions and Convertible Securities attributed to the Tracking
Group, any indemnity or guarantee obligations incurred in connection with the
Disposition or any liabilities for future purchase price adjustments, and any
preferential amounts plus any accumulated and unpaid dividends and other
obligations in respect of any class or series of Preferred Shares or
Undesignated Shares attributed to such Tracking Group (without duplication). For
purposes of this definition, any businesses, assets and liabilities of the
affected Tracking Group which the Board determines to retain after such
Disposition shall be deemed to constitute "reasonable provision" for such amount
of taxes, costs and liabilities (contingent or otherwise). To the extent the
proceeds of any Disposition include any securities or other property other than
cash, the Board shall determine the fair value of such securities or property,
including for the purpose of determining the comparable value thereof if the
Board determines to pay a dividend or redemption price in cash or securities or
other property as provided in this Restated Certificate of Incorporation.
"GROUP" shall mean the Aerial Group, the Cellular Group, the Telecom Group
and the TDS Group and any other Group so designated by the Board.
"INITIAL ISSUANCE DATE" shall mean, with respect to a class of stock, the
initial date of issuance of shares of such class of stock.
"INTER-GROUP INTEREST," as of any date, shall mean that part of the
Corporation's equity interest in a Tracking Group which is deemed to be held (or
subsequently acquired) by the Corporation and attributed to a Group other than
the TDS Group. A Tracking Group may not hold an Inter-Group interest in the TDS
Group.
"INTER-GROUP INTEREST FRACTION," as of any date, with respect to any
Investor Group, shall mean a fraction the numerator of which is the Number of
Shares issuable with Respect to Inter-Group Interest in an Issuer Group by such
Investor Group as of such date and the denominator of which is the sum of (a)
the aggregate Number of Shares Issuable with Respect to Inter-Group Interest in
such Issuer Group by all Investor Groups as of such date, (b) the aggregate
number of shares of Tracking Stock of such Issuer Group outstanding as of such
date and (c) the Number of Shares Issuable with Respect to Retained Interest in
such Issuer Group as of such date.
"ISSUER GROUP" shall mean a Tracking Group in which there is an Inter-Group
Interest by an Investor Group.
"INVESTOR GROUP" means a Tracking Group which holds an Inter-Group Interest
in an Issuer Group.
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"MARKET CAPITALIZATION" of any class or series of capital stock of the
Corporation on any Trading Day shall mean the product of (a) the Market Value of
one share of such class or series on such Trading Day and (b) the number of
shares of such class or series outstanding at the close of business on such
Trading Day.
"MARKET VALUE" of a share of any class or series of capital stock of the
Corporation on any day shall mean the average of the high and low reported sale
prices regular way of a share of such class or series on such day (if such day
is a Trading Day, and if such day is not a Trading Day, on the Trading Day
immediately preceding such day) or in case no such reported sale takes place on
such Trading Day the average of the reported closing bid and asked prices
regular way of a share of such class or series on such Trading Day, in either
case on the American Stock Exchange or such other national securities exchange
or the Nasdaq National Market on which such class or series is listed, or if the
shares of such class or series are not quoted on the American Stock Exchange or
any other national securities exchange or the Nasdaq National Market on such
Trading Day, the average of the closing bid and asked prices of a share of such
class or series in the over-the-counter market on such Trading Day as furnished
by any New York Stock Exchange member firm selected from time to time by the
Corporation, or if such closing bid and asked prices are not made available by
any such New York Stock Exchange member firm on such Trading Day, the market
value of a share of such class or series as determined by the Board; PROVIDED,
that if the Special Common Shares or Series A Common Shares are not trading on a
national securities exchange or the Nasdaq National Market, and if bid and asked
prices are not available for the Special Common Shares or the Series A Common
Shares, the Market Value of a Special Common Share or a Series A Common Share,
as applicable, shall be deemed to be the same as a Common Share for purposes of
determining Market Value under Sections 8, 10 and 12 hereof; and PROVIDED
FURTHER, that for purposes of determining Market Values under Sections 8, 10 and
12 hereof (a) the "Market Value" of a share of any series of Common Stock on any
day prior to the "ex" date or any similar date for any dividend or distribution
paid or to be paid with respect to such series of Common Stock shall be reduced
by the fair market value of the per share amount of such dividend or
distribution as determined by the Board and (b) the "Market Value" of a share of
any series of Common Stock on any day prior to (i) the effective date of any
subdivision (by stock split or otherwise) or combination (by reverse stock split
or otherwise) of outstanding shares of such series of Common Stock or (ii) the
"ex" date or any similar date for any dividend or distribution with respect to
any such series of Common Stock in shares of such series of Common Stock, shall
be appropriately adjusted to reflect such subdivision, combination, dividend or
distribution.
"MERGER," shall mean the merger of TDS Iowa with and into the Corporation.
"NUMBER OF SHARES ISSUABLE WITH RESPECT TO INTER-GROUP INTEREST" shall mean,
with respect to any Tracking Group (for purposes of this definition, the
("Issuer Group"), the number of shares of Tracking Stock of the Issuer Group
(the ("Issuer Group Shares") which are attributed to, and that could be issued
or sold by the Corporation for the benefit of, another Tracking Group (for
purposes of this definition, the ("Investor Group"). Initially, the Number of
Shares Issuable with Respect to Inter-Group Interest in each Tracking Group
shall be zero, and shall from time to time thereafter, as applicable, be:
(a) adjusted as appropriate to reflect subdivisions (by stock split or
otherwise) and combinations (by reverse stock split or otherwise) of the
Issuer Group Shares and dividends or distributions of Issuer Group Shares to
the holders thereof and other reclassifications of the Issuer Group Shares
or similar transactions;
(b) decreased (but not to less than zero) by (i) the aggregate number of
Issuer Group Shares issued or sold by the Corporation, for cash, securities
or other property, the proceeds of which are attributed to the Investor
Group, (ii) the aggregate number of Issuer Group Shares issued or delivered
upon conversion, exercise or exchange of Convertible Securities, the
proceeds of which are attributed to the Investor Group, (iii) the aggregate
number of Issuer Group Shares issued or delivered by the Corporation as a
dividend or distribution to holders of shares of the Investor Group, (iv)
the aggregate number of Issuer Group Shares issued or delivered upon the
conversion, exercise or exchange of any Convertible Securities issued or
delivered by the Corporation as a dividend or distribution or by
reclassification or exchange to holders of shares of the Investor Group, and
(v) the aggregate number of Issuer Group Shares (rounded, if necessary, to
the nearest whole number), equal to the aggregate fair value (as determined
by the Board) of assets or properties attributed to the Issuer Group that
are transferred from the Issuer Group to the Investor Group in consideration
of a reduction in the Number of Shares Issuable with Respect to Inter-Group
Interest by the Investor Group in the Issuer Group, divided by the Market
Value of one Issuer Group Share as of the date of such transfer;
(c) increased by (i) the aggregate number of any Issuer Group Shares
which are retired or otherwise cease to be outstanding following their
purchase with funds attributed to the Investor Group and (ii) a number
B-24
<PAGE>
(rounded, if necessary, to the nearest whole number), equal to the fair
value (as determined by the Board) of assets or properties theretofore
attributed to the Investor Group that are contributed to the Issuer Group in
consideration of an increase in the Number of Shares Issuable with Respect
to Inter-Group Interest in the Issuer Group by the Investor Group, divided
by the Market Value of one Issuer Group Share as of the date of such
contribution; and
(d) adjusted as may be appropriate to reflect other transactions between
the Issuer Group and the Investor Group, as determined in good faith by the
Board.
Whenever a change in the Number of Shares Issuable with Respect to
Inter-Group Interest with respect to any Group occurs, the Corporation shall
prepare and file a statement of such change with the Secretary of the
Corporation.
"NUMBER OF SHARES ISSUABLE WITH RESPECT TO RETAINED INTEREST" shall mean the
number of shares of a class of Tracking Stock of a Tracking Group (for purposes
of this definition, the "Issuer Group") that are attributed to, and could be
issued or sold by the Corporation for the account of, the TDS Group in respect
of a Retained Interest by the TDS Group in such Issuer Group. The Number of
Shares Issuable with Respect to Retained Interest shall initially be determined
by the Board, and shall from time to time thereafter, as applicable, be:
(a) adjusted as appropriate to reflect subdivisions (by stock split or
otherwise) and combinations (by reverse stock split or otherwise) of the
Issuer Group Shares, and dividends or distributions of Issuer Group Shares
to the holders thereof and other reclassifications of Issuer Group Shares or
similar transactions;
(b) decreased (but not to less than zero) by (i) the aggregate number of
Issuer Group Shares issued or sold by the Corporation, for cash, securities
or other property, the proceeds of which are attributed to the TDS Group,
(ii) the aggregate number of Issuer Group Shares issued or delivered upon
conversion, exercise or exchange of Convertible Securities (including
Pre-Distribution Convertible Securities), the proceeds of which are
attributed to the TDS Group, (iii) the aggregate number of Issuer Group
Shares issued or delivered by the Corporation as a dividend or distribution
to holders of Common Shares, Series A Common Shares or Special Common
Shares, (iv) the aggregate number of Issuer Group Shares issued or delivered
upon the conversion, exercise or exchange of any Convertible Securities
issued or delivered by the Corporation as a dividend or distribution or by
reclassification or exchange to holders of shares of Common Shares, Series A
Common Shares or Special Common Shares, and (v) the aggregate number of
Issuer Group Shares (rounded, if necessary, to the nearest whole number),
equal to the aggregate fair value (as determined by the Board) of assets or
properties attributed to the Issuer Group that are transferred from the
Issuer Group to the TDS Group in consideration of a reduction in the Number
of Shares Issuable with Respect to Retained Interest in the Issuer Group,
divided by the Market Value of one Issuer Group Share as of the date of such
transfer;
(c) increased by (i) the aggregate number of any Issuer Group Shares
which are retired or otherwise cease to be outstanding following their
purchase with funds attributed to the TDS Group and (ii) a number (rounded,
if necessary, to the nearest whole number), equal to the fair value (as
determined by the Board) of assets or properties theretofore attributed to
the TDS Group that are contributed to the Issuer Group in consideration of
an increase in the Number of Shares Issuable with Respect to Retained
Interest in the Issuer Group, divided by the Market Value of one Issuer
Group Share as of the date of such contribution; and
(d) adjusted as may be appropriate to reflect other transactions between
the Issuer Group and the TDS Group, as determined in good faith by the
Board.
Whenever a change in the Number of Shares Issuable with Respect to
Retained Interest in any Tracking Group occurs, the Corporation shall
prepare and file a statement of such change with the Secretary of the
Corporation.
"NUMBER OF SHARES ISSUABLE TO THIRD PARTIES" shall mean, as of any date, the
number of shares of any class or series of Common Stock (such shares are herein
referred to as "Shares Issuable to Third Parties") which are issuable (a) as
Committed Acquisition Shares, (b) pursuant to the conversion, exercise or
exchange of Convertible Securities or (c) otherwise, other than shares which are
deemed to be issuable with respect to a Retained Interest or with respect to an
Inter-Group Interest, as may be determined in good faith by the Board
considering any relevant factors, including whether the holders of Convertible
Securities would derive an economic benefit from the conversion, exercise or
exchange of such Convertible Securities which exceeds the economic cost thereof
or the economic benefit of not converting, exercising or exchanging such
Convertible Securities.
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<PAGE>
"OUTSTANDING INTEREST FRACTION," as of any date, shall mean, with respect to
any class of Tracking Stock, a fraction the numerator of which is the aggregate
number of shares of such class of Tracking Stock outstanding on such date and
the denominator of which is the sum of (a) such aggregate number of shares, (b)
the Number of Shares Issuable with Respect to Retained Interest of such class of
Tracking Stock as of such date and (c) the aggregate Number of Shares Issuable
with Respect to Inter-Group Interest by all other Tracking Groups in such
Tracking Stock, if any, as of such date.
"PRE-81 PREFERRED SHARES," as of any date shall mean the series of Preferred
Shares of the Corporation which are issued in the Merger in exchange for series
of Preferred Shares of TDS Iowa that were originally issued before October 31,
1981, as identified in Section A of Article IV.
"PRE-DISTRIBUTION CONVERTIBLE SECURITIES" shall mean Convertible Securities
that are outstanding on the record date for the Distribution and are, prior to
such date, convertible into or exercisable or exchangeable for either Common
Shares or Series A Common Shares; PROVIDED, if the record date for the
Distribution of any of the Cellular Group Shares, Telecom Group Shares or Aerial
Group Shares is not the same date, the Board shall determine which, if any,
Convertible Securities (or proportion thereof) that are issued after the first
record date for any part of the Distribution, shall represent Pre-Distribution
Convertible Securities.
"POST-81 PREFERRED SHARES," as of any date shall mean the series of
Preferred Shares of the Corporation which are issued in the Merger in exchange
for series of Preferred Shares of TDS Iowa that were originally issued after
October 31, 1981, as identified in Section A of Article IV.
"QUALIFYING SUBSIDIARY" or "QUALIFYING SUBSIDIARIES" as of any date shall
mean a Subsidiary or Subsidiaries of the Corporation (a) in which (i) the
Corporation's ownership and voting interest is sufficient to satisfy the
requirements of the Internal Revenue Service for a distribution of the
Corporation's interest in such Subsidiary to the holders of Common Stock of the
Corporation that is tax-free to such holders or (ii) the Corporation owns,
directly or indirectly, all of the issued and outstanding capital stock and (b)
which hold(s) all of the assets and liabilities attributed to a Tracking Group.
"RELATED BUSINESS TRANSACTION" shall mean any Disposition of all or
substantially all of the properties and assets of a Tracking Group in which the
Corporation receives as proceeds of such Disposition primarily equity securities
(including, without limitation, capital stock, convertible securities,
partnership or limited partnership interests and other types of equity
securities, without regard to the voting power or contractual or other
management or governance rights related to such equity securities) of the
purchaser or acquiror of such assets and properties of such Tracking Group, any
entity which succeeds (by merger, formation of a joint venture enterprise or
otherwise) to such assets and properties of such Tracking Group or a third party
issuer, which purchaser, acquiror or other issuer is engaged or proposes to
engage primarily in one or more businesses similar or complementary to the
businesses conducted by such Tracking Group prior to such Disposition, as
determined in good faith by the Board.
"RETAINED INTEREST AVAILABLE DIVIDEND AMOUNT," as of any date, shall mean,
with respect to a Tracking Group, an amount (not less than zero) equal to the
product of (a) a fraction, the numerator of which is the Retained Interest
Fraction and the denominator of which is the Outstanding Interest Fraction with
respect to such Tracking Group multiplied by (b) the Available Dividend Amount
of such Tracking Group.
"RETAINED INTEREST FRACTION," as of any date, shall mean, with respect to
any class of Tracking Stock, a fraction the numerator of which is the Number of
Shares Issuable with Respect to Retained Interest of such class of Tracking
Stock as of such date and the denominator of which is the sum of (a) such Number
of Shares Issuable with Respect to Retained Interest as of such date, (b) the
aggregate Number of Shares Issuable with Respect to Inter-Group Interest by all
other Tracking Groups in such Tracking Stock, if any, as of such date, and (c)
the aggregate number of shares of such class of Tracking Stock outstanding as of
such date.
"SHARES ISSUABLE TO THIRD PARTIES" shall have the meaning set forth in the
definition of "Number of Shares Issuable to Third Parties."
"SUBSIDIARY" shall mean, with respect to any person or entity, any
corporation or partnership 50% or more of whose outstanding voting securities or
partnership interests, as the case may be, are directly or indirectly owned by
such person or entity.
"TDS GROUP" shall mean, as of any date that any shares of any class or
series of Tracking Stock have been issued and continue to be outstanding:
B-26
<PAGE>
(a) the interest of the Corporation and all of its subsidiaries,
(including any successors thereto by merger, consolidation or sale of all or
substantially all of its assets) and their respective properties and assets,
other than (except as provided in paragraph (e) of this definition) the
interest of the Corporation and its subsidiaries in Aerial and its
subsidiaries, TDS Telecom and its subsidiaries, U.S. Cellular and its
subsidiaries, and any other subsidiaries attributed by the Board to a Group
other than the TDS Group (including any successors thereto by merger,
consolidation or sale of all or substantially all of its assets, whether or
not in connection with Related Business Transactions) and their respective
businesses, assets and liabilities;
(b) all businesses, assets and liabilities of the Corporation or any of
its subsidiaries to the extent attributed to the TDS Group by the Board,
whether or not such businesses, assets or liabilities are businesses, assets
and liabilities of the TDS Group or any of its subsidiaries (or a successor
as described in clause (a) of this sentence);
(c) all businesses, assets and liabilities contributed or otherwise
transferred to the TDS Group from any of the Tracking Groups;
(d) the interest of the Corporation or any of its subsidiaries in the
businesses, assets and liabilities acquired by the Corporation or any of its
subsidiaries for the TDS Group, as determined by the Board;
(e) a proportionate undivided interest in each and every business, asset
and liability attributed to a Tracking Group equal to the Retained Interest
Fraction of the TDS Group in such other Tracking Group; and
(f) such other businesses, assets and liabilities and such adjustments
to the foregoing as may be contemplated hereby or which may be determined in
good faith by the Board.
If a Retained Interest in any Tracking Group is then existing and if the
Corporation shall pay a dividend or make any other distribution with respect to
holders of Tracking Stock of such Tracking Group payable in cash, securities or
other property of the Corporation attributed to such Tracking Group, other than
shares of Tracking Stock, the TDS Group shall be deemed to hold an amount or
fair value thereof (as determined in good faith by the Board) of such cash,
securities or other property equal to the amount or fair value so distributed
multiplied by a fraction the numerator of which is such Tracking Group's
Retained Interest Fraction and the denominator of which is such Tracking Group's
Outstanding Interest Fraction in effect immediately prior to the record date for
such dividend or other distribution and, to the extent interest or dividends are
paid or other distributions are made on any securities other than shares of
Tracking Stock so distributed to the holders of such shares of Tracking Stock,
such Tracking Group shall no longer include a corresponding ratable amount or
fair value of the kind of assets paid as such interest or dividends or other
distributions in respect of such securities deemed to be held by the TDS Group.
From and after any transfer of cash, securities or other property from a
Tracking Group to the TDS Group, such Tracking Group shall no longer include the
cash, securities or other property so transferred and the TDS Group shall
include such cash, securities or other property and from and after any transfer
of cash, securities or other property from the TDS Group to a Tracking Group,
the TDS Group shall no longer include the cash, securities or other property so
transferred and such Tracking Group shall include such cash, securities or other
property.
"TDS GROUP SHARES" shall mean the Series A Common Shares, Common Shares and
any issued Special Common Shares of the Corporation and any other shares of
capital stock designated by the Board as TDS Group Shares.
"TDS IOWA" shall mean Telephone and Data Systems, Inc., an Iowa corporation.
"TDS TELECOM" shall mean TDS Telecommunications Corporation, a Delaware
corporation.
"TELECOM GROUP" shall mean, as of any date that any shares of Telecom Group
Stock have been issued and continue to be outstanding:
(a) the interest of the Corporation or any of its subsidiaries in TDS
Telecom and its subsidiaries (including any successor thereto by merger,
consolidation or sale of all or substantially all of its assets, whether or
not in connection with a Related Business Transaction) and their respective
businesses, assets and liabilities, except any of such businesses, assets or
liabilities which have been attributed by the Board to another Group;
(b) all businesses, assets and liabilities of the Corporation or any of
its subsidiaries to the extent attributed to the Telecom Group by the Board,
whether or not such businesses, assets or liabilities are businesses, assets
and liabilities of TDS Telecom or any of its subsidiaries (or a successor as
described in clause (a) of this sentence);
B-27
<PAGE>
(c) all businesses, assets and liabilities contributed or otherwise
transferred to the Telecom Group from the TDS Group or any of the other
Tracking Groups;
(d) the interest of the Corporation or any of its subsidiaries in the
businesses, assets and liabilities acquired by the Corporation or any of its
subsidiaries for the Telecom Group, as determined by the Board;
(e) a proportionate undivided interest in each and every business, asset
and liability attributed to another Tracking Group equal to the Inter-Group
Interest Fraction, if any, of the Telecom Group in such other Tracking
Group; and
(f) such other businesses, assets and liabilities and such adjustments
to the foregoing as may be contemplated hereby or which may be determined in
good faith by the Board.
If a Retained Interest in the Telecom Group is then existing and if the
Corporation shall pay a dividend or make any other distribution with respect to
Telecom Group Common Shares payable in cash, securities or other property of the
Corporation attributed to the Telecom Group, other than Telecom Group Common
Shares, the TDS Group shall be deemed to hold an amount or fair value thereof
(as determined in good faith by the Board) of such cash, securities or other
property equal to the amount or fair value so distributed multiplied by a
fraction the numerator of which is the Telecom Group's Retained Interest
Fraction and the denominator of which is the Telecom Group's Outstanding
Interest Fraction in effect immediately prior to the record date for such
dividend or other distribution and, to the extent interest or dividends are paid
or other distributions are made on any securities other than Telecom Group
Common Shares so distributed to the holders of Telecom Group Common Shares, the
Telecom Group shall no longer include a corresponding ratable amount or fair
value of the kind of assets paid as such interest or dividends or other
distributions in respect of such securities deemed to be held by the TDS Group.
If an Inter-Group Interest in the Telecom Group is then existing and if the
Corporation shall pay a dividend or make any other distribution with respect to
Telecom Group Common Shares payable in cash, securities or other property of the
Corporation attributed to the Telecom Group other than Telecom Group Common
Shares, the Tracking Group holding the Inter-Group Interest in the Telecom Group
shall be deemed to hold an amount or fair value thereof (as determined in good
faith by the Board) of such cash, securities or other property equal to the
amount or fair value so distributed multiplied by a fraction the numerator of
which is the Inter-Group Interest Fraction in the Telecom Group in effect
immediately prior to the record date for such dividend or other distribution and
the denominator of which is equal to the Telecom Group's Outstanding Interest
Fraction in effect immediately prior to the record date for such dividend or
other distribution and, to the extent interest or dividends are paid or other
distributions are made on any securities other than Telecom Group Common Shares
so distributed to the holders of Telecom Group Common Shares, the Telecom Group
shall no longer include a corresponding ratable amount or fair value of the kind
of assets paid as such interest or dividends or other distributions in respect
of such securities deemed to be held by the Tracking Group holding the
Inter-Group Interest in the Telecom Group.
From and after any transfer of cash, securities or other property from the
Telecom Group to the TDS Group or to another Tracking Group, the Telecom Group
shall no longer include the cash, securities or other property so transferred
and the TDS Group or such other Tracking Group, as the case may be, shall
include such cash, securities or other property, and from and after any transfer
of cash, securities or other property from the TDS Group or another Tracking
Group to the Telecom Group, the TDS Group or such other Tracking Group, as the
case may be, shall no longer include the cash, securities or other property so
transferred and the Telecom Group shall include such cash, securities or other
property.
"TELECOM GROUP COMMON SHARES" shall mean the TDS Telecommunications Group
Common Shares, par value $0.01 per share.
"TRACKING GROUP" shall mean the Aerial Group, the Cellular Group and the
Telecom Group, and any other business group designated as a Tracking Group by
the Board.
"TRACKING STOCK" shall mean the Aerial Group Common Shares, the Cellular
Group Common Shares and the Telecom Group Common Shares, and any other shares of
capital stock of the Corporation which the Board designates as Tracking Stock.
"TRADING DAY" shall mean each weekday other than a day on which the relevant
class of Common Stock of the Corporation is not traded on any national
securities exchange or quoted on the Nasdaq Stock Market or on the
over-the-counter market.
"U.S. CELLULAR" shall mean United States Cellular Corporation, a Delaware
corporation.
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<PAGE>
20. DETERMINATIONS BY BOARD. The Board of Directors shall make such
determinations with respect to the businesses, assets and liabilities to be
attributed to the Groups, the items of income and expenses for purposes of
determining the Corporation Earnings (Loss) attributable to the Groups, the
application of the provisions of this Article IV to transactions to be engaged
in by the Corporation and the powers, preferences and relative, participating,
optional and other special rights of the holders of the classes of Common Stock,
and the qualifications and restrictions thereon, provided by the Restated
Certificate of Incorporation of the Corporation, as may be or become necessary
or appropriate to the exercise of such powers, preferences and relative,
participating, optional and other special rights, including, without limiting
the foregoing, the determinations referred to in the following paragraphs of
this paragraph 20. A record of any such determination shall be filed with the
records of the actions of the Board of Directors.
(a) Upon any acquisition by the Corporation or its subsidiaries of any
assets or business, or any assumption of liabilities, outside of the
ordinary course of business of any then existing Group, the Board of
Directors shall determine whether such assets, business and liabilities (or
an interest therein) shall be for the benefit of one Group or that an
interest therein shall be partly for the benefit of one or more Groups.
(b) Upon any issuance of any shares of Tracking Stock at a time when the
Number of Shares Issuable with Respect to Retained Interest or the Number of
Shares Issuable with Respect to Inter-Group Interest is more than zero, the
Board of Directors shall determine, based on the use of the proceeds of such
issuance and any other relevant factors, whether all or any part of the
shares of such Tracking Stock so issued should reduce the Number of Shares
Issuable with Respect to Retained Interest or the Number of Shares Issuable
with Respect to Inter-Group Interest, as the case may be.
(c) Upon any issuance by the Corporation or any subsidiary thereof of
any Convertible Securities that are convertible into or exchangeable or
exercisable for shares of a class of Tracking Stock, if at the time such
Convertible Securities are issued the Number of Shares Issuable with Respect
to Retained Interest or the Number of Shares Issuable with Respect to
Inter-Group Interest is greater than zero, the Board of Directors shall
determine whether, upon conversion, exchange or exercise of such Convertible
Securities, the issuance of shares of such Tracking Stock pursuant thereto
shall, in whole or in part, reduce the Number of Shares Issuable with
Respect to Retained Interest or the Number of Shares Issuable with Respect
to Inter-Group Interest, taking into consideration the use of the proceeds
of such issuance of Convertible Securities and any other relevant factors.
(d) Upon any repurchase by the Corporation or any subsidiary thereof of
shares of any class of Tracking Stock, the Board of Directors shall
determine, based on the source of funds used and any other relevant factors,
whether all or any part of the shares of such Tracking Stock so purchased
shall increase the Number of Shares Issuable with Respect to Retained
Interest or the Number of Shares Issuable with Respect to Inter-Group
Interest, as the case may be.
If the Board designates any new class or series of capital stock, the Board
shall make such determinations under this Restated Certificate of Incorporation
as the Board determines may be necessary or appropriate in connection therewith.
Subject to applicable law, any determinations made in good faith by the
Board under any provision of this Article IV or any certificate of designation
filed pursuant hereto, and any determinations with respect to any Group or the
rights of holders of any class or series of capital stock made pursuant to or in
furtherance of this Article IV, shall be final and binding on all shareholders.
ARTICLE V
The address of the registered office of the Corporation is Corporation Trust
Company, in the County of New Castle, and the name of its registered agent at
such address is Corporation Trust Center, 1209 Orange Street, Wilmington,
Delaware 19801.
ARTICLE VI
A. NUMBER AND CLASSES OF DIRECTORS. The number of directors of the
Corporation shall be fixed by or pursuant to the Bylaws of the Corporation, but
shall not be less than three. The directors shall be divided into three classes
and each class shall be as nearly equal in number as possible. The term of
office of directors of the second class shall expire at the annual meeting of
shareholders in 1998; that of the third class shall expire at the annual meeting
of shareholders in 1999; and that of the first class shall expire at the annual
meeting of shareholders in
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<PAGE>
2000. At each annual meeting after such classification, the number of directors
equal to the number of the class, the term of which expired at the time of such
meeting, shall be elected to hold office until the third succeeding annual
meeting of shareholders. If the number of directors fixed by or pursuant to the
Bylaws of the Corporation is changed at any time, any newly created
directorships or any decrease in directorships shall be so apportioned among the
classes by the Board so as to make all classes as nearly equal in number as
possible; PROVIDED, HOWEVER, that no decrease in the number of directors shall
shorten the term of any incumbent director.
B. REMOVAL. Any one or more of or all of the directors may be removed with
cause only by a vote of the holders of at least a majority of the voting power
of shares then entitled to vote in the election of such directors, and any one
or more or all of the directors may be removed without cause only by a vote of
the holders of at least 80% of the voting power of the shares then entitled to
vote in the election of such directors.
C. BALLOTS. The election of directors need not be by written ballot unless
the Bylaws of the Corporation so provide.
ARTICLE VII
To the extent permitted by the DGCL or any other applicable law presently or
hereafter in effect, no director of the Corporation shall be personally liable
to the Corporation or its shareholders for monetary damages for breach of any
fiduciary duty owed to the Corporation or its shareholders; PROVIDED that this
provision shall not relieve a director from liability (a) for any breach of the
director's duty of loyalty to the Corporation or its shareholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) for transactions from which the director derives
an improper personal benefit or (d) under Section 174 of the DGCL. This Article
shall not apply to acts or omissions occurring prior to its effectiveness. No
amendment to, expiration of or repeal of this Article shall apply to or have any
effect on the liability or alleged liability of any director of the Corporation
for or with respect to any acts or omissions of such director occurring prior to
such amendment, expiration or repeal.
ARTICLE VIII
The Board of the Corporation, when evaluating any proposal or offer of
another party to (a) make a tender or exchange offer for any equity security of
the Corporation; (b) merge or consolidate the Corporation with another
corporation; or (c) purchase or otherwise acquire all or substantially all of
the properties and assets of the Corporation may, in connection with the
exercise of its judgment in determining what is in the best interests of the
Corporation and its shareholders, give due consideration to all factors the
directors deem relevant, including without limitation (i) the effects on the
customers of the Corporation or any of its subsidiaries or on such other
constituencies of the Corporation as the Board considers relevant under the
circumstances; (ii) not only the consideration being offered (after taking into
account corporate and shareholder taxes) in relation to the then current market
price for the Corporation's outstanding shares of capital stock, but also the
Board's estimate of the future value of the Corporation (including the
unrealized value of its properties and assets) as an independent going concern;
(iii) the purpose of the Corporation, and any of its subsidiaries, to provide
quality products and services on a long-term basis; and (iv) the long-term as
well as short-term interests of the Corporation and its shareholders, including
the possibility that such interests may be best served by the continued
independence of the Corporation. If, on the basis of such factors, the Board so
determines that a proposal or offer to acquire or merge the Corporation, or to
sell its assets, is not in the best interests of the Corporation, it may reject
the proposal or offer. If the Board determines to reject any such proposal or
offer, the Board shall have no obligation to facilitate, to remove any barriers
to, or to refrain from impeding the proposal or offer except as may be required
by applicable law. Except to the extent required by applicable law, the
consideration of any or all of such factors shall not be a violation of the
business judgment rule or of any duty of the directors to the shareholders or a
group of shareholders, even if the directors reasonably determine that any such
factor or factors outweigh the financial or other benefits to the Corporation or
a shareholder or group of shareholders.
ARTICLE IX
In furtherance and not in limitation of the powers conferred by statute, the
Board of Directors is expressly authorized to adopt, amend or repeal the Bylaws
of the Corporation.
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<PAGE>
ARTICLE X
Subject to the last sentence of this paragraph, each person who is or was a
director or officer of the Corporation, and each person who serves or served at
the request of the Corporation as a director or officer of another enterprise,
shall be indemnified by the Corporation in accordance with, and to the fullest
extent authorized by, the DGCL as it may be in effect from time to time. The
right of indemnity provided herein shall not be deemed exclusive of any other
rights to which any person may be entitled under any Bylaw, agreement, vote of
shareholders or directors, or otherwise. The Corporation may provide
indemnification to any such person, by agreement or otherwise, on such terms and
conditions as the Board of Directors may approve. Any agreement for
indemnification of any director, officer, employee or other person may provide
indemnification rights which are broader or otherwise differ from those set
forth herein. In furtherance and not in limitation of the powers conferred by
statute, the Board is expressly authorized to adopt, amend or repeal the Bylaws
of the Corporation regarding the manner and conditions under which
indemnification shall be provided hereunder by the Corporation and the extent
thereof from time to time as deemed appropriate by the Board in the best
interests of the Corporation.
SECOND: The Board of Directors of the Corporation, at a meeting duly
called at which a quorum existed, duly adopted resolutions proposing and
approving and declaring advisable this Restated Certificate of Incorporation of
the Corporation.
THIRD: Pursuant to Section 228 of the DGCL, the adoption of this Restated
Certificate of Incorporation was consented to in writing by the sole shareholder
of the Corporation.
FOURTH: This Restated Certificate of Incorporation was duly adopted in
accordance with the provisions of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, Telephone and Data Systems, Inc. has caused this
Restated Certificate to be signed by its President this day of
, 1998.
<TABLE>
<S> <C> <C>
TELEPHONE AND DATA SYSTEMS, INC.
By:
--------------------------------------
LeRoy T. Carlson, Jr.
PRESIDENT
</TABLE>
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<PAGE>
ATTACHMENT I
TO
RESTATED CERTIFICATE OF INCORPORATION
OF
TELEPHONE AND DATA SYSTEMS, INC.
INTRODUCTORY NOTE: This Attachment I to the Restated Certificate of
Incorporation of Telephone and Data Systems, Inc., a Delaware corporation ("TDS
Delaware"), describes the designations, rights, privileges and limitations of
the series of Preferred Shares of TDS Delaware which will be issued in the
Merger (as defined in the Restated Certificate of Incorporation) in exchange for
Preferred Shares of Telephone and Data Systems, Inc., an Iowa corporation ("TDS
Iowa"). Unless otherwise required by the context, for purposes of this
Attachment I, (i) references to dates of issuance of any series of Preferred
Shares shall mean the original dates of issuance of the related series of
Preferred Shares of TDS Iowa, (ii) references to conversion rates of any series
of Preferred Shares shall mean the conversion rates included in the original
certificate of designation of such series by TDS Iowa, without giving effect to
stock splits or other events after the original dates of issuance requiring
adjustment to such conversion rates, and (iii) references to all conversion or
redemption dates and periods shall be based on the original issuance date of
each series of Preferred Shares by TDS Iowa.
1. $6.00 CUMULATIVE VOTING SERIES A PREFERRED STOCK, $.01 PAR VALUE, LIQUIDATION
VALUE $100.00 PER SHARE
(a) DESIGNATION--The designation of this preferred stock shall be "$6.00
Cumulative Voting Series A Preferred Stock" (hereinafter referred to as "Series
A Preferred Stock").
(b) DIVIDENDS--The holders of the Series A Preferred Stock shall be
entitled to receive, when and as declared by the board of directors of the
Corporation, out of any assets of the Corporation available for dividends
pursuant to the laws of the State of Delaware, preferential dividends at the
rate of six dollars ($6.00) per annum per share and no more. The dividends, when
payable, shall be paid quarterly on the first days of January, April, July, and
October in each year, before any dividends shall be declared or paid upon or set
apart for the common stock of the Company for that year. Such dividends upon the
preferred stock shall be cumulative from the date of issue thereof so that if
dividends for any past dividend period at the rate of six dollars ($6.00) per
annum shall not have been paid thereon or declared and a sum sufficient for
payment thereof set apart, the deficiency shall be fully paid or set apart but
without interest, before any dividend shall be paid upon or set apart for the
common stock. Whenever the full dividend upon the preferred stock for all past
dividend periods shall have been paid and the full dividend thereon for the then
current dividend period shall have been paid or declared and a sum sufficient
for the payment thereof set apart, dividends upon the common stock may be
declared by the board of directors out of the remainder of the assets available
therefor.
(c) REDEMPTION--The Corporation may, at the option of the board of
directors, redeem the whole or any part of the outstanding Series A Preferred
Stock at any time after January 3, 1974. If such redemption is made, the holders
of any shares of Series A Preferred Stock redeemed shall be entitled to receive:
$105.00 per share if redeemed on or before January 3, 1975;
$104.50 if redeemed after January 3, 1975 but on or before January 3, 1976;
$104.00 if redeemed after January 3, 1976 but on or before January 3, 1977;
$103.50 if redeemed after January 3, 1977 but on or before January 3, 1978;
$103.00 if redeemed after January 3, 1978 but on or before January 3, 1979;
$102.50 if redeemed after January 3, 1979 but on or before January 3, 1980;
$102.00 if redeemed after January 3, 1980 but on or before January 3, 1981;
$101.50 if redeemed after January 3, 1981 but on or before January 3, 1982;
$101.00 if redeemed after January 3, 1982 but on or before January 3, 1983;
$100.50 if redeemed after January 3, 1983 but on or before January 3, 1984;
$100.00 if redeemed after January 3, 1984;
plus an amount equal to all dividends accrued and unpaid to the redemption date.
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Notice of election to redeem shall be mailed to each holder of stock to be
redeemed not less than thirty (30) days prior to the date upon which the stock
is to be redeemed. In case less than all of the outstanding Series A Preferred
Stock is to be redeemed, the amount to be redeemed and the method of effecting
such redemption, whether by lot or pro rata or otherwise, may be determined by
the board of directors. If on or before the redemption date named in such
notice, the funds necessary for such redemption shall have been set aside by the
Corporation so as to be available for payment on demand to the holders of the
preferred stock so called for redemption, then, notwithstanding that any
certificate of the preferred stock so called for redemption shall not have been
surrendered for cancellation, the dividends thereon shall cease to accrue from
and after the date of redemption so designated, and all rights with respect to
such preferred stock so called for redemption, including any right to vote or
otherwise participate in the determination of any proposed corporate action,
shall forthwith after such redemption date cease and determine, except only the
right of the holder to receive the redemption price therefor, but without
interest. Stock redeemed pursuant to the provisions hereof or any Series A
Preferred Stock purchased or otherwise acquired shall not be reissued but shall
be canceled and proceedings shall be taken in the manner prescribed by statute
to reduce the shares accordingly.
(d) VOTING RIGHTS--The holders of the shares of Series A Preferred Stock
shall be entitled to one vote for each share of such stock standing in the name
of the holder on the books of the Corporation and shall vote together with the
holders of the common stock of the Corporation as one class.
(e) PREEMPTIVE RIGHTS--No holder of any shares of Series A Preferred Stock
shall have any preemptive right to subscribe for or acquire additional shares of
the Corporation of the same or any other class, whether such shares be hereby or
hereafter authorized; and no holder of Series A Preferred Stock shall have any
preemptive right to acquire any shares which may be held in the treasury of the
Corporation; all such additional or treasury shares may be sold for such
consideration at such time and to such person or persons as the board of
directors may from time to time determine.
(f) LIQUIDATION RIGHTS--In the event of any liquidation, dissolution or
winding up of the affairs of the Corporation, whether voluntary or involuntary,
the holders of the Series A Preferred Stock shall be entitled, before any assets
of the Corporation shall be distributed among or paid over to the holders of the
common stock, to receive out of the assets of the Company $100.00 per share of
Series A Preferred Stock. If upon any such dissolution, liquidation or winding
up, the assets of the Corporation available for payment to stockholders are not
sufficient to make payment in full to the holders of the Series A Preferred
Stock, payment shall be made to such holders ratably in accordance with the
number of shares held by them and, in case there shall then be more than one
series of the Preferred Stock ratably in accordance with the respective
distributive amount to which such holders shall be entitled.
2. $7.00 CUMULATIVE CONVERTIBLE VOTING SERIES B PREFERRED STOCK, $.01 PAR VALUE,
LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION--The designation of this preferred stock shall be "$7.00
Cumulative Convertible Voting Series B Preferred Stock" (hereinafter referred to
as "Series B Preferred Stock").
(b) DIVIDENDS--The holders of the Series B Preferred Stock shall be
entitled to receive, when and as declared by the board of directors of the
Corporation, out of any assets of the Corporation available for dividends
pursuant to the laws of the State of Delaware, preferential dividends at the
rate of seven dollars ($7.00) per annum per share and no more. The dividends,
when payable, shall be paid quarterly on the first days of March, June,
September and December in each year, before any dividends shall be declared or
paid upon or set apart for the common stock of the Company for that year. Such
dividends upon the Series B Preferred Stock shall be cumulative from the date of
issue thereof so that if dividends for any past dividend period at the rate of
seven dollars ($7.00) per annum shall not have been paid thereon or declared and
a sum sufficient for payment thereof set apart, the deficiency shall be fully
paid or set apart but without interest, before any dividend shall be paid upon
or set apart for the common stock. Provided, however, that no dividends shall be
declared on the shares of any series of preferred stock for any dividend period
unless the full dividend for all prior dividend periods shall have been declared
or shall be declared at the same time upon all preferred stock outstanding
during such prior dividend periods, and further provided, that no dividends
shall be declared on the shares of any series of preferred stock unless a
dividend for the same period shall be declared at the same time upon all
preferred stock outstanding during said period in like proportion to the
dividend rate upon such shares. Whenever the full dividend upon all the
preferred stock for all past dividend periods shall have been paid and the full
dividend thereon for the then current dividend period shall have been paid or
declared and a sum sufficient for the payment thereof set apart, dividends upon
the common stock may be declared by the board of directors out of the remainder
of the assets available therefor.
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(c) REDEMPTION--The Corporation may, at the option of the board of
directors, redeem the whole or any part of the outstanding Series B Preferred
Stock at any time commencing five years after the date of issuance. If such
redemption is made, the holders of any shares of Series B Preferred Stock
redeemed shall be entitled to receive $100 per share plus an amount equal to all
dividends accrued and unpaid to the redemption date.
Notice of election to redeem shall be mailed to each holder of Series B
Preferred Stock to be redeemed not less than thirty (30) days prior to the date
upon which such stock is to be redeemed. In case less than all of the
outstanding Series B Preferred Stock is to be redeemed, the amount to be
redeemed and the method of effecting such redemption, whether by lot or pro rata
or otherwise, may be determined by the board of directors. If on or before the
redemption date named in such notice, the funds necessary for such redemption
shall have been set aside by the Corporation so as to be available for payment
on demand to the holders of the Series B Preferred Stock so called for
redemption, then, notwithstanding that any certificate of the Series B Preferred
Stock so called for redemption shall not have been surrendered for cancellation,
the dividends thereon shall cease to accrue from and after the date of
redemption so designated, and all rights with respect to such Series B Preferred
Stock so called for redemption, including any right to vote or otherwise
participate in the determination of any proposed corporate action, shall
forthwith after such redemption date cease and terminate, except only the right
of the holder to receive the redemption price therefor, but without interest.
Stock redeemed pursuant to the provisions hereof or any Series B Preferred Stock
purchased or otherwise acquired shall not be reissued but shall be canceled and
proceedings shall be taken in the manner prescribed by statute to reduce the
shares accordingly.
(d) VOTING RIGHTS--The holders of the shares of Series B Preferred Stock
shall be entitled to one vote for each share of such stock standing in the name
of the holder on the books of the Corporation and shall vote together with the
holders of the common stock and the holders of other series of the preferred
stock of the Corporation as one class.
(e) PREEMPTIVE RIGHTS--No holder of any shares of Series B Preferred Stock
shall have any preemptive right to subscribe for or acquire additional shares of
the Corporation of the same or any other class or series, whether such shares be
hereby or hereafter authorized; and no holder of Series B Preferred Stock shall
have any preemptive right to acquire any shares which may be held in the
treasury of the Corporation; all such additional or treasury shares may be sold
for such consideration at such time and to such person or persons as the board
of directors may from time to time determine.
(f) CONVERSION--
(1) The Series B Preferred Stock shall be convertible into Common Stock
as hereinafter provided, and, when and as so converted, such Series B
Preferred Stock shall be canceled and retired and shall not be reissued as
such. Any holder of the Series B Preferred Stock may at any time prior to
five years from the date of issuance convert such stock into full shares of
the Common Stock of the Corporation at the rate of ten (10) shares of Common
Stock for each share of Series B Preferred Stock. On presentation and
surrender to the Corporation at its Offices of the certificates for shares
of the Series B Preferred Stock to be converted, the holder of such stock
shall be entitled to receive in exchange therefor certificates for shares of
the fully paid and non-assessable Common Stock of the Corporation at the
rate aforesaid, all under suitable regulations to be prescribed by the board
of directors of the Corporation. Conversion of Series B Preferred Stock in
the manner aforesaid shall not affect the right of the holder of such stock
to receive dividends accrued but unpaid on such shares as of the dividend
payment date immediately prior to conversion.
(2) The number of shares of Common Stock into which each share of Series
B Preferred Stock is convertible, shall be subject to adjustment from time
to time as in clauses (A) and (B) of this subparagraph (2):
(A) In case the Corporation shall (i) pay a dividend on its Common
Stock in shares of the Corporation, (ii) subdivide its outstanding Common
Stock, (iii) combine the outstanding Common Stock into a smaller number
of shares, or (iv) issue by reclassification of its Common Stock (whether
pursuant to a merger or consolidation or otherwise) any shares of the
Corporation, then the holder of each share of Series B Preferred Stock
shall be entitled to receive upon the conversion of such share, the
number of shares of the Corporation which he would have owned or would
have been entitled to receive after the happening of any of the events
described above had such share been converted immediately prior to the
happening of such event. An adjustment made pursuant to this provision
shall become effective retroactively with respect to conversions made
subsequent to the record date in the case of a dividend, and shall become
effective on the effective date in the case of a subdivision, combination
or reclassification.
(B) No adjustment in the conversion rate shall be required unless
such adjustment would require an increase or decrease in such rate of at
least one-tenth of a common share; provided, however, that any
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adjustments which by reason of this clause (B) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment.
(3) The Corporation shall at all times reserve and keep available out of
its authorized Common Stock, solely for the purpose of issue upon conversion
of shares of Series B Preferred Stock as herein provided, such number of
shares of Common Stock as shall then be issuable upon the conversion of all
outstanding shares of Series B Preferred Stock.
(4) Fractional shares of Common Stock shall not be issued upon
conversion of Series B Preferred Stock nor shall cash adjustments be made
for fractional shares upon such conversion.
(5) For the purposes of this paragraph (f), the term "Common Stock"
shall mean (A) the class of stock designated as the Common Stock of the
Corporation at the date of this Restated Certificate of Incorporation, or
(B) any other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of change in par
value, or from par value to no par value, or from no par value to par value.
(g) LIQUIDATION RIGHTS--In the event of any liquidation, dissolution or
winding up of the affairs of the Corporation, whether voluntary or involuntary,
the holders of the Series B Preferred Stock shall be entitled, before any assets
of the Corporation shall be distributed among or paid over to the holders of the
common stock, to receive out of the assets of the Company $100.00 per share of
Series B Preferred Stock. If upon any such dissolution, liquidation or winding
up, the assets of the Corporation available for payment to stockholders are not
sufficient to make payment in full to the holders of the Series B Preferred
Stock, payment shall be made to such holders ratably in accordance with the
number of shares held by them and, in case there shall then be more than one
series of the Preferred Stock outstanding at that time, ratably in accordance
with the respective distributive amount to which such holders shall be entitled.
3. 6.00 CUMULATIVE CONVERTIBLE VOTING SERIES D PREFERRED STOCK, $.01 PAR VALUE,
LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION--The designation of this preferred stock shall be $6.00
Cumulative Convertible Voting Series D Preferred Stock (hereinafter referred to
as "Series D Preferred Stock").
(b) DIVIDENDS--The holders of the Series D Preferred Stock shall be
entitled to receive, when and as declared by the board of directors of the
Corporation, out of any assets of the Corporation available for dividends
pursuant to the laws of the State of Delaware, preferential dividends at the
rate of six dollars ($6.00) per annum per share and no more. The dividends, when
payable, shall be paid quarterly on the first days of March, June, September,
and December in each year, before any dividends shall be declared or paid upon
or set apart for the common stock of the Company for that year. Such dividends
upon the Series D Preferred Stock shall be cumulative from the date of issue
thereof so that if dividends for any past dividend period at the rate of six
dollars ($6.00) per annum shall not have been paid thereon or declared and a sum
sufficient for payment thereof set apart, the deficiency shall be fully paid or
set apart but without interest, before any dividend shall be paid upon or set
apart for the common stock. Provided, however, that no dividends shall be
declared on the shares of any series of preferred stock for any dividend period
unless the full dividend for all prior dividend periods shall have been declared
or shall be declared at the same time upon all preferred stock outstanding
during said prior dividend periods, and further provided, that no dividends
shall be declared on the shares of any series of preferred stock unless a
dividend for the same period shall be declared at the same time upon all
preferred stock outstanding during said period in like proportion to the
dividend rate upon such shares. Whenever the full dividend upon all the
preferred stock for all past dividend periods shall have been paid and the full
dividend thereon for the then current dividend period shall have been paid or
declared and a sum sufficient for the payment thereof set apart, dividends upon
the common stock may be declared by the board of directors out of the remainder
of the assets available therefor.
(c) REDEMPTION--The Corporation may, at the option of the board of
directors, redeem the whole or any part of the outstanding Series D Preferred
Stock at any time commencing ten years after the date of issuance. If such
redemption is made, the holders of any shares of Series D Preferred Stock
redeemed shall be entitled to receive $100 per share plus an amount equal to all
dividends accrued and unpaid to the redemption date.
Notice of election to redeem shall be mailed to each holder of Series D
Preferred Stock to be redeemed not less than thirty (30) days prior to the date
upon which such stock is to be redeemed. In case less than all of the
outstanding Series D Preferred Stock is to be redeemed, the amount to be
redeemed and the method of effecting such redemption, whether by lot or pro rata
or otherwise, may be determined by the board of directors. If on or before the
redemption date named in such notice, the funds necessary for such redemption
shall have been set aside by the Corporation so as to be available for payment
on demand to the holders of the Series D Preferred
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Stock so called for redemption then, notwithstanding that any certificate of the
Series D Preferred Stock so called for redemption shall not have been
surrendered for cancellation, the dividends thereon shall cease to accrue from
and after the date of redemption so designated, and all rights with respect to
such Series D Preferred Stock so called for redemption, including any right to
vote or otherwise participate in the determination of any proposed corporate
action, shall forthwith after such redemption date cease and terminate, except
only the right of the holder to receive the redemption price therefor, but
without interest. Stock redeemed pursuant to the provisions hereof or any Series
D Preferred Stock purchased or otherwise acquired shall not be reissued but
shall be canceled and proceedings shall be taken in the manner prescribed by
statute to reduce the shares accordingly.
(d) VOTING RIGHTS--The holders of the shares of Series D Preferred Stock
shall be entitled to one vote for each share of such stock standing in the name
of the holder on the books of the Corporation and shall vote together with the
holders of the common stock and the holders of other series of the preferred
stock of the Corporation as one class.
(e) PREEMPTIVE RIGHTS--No holder of any shares of Series D Preferred Stock
shall have any preemptive right to subscribe for or acquire additional shares of
the Corporation of the same or any other class or series, whether such shares be
hereby or hereafter authorized; and no holder of Series D Preferred Stock shall
have any preemptive right to acquire any shares which may be held in the
treasury of the Corporation; all such additional or treasury shares may be sold
for such consideration at such time and to such person or persons as the board
of directors may from time to time determine.
(f) CONVERSION--
(1) The Series D Preferred Stock shall be convertible into Common Stock
as hereinafter provided and, when and as so converted, such Series D
Preferred Stock shall be canceled and retired and shall not be reissued as
such. Any holder of the Series D Preferred Stock may at any time commencing
two (2) years and terminating upon the expiration of ten (10) years from the
date of issuance convert such stock into full shares of the Common Stock of
the Corporation at the rate of ten (10) shares of Common Stock for each
share of Series D Preferred Stock. On presentation and surrender to the
Corporation at its offices of the certificates for shares of the Series D
Preferred Stock to be converted, the holder of such stock shall be entitled
to receive in exchange therefor certificates for shares of the fully paid
and non-assessable Common Stock of the Corporation at the rate aforesaid,
all under suitable regulations to be prescribed by the board of directors of
the Corporation. Conversion of Series D Preferred Stock in the manner
aforesaid shall not affect the right of the holder of such stock to receive
dividends accrued but unpaid on such shares as of the dividend payment date
immediately prior to conversion.
(2) The number of shares of Common Stock into which each share of Series
D Preferred Stock is convertible, shall be subject to adjustment from time
to time as in clauses (A) and (B) of this subparagraph (2):
(A) In case the Corporation shall (i) pay a dividend on its Common
Stock in shares of the Corporation, (ii) subdivide its outstanding Common
Stock, (iii) combine the outstanding Common Stock into a smaller number
of shares, or (iv) issue by reclassification of its Common Stock (whether
pursuant to a merger or consolidation or otherwise) any shares of the
Corporation, then the holder of each share of Series D Preferred Stock
shall be entitled to receive upon the conversion of such share, the
number of shares of the Corporation which he would have owned or would
have been entitled to receive after the happening of any of the events
described above had such share been converted immediately prior to the
happening of such event. An adjustment made pursuant to this provision
shall become effective retroactively with respect to conversions made
subsequent to the record date in the case of a dividend, and shall become
effective on the effective date in the case of a subdivision, combination
or reclassification.
(B) No adjustment in the conversion rate shall be required unless
such adjustment would require an increase or decrease in such rate of at
least one-tenth of a share of Common Stock; provided, however, that any
adjustments which by reason of this clause (B) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment.
(3) The Corporation shall at all times reserve and keep available out of
its authorized Common Stock, solely for the purpose of issue upon conversion
of shares of Series D Preferred Stock as herein provided, such number of
shares of Common Stock as shall then be issuable upon the conversion of all
outstanding shares of Series D Preferred Stock.
(4) Fractional shares of Common Stock shall not be issued upon
conversion of Series D Preferred Stock nor shall cash adjustments be made
for fractional shares upon such conversion.
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(5) For the purposes of this paragraph (f), the term "Common Stock"
shall mean (A) the class of stock designated as the Common Stock of the
Corporation at the date of this Restated Certificate of Incorporation, or
(B) any other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of change in par
value, or from par value to no par value, or from no par value to par
value.
(g) LIQUIDATION RIGHTS--In the event of any liquidation, dissolution or
winding up of the affairs of the Corporation, whether voluntary or involuntary,
the holders of the Series D Preferred Stock shall be entitled, before any assets
of the Corporation shall be distributed among or paid over to the holders of the
common stock, to receive out of the assets of the Company $100.00 per share of
Series D Preferred Stock. If upon any such dissolution, liquidation or winding
up, the assets of the Corporation available for payment to stockholders are not
sufficient to make payment in full to the holders of the Series D Preferred
Stock, payment shall be made to such holders ratably in accordance with the
number of shares held by them and, in case there shall then be more than one
series of the Preferred Stock outstanding at that time, ratably in accordance
with the respective distributive amount to which such holders shall be entitled.
4. $7.00 CUMULATIVE CONVERTIBLE VOTING SERIES G PREFERRED STOCK, $.01 PAR VALUE,
LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION--The designation of this preferred stock shall be $7.00
Cumulative Convertible Voting Series G Preferred Stock (hereinafter referred to
as "Series G Preferred Stock").
(b) DIVIDENDS--The holders of the Series G Preferred Stock shall be
entitled to receive, when and as declared by the Board of Directors of the
Corporation, out of any assets of the Corporation available for dividends
pursuant to the laws of the State of Delaware, preferential dividends at the
rate of seven dollars ($7.00) per annum per share. The dividends, when payable,
shall be paid quarterly on the first days of March, June, September and December
in each year, before any dividends shall be declared or paid upon or set apart
for the common stock of the Company for that year. Such dividends upon the
Series G Preferred Stock shall be cumulative from the date of issue thereof so
that if dividends for any past dividend period at the rate of seven dollars
($7.00) per annum shall not have been paid thereon or declared and a sum
sufficient for payment thereof set apart, the deficiency shall be fully paid or
set apart before any dividend shall be paid upon or set apart for the common
stock. Provided however, that no dividends shall be declared on the shares of
any series of preferred stock for any dividend period unless the full dividend
for all prior dividend periods shall have been declared or shall be declared at
the same time upon all preferred stock outstanding during said prior dividend
periods, and further provided, that no dividends shall be declared on the shares
of any series of preferred stock unless a dividend for the same period shall be
declared at the same time upon all preferred stock outstanding during said
period in like proportion to the dividend rate upon such shares. Whenever the
full dividend upon all the preferred stock for all past dividend periods shall
have been paid and the full dividend thereon for the then current dividend
period shall have been paid or declared and a sum sufficient for the payment
thereof set apart, dividends upon the common stock may be declared by the Board
of Directors out of the remainder of the assets available therefor.
(c) REDEMPTION--Commencing ten years after the date of issuance, the
Corporation may, at the option of the Board of Directors, redeem in any one year
all or any part of the outstanding shares of Series G Preferred Stock at a price
of $100.00 per share.
Notice of redemption shall be mailed to each holder of Series G Preferred
Stock to be redeemed not less than thirty (30) days prior to the date upon which
the stock is to be redeemed. In case less than all of the outstanding Series G
Preferred Stock is to be redeemed, the amount to be redeemed and the method of
effecting such redemption, whether by lot or pro rata or otherwise, may be
determined by the Board of Directors. If on or before the redemption date named
in such notice, the funds necessary for such redemption shall have been set
aside by the Corporation so as to be available for payment on demand to the
holders of the Series G Preferred Stock so called for redemption then,
notwithstanding that any certificate of the Series G Preferred Stock so called
for redemption shall not have been surrendered for cancellation, the dividends
thereon shall cease to accrue from and after the date of redemption so
designated and all rights with respect to such Series G Preferred Stock so
called for redemption, including any right to vote or otherwise participate in
the determination of any proposed corporate action, shall forthwith after such
redemption date cease and determine, except only the right of the holder to
receive the redemption price therefor, but with interest on the unpaid dividends
calculated only until the date of redemption and without any further interest
whatsoever. Stock redeemed pursuant to the provisions hereof or any Series G
Preferred Stock purchased or otherwise acquired by the Corporation shall not be
reissued but shall be canceled and proceedings shall be taken in the manner
prescribed by statute to reduce the shares accordingly.
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(d) VOTING RIGHTS--The holders of the shares of Series G Preferred Stock
shall be entitled to one vote for each share of such stock standing in the name
of the holder on the books of the Corporation and shall vote together with the
holders of the common stock and the holders of other series of the preferred
stock of the Corporation as one class.
(e) PREEMPTIVE RIGHTS--No holder of any shares of Series G Preferred Stock
shall have any preemptive right to subscribe for or acquire additional shares of
the Corporation of the same or any other class or series, whether such shares be
hereby or hereafter authorized; and no holder of Series G Preferred Stock shall
have any preemptive right to acquire any shares which may be held in the
treasury of the Corporation; all such additional or treasury shares may be sold
for such consideration at such time and to such person or persons as the Board
of Directors may from time to time determine, unless otherwise restricted by the
terms of this statement of designations, powers and preferences.
(f) CONVERSION--
(1) The Series G Preferred Stock shall be convertible into Common Stock
as hereinafter provided and, when and as so converted, such Series G
Preferred Stock shall be canceled and retired and shall not be reissued as
such.
(2) Any holder of the Series G Preferred Stock, at any time commencing
immediately upon the issuance of the Series G Preferred Stock and
terminating upon the expiration of ten years from the date of issuance, may
convert such stock into full shares of the Common Stock of the Corporation
at the rate of nine (9) shares of Common Stock for each share of Series G
Preferred Stock upon 90 days written notice.
(3) On presentation and surrender to the Corporation at its offices of
the certificates for shares of the Series G Preferred Stock to be converted,
the holder of such stock shall be entitled to receive in exchange therefor
certificates for shares of the fully paid and non-assessable Common Stock of
the Corporation at the rate aforesaid, all under suitable regulations to be
prescribed by the Board of Directors of the Corporation. Conversion of
Series G Preferred Stock in the manner aforesaid shall not affect the right
of the holder of such stock to receive dividends accrued but unpaid on such
shares as of the dividend payment date immediately prior to conversion.
(4) The number of shares of Common Stock into which each share of Series
G Preferred Stock is convertible shall be subject to adjustment from time to
time as in clauses (A) and (B) of this subparagraph (4):
(A) In case the Corporation shall (i) pay a dividend on its Common
Stock in shares of the Corporation, (ii) subdivide its outstanding Common
Stock, (iii) combine the outstanding Common Stock into a smaller number
of shares, or (iv) issue by reclassification of its Common Stock (whether
pursuant to a merger or consolidation or otherwise) any shares of the
Corporation, then the holder of each share of Series G Preferred Stock
shall be entitled to receive upon the conversion of such share, the
number of shares of the Corporation which he would have owned or would
have been entitled to receive after the happening of any of the events
described above had such share been converted immediately prior to the
happening of such event. An adjustment made pursuant to this provision
shall become effective on the effective date in the case of a
subdivision, combination or reclassification.
(B) No adjustment in the conversion rate shall be required unless
such adjustment would require an increase or decrease in such rate of at
least one-tenth of a common share; provided, however, that any
adjustments which by reason of this clause (B) are not required to be
made shall be carried forward and taken into account by any subsequent
adjustment.
(5) The Corporation shall at all times reserve and keep available out of
its authorized Common Stock solely for the purpose of issue upon conversion
of shares of Series G Preferred Stock as herein provided, such number of
shares of Common Stock as shall then be issuable upon the conversion of all
outstanding shares of Series G Preferred Stock.
(6) Fractional shares of Common Stock shall not be issued upon
conversion of Series G Preferred Stock nor shall cash adjustments be made
for fractional shares upon such conversion.
(7) For the purpose of this paragraph (f), the term "Common Stock" shall
mean (A) the class of stock designated as the Common Stock of the
Corporation at the date of this Restated Certificate of Incorporation, or
(B) any other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of change in par
value, or from par value to no par value, or from no par value to par value.
(g) LIQUIDATION RIGHTS--In the event of any liquidation, dissolution or
winding up of the affairs of the Corporation, whether voluntary or involuntary,
the holders of the Series G Preferred Stock shall be entitled, before any
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assets of the Corporation shall be distributed among or paid over to the holders
of the common stock, to receive out of the assets of the Company $100.00 per
share of Series G Preferred Stock. If upon any such dissolution, liquidation or
winding up, the assets of the Corporation available for payment to stockholders
are not sufficient to make payment in full to the holders of the Series G
Preferred Stock, payment shall be made to such holders ratably in accordance
with the number of shares held by them and, in case there shall then be more
than one series of the Preferred Stock outstanding at that time, ratably in
accordance with the respective distributive amount to which such holders shall
be entitled.
5. $7.00 CUMULATIVE CONVERTIBLE VOTING SERIES H PREFERRED STOCK, $.01 PAR VALUE,
LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION--The designation of this preferred stock shall be $7.00
Cumulative Convertible Voting Series H Preferred Stock (hereinafter referred to
as "Series H Preferred Stock").
(b) DIVIDENDS--The holders of the Series H Preferred Stock shall be
entitled to receive, when and as declared by the Board of Directors of the
Corporation, out of any assets of the Corporation available for dividends
pursuant to the laws of the State of Delaware, preferential dividends at the
rate of seven dollars ($7.00) per annum per share. The dividends, when payable,
shall be paid quarterly on the first days of March, June, September and December
in each year, before any dividends shall be declared or paid upon or set apart
for the common stock of the Company for that year. Such dividends upon the
Series H Preferred Stock shall be cumulative from the date of issue thereof so
that if dividends for any past dividend period at the rate of seven dollars
($7.00) per annum shall not have been paid thereon or declared and a sum
sufficient for payment thereof set apart, the deficiency shall be fully paid or
set apart before any dividend shall be paid upon or set apart for the common
stock. Provided, however, that no dividends shall be declared on the shares of
any series of preferred stock for any dividend period unless the full dividend
for all prior dividend periods shall have been declared or shall be declared at
the same time upon all preferred stock outstanding during said prior dividend
periods, and further provided, that no dividends shall be declared on the shares
of any series of preferred stock unless a dividend for the same period shall be
declared at the same time upon all preferred stock outstanding during said
period in like proportion to the dividend rate upon such shares. Whenever the
full dividend upon all the preferred stock for all past dividend periods shall
have been paid and the full dividend thereon for the then current dividend
period shall have been paid or declared and a sum sufficient for the payment
thereof set apart, dividends upon the common stock may be declared by the Board
of Directors out of the remainder of the assets available therefor.
(c) REDEMPTION--
(1) Unless the holder of Series H Preferred Stock elects not to have his
shares redeemed in any one or more years in accordance with this
subparagraph (c)(1) by so informing the Corporation at any time or times in
writing (which election, if made, shall be irrevocable and shall forever bar
redemption of the Series H Preferred Stock except in accordance with the
provisions of subparagraph (c)(2)), the Corporation will redeem more than
twenty percent of the shares of Series H Preferred Stock then held by each
holder of Series H Preferred Stock at an aggregate price of $119.06 per
share on the anniversary of the date of issuance of the Series H Preferred
Stock in the following years: 1981, 1984, 1987 and 1989 through and
including 1995.
(2) Beginning on the twenty-first anniversary of the date of issuance of
the Series H Preferred Stock, the holders of Series H Preferred Stock shall
have the right, at their option, to have the Corporation redeem any or all
of the outstanding shares of Series H Preferred Stock at a price of $100.00
per share.
(3) If, on or before the applicable redemption date named above, the
funds necessary for such redemption shall have been set aside by the
Corporation so as to be available for payment on demand to the holders of
the Series H Preferred Stock so called for redemption, then, notwithstanding
that any certificate of the Series H Preferred Stock so called for
redemption shall not have been surrendered for cancellation, the dividends
thereon shall cease to accrue from and after the date of redemption so
designated and all rights with respect to such Series H Preferred Stock so
called for redemption, including any right to vote or otherwise participate
in the determination of any proposed corporate action, shall forthwith after
such redemption date cease and determine, except only the right of the
holder to receive the redemption price therefor, but with interest on the
unpaid dividends calculated only until the date of redemption and without
any further interest whatsoever.
(4) Stock redeemed pursuant to any of the provisions of paragraph (c) or
any Series H Preferred Stock purchased or otherwise acquired by the
Corporation shall not be reissued but shall be canceled and proceedings
shall be taken in the manner prescribed by statute to reduce the shares
accordingly.
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<PAGE>
(d) VOTING RIGHTS--The holders of the shares of Series H Preferred Stock
shall be entitled to one vote for each share of such stock standing in the name
of the holder on the books of the Corporation and shall vote together with the
holders of the common stock and the holders of other series of the preferred
stock of the Corporation as one class.
(e) PREEMPTIVE RIGHTS--No holder of any shares of Series H Preferred Stock
shall have any preemptive right to subscribe for or acquire additional shares of
the Corporation of the same or any other class or series, whether such shares be
hereby or hereafter authorized; and no holder of Series H Preferred Stock shall
have any preemptive right to acquire any shares which may be held in the
treasury of the Corporation; all such additional or treasury shares may be sold
for such consideration at such time and to such person or persons as the Board
of Directors may from time to time determine, unless otherwise restricted by the
terms of this statement of designations, powers and preferences.
(f) CONVERSION--
(1) The Series H Preferred Stock shall be convertible into Common Stock
as hereinafter provided and, when and as so converted, such Series H
Preferred Stock shall be canceled and retired and shall not be reissued as
such.
(2) Any holder of the Series H Preferred Stock, at any time commencing
immediately upon the issuance of the Series H Preferred Stock and
terminating upon the expiration of ten years from the date of issuance, may
convert such stock into full shares of the Common Stock of the Corporation
at the rate of nine (9) shares of Common Stock for each share of Series H
Preferred Stock upon 90 days written notice to the Corporation by the holder
of the Series H Preferred Stock. The Corporation, at its option, may consent
to shorter notice.
(3) On presentation and surrender to the Corporation at its offices of
the certificates for shares of the Series H Preferred Stock to be converted,
the holder of such stock shall be entitled to receive in exchange therefor
certificates for shares of the fully paid and non-assessable Common Stock of
the Corporation at the rate aforesaid, all under suitable regulations to be
prescribed by the Board of Directors of the Corporation. Conversion of
Series H Preferred Stock in the manner aforesaid shall not affect the right
of the holder of such stock to receive dividends accrued but unpaid on such
shares as of the dividend payment date immediately prior to conversion.
(4) The number of shares of Common Stock into which each share of Series
H Preferred Stock is convertible shall be subject to adjustment from time to
time as in clauses (A) and (B) of this subparagraph (4):
(A) In case the Corporation shall (i) pay a dividend on its Common
Stock in shares of the Corporation, (ii) subdivide its outstanding Common
Stock, (iii) combine the outstanding Common Stock into a smaller number
of shares, or (iv) issue by reclassification of its Common Stock (whether
pursuant to a merger or consolidation or otherwise) any shares of the
Corporation, then the holder of each share of Series H Preferred Stock
shall be entitled to receive upon the conversion of such share, the
number of shares of the Corporation which he would have owned or would
have been entitled to receive after the happening of any of the events
described above had such share been converted immediately prior to the
happening of such event. An adjustment made pursuant to this provision
shall become effective on the effective date in the case of a
subdivision, combination or reclassification.
(B) No adjustment in the conversion rate shall be required unless
such adjustment would require an increase or decrease in such rate of at
least one-tenth of a common share; provided, however, that any
adjustments which by reason of this clause (B) are not required to be
made shall be carried forward and taken into account by any subsequent
adjustment.
(5) The Corporation shall at all times reserve and keep available out of
its authorized Common Stock solely for the purpose of issue upon conversion
of shares of Series H Preferred Stock as herein provided, such number of
shares of Common Stock as shall then be issuable upon the conversion of all
outstanding shares of Series H Preferred Stock.
(6) Fractional shares of Common Stock shall not be issued upon
conversion of Series H Preferred Stock nor shall cash adjustments be made
for fractional shares upon such conversion.
(7) For the purposes of this paragraph (f), the term "Common Stock"
shall mean (A) the class of stock designated as the Common Stock of the
Corporation at the date of this Restated Certificate of Incorporation, or
(B) any other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of change in par
value, or from par value to no par value, or from no par value to par value.
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<PAGE>
(g) LIQUIDATION RIGHTS--In the event of any liquidation, dissolution or
winding up of the affairs of the Corporation, whether voluntary or involuntary,
the holders of the Series H Preferred Stock shall be entitled, before any assets
of the Corporation shall be distributed among or paid over to the holders of the
Common Stock, to receive out of the assets of the Company $100.00 per share of
Series H Preferred Stock. If upon any such dissolution, liquidation or winding
up, the assets of the Corporation available for payment to stockholders are not
sufficient to make payment in full to the holders of the Series H Preferred
Stock, payment shall be made to such holders ratably in accordance with the
number of shares held by them and, in case there shall then be more than one
series of the Preferred Stock outstanding at that time, ratably in accordance
with the respective distributive amount to which such holders shall be entitled.
6. $8.00 CUMULATIVE CONVERTIBLE AND REDEEMABLE VOTING SERIES N PREFERRED STOCK,
$.01 PAR VALUE, LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION--The designation of this series of Preferred Shares shall
be "$8.00 Cumulative Convertible and Redeemable Voting Series N Preferred
Shares" (hereinafter referred to as the "Series N Preferred Shares").
(b) DIVIDENDS--The holders of the Series N Preferred Shares shall be
entitled to receive, when and as declared by the board of directors of the
Corporation, out of any assets of the Corporation available for dividends
pursuant to the laws of the State of Delaware, preferential dividends at the
rate of eight dollars ($8.00) per annum per share and no more. The dividends,
when payable, shall be paid quarterly on the first days of March, June,
September and December in each year, before any dividends shall be declared or
paid upon or set apart for the Common Shares or Series A Common Shares of the
Corporation for that quarter. Such dividends upon the Series N Preferred Shares
shall be cumulative from the date of issue thereof so that if dividends for any
past dividend period at the rate of eight dollars ($8.00) per annum shall not
have been paid thereon or declared and a sum sufficient for payment thereof set
apart, the deficiency shall be fully paid or set apart but without interest,
before any dividend shall be paid upon or set apart for the Common Shares or
Series A Common Shares; provided, however, that no dividends shall be declared
on the shares of any series of preferred stock for any dividend period unless
the full dividend for all prior dividend periods shall have been declared or
shall be declared at the same time upon all preferred stock outstanding during
such prior dividend periods, and further provided that no dividends shall be
declared on the shares of any series of preferred stock unless a dividend for
the same period shall be declared at the same time upon all preferred stock
outstanding during said period in like proportion to the dividend rate upon such
shares. Whenever the full dividend upon all the series of the preferred stock
for all past dividend periods shall have been paid and the full dividend thereon
for the then current dividend period shall have been paid or declared and a sum
sufficient for the payment thereof set apart, dividends upon the Common Shares
or Series A Common Shares may be declared by the board of directors out of the
remainder of the assets available therefor.
(c) REDEMPTION--
(1) Unless such shares have been converted pursuant to paragraph (f)
hereof prior to the sixth anniversary of the date of issue thereof, the
Corporation shall, beginning with the seventh anniversary of the date of
issue thereof, and annually thereafter on each subsequent anniversary of the
date of issue thereof, redeem one-fourteenth of the number of Series N
Preferred Shares outstanding on the sixth anniversary of the date of issue
thereof, until all such shares have been redeemed, and the holders thereof
shall be entitled to receive $100.00 per share plus an amount equal to all
dividends accrued and unpaid thereon to the redemption date.
(2) Notice of any redemption shall be mailed to each holder of Series N
Preferred Shares to be redeemed not less than thirty (30) days prior to the
date upon which such stock is to be redeemed. If on or before the redemption
date specified in such notice, the funds necessary for such redemption shall
have been set aside by the Corporation so as to be available for payment on
demand to the holders of Series N Preferred Shares so called for redemption
then, notwithstanding that any certificate representing Series N Preferred
Shares so called for redemption shall not have been surrendered for
cancellation, the dividends thereon shall cease to accrue from and after the
date of such redemption so specified, and all rights with respect to such
Series N Preferred Shares so called for redemption, including any right to
vote or otherwise participate in the determination of any proposed corporate
action, shall forthwith after such redemption date cease and terminate,
except only the right of the holder to receive the redemption price
therefor, but without interest. Series N Preferred Shares redeemed pursuant
to the provisions hereof or any such shares purchased or otherwise acquired
shall not be reissued but shall be canceled and proceedings shall be taken
in the manner prescribed by statute to reduce the number of outstanding
Series N Preferred Shares accordingly.
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<PAGE>
(d) VOTING RIGHTS--The holders of Series N Preferred Shares shall be
entitled to one vote for each share of such stock standing in the name of the
holder on the books of the Corporation and shall vote together with the holders
of the common stock and the holders of other series of the preferred stock of
the Corporation as one class.
(e) PREEMPTIVE RIGHTS--No holder of any Series N Preferred Shares shall
have any preemptive right to subscribe for or acquire additional shares of the
Corporation of the same or any other class or series, whether such shares be
hereby or hereafter authorized; and no holder of Series N Preferred Shares shall
have any preemptive right to acquire any shares which may be held in the
treasury of the Corporation; all such additional or treasury shares may be sold
for such consideration at such time and to such person or persons as the board
of directors may from time to time determine.
(f) CONVERSION--
(1) The Series N Preferred Shares shall be convertible into the
Corporation's Common Shares as hereinafter provided, and when and as so
converted, such Series N Preferred Shares shall be canceled and retired and
shall not be reissued as such. Commencing upon the issuance and terminating
at the close of business on the third anniversary thereof, the Series N
Preferred Shares may be converted, upon thirty (30) days' written notice to
the Corporation into Common Shares of the Corporation at the rate of ten
(10) Common Shares for each Series N Preferred Share. Thereafter, until the
close of business on the sixth anniversary of the date of issue, the Series
N Preferred Shares may be converted, upon thirty (30) days' written notice
to the Corporation, into Common Shares of the Corporation at the rate of
nine (9) Common Shares for each Series N Preferred Share. On presentation
and surrender to the Corporation at its offices of the certificates
representing Series N Preferred Shares to be converted, the holder thereof
shall be entitled to receive in exchange therefor certificates for the fully
paid and non-assessable Common Shares of the Corporation at the rate
aforesaid, all under suitable regulations to be prescribed by the board of
directors of the Corporation. Conversion of Series N Preferred Shares in the
manner aforesaid shall not affect the right of the converting holder thereof
to receive dividends accrued but unpaid thereon as of the dividend payment
date immediately prior to conversion.
(2) The number of Common Shares into which each Series N Preferred
Shares is convertible shall be subject to adjustment from time to time as
set forth in clauses (A) and (B) of this subparagraph (2):
(A) In case the Corporation shall (i) pay a dividend on its Common
Shares in shares of the Corporation, (ii) subdivide its outstanding
Common Shares, (iii) combine the outstanding Common Shares into a smaller
number of shares or (iv) issue by reclassification of its Common Shares
(whether pursuant to a merger or consolidation or otherwise) any shares
of the Corporation, then the holder of each Series N Preferred Share
shall be entitled to receive upon the conversion of such share, the
number of shares of the Corporation which he would have owned or would
have been entitled to receive after the happening of any of the events
described above had such share been converted immediately prior to the
happening of such event. An adjustment made pursuant to this provision
shall become effective retroactively with respect to conversions made
subsequent to the record date in the case of a dividend, and shall become
effective on the effective date in the case of a subdivision, combination
or reclassification.
(B) No adjustment in the conversion rate shall be required unless
such adjustment would require an increase or decrease in such rate of at
least one-tenth (1/10) of a Common Shares; provided, however, that any
adjustments which by reason of this clause (B) are not required to be
made shall be carried forward and taken into account by any subsequent
adjustment.
(3) The Corporation shall at all times reserve and keep available out of
its authorized Common Shares, solely for the purpose of issuance upon
conversion of Series N Preferred Shares as herein provided, such number of
Common Shares as shall then be issuable upon the conversion of all
outstanding Series N Preferred Shares.
(4) Fractional Common Shares shall not be issued upon conversion of
Series N Preferred Shares, nor shall cash adjustments be made for fractional
shares upon such conversion.
(5) For the purposes of this paragraph (f), the term "Common Shares"
shall mean (A) the class of stock designated as the Common Shares of the
Corporation at the date of this Restated Certificate of Incorporation, or
(B) any other class of stock resulting from successive changes or
reclassifications of such class consisting solely of a change in par value,
or a change from no par value to par value.
(g) LIQUIDATION RIGHTS--In the event of any liquidation, dissolution or
winding up of the affairs of the Corporation, whether voluntary or involuntary,
the holders of the Series N Preferred Shares shall be entitled, before any
assets of the Corporation shall be distributed among or paid over to the holders
of Common Shares or Series A
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<PAGE>
Common Shares, to receive out of the assets of the Corporation $100.00 per
Series N Preferred Share. If upon any such dissolution, liquidation or winding
up, the assets of the Corporation available for payment to stockholders are not
sufficient to make payment in full to the holders of the Series N Preferred
Shares, payment shall be made to such holders ratably in accordance with the
number of shares held by them, and in case there shall then be more than one
series of the preferred stock outstanding at that time, ratably in accordance
with the respective distributive amount to which such holders shall be entitled.
7. $9.00 CUMULATIVE CONVERTIBLE AND REDEEMABLE VOTING SERIES O PREFERRED SHARES,
$.01 PAR VALUE, LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION--The designation of this series of Preferred Shares shall
be "$9.00 Cumulative Convertible and Redeemable Voting Series O Preferred
Shares" (hereinafter referred to as the "Series O Preferred Shares").
(b) DIVIDENDS--The holders of the Series O Preferred Shares shall be
entitled to receive, when and as declared by the board of directors of the
Corporation, out of any assets of the Corporation available for dividends
pursuant to the laws of the State of Delaware, preferential dividends at the
rate of nine dollars ($9.00) per annum per share and no more. The dividends,
when payable, shall be paid quarterly on the first days of March, June,
September and December in each year (prorated if the period such stock is
outstanding prior to the first quarterly dividend date is less than a calendar
quarter), before any dividends shall be declared or paid upon or set apart for
the Common Shares or Series A Common Shares of the Corporation for that quarter.
Such dividends upon the Series O Preferred Shares shall be cumulative from the
date of issue thereof so that if dividends for any past dividend period at the
rate of nine dollars ($9.00) per annum per share shall not have been paid
thereon or declared and a sum sufficient for payment thereof set apart, the
deficiency shall be fully paid or set apart but without interest, before any
dividend shall be paid upon or set apart for the Common Shares or Series A
Common Shares; provided, however, that no dividends shall be declared on the
shares of any series of preferred stock for any dividend period unless the full
dividend for all prior dividend periods shall have been declared or shall be
declared at the same time upon all preferred stock outstanding during such prior
dividend periods, and further provided that no dividends shall be declared on
the shares of any series of preferred stock unless a dividend for the same
period shall be declared at the same time upon all preferred stock outstanding
during said period in like proportion to the dividend rate upon such shares.
Whenever the full dividend upon all series of preferred stock for all past
dividend periods shall have been paid and the full dividend thereon for the then
current dividend period shall have been paid or declared and a sum sufficient
for the payment thereof set apart, dividends upon the Common Shares or Series A
Common Shares may be declared by the board of directors out of the remainder of
the assets available therefor.
(c) REDEMPTION--
(1) Unless such shares have been converted pursuant to paragraph (f)
hereof prior to January 1, 1990, the Corporation may, at its option from
time to time and in such amounts as it may determine, redeem the Series O
Preferred Shares for $100.00 per share plus an amount equal to all dividends
accrued and unpaid thereon to the redemption date.
(2) Unless such shares have been converted pursuant to paragraph (f)
hereof prior to January 1, 1990, the holder of Series O Preferred Shares
may, at the holder's option, during the period commencing January 1, 1990
and ending December 31, 1999, elect to have redeemed in any one year as much
as one-third (1/3) of the number of Series O Preferred Shares held by such
person on January 1, 1990.
(3) Notice of an election under either of the redemption provisions in
subparagraphs (c)(1) and (c)(2) above shall be mailed (A) in case of a
redemption at the election of the Corporation to each holder of Series O
Preferred Shares to be redeemed or (B) in the case of a redemption at the
election of the holder of Series O Preferred Shares to the Corporation not
less than thirty (30) days prior to the date upon which such stock is to be
redeemed. In case less than all of the outstanding Series O Preferred Shares
are to be redeemed by the Corporation, the amount to be redeemed and the
method of effecting such redemption, whether by lot or pro rata or
otherwise, may be determined by the Board of Directors. If on or before the
redemption date specified in such notice, the funds necessary for such
redemption shall have been set aside by the Corporation so as to be
available for payment on demand to the holders of the Series O Preferred
Shares so called for or requesting redemption, then, notwithstanding that
any certificate representing Series O Preferred Shares so called for or
requesting redemption shall not have been surrendered for cancellation, the
dividends thereon shall cease to accrue from and after the date of such
redemption so specified, and all rights with respect to such Series O
Preferred Shares so called for or requesting redemption, including any right
to vote or otherwise participate in the determination of any proposed
corporate action, shall forthwith after such redemption date cease and
terminate, except only the right of the holder to receive the redemption
price therefor, but without
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interest. Series O Preferred Shares redeemed pursuant to the provisions
hereof or any such shares purchased or otherwise acquired shall not be
reissued but shall be canceled and proceedings shall be taken in the manner
prescribed by statute to reduce the number of outstanding Series O Preferred
Shares accordingly.
(d) VOTING RIGHTS--
(1) For all purposes, the holders of Series O Preferred Shares shall be
entitled to one vote for each share of such stock standing in the name of
the holder on the books of the Corporation.
(2) Subject to the rights, if any, of the holders of one or more series
of Preferred Shares, voting as a class, to elect one or more directors, in
the election of directors, the holders of Series O Preferred Shares shall
vote together as one class with the Series A Common Shares. The total number
of directors of the Corporation shall be determined without regard to any
director(s) whom the holders of one or more series of Preferred Shares,
voting as a class, have elected or have the right to elect. In the event the
number of issued and outstanding Series A Common Shares at any time falls
below 500,000, then with respect to the election of directors at the next
annual meeting thereafter the holders of Common Shares, Series A Common
Shares and Preferred Shares shall be entitled to elect all of the directors
of the Corporation.
(e) PREEMPTIVE RIGHTS--No holder of any Series O Preferred Shares shall
have any preemptive right to subscribe for or acquire additional shares of the
Corporation of the same or any other class or series, whether such shares be
hereby or hereafter authorized; and no holder of Series O Preferred Shares shall
have any preemptive right to acquire any shares which may be held in the
treasury of the Corporation; all such additional or treasury shares may be sold
for such consideration at such time and to such person or persons as the board
of directors may from time to time determine.
(f) CONVERSION--
(1) (A) The Series O Preferred Shares shall be convertible into the
Corporation's Common Shares as hereinafter provided, and when and as so
converted, such Series O Preferred Shares shall be canceled and retired and
shall not be reissued as such. Commencing upon issuance and terminating at
the close of business on December 31, 1988, the Series O Preferred Shares
may be converted, upon sixty (60) days' written notice to the Corporation,
into Common Shares of the Corporation at the rate of nine (9) Common Shares
for each Series O Preferred Share. Thereafter, until the close of business
on December 31, 1989, the Series O Preferred Shares may be converted, upon
sixty (60) days' written notice to the Corporation, into Common Shares of
the Corporation at the rate of eight (8) Common Shares for each Series O
Preferred Share. On presentation and surrender to the Corporation at its
offices of the certificates representing the Series O Preferred Shares to be
converted, the holder thereof shall be entitled to receive in exchange
therefor certificates for fully paid and non-assessable Common Shares of the
Corporation at the rate aforesaid, all under suitable regulations to be
prescribed by the board of directors of the Corporation. Conversion of
Series O Preferred Shares in the manner aforesaid shall not affect the right
of the converting holder thereof to receive dividends accrued but unpaid
thereon as of the dividend payment date immediately prior to conversion.
(B) Notwithstanding the provisions of clause (A) above, if the Market
Value (as defined below) of a Common Share does not exceed $12.875 per
share on each of five consecutive trading days for at least two periods
of five days each from the date of issuance to December 31, 1987, then
the Corporation will deliver additional Common Shares to qualified
shareholders, in an amount equal to the Price Differential (as defined
below). The payment of additional Common Shares is limited to those
shareholders electing to receive stock in connection with the acquisition
of Chatham Telephone Company and others who receive such stock from such
shareholders through inheritance or gift, and who complete the conversion
of their Series O Preferred Shares, as provided herein, prior to August
1, 1988, and is further limited to those Common Shares owned by the
shareholder on August 1, 1988 which were (i) issued in the original
distribution of Series O Preferred Shares, or (ii) acquired pursuant to a
conversion of Series O Preferred Shares (the "Qualified Shares"). For
purposes of calculating the number of additional Common Shares to be
issued, the value of each additional Common Share being issued shall be
the highest average Market Value for two periods of five consecutive
trading days from the date of issuance through December 31, 1987. This
value is referred to hereinafter as the "Additional Share Value." The
number of additional Common Shares to be issued shall be determined by
dividing the Price Differential by the Additional Share Value. No
fractional shares will be issued in connection with the payment of
additional shares. An equivalent amount of cash for such fractional
shares shall be distributed based upon the Additional Share Value.
For purposes hereof:
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1. "Market Value" means the high sales price of a Common Share, as
reported in the Wall Street Journal.
2. "Price Differential" means the difference between the highest
average Market Value for five (5) consecutive trading days during
the period from the date of issuance through December 31, 1987,
and $12.875, multiplied by the number of Qualified Shares.
(2) The number of Common Shares into which each Series O Preferred Share
is convertible shall be subject to adjustment from time to time as set forth
in clauses (A) and (B) of this subparagraph (2):
(A) In case the Corporation shall (i) pay a dividend on its Common
Shares in shares of the Corporation, (ii) subdivide its outstanding
Common Shares, (iii) combine the outstanding Common Shares into a smaller
number of shares or (iv) issue by reclassification of its Common Shares
(whether pursuant to a merger or consolidation or otherwise) any shares
of the Corporation, then the holder of each Series O Preferred Share
shall be entitled to receive upon the conversion of such share, the
number of shares of the Corporation which the holder would have owned or
would have been entitled to receive after the happening of any of the
events described above had such share been converted immediately prior to
the happening of such event. An adjustment made pursuant to this
provision shall become effective retroactively with respect to
conversions made subsequent to the record date in the case of a dividend,
and shall become effective on the effective date in the case of a
subdivision, combination or reclassification.
(B) No adjustment in the conversion rate shall be required unless
such adjustment would require an increase or decrease in such rate of at
least one-tenth (1/10) of a Common Share; provided, however, that any
adjustments which by reason of this clause (B) are not required to be
made shall be carried forward and taken into account by any subsequent
adjustment.
(3) The Corporation shall at all times reserve and keep available out of
its authorized Common Shares, solely for the purpose of issuance upon
conversion of Series O Preferred Shares as herein provided, such number of
Common Shares as shall then be issuable upon the conversion of all
outstanding Series O Preferred Shares.
(4) Fractional Common Shares shall not be issued upon conversion of
Series O Preferred Shares, nor shall cash adjustments be made for fractional
shares upon such conversion.
(5) For the purposes of this paragraph (f), the term "Common Shares"
shall mean (A) the class of stock designated as the Common Shares of the
Corporation at the date of this Restated Certificate of Incorporation, or
(B) any other class of stock resulting from successive changes or
reclassifications of such class consisting solely of a change in par value,
or a change from no par value to par value.
(g) LIQUIDATION RIGHTS--In the event of any liquidation, dissolution or
winding up of the affairs of the Corporation, whether voluntary or involuntary,
the holders of the Series O Preferred Shares shall be entitled, before any
assets of the Corporation shall be distributed among or paid over to the holders
of Common Shares or Series A Common Shares, to receive out of the assets of the
Corporation $100.00 per Series O Preferred Share. If upon any such dissolution,
liquidation or winding up, the assets of the Corporation available for payment
to shareholders are not sufficient to make payment in full to the holders of the
Series O Preferred Shares, payment shall be made to such holders ratably in
accordance with the number of shares held by them and, in case there shall then
be more than one series of preferred stock outstanding at that time, ratably in
accordance with the respective distributive amount to which such holders shall
be entitled.
8. $10.50/$7.00 CUMULATIVE AND CONVERTIBLE VOTING SERIES S PREFERRED SHARES,
$.01 PAR VALUE, LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION--The designation of this series of Preferred Shares shall
be "$10.50/$7.00 Cumulative and Convertible Voting Series S Preferred Shares"
(hereinafter referred to as the "Series S Preferred Shares").
(b) DIVIDENDS--The rate of dividend payable upon Series S Preferred Shares
shall be ten and 50/100 dollars ($10.50) per share per annum during the first
year after issuance and seven and no/100 dollars ($7.00) per share per annum
thereafter.
(c) VOTING RIGHTS--
(1) With respect to all matters, each holder of Series S Preferred
Shares shall be entitled to one vote for each share of such stock standing
in the name of the holder on the books of the Corporation.
(2) With respect to the election of directors, the holders of Series S
Preferred Shares shall have class voting rights (voting together with the
holders of (A) other Preferred Shares that are entitled to vote thereon and
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that were issued after October 31, 1981, and (B) Series A Common Shares) to
the extent provided in Article IV of the Restated Certificate of
Incorporation of the Corporation.
(d) CONVERSION--
(1) The Series S Preferred Shares shall be convertible into the
Corporation's Common Shares as hereinafter provided, and when and as so
converted, such Series S Preferred Shares shall be canceled and retired and
shall not be reissued as such. Commencing upon issuance and terminating four
(4) years thereafter, the Series S Preferred Shares may be converted, upon
written notice to the Corporation, into Common Shares of the Corporation at
the rate of four (4) Common Shares for each Series S Preferred Share. On
presentation and surrender to the Corporation at its offices of the
certificate representing the Series S Preferred Shares to be converted, the
holder thereof shall be entitled to receive in exchange therefor
certificates for the fully paid and non-assessable Common Shares of the
Corporation at the rate aforesaid, all under suitable regulations to be
prescribed by the board of directors of the Corporation. Conversion of
Series S Preferred Shares in the manner aforesaid shall not affect the right
of the converting holder thereof to receive dividends accrued but unpaid
thereon as of the dividend payment date immediately prior to conversion.
(2) The number of Common Shares into which each Series S Preferred Share
is convertible shall be subject to adjustment from time to time as set forth
in clauses (A) and (B) of this subparagraph (2):
(A) In case the Corporation shall (i) pay a dividend on its Common
Shares in shares of the Corporation (ii) subdivide its outstanding Common
Shares, (iii) combine the outstanding Common Shares into a smaller number
of shares or (iv) issue by reclassification of its Common Shares (whether
pursuant to a merger or consolidation or otherwise) any shares of the
Corporation, then the holder of each Series S Preferred Share shall be
entitled to receive upon the conversion of such share, the number of
shares of the Corporation which he would have owned or would have been
entitled to receive after the happening of any of the events described
above had such share been converted immediately prior to the happening of
such event. An adjustment made pursuant to this provision shall become
effective retroactively with respect to conversions made subsequently to
the record date in the case of a dividend, and shall become effective on
the effective date in the case of a subdivision, combination or
reclassification.
(B) No adjustment in the conversion rate shall be required unless
such adjustment would require an increase or decrease in such rate of at
least one-tenth (1/10) of a Common Share; provided, however, that any
adjustments which by reason of this clause (B) are not required to be
made shall be carried forward and taken into account by any subsequent
adjustment.
(3) The Corporation shall at all times reserve and keep available out of
its authorized Common Shares, solely for the purpose of issuance upon
conversion of Series S Preferred Shares as herein provided, such number of
Common Shares as shall then be issuable upon the conversion of all
outstanding Series S Preferred Shares.
(4) Fractional Common Shares shall not be issued upon conversion of
Series S Preferred Shares, nor shall cash adjustments be made for fractional
shares upon such conversion.
(5) For the purposes of this paragraph (d), the term "Common Shares"
shall mean (A) the class of stock designated as the Common Shares of the
Corporation at the date of this Restated Certificate of Incorporation, or
(B) any other class of stock resulting from successive changes or
reclassifications of such class consisting solely of a change in par value,
or a change from no par value to par value.
(e) LIQUIDATION--The amount payable upon each Series S Preferred Share in
the event of either voluntary or involuntary liquidation shall be $100.00, plus
a sum equal to the amount of all accumulated and unpaid dividends thereon.
9. $8.50 CUMULATIVE, NON-CONVERTIBLE, REDEEMABLE AND VOTING SERIES U PREFERRED
SHARES, $.01 PAR VALUE, LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION--The designation of this series of Preferred Shares shall
be "$8.50 Cumulative, Non-Convertible, Redeemable and Voting Series U Preferred
Shares" (hereinafter referred to as "Series U Preferred Shares").
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(b) DIVIDENDS--The rate of dividend payable upon Series U Preferred Shares
shall be eight and 50/100 dollars ($8.50) per share per annum. Such dividends
shall be cumulative from and commence to accrue on the date of issuance.
(c) REDEMPTION--
(1) After the fifth anniversary of the date of issuance, the Corporation
may, at its option, redeem annually up to twenty percent (20%) of the Series
U Preferred Shares outstanding on such fifth anniversary for $100.00 per
share. After the tenth anniversary of their issuance, the Corporation may at
any time redeem, in whole or in part, the then outstanding Series U
Preferred Shares for $100.00 per share. In addition to the redemption price,
the following shall be paid:
(A) any accrued and unpaid dividends with respect to each Series U
Preferred Share redeemed, and
(B) an amount equal to $2.125 for each Series U Preferred Share
redeemed MULTIPLIED BY the number of days between the date fixed for
redemption and the March 1, June 1, September 1, or December 1
immediately preceding the date fixed for redemption and DIVIDED BY 90.
(2) Notice of an election under the redemption provision in subparagraph
(c)(1) above shall be delivered to each holder of Series U Preferred Shares
to be redeemed at the address appearing on the records of the Corporation
not less than thirty (30) days prior to the date upon which such stock is to
be redeemed. If on or before the redemption date specified in such notice,
the funds necessary for such redemption shall have been set aside by the
Corporation so as to be available for payment on demand to the holder of the
Series U Preferred Shares so called for redemption, then, notwithstanding
that any certificate representing Series U Preferred Shares so called for
redemption shall not have been surrendered for cancellation, the dividends
thereon shall cease to accrue from and after the date of such redemption so
specified, and all rights with respect to such Series U Preferred Shares so
called for redemption, including any right to vote or otherwise participate
in the determination of any proposed corporate action, shall terminate at
the close of business on such redemption date, except only the right of the
holder to receive the redemption price therefor, but without interest. The
Series U Preferred Shares purchased or otherwise acquired shall not be
reissued but shall be canceled and proceedings shall be taken in the manner
prescribed by statute to reduce the number of Preferred Shares which the
Corporation is authorized to issue by the number of shares canceled.
(d) VOTING RIGHTS--
(1) With respect to all matters, each holder of Series U Preferred
Shares shall be entitled to one vote for each share of such stock standing
in the name of the holder on the books of the Corporation.
(2) With respect to the election of directors, the holders of Series U
Preferred Shares shall have class voting rights (voting together with the
holders of (A) other Preferred Shares that are entitled to vote thereon and
that were issued after October 31, 1981, and (B) Series A Common Shares) to
the extent provided in Article IV of the Restated Certificate of
Incorporation of the Corporation.
(e) CONVERSION--The Series U Preferred Shares shall not be convertible.
(f) LIQUIDATION--The amount payable upon each Series U Preferred Share in
the event of either voluntary or involuntary liquidation shall be $100.00, plus
a sum equal to the amount of all accumulated and unpaid dividends thereon.
10. $9.00 CUMULATIVE AND CONVERTIBLE VOTING SERIES BB PREFERRED SHARES, $.01 PAR
VALUE, LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION--The designation of this series of Preferred Shares shall
be $9.00 Cumulative, Convertible and Redeemable Voting Series BB Preferred
Shares" (hereinafter referred to as the "Series BB Preferred Shares").
(b) DIVIDENDS--The rate of dividend payable upon Series BB Preferred Shares
shall be nine and no/100 dollars ($9.00) per share per annum.
(c) REDEMPTION--
(1) Unless the Series BB Preferred Shares have been converted, or
written notice to convert has been received prior to the expiration of the
conversion period set forth in paragraph (e) hereof, then commencing with
the tenth anniversary of the issuance of the Series BB Preferred Shares and
ending ten years thereafter, the Corporation may, at its sole option, at any
time thereafter, redeem up to two thousand (2,000) shares per
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annum of the then outstanding Series BB Preferred Shares for $100.00 per
share, plus an amount equal to all dividends accrued and unpaid thereon on
the redemption date.
(2) Notice of an election under the redemption provision in subparagraph
(c)(1) above shall be delivered to the Corporation not less than thirty (30)
days prior to the date upon which such stock is to be redeemed. If on or
before the redemption date specified in such notice, the funds necessary for
such redemption shall have been set aside by the Corporation so as to be
available for payment on demand to the holder of Series BB Preferred Shares
so offered for redemption, then, notwithstanding that any certificate
representing Series BB Preferred Shares so offered for redemption shall have
not been so surrendered for cancellation, the dividends thereon shall cease
to accrue from and after the date of such redemption so specified, and all
rights with respect to such Series BB Preferred Shares so offered for
redemption, including any right to vote or otherwise participate in the
determination of any proposed corporate action, shall forthwith after such
redemption date shall cease and terminate, except only the right of the
holder to receive the redemption price therefor, but without interest.
(d) VOTING RIGHTS--
(1) With respect to all matters, each holder of Series BB Preferred
Shares shall be entitled to one vote for each share of such stock standing
in the name of the holder on the books of the Corporation.
(2) With respect to the election of directors, the holders of Series BB
Preferred Shares shall have class voting rights (voting together with the
holders of (A) other Preferred Shares that are entitled to vote thereon and
that were issued after October 31, 1981, and (B) Series A Common Shares) to
the extent provided in Article IV of the Restated Certificate of
Incorporation of the Corporation.
(e) CONVERSION--
(1) The Series BB Preferred Shares shall be convertible into the
Corporation's Common Shares as hereinafter provided. Commencing upon
issuance and terminating ten (10) years thereafter, the Series BB Preferred
Shares may be converted, upon written notice to the Corporation, into Common
Shares of the Corporation at the rate of six (6) Common Shares for each
Series BB Preferred Share. On presentation and surrender to the Corporation
at its offices of the certificate representing the Series BB Preferred
Shares to be converted, the holder thereof shall be entitled to receive in
exchange therefor certificates for the fully paid and non-assessable Common
Shares of the Corporation at the rate aforesaid, all under suitable
regulations to be prescribed by the board of directors of the Corporation.
Conversion of Series BB Preferred Shares in the manner aforesaid shall not
affect the right of the converting holder thereof to receive dividends
accrued but unpaid thereon as of the dividend payment date immediately prior
to conversion.
(2) The number of Common Shares into which each Series BB Preferred
Share is convertible shall be subject to adjustment from time to time as set
forth in clauses (A) and (B) of this subparagraph (2):
(A) In case the Corporation shall (i) pay a dividend on its Common
Shares in shares of the Corporation (ii) subdivide its outstanding Common
Shares, (iii) combine the outstanding Common Shares into a smaller number
of shares, or (iv) issue by reclassification of its Common Shares
(whether pursuant to a merger or consolidation or otherwise) any shares
of the Corporation, then the holder of each Series BB Preferred Share
shall be entitled to receive upon the conversion of such share, the
number of shares of the Corporation which he would have owned or would
have been entitled to receive after the happening of any of the events
described above had such share been converted immediately prior to the
happening of such event. An adjustment made pursuant to this provision
shall become effective retroactively with respect to conversions made
subsequent to the record date in the case of a dividend, and shall become
effective on the effective date in the case of a subdivision, combination
or reclassification.
(B) No adjustment in the conversion rate shall be required unless
such adjustment would require an increase or decrease in such rate of at
least one-tenth (1/10) of a Common Share; provided, however, that any
adjustments which by reason of this clause (B) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment.
(3) The Corporation shall at all times reserve and keep available out of
its authorized Common Shares, solely for the purpose of issuance upon
conversion of Series BB Preferred Shares as herein provided, such number of
Common Shares as shall then be issuable upon the conversion of all
outstanding Series BB Preferred Shares.
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(4) Fractional Common Shares shall not be issued upon conversion of
Series BB Preferred Shares, nor shall cash adjustments be made for
fractional shares upon such conversion.
(5) For the purposes of this paragraph (e), the term "Common Shares"
shall mean (A) the class of stock designated as the Common Shares of the
Corporation at the date of this Restated Certificate of Incorporation, or
(B) any other class of stock resulting from successive changes or
reclassifications of such class consisting solely of a change in par value,
or a change from no par value to par value.
(f) LIQUIDATION--The amount payable upon each Series BB Preferred Share in
the event of either voluntary or involuntary liquidation shall be $100.00, plus
a sum equal to the amount of all accumulated and unpaid dividends thereon.
11. $7.00 CUMULATIVE, CONVERTIBLE AND REDEEMABLE VOTING SERIES DD PREFERRED
SHARES, $.01 PAR VALUE, LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION.--The designation of this series of Preferred Shares shall
be $7.00 Cumulative, Convertible and Redeemable Voting Series DD Preferred
Shares (hereinafter referred to as the "Series DD Preferred Shares").
(b) DIVIDENDS.--The rate of dividend payable upon Series DD Preferred
Shares shall be seven and no/100 dollars ($7.00) per share per annum.
(c) CONVERTIBILITY.--Commencing upon issuance and terminating on the day
before the fifteenth anniversary thereof, the Series DD Preferred Shares shall
be convertible, at the election of the holder of Series DD Preferred Shares and
upon surrender to the Corporation of the certificate or certificates
representing the shares to be converted, into fully paid and non-assessable TDS
Common Shares, $1.00 par value (hereinafter referred to as the "Common Shares"),
at the rate of five and one-quarter (5.25) Common Shares for each Series DD
Preferred Share. Certificates representing any Series DD Preferred Shares
surrendered for conversion shall be delivered to the Corporation duly endorsed,
or accompanied by proper instruments of transfer, to the Corporation or in
blank, together with a written notice to the Corporation of the holder's
election to make the conversion and of the name or names in which the
certificate or certificates for Common Shares shall be issued. The Corporation
shall pay all documentary, stamp, and similar taxes that may be payable in
respect of the issue or delivery of Common Shares upon conversion of any Series
DD Preferred Shares. The Corporation shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
Common Shares the full number of Common Shares that would be deliverable upon
the conversion of Series DD Preferred Shares then outstanding.
If at any time the Corporation elects to redeem part or all of the
outstanding Series DD Preferred Shares (pursuant to paragraph (e) of this
Statement of Designation, Preferences and Rights), the holders of the Series DD
Preferred Shares that the Corporation elects to redeem shall be entitled to
convert those shares to Common Shares by delivering to the Corporation, not less
than ten (10) days before the redemption date specified in the Corporation's
notice of redemption, a written notice of the holder's election to convert part
or all of his Series DD Preferred Shares to Common Shares, together with the
certificate or certificates representing the Series DD Preferred Shares to be
converted duly endorsed (or accompanied by proper instruments of transfer) to
the Corporation or in blank.
The number of Common Shares into which each Series DD Preferred Share is
convertible shall be subject to adjustment from time to time as set forth below:
In case the Corporation shall (1) pay a dividend on its Common Shares (in
shares of the Corporation), (2) subdivide its outstanding Common Shares, (3)
combine the outstanding Common Shares into a smaller number of shares or (4)
issue by reclassification of its Common Shares (whether pursuant to a merger or
consolidation or otherwise) any shares of the Corporation, then the holder of
each Series DD Preferred Share shall be entitled to receive upon the conversion
of such share, the number of shares of the Corporation which he or she would
have owned or would have been entitled to receive after the happening of any of
the events described above had such share been converted immediately prior to
the happening of such event. An adjustment made pursuant to this provision shall
become effective retroactively with respect to conversions made subsequent to
the record date in the case of a dividend, and shall become effective on the
effective date in the case of a subdivision, combination or reclassification.
Fractional Common Shares shall not be issued upon conversion of Series DD
Preferred Shares, nor shall cash adjustments be made for fractional shares upon
such conversion.
(d) LIQUIDATION VALUE.--Each Series DD Preferred Share shall have a
liquidation value of $100.00.
(e) REDEEMABILITY.--The Series DD Preferred Shares shall be redeemable upon
the second anniversary of their issuance, and on each anniversary thereafter
through the sixth such anniversary, at the election of the holder of
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Series DD Preferred Shares, which election shall be made not less than ten (10)
days before each such anniversary. The Corporation shall redeem on a pro-rata
basis for each holder, up to twenty percent (20%) of the number of Series DD
Preferred Shares issued and outstanding on each anniversary of their issuance
without premium, upon payment to the holder of Series DD Preferred Shares to be
redeemed of $100.00 per share PLUS
(1) any accrued and unpaid dividends with respect to each Series DD
Preferred Share redeemed, and
(2) an amount equal to $1.75 for each Series DD Preferred Share redeemed
MULTIPLIED BY the number of days between the date fixed for redemption and
the March 1, June 1, September 1, or December 1 immediately preceding the
date fixed for redemption and DIVIDED BY 90.
The right of redemption provided in the preceding sentence shall not be
cumulative. In the event that a holder of Series DD Preferred Shares fails to
exercise its right of redemption during any year, such right of redemption with
respect to the Series DD Preferred Shares eligible for redemption during such
year shall lapse. A holder of Series DD Preferred Shares shall exercise its
right of redemption by mailing to the Corporation written notice of its election
to redeem Series DD Preferred Shares, together with a certificate or
certificates representing the Series DD Preferred Shares to be redeemed, duly
endorsed or accompanied by proper instruments of transfer. The foregoing right
of redemption may only be exercised if the price of the Common Shares at the
time the holder of Series DD Preferred Shares gives notice of his or her desire
to have Series DD Preferred Shares redeemed is below $19.00 per share (or such
equivalent price as may exist as a result of any stock split, stock dividend,
reclassification or similar event).
After the fifteenth anniversary of their issuance, the Series DD Preferred
Shares outstanding may be redeemed at the election of the Corporation from time
to time in whole or in part, without premium, upon payment to the holder of
Series DD Preferred Shares to be redeemed of $100 per share PLUS
(1) any accrued and unpaid dividends with respect to each Series DD
Preferred Share redeemed, and
(2) an amount equal to $1.75 for each Series DD Preferred Share redeemed
MULTIPLIED BY the number of days between the date fixed for redemption and
the March 1, June 1, September 1, or December 1 immediately preceding the
date fixed for redemption and DIVIDED BY 90.
Notice of any redemption shall be mailed to each holder of Series DD Preferred
Shares to be redeemed not less than thirty (30) days prior to the date upon
which such stock is to be redeemed. If on or before the redemption date
specified in such notice, the funds necessary for such redemption shall have
been set aside by the Corporation so as to be available for payment on demand to
the holders of Series DD Preferred Shares so called for redemption then,
notwithstanding that any certificate representing Series DD Preferred Shares so
called for redemption shall not have been surrendered for cancellation, the
dividends thereon shall cease to accrue from and after the date of such
redemption so specified, and all rights with respect to such Series DD Preferred
Shares so called for redemption, including any right to vote or otherwise
participate in the determination of any proposed corporate action, shall
forthwith after such redemption date cease and terminate, except only the right
of the holder to receive the redemption price therefor, but without interest.
(f) VOTING RIGHTS.--With respect to all matters, each holder of Series DD
Preferred Shares shall be entitled to one vote for each share of such stock
standing in the name of the holder on the books of the Corporation. With respect
to the election of directors, the holders of Series DD Preferred Shares shall
have class voting rights (voting together with the holders of (1) other
Preferred Shares that are entitled to vote thereon and that were issued after
October 31, 1981, and (2) Series A Common Shares) to the extent provided in
Article IV of the Restated Certificate of Incorporation of the Corporation.
(g) LIQUIDATION PREFERENCE.--For purposes of Article IV of this Restated
Certificate of Incorporation, the "fixed amount payable" for the Series DD
Preferred Shares shall be $100.00 per share.
12. $6.00 CUMULATIVE, CONVERTIBLE, REDEEMABLE AND VOTING SERIES EE PREFERRED
SHARES, $.01 PAR VALUE, LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION--The designation of this series of Preferred Shares shall
be "$6.00 Cumulative, Convertible, Redeemable and Voting Series EE Preferred
Shares" (hereinafter referred to as the "Series EE Preferred Shares").
(b) DIVIDENDS--The rate of dividend payable upon Series EE Preferred Shares
shall be six and no/100 dollars ($6.00) per share per annum. Such dividends
shall be cumulative from and commence to accrue on the date of issuance.
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(c) REDEMPTION--
(1) After the twentieth anniversary of the date of issuance, the
Corporation may, at its option, at any time redeem all or a portion of the
then outstanding Series EE Preferred Shares for $100.00 per share, plus an
amount equal to all accumulated and unpaid dividends thereon.
(2) Notice of an election under the redemption provision in subparagraph
(c)(1) above shall be delivered to each holder of Series EE Preferred Shares
to be redeemed at the address appearing on the records of the Corporation
not less than thirty (30) days prior to the date upon which such stock is to
be redeemed. If, on the redemption date specified in such notice, the funds
necessary for such redemption shall have been set aside by the Corporation
so as to be available for payment on demand to the holder of Series EE
Preferred Shares so called for redemption, then notwithstanding that any
certificate representing Series EE Preferred Shares so called for redemption
shall not have been surrendered for cancellation, the dividends thereon
shall cease to accrue from and after the date of such redemption so
specified, and all rights with respect to such Series EE Preferred Shares so
called for redemption, including any right to vote or otherwise participate
in the determination of any proposed corporate action, shall terminate at
the close of business on such redemption date, except only the right of the
holder to receive the redemption price therefor, but without interest.
(d) VOTING RIGHTS--
(1) With respect to all matters, each holder of Series EE Preferred
Shares shall be entitled to one vote for each share of such stock standing
in the name of the holder on the books of the Corporation.
(2) With respect to the election of directors, the holders of Series EE
Preferred Shares shall have class voting rights (voting together with the
holders of (A) other Preferred Shares that are entitled to vote thereon and
that were issued after October 31, 1981, and (B) Series A Common Shares) to
the extent provided in Article IV of the Restated Certificate of
Incorporation of the Corporation.
(e) CONVERSION--
(1) Commencing upon issuance and terminating at the close of business on
the day before the tenth anniversary of the date of issuance, each
outstanding Series EE Preferred Share may be converted, upon fifteen (15)
days' written notice into four and one-half (4.5) Common Shares. On
presentation and surrender to the Corporation at its offices of the
certificate representing the Series EE Preferred Shares to be converted, the
holder thereof shall be entitled to receive in exchange therefor
certificates for the fully paid and non-assessable Common Shares of the
Corporation at the rate aforesaid, all under suitable regulations to be
prescribed by the board of directors of the Corporation. Conversion of
Series EE Preferred Shares in the manner aforesaid shall not affect the
right of the converting holder thereof to receive dividends accrued but
unpaid thereon as of the dividend payment date immediately prior to
conversion.
(2) The number of Common Shares into which each Series EE Preferred
Share is convertible shall be subject to adjustment from time to time. In
the event the Corporation shall (A) pay a dividend on its Common Shares (in
Common Shares of the Corporation) of more than 20% of the number of
outstanding Common Shares, (B) subdivide its outstanding Common Shares, (C)
combine the outstanding Common Shares into a smaller number of shares or (D)
issue by reclassification of its Common Shares (whether pursuant to a merger
or consolidation or otherwise) any shares of the Corporation, then the
holder of each Series EE Preferred Share shall be entitled to receive, upon
the conversion of such share, the number of shares of the Corporation which
he would have owned or would have been entitled to receive after the
happening of any of the events described above had such share been converted
immediately prior to the happening of such event. An adjustment made
pursuant to this provision shall become effective retroactively with respect
to conversions made after the record date in the case of a dividend, and
shall become effective on the effective date in the case of a subdivision,
combination or reclassification.
(3) The Corporation shall at all times reserve and keep available out of
its authorized Common Shares, solely for the purpose of issuance upon
conversion of Series EE Preferred Shares as herein provided, such number of
Common Shares as shall then be issuable upon the conversion of all
outstanding Series EE Preferred Shares.
(4) Fractional Common Shares shall not be issued upon conversion of
Series EE Preferred Shares, nor shall cash adjustments be made for
fractional shares upon such conversion.
(5) For the purposes of this paragraph (e), the term "Common Shares"
shall mean (A) the class of stock designated as the Common Shares of the
Corporation on the date this Restated Certificate of Incorporation is
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filed with the Delaware Secretary of State, or (B) any other class of stock
resulting from successive changes or reclassifications of such class
consisting solely of a change in par value, or a change from no par value.
(f) LIQUIDATION--The amount payable upon each Series EE Preferred Share in
the event of either voluntary or involuntary liquidation shall be $100.00, plus
a sum equal to the amount of all accumulated and unpaid dividends thereon.
13. $5.00 CUMULATIVE CONVERTIBLE AND REDEEMABLE VOTING SERIES GG PREFERRED
SHARES, $.01 PAR VALUE, LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION.--The designation of this series of Preferred Shares shall
be "$5.00 Cumulative Convertible and Redeemable Voting Series GG Preferred
Shares" (hereinafter referred to as the "Series GG Preferred Shares').
(b) DIVIDENDS.--Each holder of a share of Series GG Preferred Shares shall
be entitled to receive, when, as and if declared by the board of directs of the
Corporation, out of funds of the Corporation legally available therefor,
cumulative dividends during each fiscal quarter that such Series GG Preferred
Shares is outstanding at a per annum dividend rate of five dollars ($5.00) per
share. Such dividends shall be cumulative from and commence to accrue on the
date of original issuance of such Series GG Preferred Shares (the "Issue Date").
(c) REDEMPTION.--
(1) Unless the Series GG Preferred Shares have been converted or the
Corporation shall have received prior to the tenth anniversary of the Issue
Date written notice of election to convert in accordance with paragraph (e)
hereof, on or after the tenth anniversary of the Issue Date, the Series GG
Preferred Shares shall be redeemable, in whole or in part from time-to-time,
at the option of the Corporation, upon giving notice as provided in
subparagraph (c)(2) hereof, at a redemption price (the "Redemption Price")
equal to the product of the number of Series GG Preferred Shares called for
redemption times the sum of (A) $100.00 per Series GG Preferred Share plus
(B) all dividends accrued and unpaid thereon through the date set for
redemption (the "Redemption Date"); provided, however, that prior to the
twelfth anniversary of the Issue Date the Corporation shall have redeemed
all the Series GG Preferred Shares outstanding. The Redemption Price payable
on any Redemption Date shall be payable, at the option of Corporation, (x)
in cash (by certified check) or (y) by the issuance of Common Shares of the
Corporation to the record holder of such Series GG Preferred Shares being
redeemed. In the event that the Corporation elects to pay the Redemption
Price by issuing its Common Shares, the number of Common Shares to be issued
shall be calculated based upon the closing price on the American Stock
Exchange (or, if the Corporation's Common Shares are not listed on the
American Stock Exchange on the first trading day immediately preceding the
date notice is given, the closing price of such Common Shares on (in order
if more than one applies) any national securities exchange, any regional
securities exchange, the highest bid price quoted through the National
Association of Securities Dealers Automated Quotation System or the highest
bid price reported by dealers in the over-the-counter market) of the
Corporation's Common Shares on the first trading day immediately preceding
the date that the notice of redemption is mailed to record holders.
(2) Notice of an election under the redemption provision in subparagraph
(c)(1) above shall be mailed (by first class, postage prepaid) to each
holder of Series GG Preferred Shares to be redeemed at the address appearing
on the records of the Corporation not less than thirty (30) days prior to
the Redemption Date. If on or before the Redemption Date specified in such
notice, the funds necessary for such redemption shall have been set aside by
the Corporation so as to be available for payment to the holder of Series GG
Preferred Shares so called for redemption upon such holder's surrender of
such Series GG Preferred Shares to the Corporation, then, notwithstanding
that any certificate representing Series GG Preferred Shares so called for
redemption shall not have been surrendered for cancellation, the dividends
thereon shall cease to accrue from and after the Redemption Date, and all
rights with respect to such Series GG Preferred Shares so called for
redemption, including any right to vote or otherwise participate, in the
determination of any proposed corporate action, shall terminate at the close
of business on such Redemption Date, except only the right of the holder to
receive the Redemption Price therefor, but without interest.
(d) Each such notice of redemption shall state:
(1) the Redemption Date;
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(2) the number of Series GG Preferred Shares to be redeemed and,
if less than all the shares held by such holder are to be redeemed
from such holder, the number of shares to be redeemed from such
holder;
(3) whether the Redemption Price will be paid in cash (by
certified check) or by the issuance of Common Shares of the
Corporation, and, if payment is to be made by the issuance of Common
Shares, the number of Common Shares to be issued to such holder;
(4) the place where certificates for such shares are to be
surrendered for payment of the Redemption Price; and
(5) that dividends on the shares to be redeemed shall cease to
accrue on such Redemption Date.
On or after the Redemption Date each holder of shares of Series GG Preferred
Shares to be redeemed shall present and surrender his certificate or
certificates for such shares to the Corporation at the place designated in such
notice and thereupon the Redemption Price of such shares shall be paid to or on
the order of the person whose name appears on such certificate or certificates
as the owner thereof and each surrendered certificate shall be cancelled. In
case fewer than all the shares represented by such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares. From and
after the Redemption Date (unless the Corporation shall default in payment of
the Redemption Price) all dividends on the shares of Series GG Preferred Shares
designated for redemption in such notice shall cease to accrue, and all rights
of the holders thereof as shareholders of the Corporation, except the right to
receive the Redemption Price thereof, without interest, upon the surrender of
certificates representing the same, shall cease and terminate and such shares
shall not thereafter be transferred (except with the consent of the Corporation)
on the books of the Corporation and such shares shall not be deemed to be
outstanding for any purpose whatsoever.
(e) VOTING RIGHTS.
(1) With respect to all matters, each holder of Series GG Preferred
Shares shall be entitled to one vote for each share of such stock standing
in the name of the holder on the books of the Corporation.
(2) With respect to the election of directors, the holders of Series GG
Preferred Shares shall have class voting rights (voting together with the
holders of (A) other Preferred Shares that are entitled to vote thereon and
that were issued after October 31, 1981, and (B) Series A Common Shares) to
the extent provided in Article IV of the Restated Certificate of
Incorporation of the Corporation.
(f) CONVERSION.
(1) Commencing upon the Issue Date and terminating at the close of
business on the day before the tenth anniversary of the Issue Date, the
outstanding Series GG Preferred Shares may be converted at any time, upon
fifteen (15) days' written notice mailed to the Corporation (by first class,
postage prepaid), into 2.3 Common Shares for each Series GG Preferred Share.
On presentation and surrender of the certificate(s) representing the Series
GG Preferred Shares to be converted to the Corporation at its offices, the
holder thereof shall be entitled to receive in exchange therefor
certificates for the fully paid and non-assessable Common Shares of the
Corporation at the rate aforesaid, all under suitable regulations to be
prescribed by the board of directors of the Corporation. Conversion of
Series GG Preferred Shares in the manner aforesaid shall not affect the
right of the converting holder thereof to receive dividends accrued but
unpaid thereon as of the dividend payment date immediately prior to the date
of conversion (the "Conversion Date").
(2) The number of Common Shares into which each Series GG Preferred
Shares is convertible shall be subject to adjustment from time to time as
set forth in clauses (A) and (B) of this subparagraph (2):
(A) In the event the Corporation shall (i) pay a dividend on its
Common Shares in shares of the Corporation, (ii) subdivide its
outstanding Common Shares, (iii) combine the outstanding Common Shares
into a smaller number of shares or (iv) issue by reclassification of its
Common Shares (whether pursuant to a merger or consolidation or
otherwise) any shares of the Corporation, then the holder of each Series
GG Preferred Share shall be entitled to receive upon the conversion of
such share, the number of shares of the Corporation which he would have
owned or would have been entitled to receive after the happening of any
of the events described above had such share been converted immediately
prior to the happening of such event. An adjustment made pursuant to this
provision shall become effective retroactively with respect to
conversions made after the record date in the case of a dividend, and
shall become effective on the effective date in the case of a
subdivision, combination or reclassification.
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(B) No adjustment in the conversion rate shall be required unless
such adjustment would require an increase or decrease in such rate of at
least one-tenth (1/10) of a Common Share; provided, however, that any
adjustments which by reason of this clause (B) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment.
(3) The Corporation shall at all times reserve and keep available out of
its authorized Common Shares, solely for the purpose of issuance upon
conversion of Series GG Preferred Shares as herein provided, such number of
Common Shares as shall then be issuable upon the conversion of all
outstanding Series GG Preferred Shares.
(4) Fractional Common Shares shall not be issued upon conversion of
Series GG Preferred Shares, nor shall cash adjustments be made for
fractional shares upon such conversion.
(5) For purposes of this paragraph (e), the term "Common Shares" shall
mean (A) the class of stock designated as the Common Shares of the
Corporation on the date this Restated Certificate of Incorporation is filed
with the Delaware Secretary of State, or (B) any other class of stock
resulting from successive changes or reclassifications of such class
consisting solely of a change in par value, or a change from no par value to
par value.
(6) Each such notice of conversion shall state:
(A) The Conversion Date (which shall be at least fifteen (15) days
subsequent to the date of mailing of such notice); and
(B) The number of Series GG Preferred Shares to be converted, if less
than all the shares held by such holder.
The holder shall deliver his certificate(s) representing such Series GG
Preferred Shares to be converted to the Corporation with the notice of
conversion. In case fewer than all the shares represented by such certificate
are converted, a new certificate shall be issued representing the unconverted
shares. From and after the Conversion Date (unless the Corporation shall default
in issuing the Common Shares on the Conversion Date) all dividends on such
shares of Series GG Preferred Shares shall cease to accrue and such shares shall
not be outstanding for any purpose whatsoever.
(g) PREFERENCE VALUE IN LIQUIDATION. The amount payable upon each Series
GG Preferred Shares in the event of either voluntary or involuntary liquidation
shall be $100.00, plus a sum equal to the amount of all dividends accrued and
unpaid dividends thereon.
14. REDEEMABLE VOTING SERIES HH PREFERRED SHARES, $.01 PAR VALUE, LIQUIDATION
VALUE $100.00 PER SHARE
(a) DESIGNATION. The designation of this series of Preferred Shares shall
be "Redeemable Voting Series HH Preferred Shares" (hereinafter referred to as
the "Series HH Preferred Shares").
(b) DIVIDENDS. Each holder of a Series HH Preferred Share shall be
entitled to receive, when, as and if declared by the board of directors of the
Corporation, out of funds of the Corporation legally available therefor,
cumulative dividends during each fiscal quarter that such Series HH Preferred
Shares are outstanding at a per annum dividend rate of six dollars ($6.00) per
share. Such dividends shall be payable as declared and cumulative from and
commence to accrue on the date of original issuance of such Series HH Preferred
Shares (the "Issue Date").
(c) REDEMPTION AT ELECTION OF HOLDER.
(1) The Series HH Preferred Shares shall be redeemable, in whole or in
part, at the option of the holder thereof, on March 1, 1992, upon written
notice given by such holder, between September 1, 1991 and December 1, 1991
and on the first day of March in calendar years 1997 through 2012, upon
written notice given by such holder between the first day of September and
the first day of December of the immediately preceding calendar year, of the
holder's election to have the Corporation redeem such shares on March 1st of
the next succeeding calendar year (the "Redemption Date"). Notice of an
election under the redemption provision above shall be mailed (by first
class, postage prepaid) to the office or agency maintained by the
Corporation for that purpose and each notice shall state the number of
Series HH Preferred Shares to be redeemed, if less than all the shares held
by the holder giving such notice.
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(2) Except as provided in the preceding paragraph, the Series HH
Preferred Shares shall not be subject to redemption and shall not be subject
to the election by the holder thereof to have the Corporation redeem such
Series HH Preferred Shares.
(3) Upon receipt of written notice from the holder of its election to
redeem, the Corporation shall redeem the Series HH Preferred Shares to be
redeemed pursuant to such notice of redemption on the Redemption Date. The
redemption price (the "Redemption Price") of the Series HH Preferred Shares
shall be equal to the product of the number of Series HH Preferred Shares
elected to be redeemed multiplied by the sum of (A) $100.00 per share plus
(B) all dividends accrued and unpaid, whether declared or undeclared,
thereon through the Redemption Date. The Redemption Price payable on any
Redemption Date shall be paid by check mailed to the holder within 30 days
of the Redemption Date.
(4) If on or before the Redemption Date, the funds necessary for such
redemption shall have been set aside by the Corporation so as to be
available for payment to any holder of the Series HH Preferred Shares to be
redeemed pursuant to such notice of redemption upon such holder's surrender
of such Series HH Preferred Shares to the Corporation, then, notwithstanding
that any certificate representing Series HH Preferred Shares to be so
redeemed shall not have been surrendered for cancellation, the dividends
thereon shall cease to accrue from and after the Redemption Date, and all
rights with respect to such Series HH Preferred Shares to be so redeemed,
including any right to vote or otherwise participate in the determination of
any proposed corporate action, shall terminate at the close of business on
such Redemption Date, except only the right of the holder to receive the
Redemption Price therefor, but without interest.
(5) Each holder who has given notice pursuant to subparagraph (c)(1)
above shall deliver the certificate representing the Series HH Preferred
Shares to be redeemed to the Corporation with the notice of the redemption.
In case fewer than all the shares represented by such certificate are to be
redeemed, a new certificate shall be issued representing the shares which
were not so redeemed.
(d) VOTING RIGHTS.
(1) With respect to all matters, each holder of Series HH Preferred
Shares shall be entitled to one vote for each share of such stock standing
in the name of the holder on the books of the Corporation.
(2) With respect to the election of directors, the holders of Series HH
Preferred Shares shall have class voting rights (voting together with the
holders of (A) other Preferred Shares that are entitled to vote thereon and
that were issued after October 31, 1981, and (B) Series A Common Shares) to
the extent provided in Article IV of the Restated Certificate of
Incorporation of the Corporation.
(e) PREFERENCE VALUE IN LIQUIDATION. The amount payable upon each Series
HH Preferred Share in the event of either voluntary or involuntary liquidation
shall be $100.00.
15. REDEEMABLE VOTING SERIES II PREFERRED SHARES, $.01 PAR VALUE, LIQUIDATION
VALUE $100.00 PER SHARE
(a) DESIGNATION. The designation of this series of Preferred Shares shall
be "Redeemable Voting Series II Preferred Shares" (hereinafter referred to as
the "Series II Preferred Shares").
(b) DIVIDENDS. Each holder of a Series II Preferred Share shall be
entitled to receive, when, as and if declared by the board of directors of the
Corporation, out of funds of the Corporation legally available therefor,
cumulative dividends during each fiscal quarter that such Series II Preferred
Shares are outstanding at a per annum dividend rate of six dollars ($6.00) per
share. Such dividends shall be payable as declared and cumulative from and
commence to accrue on the date of original issuance of such Series II Preferred
Shares (the "Issue Date").
(c) REDEMPTION AT ELECTION OF HOLDER.
(1) The Series II Preferred Shares shall be redeemable, in whole or in
part, at the option of the holder thereof, on March 1, 1993, upon written
notice given by such holder, between September 1, 1992 and December 1, 1992
and on the first day of March in calendar years 1997 through 2012, upon
written notice given by such holder between the first day of September and
the first day of December of the immediately preceding calendar year, of the
holder's election to have the Corporation redeem such shares on March 1st of
the next succeeding calendar year (the "Redemption Date"). Notice of an
election under the redemption provision above shall be mailed (by first
class, postage prepaid) to the office or agency maintained by the
Corporation for that purpose and each notice shall state the number of
Series II Preferred Shares to be redeemed, if less than all the shares held
by the holder giving such notice.
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(2) Except as provided in the preceding paragraph, the Series II
Preferred Shares shall not be subject to redemption and shall not be subject
to the election by the holder thereof to have the Corporation redeem such
Series II Preferred Shares.
(3) Upon receipt of written notice from the holder of its election to
redeem, the Corporation shall redeem the Series II Preferred Shares to be
redeemed pursuant to such notice of redemption on the Redemption Date. The
redemption price (the "Redemption Price") of the Series II Preferred Shares
shall be equal to the product of the number of Series II Preferred Shares
elected to be redeemed multiplied by the sum of (A) $100.00 per share plus
(B) all dividends accrued and unpaid, whether declared or undeclared,
thereon through the Redemption Date. The Redemption Price payable on any
Redemption Date shall be paid by check mailed to the holder within 30 days
of the Redemption Date.
(4) If on or before the Redemption Date, the funds necessary for such
redemption shall have been set aside by the Corporation so as to be
available for payment to any holder of the Series II Preferred Shares to be
redeemed pursuant to such notice of redemption upon such holder's surrender
of such Series II Preferred Shares to the Corporation, then, notwithstanding
that any certificate representing Series II Preferred Shares to be so
redeemed shall not have been surrendered for cancellation, the dividends
thereon shall cease to accrue from and after the Redemption Date, and all
rights with respect to such Series II Preferred Shares to be so redeemed,
including any right to vote or otherwise participate in the determination of
any proposed corporate action, shall terminate at the close of business on
such Redemption Date, except only the right of the holder to receive the
Redemption Price therefor, but without interest.
(5) Each holder who has given notice pursuant to subparagraph (c)(1)
above shall deliver the certificate representing the Series II Preferred
Shares to be redeemed to the Corporation with the notice of the redemption.
In case fewer than all the shares represented by such certificate are to be
redeemed, a new certificate shall be issued representing the shares which
were not so redeemed.
(d) VOTING RIGHTS.
(1) With respect to all matters, each holder of Series II Preferred
Shares shall be entitled to one vote for each share of such stock standing
in the name of the holder on the books of the Corporation.
(2) With respect to the election of directors, the holders of Series II
Preferred Shares shall have class voting rights (voting together with the
holders of (A) other Preferred Shares that are entitled to vote thereon and
that were issued after October 31, 1981, and (B) Series A Common Shares) to
the extent provided in Article IV of the Restated Certificate of
Incorporation of the Corporation.
(e) PREFERENCE VALUE IN LIQUIDATION. The amount payable upon each Series
II Preferred Share in the event of either voluntary or involuntary liquidation
shall be $100.00.
16. REDEEMABLE VOTING SERIES JJ PREFERRED SHARES, $.01 PAR VALUE, LIQUIDATION
VALUE $100.00 PER SHARE
(a) DESIGNATION. The designation of this series of Preferred Shares shall
be "Redeemable Voting Series JJ Preferred Shares" (hereinafter referred to as
the "Series JJ Preferred Shares").
(b) DIVIDENDS. Each holder of a Series JJ Preferred Share shall be
entitled to receive, when, as and if declared by the board of directors of the
Corporation, out of funds of the Corporation legally available therefor,
cumulative dividends during each fiscal quarter that such Series JJ Preferred
Shares are outstanding at a per annum dividend rate of six dollars ($6.00) per
share. Such dividends shall be payable as declared and cumulative from and
commence to accrue on the date of original issuance of such Series JJ Preferred
Shares (the "Issue Date").
(c) REDEMPTION AT ELECTION OF HOLDER.
(1) The Series JJ Preferred Shares shall be redeemable, in whole or in
part, at the option of the holder thereof, on March 1, 1994, upon written
notice given by such holder, between September 1, 1993 and December 1, 1993
and on the first day of March in calendar years 1997 through 2012, upon
written notice given by such holder between the first day of September and
the first day of December of the immediately preceding calendar year, of the
holder's election to have the Corporation redeem such shares on March 1st of
the next succeeding calendar year (the "Redemption Date"). Notice of an
election under the redemption provision above shall be mailed (by first
class, postage prepaid) to the office or agency maintained by the
Corporation for
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that purpose and each notice shall state the number of Series JJ Preferred
Shares to be redeemed, if less than all the shares held by the holder giving
such notice.
(2) Except as provided in the preceding paragraph, the Series JJ
Preferred Shares shall not be subject to redemption and shall not be subject
to the election by the holder thereof to have the Corporation redeem such
Series JJ Preferred Shares.
(3) Upon receipt of written notice from the holder of its election to
redeem, the Corporation shall redeem the Series JJ Preferred Shares to be
redeemed pursuant to such notice of redemption on the Redemption Date. The
redemption price (the "Redemption Price") of the Series JJ Preferred Shares
shall be equal to the product of the number of Series JJ Preferred Shares
elected to be redeemed multiplied by the sum of (A) $100.00 per share plus
(B) all dividends accrued and unpaid, whether declared or undeclared,
thereon through the Redemption Date. The Redemption Price payable on any
Redemption Date shall be paid by check mailed to the holder within 30 days
of the Redemption Date.
(4) If on or before the Redemption Date, the funds necessary for such
redemption shall have been set aside by the Corporation so as to be
available for payment to any holder of the Series JJ Preferred Shares to be
redeemed pursuant to such notice of redemption upon such holder's surrender
of such Series JJ Preferred Shares to the Corporation, then, notwithstanding
that any certificate representing Series JJ Preferred Shares to be so
redeemed shall not have been surrendered for cancellation, the dividends
thereon shall cease to accrue from and after the Redemption Date, and all
rights with respect to such Series JJ Preferred Shares to be so redeemed,
including any right to vote or otherwise participate in the determination of
any proposed corporate action, shall terminate at the close of business on
such Redemption Date, except only the right of the holder to receive the
Redemption Price therefor, but without interest.
(5) Each holder who has given notice pursuant to subparagraph (c)(1)
above shall deliver the certificate representing the Series JJ Preferred
Shares to be redeemed to the Corporation with the notice of the redemption.
In case fewer than all the shares represented by such certificate are to be
redeemed, a new certificate shall be issued representing the shares which
were not so redeemed.
(d) VOTING RIGHTS.
(1) With respect to all matters, each holder of Series JJ Preferred
Shares shall be entitled to one vote for each share of such stock standing
in the name of the holder on the books of the Corporation.
(2) With respect to the election of directors, the holders of Series JJ
Preferred Shares shall have class voting rights (voting together with the
holders of (A) other Preferred Shares that are entitled to vote thereon and
that were issued after October 31, 1981, and (B) Series A Common Shares) to
the extent provided in Article IV of the Restated Certificate of
Incorporation of the Corporation.
(e) PREFERENCE VALUE IN LIQUIDATION. The amount payable upon each Series
JJ Preferred Share in the event of either voluntary or involuntary liquidation
shall be $100.00.
17. REDEEMABLE VOTING SERIES KK PREFERRED SHARES, $.01 PAR VALUE, LIQUIDATION
VALUE $100.00 PER SHARE
(a) DESIGNATION. The designation of this series of Preferred Shares shall
be "Redeemable Voting Series KK Preferred Shares" (hereinafter referred to as
the "Series KK Preferred Shares").
(b) DIVIDENDS. Each holder of a Series KK Preferred Share shall be
entitled to receive, when, as and if declared by the board of directors of the
Corporation, out of funds of the Corporation legally available therefor,
cumulative dividends during each fiscal quarter that such Series KK Preferred
Shares are outstanding at a per annum dividend rate of six dollars ($6.00) per
share. Such dividends shall be payable as declared and cumulative from and
commence to accrue on the date of original issuance of such Series KK Preferred
Shares (the "Issue Date").
(c) REDEMPTION AT ELECTION OF HOLDER.
(1) The Series KK Preferred Shares shall be redeemable, in whole or in
part, at the option of the holder thereof, on March 1, 1995, upon written
notice given by such holder, between September 1, 1994 and December 1, 1994
and on the first day of March in calendar years 1997 through 2012, upon
written notice given by such holder between the first day of September and
the first day of December of the immediately preceding calendar year, of the
holder's election to have the Corporation redeem such shares on March 1st of
the next succeeding calendar year (the "Redemption Date"). Notice of an
election under the redemption provision
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above shall be mailed (by first class, postage prepaid) to the office or
agency maintained by the Corporation for that purpose and each notice shall
state the number of Series KK Preferred Shares to be redeemed, if less than
all the shares held by the holder giving such notice.
(2) Except as provided in the preceding paragraph, the Series KK
Preferred Shares shall not be subject to redemption and shall not be subject
to the election by the holder thereof to have the Corporation redeem such
Series KK Preferred Shares.
(3) Upon receipt of written notice from the holder of its election to
redeem, the Corporation shall redeem the Series KK Preferred Shares to be
redeemed pursuant to such notice of redemption on the Redemption Date. The
redemption price (the "Redemption Price") of the Series KK Preferred Shares
shall be equal to the product of the number of Series KK Preferred Shares
elected to be redeemed multiplied by the sum of (A) $100.00 per share plus
(B) all dividends accrued and unpaid, whether declared or undeclared,
thereon through the Redemption Date. The Redemption Price payable on any
Redemption Date shall be paid by check mailed to the holder within 30 days
of the Redemption Date.
(4) If on or before the Redemption Date, the funds necessary for such
redemption shall have been set aside by the Corporation so as to be
available for payment to any holder of the Series KK Preferred Shares to be
redeemed pursuant to such notice of redemption upon such holder's surrender
of such Series KK Preferred Shares to the Corporation, then, notwithstanding
that any certificate representing Series KK Preferred Shares to be so
redeemed shall not have been surrendered for cancellation, the dividends
thereon shall cease to accrue from and after the Redemption Date, and all
rights with respect to such Series KK Preferred Shares to be so redeemed,
including any right to vote or otherwise participate in the determination of
any proposed corporate action, shall terminate at the close of business on
such Redemption Date, except only the right of the holder to receive the
Redemption Price therefor, but without interest.
(5) Each holder who has given notice pursuant to subparagraph (c)(1)
above shall deliver the certificate representing the Series KK Preferred
Shares to be redeemed to the Corporation with the notice of the redemption.
In case fewer than all the shares represented by such certificate are to be
redeemed, a new certificate shall be issued representing the shares which
were not so redeemed.
(d) VOTING RIGHTS.
(1) With respect to all matters, each holder of Series KK Preferred
Shares shall be entitled to one vote for each share of such stock standing
in the name of the holder on the books of the Corporation.
(2) With respect to the election of directors, the holders of Series KK
Preferred Shares shall have class voting rights (voting together with the
holders of (A) other Preferred Shares that are entitled to vote thereon and
that were issued after October 31, 1981, and (B) Series A Common Shares) to
the extent provided in Article IV of the Restated Certificate of
Incorporation of the Corporation.
(e) PREFERENCE VALUE IN LIQUIDATION. The amount payable upon each Series
KK Preferred Share in the event of either voluntary or involuntary liquidation
shall be $100.00.
18. REDEEMABLE VOTING SERIES LL PREFERRED SHARES, $.01 PAR VALUE, LIQUIDATION
VALUE $100.00 PER SHARE
(a) DESIGNATION. The designation of this series of Preferred Shares shall
be "Redeemable Voting Series LL Preferred Shares" (hereinafter referred to as
the "Series LL Preferred Shares").
(b) DIVIDENDS. Each holder of a Series LL Preferred Share shall be
entitled to receive, when, as and if declared by the board of directors of the
Corporation, out of funds of the Corporation legally available therefor,
cumulative dividends during each fiscal quarter that such Series LL Preferred
Shares are outstanding at a per annum dividend rate of six dollars ($6.00) per
share. Such dividends shall be payable as declared and cumulative from and
commence to accrue on the date of original issuance of such Series LL Preferred
Shares (the "Issue Date").
(c) REDEMPTION AT ELECTION OF HOLDER.
(1) The Series LL Preferred Shares shall be redeemable, in whole or in
part, at the option of the holder thereof, on March 1, 1996, upon written
notice given by such holder, between September 1, 1995 and December 1, 1995
and on the first day of March in calendar years 1997 through 2012, upon
written notice given by such holder between the first day of September and
the first day of December of the immediately preceding calendar year, of the
holder's election to have the Corporation redeem such shares on March 1st of
the next
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succeeding calendar year (the "Redemption Date"). Notice of an election
under the redemption provision above shall be mailed (by first class,
postage prepaid) to the office or agency maintained by the Corporation for
that purpose and each notice shall state the number of Series LL Preferred
Shares to be redeemed, if less than all the shares held by the holder giving
such notice.
(2) Except as provided in the preceding paragraph, the Series LL
Preferred Shares shall not be subject to redemption and shall not be subject
to the election by the holder thereof to have the Corporation redeem such
Series LL Preferred Shares.
(3) Upon receipt of written notice from the holder of its election to
redeem, the Corporation shall redeem the Series LL Preferred Shares to be
redeemed pursuant to such notice of redemption on the Redemption Date. The
redemption price (the "Redemption Price") of the Series LL Preferred Shares
shall be equal to the product of the number of Series LL Preferred Shares
elected to be redeemed multiplied by the sum of (A) $100.00 per share plus
(B) all dividends accrued and unpaid, whether declared or undeclared,
thereon through the Redemption Date. The Redemption Price payable on any
Redemption Date shall be paid by check mailed to the holder within 30 days
of the Redemption Date.
(4) If on or before the Redemption Date, the funds necessary for such
redemption shall have been set aside by the Corporation so as to be
available for payment to any holder of the Series LL Preferred Shares to be
redeemed pursuant to such notice of redemption upon such holder's surrender
of such Series LL Preferred Shares to the Corporation, then, notwithstanding
that any certificate representing Series LL Preferred Shares to be so
redeemed shall not have been surrendered for cancellation, the dividends
thereon shall cease to accrue from and after the Redemption Date, and all
rights with respect to such Series LL Preferred Shares to be so redeemed,
including any right to vote or otherwise participate in the determination of
any proposed corporate action, shall terminate at the close of business on
such Redemption Date, except only the right of the holder to receive the
Redemption Price therefor, but without interest.
(5) Each holder who has given notice pursuant to subparagraph (c)(1)
above shall deliver the certificate representing the Series LL Preferred
Shares to be redeemed to the Corporation with the notice of the redemption.
In case fewer than all the shares represented by such certificate are to be
redeemed, a new certificate shall be issued representing the shares which
were not so redeemed.
(d) VOTING RIGHTS.
(1) With respect to all matters, each holder of Series LL Preferred
Shares shall be entitled to one vote for each share of such stock standing
in the name of the holder on the books of the Corporation.
(2) With respect to the election of directors, the holders of Series LL
Preferred Shares shall have class voting rights (voting together with the
holders of (A) other Preferred Shares that are entitled to vote thereon and
that were issued after October 31, 1981, and (B) Series A Common Shares) to
the extent provided in Article IV of the Restated Certificate of
Incorporation of the Corporation.
(e) PREFERENCE VALUE IN LIQUIDATION. The amount payable upon each Series
LL Preferred Share in the event of either voluntary or involuntary liquidation
shall be $100.00.
19. REDEEMABLE VOTING SERIES QQ PREFERRED SHARES, $.01 PAR VALUE, LIQUIDATION
VALUE $100.00 PER SHARE
(a) DESIGNATION. The designation of the series of Preferred Shares created
by this resolution shall be "Redeemable Voting Series QQ Preferred Shares"
(hereinafter referred to as the "Series QQ Preferred Shares").
(b) DIVIDENDS. Each holder of a Series QQ Preferred Share shall be
entitled to receive, when, as and if declared by the board of directors of the
Corporation, cumulative dividends during each fiscal quarter to the extent set
forth below. Such dividends shall commence to accrue (whether or not declared),
without interest, with the fiscal quarter ending December 31, 1991, at a per
annum rate of four dollars ($4.00) per share and shall be paid (if and when
declared) in cash on the first business day after the end of the quarter for
which accrued; provided, however, that any dividends accrued with respect to the
first thirteen quarters after September 30, 1991, shall be paid by issuing
additional Series QQ Preferred Shares at the annual rate of .04 of a share for
each outstanding Series QQ Preferred Share; and such dividends shall accrue
thereafter at a per annum rate of six dollars ($6.00) per share. If with respect
to any of the first thirteen quarters after September 30, 1991, any of the
additional Series QQ Preferred Shares to be paid in satisfaction of the dividend
then accrued are not issued, then, for the purpose of determining the cumulative
dividends to which each holder of Series QQ Preferred Shares shall thereafter be
entitled to receive with respect to subsequent fiscal quarters ended on or
before December 31, 1994, the additional Series QQ
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Preferred Shares not so issued shall be deemed to have been issued as of the
first business day following the fiscal quarter for which accrued and to accrue
dividends commencing with the quarter in which deemed to be issued.
(c) REDEMPTION AT ELECTION OF CORPORATION.
(1) Unless the holder shall have elected to have the Series QQ Preferred
Shares redeemed in accordance with subparagraph (d)(1) hereof, the Series QQ
Preferred Shares shall thereafter be redeemable in whole but not in part by
the Corporation, upon giving notice as provided in subparagraph (c)(2)
hereof, by delivering, at the option of the Corporation, on any date set for
redemption (the "Redemption Date"), for each Series QQ Share (A) 4.35003
(the "Redemption Ratio") fully paid and non-assessable Common Shares, par
value $1.00 per share ("USCC Common Shares"), of United States Cellular
Corporation, a Delaware corporation ("USCC"), or (B) that number of Common
Shares, par value $1.00 per share, of the Corporation ("TDS Common Shares")
having a Market Value equal to the Market Value of one USCC Common Share
multiplied by the Redemption Ratio, or (C) a combination of USCC Common
Shares and TDS Common Shares having an aggregate Market Value equal to the
Market Value of one USCC Common Share multiplied by the Redemption Ratio, or
(D) cash (paid by certified check) equal to the Market Value of one USCC
Common Share multiplied by the Redemption Ratio.
(2) Notice of an election under the redemption provision in subparagraph
(c)(1) above shall be mailed (by first class, postage prepaid) to each
holder of Series QQ Preferred Shares to be redeemed at the address appearing
on the records of the Corporation not less than thirty (30) days prior to
the Redemption Date. If the Corporation elects to redeem any of the Series
QQ Preferred Shares in cash and, on or before the Redemption Date specified
in such notice, the funds necessary for such redemption shall have been set
aside by the Corporation so as to be available for payment to the holders of
Series QQ Preferred Shares so called for redemption upon such holders'
surrender of such Series QQ Preferred Shares to the Corporation, then,
notwithstanding that any certificate representing Series QQ Preferred Shares
so called for redemption shall not have been surrendered for cancellation,
all rights with respect to such Series QQ Preferred Shares so called for
redemption, including any right to vote or otherwise participate in the
determination of any proposed corporate action, shall terminate at the close
of business on such Redemption Date, except only the right of the holder to
receive the Redemption Price therefor, but without interest.
(3) Each notice of redemption shall state:
(A) the Redemption Date;
(B) the number of Series QQ Preferred Shares to be redeemed;
(C) whether the Redemption Price will be paid in cash (by certified
check), by the issuance of TDS Common Shares, by the transfer of USCC
Common Shares, or by a combination thereof; and
(D) the place where certificates for the Series QQ Preferred Shares
are to be surrendered for payment of the Redemption Price.
(4) Each holder of Series QQ Preferred Shares to be redeemed shall
present and surrender his certificate for such shares to the Corporation at
the place designated in such notice. Within two business days after the date
of such presentation or, if later, upon the Redemption Date, the Redemption
Price of such shares shall be paid to or on the order of the person whose
name appears on such certificate as the owner thereof and each surrendered
certificate shall be canceled. From and after the Redemption Date (unless
the Corporation shall default in payment of the Redemption Price), all
rights of the holders thereof as shareholders of the Corporation, except the
right to receive the Redemption Price thereof, without interest, upon the
surrender of certificates representing the same, shall cease and terminate,
such shares shall not thereafter be transferred (except with the consent of
the Corporation) on the books of the Corporation, and such shares shall not
be deemed to be outstanding for any purpose whatsoever.
(5) For purposes of this Statement, (A) the "Market Value" per share of
TDS Common Shares or USCC Common Shares at any time as of which such value
is to be determined shall be deemed to be the average "Closing Price" (as
defined below) for TDS or USCC Common Shares, as the case may be, for the
five trading days ending on the fifth business day preceding the relevant
Redemption Date, Accelerated Redemption Date or effective date of a Going
Private Transaction of the type referred to in clause (d)(4)(C) below, (B) a
"business day" means a day on which the New York Stock Exchange or other
principal stock exchange or over-the-counter market on which the TDS or USCC
Common Shares, as the case may be, are traded was open for at
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<PAGE>
least one-half of its normal business day, and (C) the "Closing Price" on any
day shall be the last sale price of such shares, regular way, as reported in a
composite published report of transactions which includes transactions on the
exchange or other principal markets in which such shares are traded or, if there
is no such composite report as to any such day, the last reported sale price,
regular way (or if there is no such reported sale on such day, the average of
the closing reported bid and asked prices) on the principal United States
securities trading market (whether a stock exchange, National Association of
Securities Dealers Automated Quotation System or otherwise) on which such shares
are traded.
(d) REDEMPTION AT ELECTION OF HOLDER.
(1) The Series QQ Preferred Shares outstanding on January 1, 1995, shall
be redeemable in whole or in part at the option of the holder thereof on
January 31, 1995, upon written notice given by such holder at the office or
agency maintained by the Corporation for that purpose.
(2) Each Series QQ Preferred Share tendered to the Corporation for
redemption pursuant to subparagraph (d)(1) above shall be redeemed by the
Corporation on the date specified in the notice (and permitted by this
Statement) referred to in subparagraph (d)(1) above (which shall be the
"Redemption Date" of such shares), by delivering, at the option of the
Corporation, (A) that number of fully paid and non-assessable USCC Common
Shares determined by multiplying one (1) by the Redemption Ratio, or (B)
that number of TDS Common Shares having a Market Value equal to the Market
Value of one USCC Common Share multiplied by the Redemption Ratio, or (C) a
combination of USCC Common Shares and TDS Common Shares having an aggregate
Market Value equal to the Market Value of one USCC Common Share multiplied
by the Redemption Ratio.
(3) Upon presentation and surrender of the certificate representing the
Series QQ Preferred Shares to be redeemed, the holder thereof shall be
entitled to receive in exchange therefor a certificate or certificates
representing the fully paid and non-assessable TDS Common Shares, USCC
Common Shares, or a combination thereof, determined in the manner set forth
in subparagraph (d)(2) above. In addition, if any additional Series QQ
Preferred Shares that were to be issued in payment of dividends accrued with
respect to the first thirteen quarters after September 30, 1991, were not
issued prior to the Redemption Date, then such holder shall also receive, in
satisfaction of such dividends, the additional TDS Common Shares, USCC
Common Shares, or a combination thereof, determined in the manner set forth
in subparagraph (d)(2) above, which such holder would have received if such
additional shares had been issued and had been tendered for redemption.
(4) The amount and kind of securities or property to be delivered
pursuant to subparagraph (c)(1) or (d)(2) above shall be subject to
adjustment from time to time as follows:
(A) In case USCC shall (i) take a record of the holders of USCC
Common Shares for the purpose of entitling them to receive a dividend
payable in USCC Common Shares, (ii) subdivide the outstanding USCC Common
Shares, or (iii) combine the outstanding USCC Common Shares into a
smaller number of shares, the Redemption Ratio shall be adjusted (or
further adjusted in the case of successive such events) so that each
holder of Series QQ Preferred Shares shall thereafter be entitled upon
the redemption of each share thereof held by him to receive for each such
share the number of USCC Common Shares which he would have owned or been
entitled to receive after the happening of that one of the events
described above which shall have happened had such Series QQ Preferred
Share been redeemed immediately prior to the happening of such event in
exchange for USCC Common Shares, such entitlement to become effective
immediately after the opening of business on the day next following (x)
the record date for such dividend, or (y) the day upon which such
subdivision or combination shall become effective.
(B) In case USCC shall take a record of the holders of USCC Common
Shares for the purpose of entitling them to receive an Extraordinary
Dividend (as hereinafter defined), the holder of each Series QQ Preferred
Share shall be entitled in each such case to an additional cash payment
upon the redemption of such share in an amount equal to the amount of
cash and the fair market value as of such record date of any property
other than cash that such holder would have been entitled to receive as a
result of such Extraordinary Dividend had such Series QQ Preferred Share
been redeemed immediately prior to such record date in exchange for USCC
Common Shares. As used herein the term "Extraordinary Dividend" means any
dividend upon USCC Common Shares payable in cash and/or in property other
than cash if and to the extent that on the record date thereof the amount
of such cash and the fair market value of such property per USCC Common
Share (when added to all other dividends (other than any dividend
referred to in clause (d)(4)(A) above) previously paid on USCC Common
Shares during the same Payment Period
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<PAGE>
(as hereinafter defined)) exceeds ten percent of the average Closing
Price for USCC Common Shares for the five trading days ending on such
record date; provided, however, that the term "Extraordinary Dividend"
shall not include any dividend referred to in clause (d)(4)(A) above. As
used herein the term "Payment Period" means each consecutive 12-month
period commencing on October 1, 1991, and each anniversary thereof.
(C) In case USCC shall effect a Going Private Transaction (as
hereinafter defined) in which the consideration to be received by the
holders of USCC Common Shares consists of equity securities of TDS, then,
notwithstanding any provision of this Statement to the contrary, upon the
subsequent redemption of the Series QQ Preferred Shares, each Series QQ
Preferred Share tendered to the Corporation for redemption pursuant to
subparagraph (c)(2) or (d)(1) above shall be redeemed by the Corporation
on the Redemption Date specified in the redemption notice (and otherwise
permitted by this Statement) by delivering that number of TDS Common
Shares having a Market Value as of the effective date of such Going
Private Transaction equal to the Market Value on such date of that number
of USCC Common Shares for which such Series QQ Preferred Share might have
been redeemed immediately prior to such Going Private Transaction, plus
that number of USCC Common Shares which the holder of such Series QQ
Preferred Share would have been entitled to receive if all of the
additional Series QQ Preferred Shares to be issued in payments of accrued
dividends for the first thirteen quarters after September 30, 1991,
pursuant to the proviso in paragraph (b) above, had been issued and
immediately redeemed for USCC Common Shares on the last business day
immediately preceding the effective date of such Going Private
Transaction. The TDS Common Shares to be delivered pursuant to this
clause (d)(4)(C) shall be subject to adjustment from time to time after
the effective date of a Going Private Transaction of the type referred to
in this clause pursuant to clauses (d)(4)(A) and (B) as if such clauses
referred to TDS and TDS Common Shares rather than USCC and USCC Common
Shares, respectively.
(D) No adjustment in the number of TDS or USCC Common Shares, as the
case may be, to which any holder is entitled pursuant to the application
of clause (d)(4)(A) above shall be required unless such adjustment would
require an increase or decrease of at least 1/10th of a TDS or USCC
Common Share, as the case may be; provided, however, that any adjustments
which by reason of this clause (D) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment.
(5) Each holder who has given notice pursuant to subparagraph (d)(1)
above shall deliver the certificate representing the Series QQ Preferred
Shares to be redeemed to the Corporation with the notice of the redemption.
In case fewer than all the shares represented by any certificate are
redeemed, a new certificate shall be issued representing the unredeemed
shares.
(e) REDEMPTION IN THE EVENT OF ORGANIC CHANGE. In case USCC shall propose
to effect any reorganization or reclassification of USCC Common Shares,
consolidate or merge with another corporation, or sell to another corporation
all or substantially all of its assets in such a way that holders of its
outstanding USCC Common Shares shall be entitled to receive (either directly or
upon subsequent liquidation) stock, securities, cash or other property with
respect to or in exchange for such USCC Common Shares (collectively, any
"Organic Change"), and immediately after such Organic Change TDS or USCC would
no longer be under common control within the meaning of Rule 405 promulgated by
the Securities and Exchange Commission (the "SEC") under the Securities Act of
1933, as amended (a "Disaffiliation Transaction"), or USCC or TDS shall propose
to effect any transaction or series of transactions of the type described in
paragraph (a)(3)(i) of Rule 13e-3 promulgated by the SEC under the Securities
Exchange Act of 1934, as amended, in which USCC is the "issuer", which has one
of the effects described in paragraph (a)(3)(ii) of such Rule (a "Going Private
Transaction"), and in which the consideration to be received by the holders of
USCC Common Shares is something other than equity securities of TDS, then TDS
shall deliver a notice of redemption (as described in subparagraph (c)(3) above)
to each holder of Series QQ Preferred Shares at least ten business days prior to
the earliest date (the "Effective Date") on which holders of USCC Common Shares
shall become entitled to receive stock, securities, cash or other property in
connection with such Disaffiliation Transaction or such Going Private
Transaction. Such notice of redemption shall specify the Effective Date and each
Series QQ Preferred Share shall be redeemed on a date (the "Accelerated
Redemption Date") which is not later than the last business day preceding such
Effective Date by the delivery by the Corporation of that number of USCC Common
Shares for which such Series QQ Preferred Share might have been redeemed
immediately prior to such Disaffiliation Transaction or such Going Private
Transaction, plus that number of USCC Common Shares which the holder of such
Series QQ Preferred Share would have been entitled to receive if all of the
additional Series QQ Preferred Shares to be issued in payment of accrued
dividends for the first thirteen fiscal
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quarters after September 30, 1991, pursuant to the proviso in paragraph (b)
above, had been issued and immediately redeemed for USCC Common Shares on the
Accelerated Redemption Date.
(f) NO FRACTIONAL SHARES. No fractional TDS Common Shares or USCC Common
Shares shall be issued upon the redemption of Series QQ Preferred Shares, nor
shall cash adjustments be made for fractional shares upon such redemption.
(g) TERMINOLOGY. For purposes of this Statement, the term "TDS Common
Shares" and the term "USCC Common Shares" shall mean (A) the class of stock
designated as the Common Shares of the Corporation and the Common Shares of
USCC, respectively, on the date this Statement is filed with the Delaware
Secretary of State, or (B) any other class of stock resulting from successive
changes or reclassifications of such class consisting solely of a change in par
value, or a change from no par value to par value.
(h) VOTING RIGHTS.
(1) With respect to all matters, each holder of Series QQ Preferred
Shares shall be entitled to one vote for each share of such stock standing
in the name of the holder on the books of the Corporation.
(2) With respect to the election of directors, the holders of Series QQ
Preferred Shares shall have class voting rights (voting together with the
holders of (A) other Preferred Shares that are entitled to vote thereon and
that were issued after October 31, 1981, and (B) Series A Common Shares) to
the extent provided in Article IV of the Restated Certificate of
Incorporation of the Corporation.
(i) PREFERENCE VALUE IN LIQUIDATION. The amount payable upon each Series
QQ Preferred Share in the event of either voluntary or involuntary liquidation
shall be $100.00.
20. $7.50 CUMULATIVE CONVERTIBLE AND REDEEMABLE VOTING SERIES RR PREFERRED
SHARES, $.01 PAR VALUE, LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION. The designation of this series of Preferred Shares shall
be "$7.50 Cumulative Convertible and Redeemable Voting Series RR Preferred
Shares" (hereinafter referred to as the "Series RR Preferred Shares").
(b) DIVIDENDS. Each holder of a Series RR Preferred Share shall be
entitled to receive, when, as and if declared by the board of directors of the
Corporation, out of funds of the Corporation legally available therefor,
cumulative dividends during each fiscal quarter that such Series RR Preferred
Share is outstanding at a per annum dividend rate of seven dollars and fifty
cents ($7.50) per share. Such dividends shall be cumulative from and shall
commence to accrue on the date of original issuance of such Series RR Preferred
Shares (the "Issue Date").
(c) REDEMPTION.
(1) Unless the Series RR Preferred Shares have been converted or the
Corporation shall have received prior to the fifth anniversary of the Issue
Date written notice of election to convert in accordance with paragraph (e)
hereof, on or after the fifth anniversary of the Issue Date, the Series RR
Preferred Shares shall be redeemable, in whole or in part from time to time,
at the option of the Corporation, upon giving notice as provided in
subparagraph (c)(2) hereof, at a redemption price (the "Redemption Price")
equal to the sum of (A) $100.00 for each Series RR Preferred Share called
for redemption plus (B) all dividends accrued and unpaid thereon through the
date set for redemption (the "Redemption Date"). The Redemption Price
payable on any Redemption Date shall be payable, at the option of the
Corporation, (x) in cash (by certified check) or (y) by the issuance of
Common Shares of the Corporation to the record holder of such Series RR
Preferred Shares being redeemed. In the event that the Corporation elects to
pay the Redemption Price by issuing its Common Shares, the number of Common
Shares to be issued shall be calculated (and rounded to the nearest whole
share) based upon the arithmetical average of the closing price on the
American Stock Exchange (or, if the Corporation's Common Shares are not
listed on the American Stock Exchange (in order if more than one applies),
the closing price of such Common Shares on any national securities exchange
or on any regional securities exchange, the highest bid price quoted through
the National Association of Securities Dealers Automated Quotation System,
or the highest bid price reported by dealers in the over-the-counter market)
of the Corporation's Common Shares for the thirty (30) trading days ending
on the third trading day prior to the Redemption Date.
(2) Notice of an election under the redemption provision in subparagraph
(c)(1) above shall be mailed (by first class, postage prepaid) to each
holder of Series RR Preferred Shares to be redeemed at the address appearing
on the records of the Corporation not less than thirty (30) days prior to
the Redemption Date. If on or
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before the Redemption Date specified in such notice, the funds necessary for
such redemption shall have been set aside by the Corporation so as to be
available for payment to the holder of Series RR Preferred Shares so called
for redemption upon such holder's surrender of such Series RR Preferred
Shares to the Corporation, then, notwithstanding that any certificate
representing Series RR Preferred Shares so called for redemption shall not
have been surrendered for cancellation, the dividends thereon shall cease to
accrue from and after the Redemption Date, and all rights with respect to
such Series RR Preferred Shares so called for redemption, including any
right to vote or otherwise participate in the determination of any proposed
corporate action, shall terminate at the close of business on such
Redemption Date, except only the right of the holder to receive the
Redemption Price therefor, but without interest.
(3) Each such notice of redemption shall state:
(A) the Redemption Date;
(B) the number of Series RR Preferred Shares to be redeemed and, if
less than all the shares held by such holder are to be redeemed from such
holder, the number of shares to be redeemed from such holder;
(C) whether the Redemption Price will be paid in cash (by certified
check) or by the issuance of Common Shares of the Corporation;
(D) the place where certificates for such shares are to be
surrendered for payment of the Redemption Price; and
(E) that dividends on the shares to be redeemed shall cease to accrue
on such Redemption Date.
(5) On or after the Redemption Date each holder of shares of Series RR
Preferred Shares to be redeemed shall present and surrender the certificate
or certificates for such shares to the Corporation at the place designated
in such notice and thereupon the Redemption Price of such shares shall be
paid to or on the order of the person whose name appears on such certificate
or certificates as the owner thereof and each surrendered certificate shall
be cancelled. In case fewer than all the shares represented by such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares. From and after the Redemption Date (unless the
Corporation shall default in payment of the Redemption Price) all dividends
on the Series RR Preferred Shares designated for redemption in such notice
shall cease to accrue, and all rights of the holders thereof as shareholders
of the Corporation, except the right to receive the Redemption Price
thereof, without interest, upon the surrender of certificates representing
the same, shall cease and terminate and such shares shall not thereafter be
transferred (except with the consent of the Corporation) on the books of the
Corporation and such shares shall not be deemed to be outstanding for any
purpose whatsoever.
(d) VOTING RIGHTS.
(1) With respect to all matters, each holder of Series RR Preferred
Shares shall be entitled to one vote for each share of such stock standing
in the name of the holder on the books of the Corporation.
(2) With respect to the election of directors, the holders of Series RR
Preferred Shares shall have class voting rights (voting together with the
holders of (A) other Preferred Shares that are entitled to vote thereon and
that were issued after October 31, 1981, and (B) Series A Common Shares) to
the extent provided in Article IV of the Restated Certificate of
Incorporation of the Corporation.
(e) CONVERSION.
(1) Commencing upon the Issue Date and terminating at the close of
business on the day before the fifth anniversary of the Issue Date, each
outstanding Series RR Preferred Share may be converted at any time, upon
written notice mailed to the Corporation (by first class, postage prepaid),
into 2.06 Common Shares. A holder of Series RR Preferred Shares shall be
entitled to receive in exchange therefor certificates for the fully paid and
non-assessable Common Shares of the Corporation at the rate aforesaid
(rounded to the nearest whole share) within fifteen (15) days following the
later of (A) receipt by the Corporation of written notice of intent to
convert, and (B) presentation and surrender to the Corporation at its
offices of the certificates representing the Series RR Preferred Shares to
be converted (the "Conversion Date"), all under suitable regulations to be
prescribed by the board of directors of the Corporation. Conversion of
Series RR Preferred Shares in the manner aforesaid shall not affect the
right of the converting holder thereof to receive dividends accrued but
unpaid thereon as of any dividend payment date prior to the Conversion Date.
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(2) The number of Common Shares into which each Series RR Preferred
Share is convertible shall be subject to adjustment from time to time as set
forth in clauses (A) and (B) of this subparagraph (2):
(A) In the event the Corporation shall (i) pay a dividend on its
Common Shares in shares of the Corporation, (ii) subdivide its
outstanding Common Shares, (iii) combine the outstanding Common Shares
into a smaller number of shares or (iv) issue by reclassification of its
Common Shares (whether pursuant to a merger or consolidation or
otherwise) any shares of the Corporation, then the holder of each Series
RR Preferred Share shall be entitled to receive upon the conversion of
such share, the number of shares of the Corporation which such holder
would have owned or would have been entitled to receive after the
happening of any of the events described above had such share been
converted immediately prior to the happening of such event. An adjustment
made pursuant to this provision shall become effective retroactively with
respect to conversions made after the record date in the case of a
dividend, and shall become effective on the effective date in the case of
a subdivision, combination or reclassification.
(B) No adjustment in the conversion rate shall be required unless
such adjustment would require an increase or decrease in such rate of at
least one-tenth (1/10) of a Common Share; provided, however, that any
adjustments which by reason of this clause (B) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment.
(3) The Corporation shall at all times reserve and keep available out of
its authorized Common Shares, solely for the purpose of issuance upon
conversion of Series RR Preferred Shares as herein provided, such number of
Common Shares as shall then be issuable upon the conversion of all
outstanding Series RR Preferred Shares.
(4) Fractional Common Shares shall not be issued upon conversion of
Series RR Preferred Shares, nor shall cash adjustments be made for
fractional shares upon such conversion.
(5) For purposes of this paragraph (e), the term "Common Shares" shall
mean (A) the class of stock designated as the Common Shares of the
Corporation on the date this Statement is filed with the Delaware Secretary
of State, or (B) any other class of stock resulting from successive changes
or reclassification of such class consisting solely of a change in par
value, or a change from no par value to par value.
(6) Each notice of conversion shall state the number of Series RR
Preferred Shares to be converted, if less than all the shares held by such
holder. In case fewer than all the shares represented by such certificate
are converted, a new certificate shall be issued representing the
unconverted shares. From and after the Conversion Date (unless the
Corporation shall default in issuing the Common Shares on the Conversion
Date), all dividends on such converted shares of Series RR Preferred Shares
shall cease to accrue and such shares shall not be outstanding for any
purpose whatsoever.
(f) PREFERENCE VALUE IN LIQUIDATION. The amount payable with respect to
each Series RR Preferred Share in the event of either voluntary or involuntary
liquidation shall be $100.00, plus a sum equal to the amount of all dividends
accrued and unpaid thereon.
21. $5.50 CUMULATIVE CONVERTIBLE AND REDEEMABLE VOTING SERIES SS PREFERRED
SHARES, $.01 PAR VALUE, LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION. The designation of the series of Preferred Shares created
by this resolution shall be "$5.50 Cumulative Convertible and Redeemable Voting
Series SS Preferred Shares" (hereinafter referred to as the "Series SS Preferred
Shares").
(b) DIVIDENDS. Each holder of a Series SS Preferred Share shall be
entitled to receive, when, as and if declared by the board of directors of the
Corporation, out of funds of the Corporation legally available therefor,
cumulative dividends during each fiscal quarter to the extent set forth below.
Such dividends shall be cumulative from and shall commence to accrue (whether or
not declared) on the date of original issuance of such Series SS Preferred
Shares (the "Issue Date"), at a per annum dividend rate of five dollars and
fifty cents ($5.50) per share.
(c) REDEMPTION.
(1) On or after the fifth anniversary of the Issue Date, the Series SS
Preferred Shares shall be redeemable, in whole or in part from time to time,
at the option of the Corporation, on a date (the "Optional Redemption Date")
which is the first business day after a dividend payment date, pursuant to a
notice as provided in subparagraph (c)(3) hereof, at a redemption price (the
"Optional Redemption Price") equal to the sum of
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(A) $100.00 for each Series SS Preferred Share called for redemption plus
(B) all dividends accrued and unpaid thereon through the Optional Redemption
Date. The Optional Redemption Price payable on any Optional Redemption Date
shall be payable (i) in cash (by certified check), or (ii) in the event that
the Average Closing Price (as defined below) for the Common Shares of the
Corporation exceeds $44.44, then, at the option of the Corporation (to be
exercised, if at all, in its notice of redemption) by (I) the issuance to
the record holder of the Series SS Preferred Shares being redeemed of 2.25
Common Shares (subject to adjustment as set forth in paragraph (e)(2)
hereof) for each Series SS Preferred Share so redeemed plus (II) the payment
in cash of all dividends accrued and unpaid thereon through the Optional
Redemption Date. If a holder, subsequent to receiving a notice of redemption
of less than all of such holder's Series SS Preferred Shares and at least
fifteen (15) days prior to the Redemption Date, elects to convert any Series
SS Preferred Shares, then the number of shares to be redeemed from such
holder on such Redemption Date shall be reduced by the lesser of (x) the
number of Series SS Preferred Shares called for redemption from such holder
and (y) the number of such shares converted by such holder. For purposes
hereof, the term "Average Closing Price" shall mean the arithmetical average
of the closing price on the American Stock Exchange of the Common Shares of
the Corporation for the five trading days ending on the fifth business day
preceding the relevant Redemption Date and, if the Common Shares of the
Corporation are not listed on the American Stock Exchange then, in order, if
more than one applies, the arithmetical average of the closing price of such
Common Shares on any national securities exchange or on any regional
securities exchange, the highest bid price quoted through the National
Association of Securities Dealers Automated Quotation System, or the highest
bid price reported by dealers in the over-the-counter market.
(2) If an Optional Redemption Date has not occurred by the tenth
anniversary of the Issue Date (the "Mandatory Redemption Date" and, together
with the Optional Redemption Date, the "Redemption Date"), the Corporation
shall, on the Mandatory Redemption Date, redeem all Series SS Preferred
Shares then outstanding at a redemption price (the "Mandatory Redemption
Price" and, together with the Optional Redemption Price, the "Redemption
Price") equal to the sum of (A) $100.00 for each Series SS Preferred Share
outstanding on the Mandatory Redemption Date plus (B) all dividends accrued
and unpaid thereon through the Mandatory Redemption Date. The Mandatory
Redemption Price shall be payable in cash by certified check.
(3) Notice of (A) an election under the redemption provision in
subparagraph (c)(1) above, or (B) the Mandatory Redemption Date, shall be
mailed (by registered mail, return receipt requested) to each holder of
Series SS Preferred Shares to be redeemed at the address appearing on the
records of the Corporation not less than sixty (60) days prior to the
Redemption Date. If, on or before the Redemption Date specified in such
notice, the funds or Common Shares necessary for such redemption shall have
been set aside by the Corporation so as to be available for payment to the
holder of Series SS Preferred Shares so called for redemption upon such
holder's surrender of such Series SS Preferred Shares to the Corporation,
then, notwithstanding that any certificate representing Series SS Preferred
Shares so called for redemption shall not have been surrendered for
cancellation, the dividends thereon shall cease to accrue from and after the
Redemption Date, and all rights with respect to such Series SS Preferred
Shares so called for redemption, including any right to vote or otherwise
participate in the determination of any proposed corporate action, shall
terminate at the close of business on such Redemption Date, except only the
right of the holder to receive the Redemption Price therefor, but without
interest.
(4) Each such notice of redemption shall state:
(A) the Redemption Date;
(B) the number of Series SS Preferred Shares to be redeemed and, if
less than all the shares held by such holder are to be redeemed from such
holder, the number of shares to be redeemed from such holder (subject in
each case to the right of the holder to convert such shares prior to the
Redemption Date);
(C) in the case of an Optional Redemption Date, whether the Optional
Redemption Price will be paid in cash (by certified check) or, in the
event the Average Closing Price exceeds $44.44, by the issuance of Common
Shares of the Corporation;
(D) the place where certificates for such shares are to be
surrendered for payment of the Redemption Price; and
(E) that dividends on the shares to be redeemed shall cease to accrue
on such Redemption Date.
(5) On or after a Redemption Date, each holder of shares of Series SS
Preferred Shares to be redeemed shall present and surrender the certificate
or certificates for such shares to the Corporation at the place
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designated in such notice and thereupon the Redemption Price of such shares
shall be paid to or on the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be cancelled. In case fewer than all the shares
represented by such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares. From and after a Redemption Date
(unless the Corporation shall default in payment of the Redemption Price)
all dividends on the Series SS Preferred Shares designated for redemption in
such notice shall cease to accrue, and all rights of the holders thereof as
shareholders of the Corporation, except the right to receive the Redemption
Price thereof, without interest, upon the surrender of certificates
representing the same, shall cease and terminate and such shares shall not
thereafter be transferred (except with the consent of the Corporation) on
the books of the Corporation and such shares shall not be deemed to be
outstanding for any purpose whatsoever.
(d) VOTING RIGHTS.
(1) With respect to all matters, each holder of Series SS Preferred
Shares shall be entitled to one vote for each share of such stock standing
in the name of the holder on the books of the Corporation.
(2) With respect to the election of directors, the holders of Series SS
Preferred Shares shall have class voting rights (voting together with the
holders of (A) other Preferred Shares that are entitled to vote thereon and
that were issued after October 31, 1981, and (B) Series A Common Shares) to
the extent provided in Article IV of the Restated Certificate of
Incorporation of the Corporation.
(e) CONVERSION.
(1) At any time and from time to time after the Issue Date, any holder
of Series SS Preferred Shares may convert all or any portion of the Series
SS Preferred Shares held by such holder into Common Shares at a conversion
ratio (subject to adjustment as set forth below) of 2.25 Common Shares for
each Series SS Preferred Share so converted; provided, however, that, in the
case of Series SS Preferred Shares called for redemption or shares to be
redeemed on the Mandatory Redemption Date, the right of the holder thereof
to convert such shares shall expire fifteen (15) days prior to the
Redemption Date. A holder of Series SS Preferred Shares shall be entitled to
receive in exchange therefor certificates for the fully paid and
non-assessable Common Shares of the Corporation at the rate aforesaid (with
the aggregate number of such Common Shares rounded to the nearest whole
share) within fifteen (15) days following presentation and surrender by such
holder to the Corporation at its offices of the certificates representing
the Series SS Preferred Shares to be converted (the "Conversion Date"), all
under suitable regulations (which shall not be inconsistent with the
provisions hereof, which shall not materially impair the rights of the
holder, and of which the holder shall receive advance notice) to be
prescribed by the board of directors of the Corporation. Conversion of
Series SS Preferred Shares in the manner aforesaid shall not affect the
right of the converting holder thereof to receive (on the Conversion Date if
such dividends shall be legally payable by the Corporation on such date, or
as promptly after the Conversion Date as such dividends shall be legally
payable) dividends accrued but unpaid thereon as of any dividend payment
date prior to the Conversion Date.
(2) The number of Common Shares to be exchanged for each Series SS
Preferred Share that is converted pursuant to subparagraph (e)(1) or
redeemed in accordance with subparagraph (c)(1) shall be subject to
adjustment from time to time as set forth in clauses (A) and (B) of this
subparagraph (2):
(A) In the event the Corporation shall (i) pay a dividend on its
Common Shares in shares of the Corporation, (ii) subdivide its
outstanding Common Shares, (iii) combine the outstanding Common Shares
into a smaller number of shares or (iv) issue by reclassification of its
Common Shares (whether pursuant to a merger or consolidation or
otherwise) any shares of the Corporation, then the holder of each Series
SS Preferred Share shall be entitled to receive in exchange for such
share upon the conversion or redemption thereof the number of shares of
the Corporation which such holder would have owned or would have been
entitled to receive after the happening of any of the events described
above had such share been converted immediately prior to the happening of
such event. The adjustments provided for in this clause (A) shall be
cumulative if more than one event requiring an adjustment shall occur
between the Issue Date and the Conversion Date or Redemption Date, as the
case may be.
(B) No adjustment pursuant to this paragraph (e) shall be required
unless such adjustment would require an increase or decrease in such rate
of at least one-tenth (1/10) of a Common Share; provided, however, that
any adjustments which by reason of this clause (B) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment.
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<PAGE>
(C) Promptly after any adjustment pursuant to this paragraph (e), the
Corporation shall give written notice thereof to all holders of Series SS
Preferred Shares, setting forth in reasonable detail and certifying the
calculation of such adjustment.
(3) The Corporation shall at all times reserve and keep available out of
its authorized Common Shares, solely for the purpose of issuance upon
conversion of Series SS Preferred Shares as herein provided, such number of
Common Shares as shall then be issuable upon the conversion of all
outstanding Series SS Preferred Shares.
(4) Fractional Common Shares shall not be issued upon conversion of
Series SS Preferred Shares, nor shall cash adjustments be made for
fractional shares upon such conversion.
(5) For purposes of this paragraph (e), the term "Common Shares" shall
mean (A) the class of stock designated as the Common Shares of the
Corporation on the date this Statement is filed with the Delaware Secretary
of State, or (B) any other class of stock resulting from successive changes
or reclassification of such class consisting solely of a change in par
value, or a change from no par value to par value.
(6) Each notice of conversion shall state the number of Series SS
Preferred Shares to be converted, if less than all the shares held by such
holder. In case fewer than all the shares represented by such certificate
are converted, a new certificate shall be issued representing the
unconverted shares. From and after the Conversion Date (unless the
Corporation shall default in issuing the Common Shares on the Conversion
Date), all dividends on such converted shares of Series SS Preferred Shares
shall cease to accrue and such shares shall not be outstanding for any
purpose whatsoever.
(f) PREFERENCE VALUE IN LIQUIDATION. The amount payable with respect to
each Series SS Preferred Share in the event of either voluntary or involuntary
liquidation of the Corporation shall be $100.00, plus a sum equal to the amount
of all dividends accrued and unpaid thereon.
22. $5.00 CUMULATIVE CONVERTIBLE AND REDEEMABLE VOTING SERIES TT PREFERRED
SHARES, $.01 PAR VALUE, LIQUIDATION VALUE $100.00 PER SHARE
(a) DESIGNATION. The designation of the series of Preferred Shares created
by this resolution shall be "$5.00 Cumulative Convertible and Redeemable Voting
Series TT Preferred Shares" (hereinafter referred to as the "Series TT Preferred
Shares").
(b) DIVIDENDS. Each holder of a Series TT Preferred Share shall be
entitled to receive, when, as and if declared by the board of directors of the
Corporation, out of funds of the Corporation legally available therefor,
cumulative dividends during each fiscal quarter to the extent set forth below.
Such dividends shall be cumulative from and shall commence to accrue (whether or
not declared) on the date of original issuance of such Series TT Preferred
Shares (the "Issue Date"), at a per annum dividend rate of five dollars ($5.00)
per share.
(c) REDEMPTION.
(1) On or after the tenth anniversary of the Issue Date, the Series TT
Preferred Shares shall be redeemable, in whole or in part from time to time,
at the option of the Corporation, on a date (the "Redemption Date") which is
the first business day after a dividend payment date, pursuant to a notice
as provided in subparagraph (c)(2) hereof, at a redemption price (the
"Redemption Price") equal to the sum of (A) $100.00 for each Series TT
Preferred Share called for redemption plus (B) all dividends accrued and
unpaid thereon through the Redemption Date. The Redemption Price payable on
any Redemption Date shall be payable (i) in cash (by certified check), or
(ii) by the issuance of Common Shares of the Corporation to the record
holder of such Series TT Preferred Shares being redeemed. In the event that
the Corporation elects to pay the Redemption Price by issuing its Common
Shares, the number of Common Shares to be issued shall be calculated (and
rounded to the nearest whole share) based upon the arithmetical average of
the closing price on the American Stock Exchange (or, if the Corporation's
Common Shares are not listed on the American Stock Exchange (in order if
more than one applies), the closing price of such Common Shares on any
national securities exchange or on any regional securities exchange, the
highest bid price quoted through the National Association of Securities
Dealers Automated Quotation System, or the highest bid price reported by
dealers in the over-the-counter market) of the Corporation's Common Shares
for the thirty (30) trading days ending on the third trading day prior to
the Redemption Date. If a holder, subsequent to receiving a notice of
redemption of such holder's Series TT Preferred Shares and at least fifteen
(15) days prior to the Redemption Date, properly elects to convert any
Series TT Preferred Shares, then the number of shares to be redeemed from
such holder on
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such Redemption Date shall be reduced by the lesser of (x) the number of
Series TT Preferred Shares called for redemption from such holder and (y)
the number of such shares converted by such holder.
(2) Notice of an election under the redemption provision in subparagraph
(c)(1) above shall be mailed (by registered mail, return receipt requested)
to each holder of Series TT Preferred Shares to be redeemed at the address
appearing on the records of the Corporation not less than sixty (60) days
prior to the Redemption Date. If, on or before the Redemption Date specified
in such notice, the funds or Common Shares necessary for such redemption
shall have been set aside by the Corporation so as to be available for
payment to the holder of Series TT Preferred Shares so called for redemption
upon such holder's surrender of such Series TT Preferred Shares to the
Corporation, then, notwithstanding that any certificate representing Series
TT Preferred Shares so called for redemption shall not have been surrendered
for cancellation, the dividends thereon shall cease to accrue from and after
the Redemption Date, and all rights with respect to such Series TT Preferred
Shares so called for redemption, including any right to vote or otherwise
participate in the determination of any proposed corporate action, shall
terminate at the close of business on such Redemption Date, except only the
right of the holder to receive the Redemption Price therefor, but without
interest.
(3) Each such notice of redemption shall state:
(A) the Redemption Date;
(B) the number of Series TT Preferred Shares to be redeemed and, if
less than all the shares held by such holder are to be redeemed from such
holder, the number of shares to be redeemed from such holder (subject, if
applicable, to the right of the holder to convert such shares prior to
the Redemption Date);
(C) whether the Redemption Price will be paid in cash (by certified
check) or by the issuance of Common Shares of the Corporation;
(D) the place where certificates for such shares are to be
surrendered for payment of the Redemption Price; and
(E) that dividends on the shares to be redeemed shall cease to accrue
on such Redemption Date.
(4) On or after a Redemption Date, each holder of shares of Series TT
Preferred Shares to be redeemed shall present and surrender the certificate
or certificates for such shares to the Corporation at the place designated
in such notice and thereupon the Redemption Price of such shares shall be
paid to or on the order of the person whose name appears on such certificate
or certificates as the owner thereof and each surrendered certificate shall
be canceled. In case fewer than all the shares represented by such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares. From and after a Redemption Date (unless the Corporation
shall default in payment of the Redemption Price) all dividends on the
Series TT Preferred Shares designated for redemption in such notice shall
cease to accrue, and all rights of the holders thereof as shareholders of
the Corporation, except the right to receive the Redemption Price thereof,
without interest, upon the surrender of certificates representing the same,
shall cease and terminate and such shares shall not thereafter be
transferred (except with the consent of the Corporation) on the books of the
Corporation and such shares shall not be deemed to be outstanding for any
purpose whatsoever.
(d) VOTING RIGHTS.
(1) With respect to all matters, each holder of Series TT Preferred
Shares shall be entitled to one vote for each share of such stock standing
in the name of the holder on the books of the Corporation.
(2) With respect to the election of directors, the holders of Series TT
Preferred Shares shall have class voting rights (voting together with the
holders of (A) other Preferred Shares that are entitled to vote thereon and
that were issued after October 31, 1981, and (B) Series A Common Shares) to
the extent provided in Article IV of the Restated Certificate of
Incorporation of the Corporation.
(e) CONVERSION.
(1) At any time and from time to time for the period commencing on the
Issue Date and terminating on the tenth anniversary of the Issue Date, any
holder of Series TT Preferred Shares may convert all or any portion of the
Series TT Preferred Shares held by such holder into Common Shares at a
conversion ratio (subject to adjustment as set forth below) of 1.818 Common
Shares for each Series TT Preferred Share so converted; provided, however,
that, in the case of Series TT Preferred Shares called for redemption, the
right of the holder thereof to convert such shares shall expire fifteen (15)
days prior to the Redemption Date. A holder of Series TT Preferred Shares
shall be entitled to receive in exchange therefor certificates for the fully
paid and non-
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assessable Common Shares of the Corporation at the rate aforesaid (with the
aggregate number of such Common Shares rounded to the nearest whole share)
within fifteen (15) days following presentation and surrender by such holder
to the Corporation at its offices of the certificates representing the
Series TT Preferred Shares to be converted (the "Conversion Date"), all
under suitable regulations (which shall not be inconsistent with the
provisions hereof, which shall not materially impair the rights of the
holder, and of which the holder shall receive advance notice) to be
prescribed by the board of directors of the Corporation. Conversion of
Series TT Preferred Shares in the manner aforesaid shall not affect the
right of the converting holder thereof to receive (on the Conversion Date if
such dividends shall be legally payable by the Corporation on such date, or
as promptly after the Conversion Date as such dividends shall be legally
payable) dividends accrued but unpaid thereon as of any dividend payment
date prior to the Conversion Date.
(2) The number of Common Shares to be exchanged for each Series TT
Preferred Share that is converted pursuant to subparagraph (e)(1) or
redeemed in accordance with subparagraph (c)(1) shall be subject to
adjustment from time to time as set forth in clauses (A) and (B) of this
subparagraph (2):
(A) In the event the Corporation shall (i) pay a dividend on its
Common Shares in shares of the Corporation, (ii) subdivide its
outstanding Common Shares, (iii) combine the outstanding Common Shares
into a smaller number of shares or (iv) issue by reclassification of its
Common Shares (whether pursuant to a merger or consolidation or
otherwise) any shares of the Corporation, then the holder of each Series
TT Preferred Share shall be entitled to receive in exchange for such
share upon the conversion or redemption thereof the number of shares of
the Corporation which such holder would have owned or would have been
entitled to receive after the happening of any of the events described
above had such share been converted immediately prior to the happening of
such event. The adjustments provided for in this clause (A) shall be
cumulative if more than one event requiring an adjustment shall occur
between the Issue Date and the Conversion Date or Redemption Date, as the
case may be.
(B) No adjustment pursuant to this paragraph (e) shall be required
unless such adjustment would require an increase or decrease in such rate
of at least one-tenth (1/10) of a Common Share; provided, however, that
any adjustments which by reason of this clause (B) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment.
(C) Promptly after any adjustment pursuant to this paragraph (e), the
Corporation shall give written notice thereof to all holders of Series TT
Preferred Shares, setting forth in reasonable detail and certifying the
calculation of such adjustment.
(3) The Corporation shall at all times reserve and keep available out of
its authorized Common Shares, solely for the purpose of issuance upon
conversion of Series TT Preferred Shares as herein provided, such number of
Common Shares as shall then be issuable upon the conversion of all
outstanding Series TT Preferred Shares.
(4) Fractional Common Shares shall not be issued upon conversion of
Series TT Preferred Shares, nor shall cash adjustments be made for
fractional shares upon such conversion.
(5) For purposes of this paragraph (e), the term "Common Shares" shall
mean (A) the class of stock designated as the Common Shares of the
Corporation on the date this Statement is filed with the Delaware Secretary
of State, or (B) any other class of stock resulting from successive changes
or reclassification of such class consisting solely of a change in par
value, or a change from no par value to par value.
(6) Each notice of conversion shall state the number of Series TT
Preferred Shares to be converted, if less than all the shares held by such
holder. In case fewer than all the shares represented by such certificate
are converted, a new certificate shall be issued representing the
unconverted shares. From and after the Conversion Date (unless the
Corporation shall default in issuing the Common Shares on the Conversion
Date), all dividends on such converted shares of Series TT Preferred Shares
shall cease to accrue and such shares shall not be outstanding for any
purpose whatsoever.
(f) PREFERENCE VALUE IN LIQUIDATION. The amount payable with respect to
each Series TT Preferred Share in the event of either voluntary or involuntary
liquidation of the Corporation shall be $100.00, plus a sum equal to the amount
of all dividends accrued and unpaid thereon.
* * * * * * * *
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EXHIBIT C-1
OPINION OF CREDIT SUISSE FIRST BOSTON CORPORATION
December 17, 1997
Board of Directors
Telephone and Data Systems, Inc.
30 North LaSalle Street
Chicago, Illinois 60602
Dear Sirs:
We have reviewed a proposal (the "Proposal") by Telephone and Data Systems,
Inc. (the "Company") as set forth in the preliminary Proxy Statement/Prospectus
(the "Proxy Statement/Prospectus"), a form of which was presented to the
Company's Board of Directors on December 15, 1997, to: (i) create three new
classes of common stock, which are intended to reflect separately the
performance of the Company's cellular telephone, landline telephone and personal
communications service businesses (the "Tracking Stocks"), and (ii) change the
state of incorporation of the Company from Iowa to Delaware (the
"Reincorporation").
The Proposal would, among other things, authorize three new classes of
common stock, to be designated as United States Cellular Group Common Shares
(the "Cellular Group Common Shares"), TDS Telecommunications Group Common Shares
(the "Telecom Group Common Shares") and Aerial Communications Group Common
Shares (the "Aerial Group Common Shares"). The Cellular Group Common Shares,
when issued, are intended to reflect the separate performance of the United
States Cellular Group (the "Cellular Group"), which primarily includes the
Company's interest in United States Cellular Corporation, currently an
approximately 81%-owned subsidiary of the Company which operates and invests in
cellular telephone companies and properties ("U.S. Cellular"). The Telecom Group
Common Shares, when issued, are intended to reflect the separate performance of
the TDS Telecommunications Group (the "Telecom Group"), which primarily includes
the Company's interest in TDS Telecommunications Corporation, a wholly-owned
subsidiary of the Company which operates landline telephone companies ("TDS
Telecom"). The Aerial Group Common Shares, when issued, are intended to reflect
the separate performance of the Aerial Communications Group (the "Aerial
Group"), and together with the Cellular Group and the Telecom Group, the
"Tracking Group"), which primarily includes the Company's interest in Aerial
Communications, Inc., currently an approximately 83%-owned subsidiary of the
Company which is developing broadband personal communications services
("Aerial").
According to the Proposal, the Company intends to: (i) offer and sell
Telecom Group Common Shares in a public offering for cash, (the "Telecom Public
Offering"), and allocate the net proceeds thereof to the Telecom Group; (ii)
issue Cellular Group Common Shares in exchange for all of the shares of common
stock of U.S. Cellular which are not owned by the Company pursuant to a merger
between a subsidiary of the Company and U.S. Cellular (the "U.S. Cellular
Merger"); (iii) issue Aerial Group Common Shares in exchange for all of the
shares of common stock of Aerial which are not owned by the Company pursuant to
a merger between a subsidiary of the Company and Aerial (the "Aerial Merger");
and (iv) distribute Cellular Group Common Shares, Telecom Group Common Shares
and Aerial Group Common Shares (the "Distributed Group Shares") in the form of a
stock dividend on a pro rata basis to holders of Series A Common Shares and
Common Shares of the Company such that, after the events described in (i), (ii)
and (iii) have occurred, approximately 20% of the common shareholders' value of
each Tracking Group stock would initially be retained in a residual group (the
"Distribution"; the Common Shares of the Company and the Distributed Group
Shares distributed to the holders of Common Shares of the Company referred to
together as the "Proposed Common Equity"). You have informed us that it is
currently anticipated that the Distribution would take place in June 1998 or
later, after the completion of the Telecom Public Offering, the U.S. Cellular
Merger and the Aerial Merger. The U.S. Cellular Merger, the Aerial Merger and
the Distribution are intended to be tax-free to shareholders (except with
respect to any cash received in lieu of fractional shares). The Telecom Public
Offering, U.S. Cellular Merger, Aerial Merger, Distribution, and Reincorporation
are herein collectively referred to as the Recapitalization (the
"Recapitalization").
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You have asked us to advise you with respect to the effect of the
implementation of the Recapitalization on (i) the market value of the Proposed
Common Equity and (ii) the ability of the Company to raise equity capital
through an offering or offerings of shares of common equity or securities
convertible into common equity ("Equity Market Access"), assuming that such
proposed Recapitalization was effective as of the date hereof. The terms of the
Tracking Stocks and the proposed Recapitalization are set forth in the Proxy
Statement/Prospectus, and all capitalized terms not specifically defined herein
shall have the meanings ascribed to them in the Proxy Statement/ Prospectus.
We have assumed with your consent that, immediately prior to the proposed
Recapitalization, the Company Common Shares, the Series A Common Shares, the
Preferred Shares, the U.S. Cellular Common and Series A Common Shares and the
Aerial Common and Series A Common Shares (the "Initial Shares") will continue to
be the only classes of capital stock of the Company, U.S. Cellular, and Aerial,
respectively, which are outstanding; that, other than in connection with the
proposed Recapitalization, there will be no material change in the number of
Initial Shares outstanding prior to the implementation of the proposed
Recapitalization; and that, immediately after the proposed Recapitalization, the
Company Common Shares, the Series A Common Shares, the Preferred Shares and the
Tracking Stocks will be the only classes of capital stock then outstanding. We
have also assumed that the U.S. Cellular Merger and the Aerial Merger are
consummated on the terms set forth in the Proxy Statement/ Prospectus. We have
further assumed that, prior to the proposed Recapitalization, the Initial Shares
which are currently listed will continue to be listed on their respective
exchanges or trading markets, and that, following the proposed Recapitalization,
the Company's Common Shares and the Tracking Stocks will be eligible for, and
will be the only capital stock of the Company listed on, the American Stock
Exchange.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company, as well as the Proxy
Statement/Prospectus. We have also reviewed certain other information, including
financial forecasts, provided to us by the Company, and have met with the
Company's management to discuss the business and prospects of the Company and
the Tracking Group and the potential impact of changes in the competitive
environment and in the Company's and the Tracking Group's business plans and
strategies on those forecasts, business and prospects.
We have also considered certain financial and stock market data of the
Company, and we have compared those data with similar data for other publicly
held companies which have multiple classes of stock outstanding which reflect
the performance of specific lines of business, and we have considered the
financial terms of the different classes of stock of such companies. We also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information (including the
information contained in the Proxy Statement/Prospectus) and have relied on its
being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
Company's management as to the future financial performance of the Company and
the Tracking Group. In addition, we have not been requested to make, and have
not made, an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Company or the Tracking Group, nor have we been
furnished with any such evaluations or appraisals. We are not expressing any
opinion as to what the actual value of the Tracking Stocks will be when issued
to the Company's stockholders pursuant to the Recapitalization or the prices at
which such Tracking Stocks will trade subsequent to the Recapitalization. In
addition, we are not expressing any opinion whatsoever as to the individual
merits of the U.S. Cellular Merger, the Aerial Merger, or the Telecom Public
Offering, or any opinion whatsoever with respect to the Reincorporation. Our
opinion does not address the Company's underlying business decision to effect
the Recapitalization and does not constitute a recommendation to any shareholder
of the Company as to how such shareholder should vote with respect to the
Recapitalization.
Our analysis is necessarily based on financial, economic, market, and other
conditions as they exist and can be evaluated on the date of this letter and
assumes the Recapitalization was effective as of the date hereof, and we note
that such conditions may change prior to the expected date of consummation of
the Recapitalization. The Recapitalization may cause a change in perception by
some investors of the future plans of the Company or the holders of Series A
Common Shares. Consequently, our opinion assumes that the market has had a
reasonable opportunity to understand and evaluate the Recapitalization. In
addition, the Tracking Stocks which would be issued to the public shareholders
of the Company in the proposed Distribution might trade initially at market
prices below those at which they would trade on a fully distributed basis.
C1-2
<PAGE>
It is understood that this letter is for the information of the Board of
Directors of the Company in connection with its consideration of the proposed
Recapitalization and is not to be quoted or referred to, in whole or in part, in
any registration statement, prospectus or in any other document used in
connection with the offering or sale of securities, nor shall this letter be
used for any other purposes, without our prior written consent; provided, that
this opinion may be included in its entirety, or appropriately described or
referred to, in any communication by the Company or the Board of Directors to
the stockholders of the Company or the Securities and Exchange Commission,
including the preliminary and definitive proxy statement/prospectus of the
Company relating to the Recapitalization; provided, that we have had the
opportunity to review and comment on such communication prior to the filing with
the Securities and Exchange Commission and prior to its dissemination to
stockholders.
We have acted as financial advisor to the Company in connection with the
Recapitalization and will receive a fee for our services, a portion of which is
contingent upon the consummation of the Recapitalization.
In the ordinary course of our business, we and our affiliates may actively
trade the debt and equity securities of the Company, US Cellular and Aerial for
our and such affiliates' own accounts and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
In the past, we have performed certain investment banking services for the
Company, US Cellular and Aerial and their affiliates and have received customary
fees for such services.
Based upon and subject to the foregoing, it is our opinion that, assuming
that the proposed Recapitalization had been effective as of the date hereof, the
Recapitalization would not have a material adverse effect from a financial point
of view on (i) the aggregate market value on a fully-distributed basis of the
Proposed Common Equity outstanding after such Recapitalization as compared with
the aggregate market value of the Company Common Shares outstanding immediately
prior to the announcement of such Recapitalization or (ii) the Company's Equity
Market Access after such Recapitalization as compared to the Company's Equity
Market Access prior to the announcement of such Recapitalization.
Sincerely,
CREDIT SUISSE FIRST BOSTON CORPORATION
C1-3
<PAGE>
EXHIBIT C-2
OPINION OF SALOMON SMITH BARNEY
December 17, 1997
Board of Directors
Telephone and Data Systems, Inc.
30 North LaSalle Street
Chicago, Illinois 60602
Dear Sirs:
We have reviewed a proposal (the "Proposal") by Telephone and Data Systems,
Inc. (the "Company") as set forth in the preliminary Proxy Statement/Prospectus
(the "Proxy Statement/Prospectus"), a form of which was presented to the
Company's Board of Directors on December 15, 1997, to: (i) create three new
classes of common stock, which are intended to reflect separately the
performance of the Company's cellular telephone, landline telephone and personal
communications service businesses (the "Tracking Stocks"), and (ii) change the
state of incorporation of the Company from Iowa to Delaware (the
"Reincorporation").
The Proposal would, among other things, authorize three new classes of
common stock, to be designated as United States Cellular Group Common Shares
(the "Cellular Group Common Shares"), TDS Telecommunications Group Common Shares
(the "Telecom Group Common Shares") and Aerial Communications Group Common
Shares (the "Aerial Group Common Shares"). The Cellular Group Common Shares,
when issued, are intended to reflect the separate performance of the United
States Cellular Group (the "Cellular Group"), which primarily includes the
Company's interest in United States Cellular Corporation, currently an
approximately 81%-owned subsidiary of the Company which operates and invests in
cellular telephone companies and properties ("U.S. Cellular"). The Telecom Group
Common Shares, when issued, are intended to reflect the separate performance of
the TDS Telecommunications Group (the "Telecom Group"), which primarily includes
the Company's interest in TDS Telecommunications Corporation, a wholly-owned
subsidiary of the Company which operates landline telephone companies ("TDS
Telecom"). The Aerial Group Common Shares, when issued, are intended to reflect
the separate performance of the Aerial Communications Group (the "Aerial
Group"), and together with the Cellular Group and the Telecom Group, the
"Tracking Group"), which primarily includes the Company's interest in Aerial
Communications, Inc., currently an approximately 83%-owned subsidiary of the
Company which is developing broadband personal communications services
("Aerial").
According to the Proposal, the Company intends to: (i) offer and sell
Telecom Group Common Shares in a public offering for cash, (the "Telecom Public
Offering"), and allocate the net proceeds thereof to the Telecom Group; (ii)
issue Cellular Group Common Shares in exchange for all of the shares of common
stock of U.S. Cellular which are not owned by the Company pursuant to a merger
between a subsidiary of the Company and U.S. Cellular (the "U.S. Cellular
Merger"); (iii) issue Aerial Group Common Shares in exchange for all of the
shares of common stock of Aerial which are not owned by the Company pursuant to
a merger between a subsidiary of the Company and Aerial (the "Aerial Merger");
and (iv) distribute Cellular Group Common Shares, Telecom Group Common Shares
and Aerial Group Common Shares (the "Distributed Group Shares") in the form of a
stock dividend on a pro rata basis to holders of Series A Common Shares and
Common Shares of the Company such that, after the events described in (i), (ii)
and (iii) have occurred, approximately 20% of the common shareholders' value of
each Tracking Group stock would initially be retained in a residual group (the
"Distribution"; the Common Shares of the Company and the Distributed Group
Shares distributed to the holders of Common Shares of the Company referred to
together as the "Proposed Common Equity"). You have informed us that it is
currently anticipated that the Distribution would take place in June 1998 or
later, after the completion of the Telecom Public Offering, the U.S. Cellular
Merger and the Aerial Merger. The U.S. Cellular Merger, the Aerial Merger and
the Distribution are intended to be tax-free to shareholders (except with
respect to any cash received in lieu of fractional shares). The Telecom Public
Offering, U.S. Cellular Merger, Aerial Merger, Distribution, and Reincorporation
are herein collectively referred to as the Recapitalization (the
"Recapitalization").
C2-1
<PAGE>
You have asked us to advise you with respect to the effect of the
implementation of the Recapitalization on (i) the market value of the Proposed
Common Equity and (ii) the ability of the Company to raise equity capital
through an offering or offerings of shares of common equity or securities
convertible into common equity ("Equity Market Access"), assuming that such
proposed Recapitalization was effective as of the date hereof. The terms of the
Tracking Stocks and the proposed Recapitalization are set forth in the Proxy
Statement/Prospectus, and all capitalized terms not specifically defined herein
shall have the meanings ascribed to them in the Proxy Statement/ Prospectus.
We have assumed with your consent that, immediately prior to the proposed
Recapitalization, the Company Common Shares, the Series A Common Shares, the
Preferred Shares, the U.S. Cellular Common and Series A Common Shares and the
Aerial Common and Series A Common Shares (the "Initial Shares") will continue to
be the only classes of capital stock of the Company, U.S. Cellular, and Aerial,
respectively, which are outstanding; that, other than in connection with the
proposed Recapitalization, there will be no material change in the number of
Initial Shares outstanding prior to the implementation of the proposed
Recapitalization; and that, immediately after the proposed Recapitalization, the
Company Common Shares, the Series A Common Shares, the Preferred Shares and the
Tracking Stocks will be the only classes of capital stock then outstanding. We
have also assumed that the U.S. Cellular Merger and the Aerial Merger are
consummated on the terms set forth in the Proxy Statement/ Prospectus. We have
further assumed that, prior to the proposed Recapitalization, the Initial Shares
which are currently listed will continue to be listed on their respective
exchanges or trading markets, and that, following the proposed Recapitalization,
the Company's Common Shares and the Tracking Stocks will be eligible for, and
will be the only capital stock of the Company listed on, the American Stock
Exchange.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company, as well as the Proxy
Statement/Prospectus. We have also reviewed certain other information, including
financial forecasts, provided to us by the Company, and have met with the
Company's management to discuss the business and prospects of the Company and
the Tracking Group and the potential impact of changes in the competitive
environment and in the Company's and the Tracking Group's business plans and
strategies on those forecasts, business and prospects.
We have also considered certain financial and stock market data of the
Company, and we have compared those data with similar data for other publicly
held companies which have multiple classes of stock outstanding which reflect
the performance of specific lines of business, and we have considered the
financial terms of the different classes of stock of such companies. We also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information (including the
information contained in the Proxy Statement/Prospectus) and have relied on its
being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
Company's management as to the future financial performance of the Company and
the Tracking Group. In addition, we have not been requested to make, and have
not made, an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Company or the Tracking Group, nor have we been
furnished with any such evaluations or appraisals. We are not expressing any
opinion as to what the actual value of the Tracking Stocks will be when issued
to the Company's stockholders pursuant to the Recapitalization or the prices at
which such Tracking Stocks will trade subsequent to the Recapitalization. In
addition, we are not expressing any opinion whatsoever as to the individual
merits of the U.S. Cellular Merger, the Aerial Merger, or the Telecom Public
Offering, or any opinion whatsoever with respect to the Reincorporation. Our
opinion does not address the Company's underlying business decision to effect
the Recapitalization and does not constitute a recommendation to any shareholder
of the Company as to how such shareholder should vote with respect to the
Recapitalization.
Our analysis is necessarily based on financial, economic, market, and other
conditions as they exist and can be evaluated on the date of this letter and
assumes the Recapitalization was effective as of the date hereof, and we note
that such conditions may change prior to the expected date of consummation of
the Recapitalization. The Recapitalization may cause a change in perception by
some investors of the future plans of the Company or the holders of Series A
Common Shares. Consequently, our opinion assumes that the market has had a
reasonable opportunity to understand and evaluate the Recapitalization. In
addition, the Tracking Stocks which would be issued to the public shareholders
of the Company in the proposed Distribution might trade initially at market
prices below those at which they would trade on a fully distributed basis.
C2-2
<PAGE>
It is understood that this letter is for the information of the Board of
Directors of the Company in connection with its consideration of the proposed
Recapitalization and is not to be quoted or referred to, in whole or in part, in
any registration statement, prospectus or in any other document used in
connection with the offering or sale of securities, nor shall this letter be
used for any other purposes, without our prior written consent; provided, that
this opinion may be included in its entirety, or appropriately described or
referred to, in any communication by the Company or the Board of Directors to
the stockholders of the Company or the Securities and Exchange Commission,
including the preliminary and definitive Proxy Statement/Prospectus of the
Company relating to the Recapitalization; provided, that we have had the
opportunity to review and comment on such communication prior to the filing with
the Securities and Exchange Commission and prior to its dissemination to
stockholders.
We have acted as financial advisor to the Company in connection with the
Recapitalization and will receive a fee for our services, a portion of which is
contingent upon the consummation of the Recapitalization.
In the ordinary course of our business, we and our affiliates may actively
trade the debt and equity securities of the Company, US Cellular and Aerial for
our and such affiliates' own accounts and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
In the past, we have performed certain investment banking services for the
Company, US Cellular and Aerial and their affiliates and have received customary
fees for such services.
Based upon and subject to the foregoing, it is our opinion that, assuming
that the proposed Recapitalization had been effective as of the date hereof, the
Recapitalization would not have a material adverse effect from a financial point
of view on (i) the aggregate market value on a fully-distributed basis of the
Proposed Common Equity outstanding after such Recapitalization as compared with
the aggregate market value of the Company Common Shares outstanding immediately
prior to the announcement of such Recapitalization or (ii) the Company's Equity
Market Access after such Recapitalization as compared to the Company's Equity
Market Access prior to the announcement of such Recapitalization.
Sincerely,
SALOMON SMITH BARNEY
C2-3
<PAGE>
EXHIBIT D
TELEPHONE AND DATA SYSTEMS, INC.
1998 LONG-TERM INCENTIVE PLAN
ARTICLE I
PURPOSE
The purposes of the Telephone and Data Systems, Inc. 1998 Long-Term
Incentive Plan (the "Plan") are (i) to align the interests of the stockholders
of Telephone and Data Systems, Inc., a Delaware Corporation (the "Company"), and
selected employees of the Company and certain of its Affiliates who receive
awards under the Plan by increasing the interest of such employees in the
Company's growth and success, (ii) to advance the interests of the Company by
attracting and retaining key executive and management employees of the Company
and certain of its Affiliates, and (iii) to motivate such employees to act in
the long-term best interests of the Company's stockholders.
ARTICLE II
DEFINITIONS
For purposes of the Plan, the following capitalized terms shall have the
meanings set forth in this Article.
2.1 "Aerial Group Stock" shall mean the class of shares of the Company
designated "Aerial Communications Group Common Shares" in its Restated
Certificate of Incorporation that is intended to reflect the separate
performance of the Aerial Communications Group (as defined in the Restated
Certificate of Incorporation), which primarily includes Aerial Communications,
Inc., an Affiliate of the Company.
2.2 "Affiliate" shall mean a corporation which owns directly or indirectly
at least 50% of the outstanding stock of the Company or the combined voting
power of such outstanding stock or a corporation at least 50% of whose
outstanding stock or the combined voting power of such outstanding stock is
owned directly or indirectly by the Company.
2.3 "Agreement" shall mean a written agreement between the Company and an
award recipient evidencing an award granted hereunder.
2.4 "Board" shall mean the Board of Directors of the Company.
2.5 "Bonus Stock" shall mean shares of Stock awarded hereunder that are not
subject to a Restriction Period or Performance Measures.
2.6 "Bonus Stock Award" shall mean an award of Bonus Stock that may be
awarded at the Committee's discretion.
2.7 "Bonus Year" shall mean the calendar year for which an annual bonus is
payable.
2.8 "Cellular Group Stock" shall mean the class of fshares of the Company
designated "United States Cellular Group Common Shares" in its Restated
Certificate of Incorporation that is intended to reflect the separate
performance of the United States Cellular Group (as defined in the Restated
Certificate of Incorporation), which primarily includes United States Cellular
Corporation, an Affiliate of the Company.
2.9 "Change of Control" shall have the meaning set forth in Section 8.9.
2.10 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.11 "Committee" shall mean a Committee designated by the Board, consisting
of two or more members of the Board.
2.12 "Common Stock" shall mean the class of shares of the Company
designated as "Common Shares" in its Restated Certificate of Incorporation.
2.13 "Deferred Compensation Account" shall mean a book reserve maintained
by the Company for the purpose of measuring the amount of deferred compensation
payable to an employee.
D-1
<PAGE>
2.14 "Disability" shall mean a total physical disability which, in the
Committee's judgment, prevents an award recipient from performing substantially
such award recipient's employment duties and responsibilities for a continuous
period of at least six months.
2.15 "Distributable Balance" shall mean the balance in an employee's
Deferred Compensation Account that is distributable upon the earlier of (i) the
employee's termination of employment, and (ii) the distribution date specified
by the employee.
2.16 "Employer" shall mean the Company or any Affiliate of the Company
designated by the Committee and approved by the Board.
2.17 "Employer Match Award" shall mean an amount credited to an employee's
Deferred Compensation Account pursuant to Section 7.2 hereof that is based upon
the amount deferred by the employee pursuant to Section 7.1.
2.18 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
2.19 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
2.20 "Fair Market Value" of a share of Stock shall mean its closing sale
price on the principal national stock exchange on which the Stock is traded on
the date as of which such value is being determined, or, if there shall be no
reported sale for such date, on the next preceding date for which a sale was
reported; PROVIDED, HOWEVER if Fair Market Value for any date cannot be so
determined, Fair Market Value shall be determined by the Committee by whatever
means or method as the Committee, in the good faith exercise of its discretion,
shall at such time deem appropriate.
2.21 "Incentive Stock Option" shall mean an option to purchase shares of
Stock that meets the requirements of section 422 of the Code (or any successor
provision) and that is intended by the Committee to constitute an Incentive
Stock Option.
2.22 "Legal Representative" shall mean a guardian, legal representative or
other person acting in a similar capacity with respect to an optionee.
2.23 "Mature Shares" shall mean shares of Stock (i) for which the holder
thereof has good title, free and clear of all liens and encumbrances, and (ii)
which such holder has held for at least six months or has purchased on the open
market.
2.24 "Non-Qualified Stock Option" shall mean an option to purchase shares
of Stock that is not an Incentive Stock Option.
2.25 "Performance Measures" shall mean criteria and objectives established
by the Committee that must be attained (i) during a Performance Period in order
for an employee eligible to participate in the Plan to be granted a Performance
Stock Option, (ii) during the applicable Restriction Period or Performance
Period as a condition to the award recipient's receipt of shares of Stock
subject to the award in the case of a Restricted Stock Award or receipt of
shares of Stock or cash in the case of Performance Share Award, or (iii) as a
condition to exercisability of all or a portion of an option or SAR. Such
criteria and objectives may be any one or more of the following: the attainment
by a share of Stock of a specified Fair Market Value for a specified period of
time, earnings per share, return on equity, return on capital, earnings on
investments, cash flows, revenues, sales, costs, market share, attainment of
cost reduction goals, customer count, attainment of business efficiency measures
(I.E., cost per gross or net customer addition, revenue per customer, customer
turnover rate, ratios of employees to volume of business measures and population
in licensed or operating markets), financing costs, ratios of capital spending
and investment to volume of business measures and customer satisfaction survey
results. In the case of an option or SAR granted at Fair Market Value as of the
date of grant, such criteria may also include the attainment of individual
performance objectives, or any other criteria and objectives established by the
Committee or any combination thereof.
2.26 "Performance Period" shall mean a period designated by the Committee
during which Performance Measures shall be measured.
2.27 "Performance Share" shall mean a right, contingent upon the attainment
of specified Performance Measures within a specified Performance Period, to
receive one share of Stock, which may be Restricted Stock, or, in lieu of all or
a portion thereof, the Fair Market Value of such Performance Share in cash.
2.28 "Performance Share Award" shall mean an award of Performance Shares.
D-2
<PAGE>
2.29 "Performance Stock Option" shall mean an option to purchase shares
that is granted in the event specified Performance Measures during a specified
Performance Period are attained.
2.30 "Permanent and Total Disability" shall have the meaning set forth in
section 22(e)(3) of the Code (or any successor thereto).
2.31 "Permitted Transferee" shall mean (i) the award recipient's spouse,
(ii) any of the award recipient's lineal descendants, lineal ancestors or
siblings, (iii) the award recipient's mother-in-law or father-in-law, or any
son-in-law, daughter-in-law, brother-in-law or sister-in-law, (iv) a trust of
which one or more of the persons described in clauses (i), (ii) or (iii) are the
only beneficiaries during the term the award is held by a Permitted Transferee,
(v) a partnership in which no other person is a partner other than the award
recipient or one or more of the persons described in clauses (i)-(vii) hereof,
(vi) a limited liability company in which no person is a member other than the
award recipient or one or more of the persons described in clauses (i)-(vii)
hereof, or (vii) any other person approved in writing by the Committee prior to
any transfer of an award, PROVIDED THAT any person described in clauses (i) -
(vii) hereof has entered into a written agreement with the Company to withhold
shares of Stock which would otherwise be delivered to such person to pay any
federal, state, local or other taxes that may be required to be withheld of paid
in connection with such exercise in the event that the award recipient does not
provide for an arrangement satisfactory to the Company to assure that such taxes
will be paid.
2.32 "Restricted Stock" shall mean shares of Stock that are subject to a
Restriction Period.
2.33 "Restricted Stock Award" shall mean an award of Restricted Stock.
2.34 "Restriction Period" shall mean any period designated by the Committee
during which the Stock subject to a Restricted Stock Award may not be sold,
transferred, assigned, pledged, hypothecated or otherwise encumbered or disposed
of, except as provided in the Plan or the Agreement relating to such award.
2.35 "SAR" shall mean a stock appreciation right that entitles the holder
thereof to receive upon exercise of the SAR shares of Stock (which may be
Restricted Stock), cash or a combination thereof with an aggregate value equal
to the excess of the Fair Market Value of one share of Stock on the date of
exercise over the base price of a share of Stock subject to such SAR, multiplied
by the number of shares of Stock with respect to which such SAR is exercised.
2.36 "Stock" shall mean Common Stock, Aerial Group Stock, Cellular Group
Stock, TDS Telecom Group Stock and any other equity security that (i) is
designated by the Board to be available for stock option grants under the Plan
or (ii) becomes available for grants under the Plan by reason of a conversion,
stock split, stock dividend, recapitalization, reorganization, merger,
consolidation, combination, exchange of shares, spin-off or other similar change
in capitalization or event or any distribution to holders of shares of Common
Stock, Aerial Group Stock, Cellular Group Stock or TDS Telecom Group Stock.
2.37 "Stock Award" shall mean a Restricted Stock Award or a Bonus Stock
Award.
2.38 "TDS Telecom Group Stock" shall mean the class of shares of the
Company designated "TDS Telecommunications Group Common Shares" in its Restated
Certificate of Incorporation that is intended to reflect the separate
performance of the TDS Telecommunications Group (as defined in the Restated
Certificate of Incorporation), which primarily includes TDS Telecommunications
Corporation, an Affiliate of the Company.
ARTICLE III
ELIGIBILITY AND ADMINISTRATION
3.1 ELIGIBILITY. Participants in the Plan shall consist of such employees
of the Employers as the Committee in its sole discretion may select from time to
time. The Committee's selection of an employee to participate in the Plan at any
time shall not require the Committee to select such employee to participate in
the Plan at any other time.
3.2 COMMITTEE ADMINISTRATION. (a) IN GENERAL. The Plan shall be
administered by the Committee in accordance with the terms of the Plan. The
Committee, in its discretion, shall select employees for participation in the
Plan and shall determine the form, amount and timing of each grant of an award
and, if applicable, the number of shares of Stock subject to each award, the
purchase price or base price per share of Stock purchasable upon exercise of the
award, the time and conditions of exercise or settlement of the award and all
other terms and conditions of the award, including, without limitation, the form
and terms of the Agreement evidencing the award. Any one or a combination of the
following awards may be made under the Plan to eligible persons: (i) options to
purchase shares in the form of Incentive Stock Options or Non-Qualified Stock
Options, (ii) SARs, (iii) Stock Awards
D-3
<PAGE>
in the form of Restricted Stock or Bonus Stock, (iv) Performance Share Awards
and (v) Employer Match Awards. The Committee may, in its sole discretion and for
any reason at any time, take action such that (A) any or all outstanding options
and SARs shall become exercisable in part or in full, (B) the Restriction Period
applicable to any outstanding Restricted Stock Award shall terminate or shall be
of a shorter duration, (C) the Performance Period applicable to any outstanding
Performance Share Award shall terminate or be of a shorter duration, (D) the
Performance Measures applicable to any outstanding Performance Share Award or to
any outstanding Restricted Stock Award shall be deemed to be attained at the
maximum or any other level, and (E) all or a portion of the amount in a Deferred
Compensation Account attributable to an Employer Match Award shall become
nonforfeitable. The Committee shall interpret the Plan and establish any rules
and procedures the Committee deems necessary or desirable for the administration
of the Plan and may impose, incidental to the grant of an award, conditions with
respect to the award, such as restricting or limiting competitive employment or
other activities. All such interpretations, rules, procedures and conditions
shall be conclusive and binding on the parties. A majority of the members of the
Committee shall constitute a quorum. The acts of the Committee shall be either
(i) acts of a majority of the members of the Committee present at any meeting at
which a quorum is present or (ii) acts approved in writing by all of the members
of the Committee without a meeting.
(b) DELEGATION. The Committee may delegate some or all of its power and
authority hereunder to the President and Chief Executive Officer or other
executive officer of the Company as the Committee deems appropriate; PROVIDED,
HOWEVER, that the Committee may not delegate its power and authority with regard
to (A) the selection for participation in the Plan of (i) the Chief Executive
Officer of the Company (or any employee who is acting in such capacity), one of
the four highest compensated officers of the Company (other than the Chief
Executive Officer), or any other individual deemed to be a 'covered employee'
within the meaning of section 162(m) of the Code or who, in the Committee's
judgment, is likely to be a covered employee at any time during the exercise
period of the option to be granted to such employee, or (ii) an officer or other
person subject to section 16 of the Exchange Act, or (B) decisions concerning
the timing, pricing or number of shares subject to an award granted to such an
employee, officer or other person who is, or who in the Committee's judgment is
likely to be, a covered employee.
(c) INDEMNIFICATION. No member of the Board or Committee, and neither the
President and Chief Executive Officer nor any other executive officer to whom
the Committee delegates any of its power and authority hereunder, shall be
liable for any act, omission, interpretation, construction or determination made
in good faith in connection with the Plan and each member of the Board and the
Committee and the President and Chief Executive Officer and each such other
executive officer who is designated by the Committee to exercise any power or
authority hereunder shall be entitled to indemnification and reimbursement by
the Company in respect of any claim, loss, damage or expense (including
attorneys' fees) arising therefrom to the full extent permitted by law, except
as otherwise may be provided in the Company's articles of incorporation or
by-laws, and under any directors' and officers' liability insurance which may be
in effect from time to time.
3.3 SHARES AVAILABLE. Subject to adjustment as provided in Section 6.7,
(i) 2,000,000 shares of Common Stock, (ii) 3,200,000 shares of Aerial Tracking
Stock, (iii) 3,600,000 shares of Cellular Tracking Stock and (iv) 2,500,000
shares of TDS Telecom Tracking Stock shall be available under the Plan. Such
shares of Common Stock, Aerial Tracking Stock, Cellular Tracking Stock, TDS
Telecom Tracking Stock and shares of each other class of Stock that become
available under the Plan shall be reduced by the sum of the aggregate number of
shares of such class of Stock then subject to outstanding award under the Plan.
The maximum number of shares with respect to which awards of Bonus Stock,
Performance Shares, Stock Options, SARs, Restricted Stock, or any combination
thereof may be granted to any individual employee during any three-calendar year
period shall be 500,000, subject to any adjustments provided hereunder. To the
extent that an outstanding award expires or terminates unexercised or is
canceled or forfeited, the shares of Stock subject to such expired, unexercised,
canceled or forfeited portion of such award shall again be available under the
Plan. Shares of Stock to be delivered under the Plan shall be made available
from authorized and unissued shares of Stock, or authorized and issued shares of
Stock reacquired and held as treasury shares or otherwise or a combination
thereof.
ARTICLE IV
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
4.1 STOCK OPTIONS. (a) IN GENERAL. The Committee may, in its discretion,
grant options to purchase shares of Stock to such employees as may be selected
by the Committee. Each option, or portion thereof, that is not an Incentive
Stock Option, shall be a Non-Qualified Stock Option. Each Incentive Stock Option
shall be granted within ten years of the effective date of the Plan. To the
extent that the aggregate Fair Market Value (determined as of the
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date of grant) of shares of Stock with respect to which Incentive Stock Options
are exercisable for the first time by an option holder during any calendar year
(under the Plan or any other plan of the Company or any of its subsidiaries)
exceeds $100,000, such options shall constitute Non-Qualified Stock Options.
Options shall be subject to the terms and conditions set forth in this Section
4.1 and shall contain such additional terms and conditions, not inconsistent
with the terms of the Plan, as the Committee shall deem advisable.
(b) NUMBER OF SHARES AND PURCHASE PRICE. The number of shares of Stock
subject to an option and the purchase price per share of Stock purchasable upon
exercise of the option shall be determined by the Committee; PROVIDED, HOWEVER,
that the purchase price per share of Stock purchasable upon exercise of an
Incentive Stock Option shall not be less than 100% of the Fair Market Value of a
share of Stock on the date such option is granted; PROVIDED FURTHER, that if an
Incentive Stock Option shall be granted to an employee who owns capital stock
possessing more than ten percent of the total combined voting power of all
classes of capital stock of the Company or any of its subsidiaries ('Ten Percent
Holder'), the purchase price per share of Stock shall be at least 110% of its
Fair Market Value on the date such option is granted.
(c) OPTION PERIOD AND EXERCISABILITY. The period during which an option
may be exercised shall be determined by the Committee; PROVIDED, HOWEVER, that
no Incentive Stock Option shall be exercised later than ten years after its date
of grant; PROVIDED FURTHER, that if an Incentive Stock Option shall be granted
to a Ten Percent Holder, such option shall be exercised within five years of its
date of grant. The Committee may, in its discretion, establish Performance
Measures which must be satisfied during a Performance Period as a condition
either to a grant of an option or to the exercisability of all or a portion of
an option. The Committee shall determine whether an option shall become
exercisable in cumulative or non-cumulative installments or in part or in full
at any time. An option may be exercised only with respect to whole shares of
Stock.
(d) METHOD OF EXERCISE. An option may be exercised (i) by giving written
notice to the Vice President-Human Resources of the Company specifying the
number of whole shares of Stock to be purchased and by accompanying such notice
with payment therefor (in full, unless another arrangement for such payment
which is satisfactory to the Company has been made) either (A) in cash, (B) in
Mature Shares having a Fair Market Value, determined as of the date of exercise,
equal to the aggregate purchase price payable by reason of such exercise, (C) by
authorizing the Company to withhold whole shares of Stock which would otherwise
be delivered upon exercise of the option having a Fair Market Value, determined
as of the date of exercise, equal to the aggregate purchase price payable by
reason of such exercise, (D) in cash by a broker-dealer acceptable to the
Company to whom the optionee has submitted an irrevocable notice of exercise or
(E) a combination of (A), (B) and (C), in each case to the extent set forth in
the Agreement relating to the option, and (ii) by executing such documents and
taking any other actions as the Company may reasonably request. The Committee
shall have sole discretion to disapprove of an election pursuant to any of
clauses (B)-(E) in the preceding sentence. If payment of the purchase price is
to be made pursuant to clause (B) or (C) (or a combination thereof) of the first
sentence of this Section 4.1(d), then any fraction of a share of Stock which
would be required to pay such purchase price shall be disregarded and the
remaining amount due shall be paid in cash by the optionee. No share of Stock
shall be delivered until the full purchase price therefor has been paid.
4.2 STOCK APPRECIATION RIGHTS. (a) IN GENERAL. The Committee may, in its
discretion, grant SARs to such employees as may be selected by the Committee.
SARs shall be subject to the terms and conditions set forth in this Section 4.2
and shall contain such additional terms and conditions, not inconsistent with
the terms of the Plan, as the Committee shall deem advisable.
(b) NUMBER OF SHARES AND BASE PRICE. The number of shares of Stock subject
to an SAR award shall be determined by the Committee. The base price of an SAR
shall be determined by the Committee; PROVIDED, HOWEVER, that such base price
per share of Stock subject to such SAR shall not be less than 100% of the Fair
Market Value of a share of Stock on the date of grant of such SAR.
(c) EXERCISE PERIOD AND EXERCISABILITY. The Agreement relating to an award
of an SAR shall specify whether such award may be settled in shares of Stock
(including shares of Restricted Stock) or cash or a combination thereof. The
period for the exercise of an SAR shall be determined by the Committee. The
Committee may, in its discretion, establish Performance Measures that must be
attained as a condition to the grant of an SAR or to the exercisability of all
or a portion of an SAR. The Committee shall determine whether an SAR may be
exercised in installments and in part or in full at any time. An SAR may be
exercised only with respect to whole shares of Stock. If an SAR is exercised
with respect to shares of Restricted Stock, a certificate or certificates
representing such shares of Restricted Stock shall be issued in accordance with
Section 5.4 and the holder of such shares of Restricted Stock shall have rights
of a stockholder of the Company as determined pursuant to Section 5.2(b). Prior
to the exercise of
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an SAR for shares of Stock, including Restricted Stock, the holder of such SAR
shall have no rights as a stockholder of the Company with respect to the shares
of Stock subject to such SAR.
(d) METHOD OF EXERCISE. An SAR may be exercised (i) by giving written
notice to the Vice President-Human Resources of the Company specifying the whole
number of shares of Stock with respect to which the SAR is being exercised and
(ii) by executing such documents and taking any such other actions as the
Company may reasonably request.
4.3 TERMINATION OF EMPLOYMENT. (a) DISABILITY. Unless otherwise specified
in the Agreement evidencing the grant of an option or SAR and, in the case of an
Incentive Stock Option, subject to Section 4.3(f), if an award recipient ceases
to be employed by any Employer by reason of Disability, then the option or SAR
held by such award recipient shall be exercisable only to the extent that such
option or SAR is exercisable on the effective date of such award recipient's
termination of employment and after such date may be exercised by such award
recipient (or such award recipient's Legal Representative) for a period of 12
months after the effective date of such award recipient's termination of
employment or until the expiration of the term of such option or SAR, whichever
period is shorter. If the award recipient shall die within such period (or other
period specified in the Agreement), then the option or SAR shall be exercisable
by the beneficiary or beneficiaries duly designated by the award recipient or,
if none, the executor or administrator of the award recipient's estate or, if
none, the person to whom the award recipient's rights under such option or SAR
shall pass by will or by applicable laws of descent and distribution, to the
same extent such option or SAR was exercisable by the award recipient on the
date of the award recipient's death, for a period ending on the later of (i) the
last day of such period and (ii) 90 days after the date of the award recipient's
death.
(b) RETIREMENT OR RESIGNATION WITH PRIOR CONSENT OF THE BOARD. Unless
otherwise specified in the Agreement evidencing the grant of an option or SAR
and, in the case of an Incentive Stock Option, subject to Section 4.3(f), if any
award recipient ceases to be employed by any Employer by reason of the award
recipient's retirement after attainment of age 65 or by reason of the award
recipient's resignation of employment at any age with the prior consent of the
board of directors of such award recipient's Employer, then the option or SAR
held by such award recipient shall be exercisable only to the extent that such
option or SAR is exercisable on the effective date of such award recipient's
retirement or resignation, as the case may be, and after such date may be
exercised by such award recipient (or such award recipient's Legal
Representative) for a period of 90 days after such effective date or until the
expiration of the term of such option or SAR, whichever period is shorter. If
the award recipient who has so retired or resigned shall die within such period
(or other period specified in the Agreement), then the option or SAR shall be
exercisable by the beneficiary or beneficiaries duly designated by the award
recipient or, if none, the executor or administrator of the award recipient's
estate or, if none, the person to whom the award recipient's rights under such
option or SAR shall pass by will or by the applicable laws of descent and
distribution, to the same extent such option or SAR was exercisable by the award
recipient on the date of the award recipient's death, for a period ending 180
days after the effective date of such award recipient's retirement or
resignation.
(c) TRANSFER OF EMPLOYMENT. Unless otherwise specified in the Agreement
evidencing the grant of an option or SAR, and in the case of an Incentive Stock
Option, subject to Section 4.3(f), if an award recipient ceases to be employed
by any Employer by reason of the award recipient's transfer of employment to an
Affiliate that is not an Employer, then any option or SAR held by the award
recipient shall be exercisable during the award recipient's continuous period of
employment with one or more Affiliates, but only to the extent that such option
or SAR is exercisable on the date of the award recipient's transfer of
employment from an Employer to an Affiliate.
(d) DEATH. Unless otherwise specified in the Agreement evidencing the
grant of an option or SAR and, in the case of an Incentive Stock Option, subject
to Section 4.3(f), if an award recipient ceases to be employed by any Employer
by reason of death, then the option or SAR held by such award recipient shall be
exercisable only to the extent that such option or SAR is exercisable on the
date of such award recipient's death, and after such date may be exercised by
the beneficiary or beneficiaries duly designated by the award recipient or, if
none the executor or administrator of the award recipient's estate or, if none,
the person to whom the award recipient's rights under such option or SAR shall
pass by will or by the applicable laws of descent or distribution for a period
of 180 days after the date of death or until the expiration of the term of such
option or SAR, whichever period is shorter.
(e) OTHER TERMINATION OF EMPLOYMENT. Unless otherwise specified in the
Agreement evidencing the grant of an option or SAR and, in the case of an
Incentive Stock Option, subject to Section 4.3(f), if an award recipient ceases
to be employed by any Employer for any reason other than Disability, retirement
after attainment of age 65, resignation of employment with the prior consent of
the board of directors of such award recipient's Employer, a transfer to an
Affiliate that is not an Employer or death, the option or SAR held by such award
recipient shall be
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exercisable only to the extent that such option or SAR is exercisable on the
effective date of such award recipient's termination of employment and after
such date may be exercised by such award recipient (or such award recipient's
Legal Representative) for a period of 30 days after such effective date or until
the expiration of the term of such option or SAR, whichever period is shorter.
If the award recipient shall die within such period (or other period specified
in the Agreement), then the option or SAR held by such award recipient shall be
exercisable only to the extent that such option or SAR is exercisable on the
date of such award recipient's death, and after such date may be exercised by
the beneficiary or beneficiaries duly designated by the award recipient or, if
none, the executor or administrator of the award recipient's estate or, if none,
the person to whom the award recipient's rights under such option or SAR shall
pass by will or by the applicable laws of descent or distribution for a period
of 120 days after the date of death or until the expiration of the term of such
option or SAR, whichever period is shorter. Notwithstanding anything in this
Section 4.3 to the contrary, if an award recipient ceases to be employed by an
Employer on account of such award recipient's negligence, willful misconduct,
competition with the Company or an Affiliate or misappropriation of confidential
information of the Company or an Affiliate, then the option or SAR shall
terminate on the date the award recipient's employment with such Employer
terminates, unless such option or SAR terminates earlier pursuant to Section
8.10.
(f) TERMINATION OF EMPLOYMENT--INCENTIVE STOCK OPTIONS. Each Incentive
Stock Option held by an award recipient who ceases to be employed by any
Employer by reason of death or Permanent and Total Disability shall be
exercisable only to the extent that such option is exercisable on the date of
such award recipient's death or on the effective date of such award recipient's
termination of employment by reason of Permanent and Total Disability, as the
case may be. In the case of the award recipient's Permanent and Total
Disability, the option may thereafter be exercised by such award recipient (or
such award recipient's Legal Representative) for a period of one year (or such
shorter period as the Committee may specify in the Agreement) after the
effective date of such award recipient's termination of employment by reason of
Permanent and Total Disability or until the expiration of the term of such
Incentive Stock Option, whichever period is shorter. In the case of the award
recipient's death, the option may thereafter be exercised by the beneficiary or
beneficiaries duly designated by the award recipient or, if none, the executor
or administrator of the award recipient's estate or, if none, the person to whom
the award recipient's rights under such option shall pass by will or by the
applicable laws of descent and distribution for a period of one year (or such
other period as the Committee may specify in the Agreement) after the date of
such award recipient's death or until the expiration of the term of such
Incentive Stock Option, whichever period is shorter.
Each Incentive Stock Option held by an award recipient who ceases to be
employed by any Employer for any reason other than death or Permanent and Total
Disability shall be exercisable only to the extent such option is exercisable on
the effective date of such award recipient's termination of employment, and may
thereafter be exercised by such award recipient (or such award recipient's Legal
Representative) for a period of three months after the effective date of such
award recipient's termination of employment or until the expiration of the term
of the Incentive Stock Option, whichever period is shorter. Notwithstanding
anything in this Section 4.3 to the contrary, if an award recipient ceases to be
employed by an Employer on account of such award recipient's negligence, willful
misconduct, competition with the Company or an Affiliate or misappropriation of
confidential information of the Company or an Affiliate, then the Incentive
Stock Option shall terminate on the date the award recipient's employment with
such Employer terminates, unless such Incentive Stock Option terminates earlier
pursuant to Section 8.10.
If an award recipient dies during the exercise period specified in the
Agreement evidencing the grant of such option following termination of
employment by reason of Permanent and Total Disability, or if the award
recipient dies during the three-month period following termination of employment
for any reason other than death or Permanent and Total Disability, then each
Incentive Stock Option held by such award recipient shall be exercisable only to
the extent such option is exercisable on the date of the award recipient's death
and may thereafter be exercised by the beneficiary or beneficiaries duly
designated by the award recipient or, if none, the executor or administrator of
the award recipient's estate or, if none, the person to whom the award
recipient's rights under such option shall pass by will or by the applicable
laws of descent and distribution for a period of one year (or such shorter
period as the Committee may specify in the Agreement) after the date of death or
until the expiration of the term of such Incentive Stock Option, whichever
period is shorter.
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ARTICLE V
STOCK AWARDS
5.1 STOCK AWARDS. The Committee may, in its discretion, grant Stock Awards
to such employees as may be selected by the Committee. The Agreement relating to
a Stock Award shall specify the number of shares of Stock subject to the award,
the purchase price (if any) and whether the Stock Award is a Restricted Stock
Award or Bonus Stock Award. Stock Awards shall be subject to the terms and
conditions set forth in this Article V and shall contain such additional terms
and conditions, not inconsistent with the terms of the Plan, as the Committee
shall deem advisable.
5.2 RESTRICTED STOCK AWARDS. (a) VESTING AND FORFEITURE. The Agreement
relating to a Restricted Stock Award shall provide, in the manner determined by
the Committee, in its discretion, and subject to the provisions of the Plan, (i)
for the vesting of the shares of Stock subject to such award in accordance with
a schedule based upon either (y) the attainment of specified Performance
Measures during the specified Restriction Period or (z) the award recipient's
periods of employment with any Employer or Affiliate during the specified
Restriction Period, and for (ii) the forfeiture of the shares of Stock subject
to such award (w) if such specified Performance Measures are not attained during
the specified Restriction Period or (x) if the holder of such award terminates
such employment during the specified Restriction Period.
(b) RIGHTS WITH RESPECT TO RESTRICTED STOCK AWARDS. Unless otherwise set
forth in the Agreement relating to a Restricted Stock Award, and subject to the
terms and conditions of a Restricted Stock Award, the holder of such award shall
have all rights as a stockholder of the Company, including, but not limited to,
voting rights, the right to receive dividends and the right to participate in
any capital adjustment applicable to all holders of Stock; PROVIDED, HOWEVER,
that a distribution with respect to shares of Stock, other than a distribution
in cash, shall be deposited with the Company and shall be subject to the same
restrictions as the shares of Stock with respect to which such distribution was
made.
(c) DISABILITY, RETIREMENT, RESIGNATION WITH PRIOR CONSENT OF THE BOARD AND
DEATH. Unless otherwise specified in the Agreement evidencing the grant of a
Restricted Stock Award, if an award recipient ceases to be employed by any
Employer by reason of Disability, retirement after attainment of age 65,
resignation of employment of any age with prior consent of the board of
directors of such award recipient's Employer or death, then the Restriction
Period applicable to such Restricted Stock Award shall terminate as of the
effective date of the award recipient's termination of employment and any
applicable Performance Measures shall be deemed attained of the target level.
Notwithstanding the first sentence of this subsection (c), if an award recipient
ceases to be employed by an Employer on account of such award recipient's
negligence, willful misconduct, competition with the Company or an Affiliate or
misappropriation of confidential information of the Company or an Affiliate,
then the Restricted Stock Award shall terminate on the date the award
recipient's employment with such Employer terminates, unless such Restricted
Stock Award terminates earlier pursuant to Section 8.10.
(d) TRANSFER OF EMPLOYMENT. Unless otherwise specified in the Agreement
evidencing the grant of a Restricted Stock Award, if an award recipient ceases
to be employed by any Employer by reason of the award recipient's transfer of
employment to an Affiliate that is not an Employer, then the award recipient's
employment with such Affiliate shall be deemed to be employment with an Employer
solely for the purpose of determining whether any applicable service requirement
is satisfied during the Restriction Period.
(e) OTHER TERMINATION OF EMPLOYMENT. Unless otherwise specified in the
Agreement evidencing the grant of a Restricted Stock Award, if an award
recipient ceases to be employed by any Employer for any reason other than
Disability, retirement after attainment of age 65, resignation of employment
with the prior consent of the board of directors of such award recipient's
Employer, a transfer to an Affiliate that is not an Employer or death, then the
Company shall cancel such award to the extent it is subject to a Restriction
Period on the effective date of such award recipient's termination of
employment, unless such Restricted Stock Award terminates earlier pursuant to
Section 8.10.
5.3 SHARE CERTIFICATES. During the Restriction Period, a certificate or
certificates representing a Restricted Stock Award may be registered in the
holder's name and may bear a legend, in addition to any legend which may be
required pursuant to Section 8.7, indicating that the ownership of the shares of
Stock represented by such certificate is subject to the restrictions, terms and
conditions of the Plan and the Agreement relating to the Restricted Stock Award.
All such certificates shall be deposited with the Company, together with stock
powers or other instruments of assignment (including a power of attorney), each
endorsed in blank with a guarantee of signature if deemed necessary or
appropriate by the Company, that would permit transfer to the Company of all or
a
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portion of the shares of Stock subject to the Restricted Stock Award in the
event such award is forfeited in whole or in part. Upon termination of any
applicable Restriction Period, or upon the grant of a Bonus Stock Award, in each
case subject to the Company's right to require payment of any taxes in
accordance with Section 8.6, a certificate or certificates evidencing ownership
of the requisite number of shares of Stock shall be delivered to the holder of
such award.
ARTICLE VI
PERFORMANCE SHARE AWARDS
6.1 PERFORMANCE SHARE AWARDS. The Committee may, in its discretion, grant
Performance Share Awards to such employees as may be selected by the Committee.
Performance Share Awards shall be subject to the terms and conditions set forth
in this Section 6.1 and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem advisable.
(a) NUMBER OF PERFORMANCE SHARES AND PERFORMANCE MEASURES. The number of
Performance Shares subject to any award and the Performance Measures and
Performance Period applicable to such award shall be determined by the
Committee.
(b) VESTING AND FORFEITURE. The Agreement relating to a Performance Share
Award shall provide, in the manner determined by the Committee, in its
discretion, and subject to the provisions of the Plan, for the vesting of such
award upon the attainment of specified Performance Measures during the specified
Performance Period, and for the forfeiture of such award if the Performance
Measures are not attained during the Performance Period.
(c) SETTLEMENT OF VESTED PERFORMANCE SHARE AWARDS. The Agreement relating
to a Performance Share Award (i) shall specify whether such award may be settled
in shares of Stock (including shares of Restricted Stock) or cash or a
combination thereof and (ii) may specify whether the holder thereof shall be
entitled to receive, on a current or deferred basis, dividend equivalents, and,
if determined by the Committee, interest on or the deemed reinvestment of any
deferred dividend equivalents, with respect to the number of shares of Stock
subject to such award. If a Performance Share Award is settled in shares of
Restricted Stock, a certificate or certificates representing such Restricted
Stock shall be issued in accordance with Section 5.4 and the holder of such
Restricted Stock shall have such rights of a stockholder of the Company as
determined pursuant to Section 5.2(b). Prior to the settlement of a Performance
Share Award in shares of Stock, including Restricted Stock, the holder of such
award shall have no rights as a stockholder of the Company with respect to the
shares of Stock subject to such award.
6.2 TERMINATION OF EMPLOYMENT. (a) DISABILITY, RETIREMENT, RESIGNATION
WITH PRIOR CONSENT OF THE BOARD AND DEATH. Unless otherwise specified in the
Agreement evidencing the grant of a Performance Share Award, if an award
recipient ceases to be employed by any Employer by reason of Disability,
retirement after attainment of age 65, resignation of employment at any age with
prior consent of the board of directors of such award recipient's Employer or
death, then any current Performance Period applicable to such award shall
thereupon terminate as of the effective date of the award recipient's
termination of employment and Performance Measures shall be deemed satisfied at
the target level. Notwithstanding the immediately preceding sentence, if an
award recipient ceases to be employed by an Employer on account of such award
recipient's negligence, willful misconduct, competition with the Company or an
Affiliate or misappropriation of confidential information of the Company or an
Affiliate, then the Performance Share Award shall terminate on the date the
award recipient's employment with such Employer terminates, unless such
Performance Share Award terminates earlier pursuant to Section 8.10.
(b) TRANSFER OF EMPLOYMENT. Unless otherwise specified in the Agreement
evidencing the grant of a Performance Share Award, if an award recipient ceases
to be employed by any Employer by reason of the award recipient's transfer of
employment to an Affiliate that is not an Employer, then the award recipient's
employment with such Affiliate shall be deemed to be employment with an Employer
solely for the purpose of determining whether any applicable service requirement
is satisfied during the Performance Period.
(c) OTHER TERMINATION. Unless otherwise specified in the Agreement
evidencing the grant of a Performance Share Award, if an award recipient ceases
to be employed by any Employer for any reason other than Disability, retirement
after attainment of age 65, resignation of employment at any age with prior
consent of the board of directors of such award recipient's Employer or death,
then the portion of such award which is subject to a Performance Period on the
effective date of such holder's termination of employment shall be forfeited and
such portion shall be canceled by the Company, unless such Performance Share
Award terminates earlier pursuant to Section 8.10.
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ARTICLE VII
DEFERRED COMPENSATION ACCOUNTS AND EMPLOYER MATCH AWARDS
7.1 DEFERRED COMPENSATION AWARDS. The Committee may, in its discretion,
permit an employee selected by the Committee to make an irrevocable election (i)
not to receive currently any whole percentage of his gross annual bonus payment
and (ii) to have an amount equal to such percentage credited to the employee's
Deferred Compensation Account (such election, a "deferral election"); PROVIDED,
HOWEVER, that the amount subject to such deferral election with respect to any
Bonus Year shall not exceed $250,000. Any deferral election shall be made prior
to the last day of the calendar year preceding the Bonus Year with respect to
which such bonus is earned. Notwithstanding the preceding sentence, (i) in the
year in which the Plan becomes effective, an employee selected by the Committee
may make such a deferral election within 30 days after the Plan's effective date
(as defined in Section 8.1) and (ii) in the first year in which an employee is
selected for participation in the Plan pursuant to this Section 7.1, the
employee may make a deferral election within 30 days after the date of his
selection. Amounts so credited to the employee's Deferred Compensation Account
(as adjusted for deemed investment returns) shall be 100% vested at all times.
7.2 EMPLOYER MATCH AWARDS. At the time the Committee selects an employee
for participation in the Plan pursuant to Section 7.1, the Committee may also
grant such an employee an Employer Match Award to be made in accordance with the
Agreement evidencing such award. Employer Match Awards shall be subject to the
terms and conditions set forth in this Section 7.2 and shall contain such
additional terms and conditions, not inconsistent with the terms of the Plan, as
the Committee shall deem advisable. As of the date on which an amount (the
"deferred amount") is credited to an employee's Deferred Compensation Account
pursuant to Section 7.1, there also shall be credited to the employee's Deferred
Compensation Account an Employer Match Award equal to a percentage of such
deferred amount specified by the Committee not in excess of 33 1/3%. One-third
of the Employer Match Award so credited to the employee's Deferred Compensation
Account (as adjusted for deemed investment returns pursuant to Section 7.3)
shall become nonforfeitable on each of the first three anniversaries of the last
day of the Bonus Year, if such employee is an employee of an Employer or an
Affiliate on such a date and the amount credited to his Deferred Compensation
Account has not been distributed before such date; PROVIDED, HOWEVER if the
employee's employment terminates by reason of retirement after attainment of age
65, resignation at any age with prior consent of the board of directors of the
employee's Employer, Disability or death, all Employer Match Awards (as adjusted
for deemed investment returns pursuant to Section 7.3) credited to the
employee's Deferred Compensation Account shall become nonforfeitable upon such
termination of employment. Notwithstanding the previous sentence, if an employee
ceases to be employed by an Employer on account of such employee's negligence,
willful misconduct, competition with the Company or an Affiliate or
misappropriation of confidential information of the Company or an Affiliate,
then any Employer Match Award shall terminate on the date the employee's
employment with such Employer terminates, unless such Employer Match Award
terminates earlier pursuant to Section 8.10. Any Employer Match Awards and any
deemed investment returns credited to an employee's Deferred Compensation
Account shall be an expense allocated to the employee's Employer for the related
Bonus Year.
7.3 DEEMED INVESTMENT OF DEFERRED COMPENSATION ACCOUNT. Amounts credited
to an employee's Deferred Compensation Account pursuant to Sections 7.1 and 7.2
above shall be deemed to be invested in whole and fractional phantom shares of
Stock as specified below at the Fair Market Value thereof on the date as of
which the amount is credited to the Deferred Compensation Account. If the
employee's Employer for the Bonus Year with respect to which an amount is
credited to his Deferred Compensation Account is the Company, then such credited
amount shall be deemed to be invested in whole and fractional phantom shares of
Common Stock. If the employee's Employer for the Bonus Year with respect to
which an amount is credited to his Deferred Compensation Account is a member of
the Aerial Communications Group, then such credited amount shall be deemed to be
invested in whole and fractional phantom shares of Aerial Group Stock. If the
employee's Employer for the Bonus Year with respect to which an amount is
credited to his Deferred Compensation Account is a member of the United States
Cellular Group, then such credited amount shall be deemed to be invested in
whole and fractional phantom shares of Cellular Group Stock. If the employee's
Employer for the Bonus Year with respect to which an amount is credited to his
Deferred Compensation Account is a member of the TDS Telecommunications Group,
then such credited amount shall be deemed to be invested in whole and fractional
phantom shares of TDS Telecom Group Stock. In the event the employment of an
employee with a Deferred Compensation Account balance is transferred to another
Employer, the amounts credited to his Deferred Compensation Account on the date
of such employment transfer shall continue to be invested in the same class of
phantom shares of Stock as on such date, and any amount credited to his Deferred
Compensation Account for service after such transfer shall be credited in the
class of phantom shares determined in reference to the identity of his new
Employer.
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7.4 PAYMENT OF DEFERRED COMPENSATION ACCOUNT. An employee shall receive a
distribution of the Distributable Balance (as determined below) of his Deferred
Compensation Account after such employee terminates employment with the
Employers and Affiliates, PROVIDED, HOWEVER that an employee may irrevocably
elect, at the time he makes a deferral election pursuant to Section 7.1, to
receive a distribution of the amount so deferred, the related vested Employer
Match Awards and any deemed investment earnings thereon (or any portion thereof)
at any earlier date that is at least two years after the date such election is
made. As of the earlier of the distribution date elected by the employee and the
date the employee terminates his employment (the "determination date"), the
Company shall compute the Distributable Balance in the Deferred Compensation
Account. This Distributable Balance shall include (i) all bonus deferrals made
through the current month reduced by any distributions of such bonus deferrals
made prior to the determination date, (ii) all nonforfeitable Employer Match
Awards reduced by any distributions of Employer Match Awards made prior to the
determination date and (iii) any deemed investment earnings and losses
attributable to the amounts included under (i) and (ii) as determined pursuant
to Section 7.3. In the event that an employee becomes disabled, his employment
shall for these purposes be deemed to terminate on the first day of the month
following the month in which the employee became disabled (thus, the
Distributable Balance shall be computed as of the preceding month). Payment of
deferred compensation under these events will be in accordance with the
employee's payment method election, provided such election is made prior to the
calendar year in which the distribution is made. If no such timely election is
made, then payment will be made in the form of a single sum payment. All
payments of deferred compensation hereunder will be made in (i) whole shares of
Stock and in the class or classes of Stock in which the Deferred Compensation
Account is deemed invested under Section 7.3 above, and (ii) cash equal to the
Fair Market Value of any fractional share. If an employee dies before the entire
Distributable Balance has been paid, then the Company shall pay the
Distributable Balance to the employee's designated beneficiary.
7.5 HARDSHIP WITHDRAWALS. In the event of an unforeseeable emergency
causing a severe financial hardship, an employee may request a payment of all or
a portion of his nonforfeitable Deferred Compensation Account in an amount equal
to that which is reasonably necessary to satisfy the emergency by submitting a
written request to the Committee accompanied with documentation evidencing the
employee's financial hardship. The Committee shall review the request and shall
determine, in its sole discretion, whether a severe financial hardship exists. A
severe financial hardship means a hardship to the employee resulting from a
sudden and unexpected illness or accident of the employee or of a dependent (as
defined in section 152(a) of the Code) of the employee, loss of the employee's
property due to casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the employee.
The circumstances that will constitute an emergency will depend upon the facts
of each case, but, in any event, payment may not be made to the extent that such
hardship is or may be relieved (i) through reimbursement or compensation by
insurance or otherwise, (ii) by liquidation of the employee's assets, to the
extent the liquidation of such assets would not itself cause severe financial
hardship or (iii) by cessation of deferrals under the Plan. Examples of what are
not considered to be unforeseeable emergencies include the need to send the
employee's child to college or the desire to purchase a home.
ARTICLE VIII
GENERAL
8.1 EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective as of
the effective date of the merger of Telephone and Data Systems, Inc., an Iowa
corporation, into the Company and shall terminate ten years thereafter unless
terminated earlier by the Board. Termination of the Plan shall not affect the
terms or conditions of any award granted prior to termination. Grants of awards
hereunder may be made at any time on or after the effective date and prior to
the termination of the Plan.
8.2 AMENDMENTS AND ADJUSTMENTS TO PERFORMANCE MEASURES. The Board may
amend the Plan as it shall deem advisable, subject to any requirement of
stockholder approval under applicable law; PROVIDED, HOWEVER, that, except as
provided in Section 8.8, no amendment shall be made without stockholder approval
if such amendment (a) would increase the maximum number of shares of any class
of Stock available for issuance under the Plan or (b) would reduce the minimum
purchase price in the case of an option or SAR. No amendment may impair the
rights of a holder of an outstanding award without the consent of such holder.
At any time prior to the issuance or delivery of any shares of Stock or the
payment of any cash in connection with an award subject to Performance Measures,
the Committee may revise the Performance Measures applicable to an award and any
related computation of payment if unforeseen events occur during the applicable
Performance Period or Restriction Period that have a substantial effect on the
Performance Measures and which, in the judgment
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of the Committee, make the application of the Performance Measures unfair unless
such revision is made; PROVIDED, HOWEVER, that no such revision shall be made
with respect to an award to the extent that the Committee determines that such
revision would cause payment under the award to fail to be deductible in full by
the Company under section 162(m) of the Code.
8.3 AGREEMENT. Each award granted under the Plan shall be evidenced by an
Agreement setting forth the terms and conditions applicable to such award. No
award shall be valid until an Agreement is executed by the Company and the
recipient of the award and, upon execution by each party and delivery of the
Agreement to the Vice President-Human Resources of the Company, such award shall
be effective as of the effective date set forth in the Agreement.
8.4 DESIGNATION OF BENEFICIARIES. Each employee may designate a
beneficiary with respect to each of his awards and his Deferred Compensation
Account by executing and filing with the Company during his lifetime a
beneficiary designation. The employee may change or revoke any such designation
by executing and filing with the Company during his lifetime a new beneficiary
designation. If any designated beneficiary predeceases the employee, or if any
corporation, partnership, trust or other entity which is a designated
beneficiary is terminated, dissolved, becomes insolvent, or is adjudicated
bankrupt prior to the date of the employee's death, or if the employee fails to
designate a beneficiary, then the following persons in the order set forth below
shall receive the entire amount which the previous designated beneficiary would
have been entitled to receive:
i) the employee's spouse, if living; otherwise
ii) the employee's then living descendants, per stirpes; and otherwise
iii) the employee's estate.
8.5 TRANSFERABILITY. No Incentive Stock Option shall be transferable other
than to a beneficiary determined pursuant to Section 8.4. An employee's Deferred
Compensation Account shall not be transferable other than (a) to beneficiary
pursuant to Section 8.4 or (b) pursuant to a court order entered in connection
with a dissolution of marriage or child support. No other award shall be
transferable other than (a) to a beneficiary determined pursuant to Section 8.4,
(b) pursuant to a court order entered in connection with a dissolution of
marriage or child support, (c) to the extent permitted by (i) securities laws
relating to the registration of securities subject to employee benefit plans and
(ii) the Agreement evidencing the grant of such award, by transfer to a
Permitted Transferee. No award or Deferred Compensation Account balance may
otherwise be sold, transferred, assigned, pledged, hypothecated, encumbered or
otherwise disposed of (whether by operation of law or otherwise) or be subject
to execution, attachment or similar process. Upon any such attempt to so sell,
transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any
award or Deferred Compensation Account balance, such award and all rights
thereunder shall immediately become null and void and any Employer Match Awards
credited to such Deferred Compensation Account shall be forfeited.
8.6 TAX WITHHOLDING. Prior to (i) the issuance or delivery of any shares
of Stock, (ii) the payment of any cash pursuant to an award made hereunder or
(iii) any distribution from an employee's Deferred Compensation Account, the
Company shall have the right to require payment by the recipient thereof of any
federal, state, local or any other taxes which may be required to be withheld or
paid in connection with such award or distribution. As determined by the
Committee at the time of the grant of an award or a deferral to an employee's
Deferred Compensation Account, an Agreement may provide that (i) the Company
shall withhold whole shares of Stock which would otherwise be delivered to the
recipient, having an aggregate Fair Market Value determined as of the date the
obligation to withhold or pay taxes arises in connection with an award (the "Tax
Date") in the amount necessary to satisfy any such obligation or (ii) the holder
may satisfy any such obligation by any of the following means: (A) a cash
payment to the Company, (B) delivery to the Company of Mature Shares the
aggregate Fair Market Value of which shall be determined as of the Tax Date, (C)
authorizing the Company to withhold whole shares of Stock which would otherwise
be delivered the aggregate Fair Market Value of which shall be determined as of
the Tax Date, (D) in the case of the exercise of an option, a cash payment by a
broker-dealer acceptable to the Company to whom the holder has submitted an
irrevocable notice of exercise or (E) any combination of (A), (B) and (C) in
each case to the extent set for in the Agreement relating to the award;
PROVIDED, HOWEVER, that the Committee shall have sole discretion to disapprove
of an election pursuant to any of clauses (B)-(E). An Agreement may provide for
shares of Stock to be delivered or withheld having an aggregate Fair Market
Value in excess of the minimum amount required to be withheld. Any fraction of a
share of Stock which would be required to satisfy such an obligation shall be
disregarded and the remaining amount due shall be paid in cash by the holder.
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8.7 RESTRICTIONS ON SHARES. Each award granted hereunder shall be subject
to the requirement that if at any time the Company determines that the listing,
registration or qualification of the shares of Stock subject to such award upon
any securities exchange or under any law, or the consent or approval of any
governmental body, or the taking of any other action is necessary or desirable
as a condition of, or in connection with, the delivery of shares thereunder,
such shares shall not be delivered unless such listing, registration,
qualification, consent, approval or other action shall have been effected or
obtained, free of any conditions not acceptable to the Company. The Company may
require that certificates evidencing shares of Stock delivered pursuant to any
award made hereunder bear a legend indicating that the sale, transfer or other
disposition thereof by the holder is prohibited except in compliance with the
Securities Act of 1933, as amended, and the rules and regulations thereunder.
8.8 ADJUSTMENT. In the event of any conversion, stock split, stock
dividend, recapitalization, reclassification, reorganization, merger,
consolidation, spin-off, combination of shares in a reverse stock split or other
similar event, (a) the number and class of securities deemed to be held in each
Deferred Compensation Account shall be adjusted by the Committee, (b) the number
and class of securities subject to each outstanding Stock Award and each
outstanding Performance Share Award shall be adjusted by the Committee and (c)
each holder of an option or SAR shall be entitled to receive upon the exercise
of an option or SAR, at a price determined by the Committee in its sole
discretion, such shares of Stock or other securities, the value of which shall
be determined by the Committee to be equivalent to the value of shares of Stock
to which the holder would be entitled had the holder exercised such option or
SAR prior to the occurrence of such event. If any other event shall occur which
in the judgment of the Board would warrant an adjustment to (i) the number and
class of securities deemed to be held in each Deferred Compensation Account,
(ii) the number and class of securities subject to each outstanding Stock Award
and each outstanding Performance Share Award, (iii) the number or designation of
the class or classes of securities available under the Plan or (iv) the number
or designation of the class or classes of securities subject to each outstanding
option or SAR or the purchase price of a share of Stock subject to the option or
SAR, or any combination of adjustments provided for in clauses (i), (ii), (iii)
and (iv), then such adjustments shall be authorized by the Board and made by the
Committee upon such terms and conditions as it may deem equitable and
appropriate. To the extent that any such event or any action taken under this
Section 8.8 shall increase the number of shares of Stock or other security
subject to an outstanding Stock Award or Performance Share Award or held in
Deferred Compensation Accounts, or entitle a holder of an option or SAR to
purchase additional shares of Stock or other security, the shares of Stock
available under the Plan shall be deemed to include such additional shares of
Stock or other security. If any such adjustment would result in a fractional
security being generally available under the Plan, then such fractional security
shall be disregarded. If any such adjustment would result in a fractional
security being subject to an award under the Plan, then the Company shall pay
the holder of such an award, in connection with the first vesting or exercise of
such award occurring after such adjustment, an amount in cash determined by
multiplying (i) the fraction of such security (rounded to the nearest hundredth)
by (ii) the excess, if any, of (A) the Fair Market Value on the vesting or
exercise date over (B) the purchase price of such security. Any determination
made by the Committee under this Section 8.8 shall be final, binding and
conclusive on all holders of awards granted under the Plan.
8.9 CHANGE IN CONTROL. (a) Notwithstanding any other provision of the Plan
or any provision of any agreement, in the event of a Change in Control, (i) any
Restriction Periods applicable to outstanding Restricted Stock Awards shall
lapse, (ii) any Performance Periods applicable to outstanding Performance Share
Awards shall lapse; (iii) any Performance Measures applicable to outstanding
Performance Share Awards and to outstanding Restricted Stock Awards (if any)
shall be deemed to be satisfied at the target level, (iv) all outstanding
options or SARs shall become immediately exercisable in full and (v) all amounts
deemed to be held in Deferred Compensation Accounts shall become nonforfeitable.
In the event of a Change in Control pursuant to Section (b)(3) below, there may
be substituted for each share of Stock available under the Plan, whether or not
then subject to an outstanding award, the number and class of shares into which
each outstanding share of such Stock shall be converted pursuant to such Change
in Control. In the event of such a substitution, the purchase price per share of
stock then subject to an outstanding award under the Plan shall be appropriately
adjusted by the Committee, but in no event shall the aggregate purchase price
for such shares be greater than the aggregate purchase price for the shares of
Stock subject to such award prior to the Change in Control.
(b) For purposes of the Plan, "Change in Control" shall mean:
(1) the acquisition by any individual, entity or group (a "Person"),
including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of
the Exchange Act, of beneficial ownership within the meaning of Rule 13d-3
promulgated under the Exchange Act, of 25% or more of the combined voting
power of the then outstanding securities of the Company entitled to vote
generally on matters (without regard to the election of directors) (the
"Outstanding Voting Securities"), excluding, however, the following: (i) any
acquisition directly
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from the Company or an Affiliate (excluding any acquisition resulting from
the exercise of an exercise, conversion or exchange privilege, unless the
security being so exercised, converted or exchanged was acquired directly
from the Company or an Affiliate), (ii) any acquisition by the Company or an
Affiliate, (iii) any acquisition by an employee benefit plan (or related
trust) sponsored or maintained by the Company or an Affiliate, (iv) any
acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (3) of this Section 8.9(b), or (v)
any acquisition by the following persons: (A) LeRoy T. Carlson or his
spouse, (B) any child of LeRoy T. Carlson or the spouse of any such child,
(C) any grandchild of LeRoy T. Carlson, including any child adopted by any
child of LeRoy T. Carlson, or the spouse of any such grandchild, (D) the
estate of any of the persons described in clauses (A)-(C), (E) any trust or
similar arrangement (including any acquisition on behalf of such trust or
similar arrangement by the trustees or similar persons) PROVIDED THAT all of
the current beneficiaries of such trust or similar arrangement are persons
described in clauses (A)-(C) or their lineal descendants, or (F) the voting
trust which expires on June 30, 2009, or any successor to such voting trust,
including the trustees of such voting trust on behalf of such voting trust
(all such persons, collectively, the "Exempted Persons");
(2) individuals who, as of the effective date of the merger of Telephone
and Data Systems, Inc., an Iowa corporation, into the Company, constitute
the Board of Directors (the "Incumbent Board") cease for any reason to
constitute at least a majority of such Board; PROVIDED THAT any individual
who becomes a director of the Company subsequent to the effective date of
the merger of Telephone and Data Systems, Inc., an Iowa corporation, into
the Company, whose election, or nomination for election by the Company's
stockholders, was approved by the vote of at least a majority of the
directors then comprising the Incumbent Board shall be deemed a member of
the Incumbent Board; and PROVIDED FURTHER, that any individual who was
initially elected as a director of the Company as a result of an actual or
threatened election contest, as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act, or any other actual or
threatened solicitation of proxies or consents by or on behalf of any Person
other than the Board shall not be deemed a member of the Incumbent Board;
(3) approval by the stockholders of the Company of a reorganization,
merger or consolidation or sale or other disposition of all or substantially
all of the assets of the Company (a "Corporate Transaction"), excluding,
however, a Corporate Transaction pursuant to which (i) all or substantially
all of the individuals or entities who are the beneficial owners of the
Outstanding Voting Securities immediately prior to such Corporate
Transaction will beneficially own, directly or indirectly, more than 51% of
the combined voting power of the outstanding securities of the corporation
resulting from such Corporate Transaction (including, without limitation, a
corporation which as a result of such transaction owns, either directly or
indirectly, the Company or all or substantially all of the Company's assets)
which are entitled to vote generally on matters (without regard to the
election of directors), in substantially the same proportions relative to
each other as the shares of Outstanding Voting Securities are owned
immediately prior to such Corporate Transaction, (ii) no Person (other than
the following Persons: (V) the Company or an Affiliate, (W) any employee
benefit plan (or related trust) sponsored or maintained by the Company or an
Affiliate, (X) the corporation resulting from such Corporate Transaction,
(Y) the Exempted Persons, (Z) and any Person which beneficially owned,
immediately prior to such Corporate Transaction, directly or indirectly, 25%
or more of the Outstanding Voting Securities) will beneficially own,
directly or indirectly, 25% or more of the combined voting power of the
outstanding securities of such corporation entitled to vote generally on
matters (without regard to the election of directors) and (iii) individuals
who were members of the Incumbent Board will constitute at least a majority
of the members of the board of directors of the corporation resulting from
such Corporate Transaction; or
(4) approval by the stockholders of the Company of a plan of complete
liquidation or dissolution of the Company.
8.10 FORFEITURE OF AWARD UPON COMPETITION WITH COMPANY OR ANY AFFILIATE OR
MISAPPROPRIATION OF CONFIDENTIAL INFORMATION. Notwithstanding any other
provision herein, on or after any date on which an award recipient (a) enters
into competition with the Company or an Affiliate, or (b) misappropriates
confidential information of the Company or an Affiliate, as determined by the
Company in its sole discretion, any option, SAR, Restricted Stock Award or
Performance Share Award then held by the award recipient shall be forfeited and
any balance credited to the award recipient's Deferred Compensation Account
attributable to Employer Match Awards shall be forfeited, in each case
regardless of whether such award or account balance would otherwise be
nonforfeitable.
For purposes of the preceding sentence, an award recipient shall be treated
as entering into competition with the Company or an Affiliate if such award
recipient (i) directly or indirectly, individually or in conjunction with any
person, firm or corporation, has contact with any customer of the Company or an
Affiliate or with any prospective
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customer which has been contacted or solicited by or on behalf of the Company or
an Affiliate for the purpose of soliciting or selling to such customer or
prospective customer any product or service, except to the extent such contact
is made on behalf of the Company or an Affiliate, or (ii) otherwise competes
with the Company or an Affiliate in any manner or otherwise engages in the
business of the Company or an Affiliate.
An award recipient shall be treated as misappropriating confidential
information of the Company or an Affiliate if such award recipient (i) uses
confidential information (as described below) for the benefit of anyone other
than the Company or such Affiliate, as the case may be, or discloses the
confidential information to anyone not authorized by the Company or such
Affiliate, as the case may be, to receive such information, (ii) upon
termination of employment, makes any summaries of, takes any notes with respect
to, or memorizes any information or takes any confidential information or
reproductions thereof from the facilities of the Company or an Affiliate, or
(iii) upon termination of employment or upon the request of the Company or an
Affiliate, fails to return all confidential information then in the award
recipient's possession. "Confidential information" shall mean any confidential
and proprietary drawings, reports, sales and training manuals, customer lists,
computer programs, and other material embodying trade secrets or confidential
technical, business, or financial information of the Company or an Affiliate.
8.11 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any
right to participate in the Plan. Neither the Plan nor any award granted
hereunder shall confer upon any person any right to continued employment by the
Company or any of its subsidiaries or affiliates or affect in any manner the
right of the Company or any of its subsidiaries or affiliates to terminate the
employment of any person at any time without liability hereunder.
8.12 RIGHTS AS STOCKHOLDER. No person shall have any right as a
stockholder of the Company with respect to any shares of Stock of the Company
that are subject to an award granted hereunder unless and until such person
becomes a stockholder of record with respect to such shares of Stock.
8.13 GOVERNING LAW. The Plan, each award granted hereunder and the related
Agreement, and all determinations made and actions taken pursuant thereto, to
the extent not otherwise governed by the Code or the laws of the United States,
shall be governed by the laws of the State of [Delaware] and construed in
accordance therewith without giving effect to principles of conflicts of laws.
8.14 SEVERABILITY. If a provision of the Plan shall be held illegal or
invalid, the illegality or invalidity shall not affect the remaining parts of
the Plan and the Plan shall be construed and enforced as if the illegal or
invalid provision had not been included in the Plan.
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EXHIBIT E
SECTIONS 490.1301 ET SEQ., OF THE IOWA BUSINESS CORPORATION ACT
(DISSENTERS' RIGHTS)
DIVISION XIII
DISSENTERS' RIGHTS
(AS OF THE DATE OF THIS PROXY STATEMENT)
PART A
490.1301 DEFINITIONS FOR DIVISION XIII IN THIS DIVISION:
1. "Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
2. "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
3. "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 490.1302 and who exercises that right when and in
the manner required by sections 490.1320 through 490.1328.
4. "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
5. "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
6. "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
7. "Shareholder" means the record shareholder or the beneficial
shareholder.
490.1302 SHAREHOLDERS' RIGHT TO DISSENT
1. A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:
a. Consummation of a plan of merger to which the corporation is a party
if either of the following apply:
(1) Shareholder approval is required for the merger by section
490.1103 or the articles of incorporation and the shareholder is entitled
to vote on the merger.
(2) The corporation is a subsidiary that is merged with its parent
under section 490.1104.
b. Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan.
c. Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course
of business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale.
d. An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it does
any or all of the following:
(1) Alters or abolishes a preferential right of the shares.
(2) Creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares.
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(3) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities.
(4) Excludes or limits the right of the shares to vote on any matter,
or to cumulate votes, other than a limitation by dilution through
issuance of shares or other securities with similar voting rights.
(5) Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired
for cash under section 490.604.
(6) Extends, for the first time after being governed by this chapter,
the period of duration of a corporation organized under chapter 491 or
496A and existing for a period of years on the day preceding the date the
corporation is first governed by this chapter.
e. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
2. A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter is not entitled to challenge the
corporate action creating the shareholder's entitlement unless the action is
unlawful or fraudulent with respect to the shareholder or the corporation.
490.1303 DISSENT BY NOMINEES AND BENEFICIAL OWNERS
1. A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in that shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one person and
notifies the corporation in writing of the name and address of each person on
whose behalf the shareholder asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which the
shareholder dissents and the shareholder's other shares were registered in the
names of different shareholders.
2. A beneficial shareholder may assert dissenters' rights as to shares held
on the shareholder's behalf only if the shareholder does both of the following:
a. Submits to the corporation the record shareholder's written consent
to the dissent not later than the time the beneficial shareholder asserts
dissenters' rights.
b. Does so with respect to all shares of which the shareholder is the
beneficial shareholder or over which that beneficial shareholder has power
to direct the vote.
PART B
490.1320 NOTICE OF DISSENTERS' RIGHTS
1. If proposed corporate action creating dissenters' rights under section
490.1302 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this part and be accompanied by a copy of this part.
2. If corporate action creating dissenters' rights under section 490.1302
is taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in section 490.1322.
490.1321 NOTICE OF INTENT TO DEMAND PAYMENT
1. If proposed corporate action creating dissenters' rights under section
490.1302 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must do all of the following:
a. Deliver to the corporation before the vote is taken written notice
of the shareholder's intent to demand payment for the shareholder's shares
if the proposed action is effectuated.
b. Not vote the dissenting shareholder's shares in favor of the
proposed action.
2. A shareholder who does not satisfy the requirements of subsection 1, is
not entitled to payment for the shareholder's shares under this part.
E-2
<PAGE>
490.1322 DISSENTERS' NOTICE
1. If proposed corporate action creating dissenters' rights under section
490.1302 is authorized at a shareholders' meeting, the corporation shall deliver
a written dissenters' notice to all shareholders who satisfied the requirements
of section 490.1321.
2. The dissenters' notice must be sent no later than ten days after the
proposed corporate action is authorized at a shareholders' meeting, or, if the
corporate action is taken without a vote of the shareholders, no later than ten
days after the corporate action is taken, and must do all of the following:
a. State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited.
b. Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received.
c. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not the person acquired beneficial ownership of
the shares before that date.
d. Set a date by which the corporation must receive the payment demand,
which date shall not be fewer than thirty nor more than sixty days after the
date the dissenters' notice is delivered.
e. Be accompanied by a copy of this division.
490.1323 DUTY TO DEMAND PAYMENT
1. A shareholder sent a dissenters' notice described in section 490.1322
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to section 490.1322, subsection 2, paragraph "c",
and deposit the shareholder's certificates in accordance with the terms of the
notice.
2. The shareholder who demands payment and deposits the shareholder's
shares under subsection 1 retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
3. A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
division.
490.1324 SHARE RESTRICTIONS
1. The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under section 490.1326.
2. The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are canceled
or modified by the taking of the proposed corporate action.
490.1325 PAYMENT
1. Except as provided in section 490.1327, at the time the proposed
corporate action is taken, or upon receipt of a payment demand, whichever occurs
later, the corporation shall pay each dissenter who complied with section
490.1323 the amount the corporation estimates to be the fair value of the
dissenter's shares, plus accrued interest.
2. The payment must be accompanied by all of the following:
a. The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any.
E-3
<PAGE>
b. A statement of the corporation's estimate of the fair value of the
shares.
c. An explanation of how the interest was calculated.
d. A statement of the dissenter's right to demand payment under section
490.1328.
e. A copy of this division.
490.1326 FAILURE TO TAKE ACTION
1. If the corporation does not take the proposed action within sixty days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
2. If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 490.1322 as if the corporate action was taken
without a vote of the shareholders and repeat the payment demand procedure.
490.1327 AFTER-ACQUIRED SHARES
1. A corporation may elect to withhold payment required by section 490.1325
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
2. To the extent the corporation elects to withhold payment under
subsection 1, after taking the proposed corporate action, it shall estimate the
fair value of the shares, plus accrued interest, and shall pay this amount to
each dissenter who agrees to accept it in full satisfaction of the dissenter's
demand. The corporation shall send with its offer a statement of its estimate of
the fair value of the shares, an explanation of how the interest was calculated,
and a statement of the dissenter's right to demand payment under section
490.1328.
490.1328 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER
1. A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of interest due,
and demand payment of the dissenter's estimate, less any payment under section
490.1325, or reject the corporation's offer under section 490.1327 and demand
payment of the fair value of the dissenter's shares and interest due, if any of
the following apply:
a. The dissenter believes that the amount paid under section 490.1325
or offered under section 490.1327 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated.
b. The corporation fails to make payment under section 490.1325 within
sixty days after the date set for demanding payment.
c. The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.
2. A dissenter waives the dissenter's right to demand payment under this
section unless the dissenter notifies the corporation of the dissenter's demand
in writing under subsection 1 within thirty days after the corporation made or
offered payment for the dissenter's shares.
PART C
490.1330 COURT ACTION
1. If a demand for payment under section 490.1328 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
2. The corporation shall commence the proceeding in the district court of
the county where a corporation's principal office or, if none in this state, its
registered office is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the
E-4
<PAGE>
registered office of the domestic corporation merged with or whose shares were
acquired by the foreign corporation was located.
3. The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced under
subsection 2 is plenary and exclusive. The court may appoint one or more persons
as appraisers to receive evidence and recommend decision on the question of fair
value. The appraisers have the powers described in the order appointing them, or
in any amendment to it. The dissenters are entitled to the same discovery rights
as parties in other civil proceedings.
5. Each dissenter made a party to the proceeding is entitled to judgment
for either of the following:
a. The amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the
corporation.
b. The fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under section 490.1327.
490.1331 COURT COSTS AND COUNSEL FEES
1. The court in an appraisal proceeding commenced under section 490.1330
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under section 490.1328.
2. The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable, for either of
the following:
a. Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of sections 490.1320 through 490.1328.
b. Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this chapter.
3. If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
E-5
<PAGE>
EXHIBIT F
ILLUSTRATION OF CERTAIN TERMS
The following illustrations demonstrate the method of calculation of the
Retained Interest and an Inter-Group Interest in any Tracking Group which the
Company may create, and the application of certain terms of the Tracking Stock
Proposal based on the assumptions set forth herein. For purposes hereof, the
Cellular Group is used as an example to illustrate the application of certain
terms applicable to all Tracking Stocks and Tracking Groups. Also for purposes
of illustration, 140 million shares are used as the number of authorized
Cellular Group Shares, 80 million shares are used as the number of Cellular
Group Shares issued in the Distribution and the U.S. Cellular Merger, 20 million
shares are used as the Number of Shares Issuable with Respect to Retained
Interest in the Cellular Group immediately following the Distribution and the
U.S. Cellular Merger and 5 million shares are used as the pre-Distribution
Number of Shares Issuable to Third Parties. Unless otherwise specified, each
illustration below should be read independently as if none of the other
transactions illustrated in this Annex had occurred. Actual calculations may be
slightly different due to rounding. The following illustrations are not intended
to be complete and are qualified in their entirety by the more detailed
information contained in the Proxy Statement/Prospectus and the other Exhibits
and Appendices thereto. Please note that the following illustrations are purely
hypothetical and the numbers used herein (including assumptions of market
values) were chosen to simplify the calculations and are not intended to
represent estimates of actual numbers or values. Capitalized terms used herein
have the respective meanings ascribed to them in the Proxy Statement/Prospectus.
See Exhibit G--Index of Certain Defined Terms.
At any given time, the Outstanding Interest Fraction, which represents the
percentage interest in the equity value of the Company attributable to a
Tracking Group that is represented by the outstanding shares of Tracking Stock
of that Tracking Group, will be equal to the quotient of:
Outstanding Shares of such Tracking Stock
------------------------------------------------------------------------
Outstanding Shares of such Tracking Stock + Number of Shares Issuable
with Respect to Retained Interest in such Tracking Group + Number of
Shares Issuable with Respect to Inter-Group Interest(s) in such Tracking
Group by other Tracking Group(s)
The balance of the equity of the Tracking Group is represented by the
Retained Interest held by the TDS Group and any other Tracking Group's
Inter-Group Interest in such Tracking Group.
At any given time, the Retained Interest Fraction, which represents the
percentage interest in the equity value of the Company attributable to a
Tracking Group that is attributable to the TDS Group, will be equal to the
quotient of:
Number of Shares Issuable with Respect to Retained Interest in the applicable
Tracking Group
------------------------------------------------------------------------
Outstanding Shares of such Tracking Stock + Number of Shares Issuable
with Respect to Retained Interest in such Tracking Group + Number of
Shares Issuable with Respect to Inter-Group Interest(s) in such Tracking
Group by other Tracking Group(s)
At any given time, the Inter-Group Interest Fraction, which represents the
percentage interest in the equity value of the Company attributable to a
Tracking Group that is attributed to other Tracking Groups, will be equal to the
quotient of:
Number of Shares Issuable with Respect to Inter-Group Interest in the applicable
Tracking Group
------------------------------------------------------------------------
Outstanding Shares of such Tracking Stock + Number of Shares Issuable
with Respect to Retained Interest in such Tracking Group + Number of
Shares Issuable with Respect to Inter-Group Interest(s) in such Tracking
Group by other Tracking Group(s)
For a particular Tracking Group, the sum of the Outstanding Interest
Fraction, the Retained Interest Fraction and the Inter-Group Interest
Fraction(s) will always equal 100%.
The Adjusted Group Outstanding Interest Fraction is a measure that differs
from the Outstanding Interest Fraction in that it takes into account the
dilutive effect of certain convertible securities and options, shares
F-1
<PAGE>
committed for acquisitions or otherwise. It is used instead of the Outstanding
Interest Fraction in certain situations and would be equal to the quotient of:
Outstanding Shares of Tracking Stock
------------------------------------------------------------------------
Outstanding Shares of such Tracking Stock + Number of Shares Issuable with
Respect to Retained Interest in such Tracking Group + Number of Shares
Issuable with Respect to Inter-Group Interest(s) in such Tracking Group by
other Tracking Group(s) + Number of Shares Issuable to Third Parties of such
Tracking Stock
PURCHASES OF SHARES OF TRACKING STOCK
The following two illustrations reflect the purchase by the Company of 5
million shares of Cellular Group Shares, which are retired or otherwise cease to
be outstanding following their purchase. For purposes of these illustrations, it
is assumed that no Inter-Group Interest in the Cellular Group exists.
A. PURCHASE WITH TRACKING GROUP FUNDS
Assume all such shares are identified as having been purchased with funds
attributed to the Cellular Group, with the Cellular Group being charged with the
consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and
outstanding............................. 80 million
Shares purchased.......................... (5) million
Total shares issued and outstanding after
purchase................................ 75 million
</TABLE>
- - The Number of Shares Issuable with Respect to Retained Interest in the
Cellular Group by the TDS Group would not be changed by the purchase of any
shares of Cellular Group Shares which are purchased with funds attributed to
the Cellular Group.
- - The Cellular Group Outstanding Interest Fraction would be 79%, calculated as
follows:
75 million
------------------------
75 million + 20 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 21% in the Cellular Group.
- - In this case, the TDS Group would be credited, and the Cellular Group would
be charged, with an amount equal to 27% (representing the ratio of the
Retained Interest Fraction (21%) to the Cellular Group Outstanding Interest
Fraction (79%)) of the aggregate amount of any dividend or other
distribution paid on the outstanding shares of Cellular Group Shares (other
than a dividend or other distribution payable in shares of Cellular Group
Shares or in certain other securities). If, for example, a dividend of $1
per share were declared and paid on the 75 million shares of Cellular Group
Shares outstanding (an aggregate of $75 million), the TDS Group would be
credited with $20 million, and the Cellular Group would be charged with that
amount in addition to the $75 million dividend on the outstanding Cellular
Group Shares (a total of $95 million).
- - The Company would have 65 million authorized and unissued shares of Cellular
Group Shares (140 million minus 75 million issued and outstanding).
B. PURCHASE WITH TDS GROUP FUNDS
Assume all such shares are identified as having been purchased with funds
attributed to the TDS Group, with the TDS Group being charged with the
consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and
outstanding............................. 80 million
Shares purchased.......................... (5) million
Total shares issued and outstanding after
purchase................................ 75 million
</TABLE>
F-2
<PAGE>
- - The Number of Shares Issuable with Respect to Retained Interest would be
increased by the number of shares of Cellular Group Shares which are so
purchased with funds attributed to the TDS Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to
Retained Interest prior to purchase..... 20 million
Shares purchased.......................... 5 million
Number of Shares Issuable with Respect to
Retained Interest after purchase........ 25 million
</TABLE>
- - The Cellular Group Outstanding Interest Fraction would be 75%, calculated as
follows:
75 million
------------------------
75 million + 25 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 25% in the Cellular Group.
- - In this case, the TDS Group would be credited, and the Cellular Group would
be charged, with an amount equal to 33% (representing the ratio of the
Retained Interest Fraction (25%) to the Cellular Group Outstanding Interest
Fraction (75%)) of the aggregate amount of any dividend or other
distribution paid on the outstanding shares of Cellular Group Shares (other
than a dividend or other distribution payable in shares of Cellular Group
Shares or in certain other securities). If, for example, a dividend of $1
per share were declared and paid on the 75 million shares of Cellular Group
Shares outstanding (an aggregate of $75 million), the TDS Group would be
credited with $25 million, and the Cellular Group would be charged with that
amount in addition to the $75 million dividend on the outstanding Cellular
Group Shares (a total of $100 million).
- - The Company would have 65 million authorized and unissued Cellular Group
Shares (140 million minus 75 million issued and outstanding).
TRANSFERS OF ASSETS BETWEEN THE TDS GROUP AND A TRACKING GROUP
A. CONTRIBUTION OF ASSETS FROM THE TDS GROUP TO A TRACKING GROUP
The following illustration reflects the contribution by the TDS Group to the
Cellular Group of $150 million of assets attributed to the TDS Group in return
for an increase in the Retained Interest on a date on which the Market Value of
the Cellular Group Shares is $50 per share and the Number of Shares Issuable
with Respect to Retained Interest is 20 million.
<TABLE>
<S> <C>
Shares previously issued and
outstanding............................. 80 million
Newly issued shares....................... --
Total shares issued and outstanding after
contribution............................ 80 million
</TABLE>
- - The Number of Shares Issuable with Respect to Retained Interest would be
increased to reflect the contribution to the Cellular Group of assets
theretofore attributed to the TDS Group. The increase in the Number of
Shares Issuable with Respect to Retained Interest would be calculated by
dividing the value of the contribution by the per share Market Value of the
Cellular Group Shares. Thus, the $150 million contribution by the TDS Group
to the Cellular Group would result in an increase of 3 million shares (an
amount equal to $150 million divided by $50).
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to
Retained Interest prior to
contribution............................ 20 million
Adjustment to reflect contribution to the
Cellular Group of assets attributed to
the TDS Group ($150 divided by $50)..... 3 million
Number of Shares Issuable with Respect to
Retained Interest after contribution.... 23 million
</TABLE>
F-3
<PAGE>
- - The Cellular Group Outstanding Interest Fraction would be 78%, calculated as
follows:
80 million
------------------------
80 million + 23 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 22% in the Cellular Group.
- - In this case, the TDS Group would be credited, and the Cellular Group would
be charged, with an amount equal to 28% (representing the ratio of the
Retained Interest Fraction (22%) to the Cellular Group Outstanding Interest
Fraction (78%)) of the aggregate amount of any dividend or other
distribution paid on the outstanding Cellular Group Shares (other than a
dividend or other distribution payable in Cellular Group Shares or in
certain other securities).
- - The Company would have 60 million authorized and unissued Cellular Group
Shares (140 million minus 80 million issued and outstanding).
B. TRANSFER OF ASSETS FROM A TRACKING GROUP TO THE TDS GROUP
The following illustration reflects the transfer by the Cellular Group to the
TDS Group of $150 million of assets attributed to the Cellular Group in return
for a reduction in the Retained Interest on a date on which the Market Value of
the Cellular Group Shares is $50 per share and the Number of Shares Issuable
with Respect to Retained Interest is 20 million.
<TABLE>
<S> <C>
Shares previously issued and
outstanding............................. 80 million
Shares purchased.......................... --
Total shares issued and outstanding after
transfer................................ 80 million
</TABLE>
- - The Number of Shares Issuable with Respect to Retained Interest would be
decreased to reflect the contribution to the TDS Group of assets theretofore
attributed to the Cellular Group. The decrease in the Number of Shares
Issuable with Respect to Retained Interest would be calculated by dividing
the value of the contribution by the per share Market Value of the Cellular
Group Shares. Thus, the $150 million contribution by the Cellular Group to
the TDS Group would result in a decrease of 3 million shares (an amount
equal to $150 million divided by $50).
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to
Retained Interest prior to transfer..... 20 million
Adjustment to reflect transfer to the TDS
Group of assets attributed to the
Cellular Group ($150 divided by $50).... (3) million
Number of Shares Issuable with Respect to
Retained Interest after transfer........ 17 million
</TABLE>
The Cellular Group will not make transfers of assets to the TDS Group in
reduction of the Retained Interest if the effect would be to reduce the Number
of Shares Issuable with Respect to Retained Interest to less than zero. The
Cellular Group cannot have an Inter-Group Interest in the TDS Group.
- - The Cellular Group Outstanding Interest Fraction would be 82%, calculated as
follows:
80 million
------------------------
80 million + 17 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 18% in the Cellular Group.
- - In this case, the TDS Group would be credited, and the Cellular Group would
be charged, with an amount equal to 22% (representing the ratio of the
Retained Interest Fraction (18%) to the Cellular Group Outstanding Interest
Fraction (82%)) of the aggregate amount of any dividend or other
distribution paid on the outstanding Cellular Group Shares (other than a
dividend or other distribution payable in Cellular Group Shares or in
certain other securities).
F-4
<PAGE>
- - The Company would have 60 million authorized and unissued Cellular (140
million minus 80 million issued and outstanding).
FUTURE OFFERINGS OF TRACKING GROUP STOCK
The following illustrations reflect the sale by the Company of 10 million
Cellular Group Shares on a date on which the Number of Shares Issuable with
Respect to Retained Interest is 20 million shares.
A. OFFERING FOR TRACKING GROUP
The following example assumes all such Cellular Group Shares issued pursuant
to the offering are identified as issued for the account of the Cellular Group,
with the net proceeds credited to the Cellular Group:
<TABLE>
<S> <C>
Shares previously issued and
outstanding............................. 80 million
Newly issued shares....................... 10 million
Total shares issued and outstanding after
offering................................ 90 million
</TABLE>
- - The Number of Shares Issuable with Respect to Retained Interest would not be
changed by the issuance of any Cellular Group Shares for the account of the
Cellular Group.
- - The Outstanding Interest Fraction would be 82%, calculated as follows:
90 million
------------------------
90 million + 20 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 18% in the Cellular Group.
- - The Company would have 50 million authorized and unissued Cellular Group
Shares remaining (140 million minus 90 million issued and outstanding).
B. OFFERING FOR THE TDS GROUP
The following example assumes all such Cellular Group Shares issued pursuant
to the offering are identified as issued for the account of the TDS Group with
respect to the Retained Interest, with the net proceeds credited to the TDS
Group:
<TABLE>
<S> <C>
Shares previously issued and
outstanding............................. 80 million
Newly issued shares....................... 10 million
Total shares issued and outstanding after
offering................................ 90 million
</TABLE>
- - The Number of Shares Issuable with Respect to Retained Interest would
decrease by the number of Cellular Group Shares issued for the account of
the TDS Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to
Retained Interest prior to offering..... 20 million
Shares issued in offering................. (10) million
Number of Shares Issuable with Respect to
Retained Interest after offering........ 10 million
</TABLE>
F-5
<PAGE>
- - The Cellular Group Outstanding Interest Fraction would be 90%, calculated as
follows:
90 million
------------------------
90 million + 10 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 10% in the Cellular Group.
- - The Company would have 50 million authorized and unissued Cellular Group
Shares (140 million minus 90 million issued and outstanding).
OFFERINGS OF CONVERTIBLE SECURITIES FOLLOWING THE DISTRIBUTION
If the Company were to issue any debt or preferred stock which was
convertible into shares of Tracking Stock, the Retained Interest Fraction and
the Outstanding Interest Fraction would be unchanged at the time of such
issuance. If any shares of Tracking Stock were issued upon the conversion of
such Convertible Security, however, then the Retained Interest Fraction and the
Outstanding Interest Fraction would be affected in a manner similar to that
shown above under "Offering for the Tracking Group", if such Convertible
Security were attributed to the Tracking Group, or under "Offering for the TDS
Group," if such Convertible Security were attributed to the TDS Group. The
conversion, exercise or exchange of Pre-Distribution Convertible Securities will
be attributed to the TDS Group.
TRACKING GROUP COMMON STOCK DIVIDENDS
The following illustrations reflect stock dividends of a Tracking Stock on
the outstanding Tracking Stock of the same Tracking Group, and on the
outstanding TDS Group Shares, respectively, on a date on which the Number of
Shares Issuable with Respect to Retained Interest is 20 million shares.
A. TRACKING STOCK DIVIDEND ON TRACKING GROUP SHARES
The following example assumes that the Company declares a stock dividend of
one-fourth of one Cellular Group Share on each outstanding Cellular Group Share.
<TABLE>
<S> <C>
Shares previously issued and
outstanding............................. 80 million
Newly issued shares....................... 20 million
Total shares issued and outstanding after
dividend................................ 100 million
</TABLE>
- - The Number of Shares Issuable with Respect to Retained Interest would be
increased proportionately to reflect the stock dividend payable in Cellular
Group Shares to holders of Cellular Group Shares.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to
Retained Interest prior to dividend..... 20 million
Adjustment to reflect dividend of shares
on outstanding Cellular Group Shares.... 5 million
Number of Shares Issuable with Respect to
Retained Interest after dividend........ 25 million
</TABLE>
- - The Outstanding Cellular Group Interest Fraction would be 80%, calculated as
follows:
100 million
------------------------
100 million + 25 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 20% in the Cellular Group. The Cellular Group Outstanding Interest
Fraction and the Retained Interest Fraction would be unchanged from the
corresponding percentages prior to the dividend.
- - The Company would have 40 million authorized and unissued Cellular Group
Shares remaining (140 million minus 100 million issued and outstanding).
F-6
<PAGE>
B. TRACKING STOCK DIVIDEND ON TDS GROUP SHARES
The following example assumes that an aggregate of 60 million TDS Group
Shares are outstanding and the Company declares a stock dividend of one-tenth of
one Cellular Group Share on each outstanding TDS Group Share.
<TABLE>
<S> <C>
Cellular Group Shares previously issued
and outstanding......................... 80 million
Newly issued Cellular Group Shares........ 6 million
Total Cellular Group Shares issued and
outstanding after dividend.............. 86 million
</TABLE>
- - Any dividend of Cellular Group Shares on the outstanding TDS Group Shares
will be treated as a dividend payable from the Number of Shares Issuable
with Respect to Retained Interest in the Cellular Group. As a result, the
Number of Shares Issuable with Respect to Retained Interest would decrease
by an amount equal to the number of Cellular Group Shares distributed on the
outstanding TDS Group Shares pursuant to the stock dividend.
<TABLE>
<S> <C>
Number of Cellular Group Shares Issuable
with Respect to Retained Interest prior
to dividend............................. 20 million
Cellular Group Shares distributed on
outstanding TDS Group Shares............ (6) million
Number of Cellular Group Shares Issuable
with Respect to Retained Interest after
dividend................................ 14 million
</TABLE>
- - The Company will not distribute to holders of TDS Group Shares as a dividend
a number of Cellular Group Shares exceeding the Number of Shares Issuable
with Respect to Retained Interest by the TDS Group in the Cellular Group.
- - The Cellular Group Outstanding Interest Fraction would be 86%, calculated as
follows:
86 million
------------------------
86 million + 14 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 14% in the Cellular Group.
- - The Company would have 54 million authorized and unissued Cellular Group
Shares remaining (140 million minus 86 million issued and outstanding).
CERTAIN CONVERSION, REDEMPTION AND SPECIAL DIVIDEND PROVISIONS
The following illustrations reflect (a) conversion of the Cellular Group
Shares at the option of the Company, (b) mandatory dividend, redemption or
conversion of the Cellular Group Shares following the Disposition of all or
substantially all of the properties and assets of the Cellular Group and (c)
redemption of all the Cellular Group Shares in exchange for stock of a
subsidiary holding all the assets and liabilities of the Cellular Group, in each
case assuming that (i) the number of outstanding Cellular Group Shares is 80
million shares, (ii) the Number of Shares Issuable with Respect to Retained
Interest is 20 million shares and (iii) the pre-Distribution Number of Shares
Issuable to Third Parties is 5 million.
CONVERSION AT THE OPTION OF THE COMPANY
The following example assumes that the Company elects to convert the
Cellular Group Shares into TDS Group Special Common Shares at the Optional
Conversion Percentage and the post-Distribution Number of Shares Issuable to
Third Parties (with respect to the Cellular Group) is 5 million.
- - The Adjusted Outstanding Cellular Group Shares would be 110 million
(representing the sum of (i) the number of outstanding Cellular Group
Shares, (ii) the Number of Shares Issuable with Respect to Retained
Interest, (iii) the pre-Distribution Number of Shares Issuable to Third
Parties (with respect to the Cellular Group) and
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<PAGE>
(iv) the post-Distribution Number of Shares Issuable to Third Parties (with
respect to the Cellular Group)), calculated as follows:
80 million + 20 million + 5 million + 5 million
- - If the Company elected to convert the Cellular Group Shares into Special
Common Shares, assuming that the Market Value of one Cellular Group Share on
each Trading Day during the twenty-Trading Day period ending on the 5th
Trading Day prior to the date of notice of such conversion is $50 and the
Market Value of one Special Common Share (or Common Share, if there is no
public market value for the Special Common Shares) on each Trading Day
during such period is $20, the Cellular Group Shares would be converted into
Special Common Shares at a ratio of 2.875 Special Common Shares for each
Cellular Group Share (representing 115% of the average daily ratio during
such period of the Market Value of one Cellular Group Share to the Market
Value of one Special Common Share). The Optional Conversion Percentage is
fixed at 115% for the first five years after the initial issuance date of
the applicable Tracking Stock, and then declines 1% per year until it is
110% on the ninth anniversary of the initial issuance date and for all
periods thereafter.
DISPOSITION OF ASSETS OF TRACKING GROUP
The following example assumes that a Disposition of all (not merely
substantially all) of the properties and assets of the Cellular Group occurs and
the Fair Value of the Net Proceeds from such Disposition equal $5 billion.
- - If the Company elected to redeem all outstanding Cellular Group Shares, the
aggregate redemption price would be $3.64 billion (representing the product
of the Adjusted Outstanding Interest Fraction for the Cellular Group and the
Fair Value of the Net Proceeds of such Disposition), calculated as follows:
80 million
__________________________________________ X $5 billion
80 million + 20 million + 5 million + 5 million
In this case each outstanding Cellular Group Share would be redeemed in
exchange for $45.50 per share (representing the quotient of the aggregate
redemption price ($3.64 billion) and the number of outstanding Cellular Group
Shares (80 million)). If any Shares Issuable to Third Parties remain outstanding
at the time of any redemption of all outstanding Cellular Group Shares following
the disposition of all (not merely substantially all) of the properties and
assets of the Cellular Group, the proportionate interest in the Fair Value of
the Net Proceeds of the Disposition to be distributed to the holders of Cellular
Group Shares will be determined on the basis of the Adjusted Outstanding
Interest Fraction, which will result in the allocation to the TDS Group of a
portion of such Fair Value of the Net Proceeds, in addition to the portion
attributable to any Retained Interest in the Cellular Group, sufficient to
provide for the delivery of the portion of the consideration (if any)
deliverable by the Company with respect to the Shares Issuable to Third Parties.
- - If the Company elected to convert the Cellular Group Shares into Special
Common Shares, assuming that the Market Value of one Cellular Group Share on
each Trading Day during the forty-Trading Day period beginning on the 11th
Trading Day following the consummation of such Disposition is $50 and the
Market Value of one Special Common Share (or Common Share, if there is no
public market value for the Special Common Shares) on each Trading Day
during such period is $20, the Cellular Group Shares would be converted into
Special Common Shares at a ratio of 2.75 Special Common Shares for each
Cellular Group Share (representing 110% of the average daily ratio during
such period of the Market Value of one Cellular Group Share to the Market
Value of one Special Common Share).
The following example assumes that a Disposition of substantially all (but
not all) of the properties and assets of the Cellular Group occurs and the Fair
Value of the Net Proceeds from the Disposition equal $4 billion.
- - If the Company elected to pay a dividend to the holders of Cellular Group
Shares, the aggregate amount of the dividend would be $3.2 billion
(representing the product of the Outstanding Interest Fraction and the Fair
Value of the Net Proceeds of the Disposition), calculated as follows:
80 million
____________________ X $4 billion
80 million + 20 million
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In this case, the TDS Group would be credited, and the Cellular Group would
be charged, with $800 million, an amount equal to 25% (representing the ratio of
the Retained Interest Fraction (20%) and the Outstanding Interest Fraction
(80%)) of the aggregate amount of such dividend.
- - If the Company elected to redeem Cellular Group Shares, the aggregate
redemption price would be $3.2 billion (representing the product of the
Outstanding Interest Fraction and the Fair Value of the Net Proceeds of such
Disposition), calculated as follows:
80 million
____________________ X $4 billion
80 million + 20 million
In this case, assuming that the average Market Value of one of Cellular
Group Share for the forty-Trading Day period beginning on the 11th Trading Day
following the consummation of such Disposition is $50, an aggregate of 64
million (equal to the quotient of the aggregate redemption price and such
average Market Value) outstanding Cellular Group Shares would be redeemed in
exchange for $50 per share.
- - If the Company elected to convert Cellular Group Shares into Special Common
Shares, assuming that the Market Value of one Cellular Group Share on each
Trading Day during the forty-Trading Day period beginning on the 11th
Trading Day following the consummation of such Disposition was $50 and the
Market Value of one Special Common Share (or Common Share, if there is no
public market value for the Special Common Shares) on each Trading Day
during such period was $20, the Cellular Group Shares would be converted
into Special Common Shares at a ratio of 2.75 (representing 110% of the
average daily ratio during such period of the Market Value of one Cellular
Group Share to the Market Value of one share of Special Common Share)
Special Common Shares for each Cellular Group Share.
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY
The following example assumes that the Company elects to redeem all of the
outstanding Cellular Group Shares in exchange for shares of common stock of U.S.
Cellular and that U.S. Cellular is a wholly-owned subsidiary of the Company.
Prior to the redemption, the Company would recapitalize U.S. Cellular so that
its capital structure included shares which were substantially similar to the
Series A Common Shares, Common Shares and Special Common Shares and increase the
number of authorized shares to permit the redemption to take place. For this
purpose, assume that the total number of outstanding shares of common stock of
U.S. Cellular is 110 million after such recapitalization, consisting of an
appropriate number of shares which correspond to the same number of shares of
Series A Common Shares, Common Shares and Special Common Shares which are then
issued and outstanding.
- - In this case, Cellular Group Shares would be redeemed in exchange for an
aggregate number of shares of common stock of U.S. Cellular corresponding to
Special Common Shares equal to 80 million (representing the product of the
Adjusted Outstanding Interest Fraction and the number of shares of common
stock of U.S. Cellular), calculated as follows:
80 million
__________________________________________ X 110 million U.S.
Cellular Common Shares
80 million + 20 million + 5 million + 5 million
In this case each outstanding Cellular Group Share would be redeemed in
exchange for one share of common stock of U.S. Cellular corresponding to Special
Common Shares, and the Company would retain 30 million shares of common stock of
U.S. Cellular corresponding to Series A Common Shares, Common Shares and Special
Common Shares. Of such shares, 10 million would correspond to Special Common
Shares and would be held by the TDS Group to be used in connection with Shares
Issuable to Third Parties. The remaining shares would be held by the TDS Group
for the benefit of the holders of TDS Group Shares or, alternatively, the Board
could elect to distribute such shares of U.S. Cellular to the holders of TDS
Group Shares. In such event, holders of Series A Common Shares would receive
U.S. Cellular shares corresponding to Series A Common Shares, holders of Common
Shares would receive U.S. Cellular shares corresponding to Common Shares and
holders of Special Common Shares, if any, would receive U.S. Cellular shares
corresponding to Special Common Shares.
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EXHIBIT G
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ---------------------------------------------------------------------------------------------------------------------- -----------
<S> <C>
Adjusted Outstanding Interest Fraction
Adjustment Date
Aerial
Aerial Group
Aerial Group Shares
Aerial Merger
Affected Tracking Group
Affected Tracking Stock
AMEX
Articles
Available Dividend Amount
Board
C.S. First Boston
Calculation Period
Cellular Business
Cellular Group
Cellular Group Shares
Committed Acquisition Shares
Committee
Common Share DRIP
Common Share Group
Common Shares
Common Stock
Communications Act
Company
Company Earning (Loss)
Converted Tracking Group
Converted Tracking Stock
Convertible Securities
Corporation
Delaware Common Shares
Delaware Preferred Shares
Delaware Series A Common Shares
Delaware Shares
Derivative Action
DGCL
Disposition
Disposition Conversion Percentage
Distribution
Distribution Ratio
Effective Time
Equity Market Access
Exchange Act
Existing Plans
Fair Market Value
Fair Value
Fair Value of Net Proceeds
FCC
Financial Advisors
Group
IBCA
Initial Shares
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---------------------------------------------------------------------------------------------------------------------- -----------
<S> <C>
Inter-Group Interest
Inter-Group Interest Fraction
Inter-Group Interest in Issuer Group
Investor Group
Iowa Common Shares
Iowa Preferred Shares
Iowa Series A Common Shares
Iowa Shares
ISO
Issuer Group
Issuer Group Inter-Group Interest Fraction
Issuer Group Outstanding Interest Fraction
Issuer Group Shares
Liquidation Unit
Market Capitalization
Market Value
Merger
Merger Agreement
Non-U.S. Shareholder
Number of Shares Issuable with Respect to Inter-Group Interest
Number of Shares Issuable with Respect to Retained Interest
Number of Shares Issuable to Third Parties
One-Vote Holders
Optional Conversion Percentage
Outstanding Interest
Outstanding Interest Fraction
PCS
PCS Business
Plan
Plan Stock
Pre-Distribution Convertible Securities
Preferred Shares
Proposed Common Equity
Proxy Statement/Prospectus
Public Holders
Qualifying Subsidiary
Recapitalization
Record Shareholder
Redemptions Date
Registration Statement
Related Business Transaction
Required Price
Reserved Property
Restated Certificate
Retained Interest
Retained Interest Available Dividend Amount
Retained Interest Fraction
Salomon Smith Barney
SAR
SEC
Securities Act
Series A Common Shares
Series A DRIP
Series A Holders
Service
Shares Issuable to Third Parties
</TABLE>
G-2
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---------------------------------------------------------------------------------------------------------------------- -----------
<S> <C>
Special Common Shares
Special Meeting
Subsidiary
Successor
TDS
TDS Delaware
TDS Group
TDS Group Dividend Rate
TDS Group Shares
TDS Iowa
TDS Telecom
TDS Voting Trust
Telecom Business
Telecom DRIP
Telecom Equivalent Dividend Rate
Telecom Group Shares
Telecom Public Offering
Telecom Group
Tracking Group
Tracking Stock
Tracking Stock Proposal
Trading Day
Transactions
Undesignated Shares
U. S. Cellular
U. S. Cellular Merger
Voting Percentage
</TABLE>
G-3
<PAGE>
ANNEX I
DESCRIPTION OF BUSINESS OF TELEPHONE AND DATA SYSTEMS, INC.
Telephone and Data Systems, Inc. (the "Company" or "TDS"), is a diversified
telecommunications service company with established cellular telephone, local
telephone and radio paging operations and developing personal communications
services ("PCS") operations. At September 30, 1997, the Company served
approximately 2.7 million customer units in 37 states, including 1,357,000
cellular telephones, 506,600 telephone access lines, 65,000 PCS telephones and
792,800 pagers. For the nine months ended September 30, 1997, cellular
operations provided 59% of the Company's consolidated revenues; telephone
operations provided 32%; PCS operations provided 2%; and paging operations
provided 7%. The Company's long-term business development strategy is to expand
its existing operations through internal growth and acquisitions and to explore
and develop other telecommunications businesses that management believes will
utilize the Company's expertise in customer-based telecommunications.
The Company conducts substantially all of its cellular operations through
its 80.9%-owned subsidiary, United States Cellular Corporation [AMEX: USM]. U.S.
Cellular provides cellular telephone service to 1,357,000 customers through 132
majority-owned and managed ("consolidated") cellular systems serving
approximately 16% of the geography and approximately 9% of the population of the
48 contiguous United States. Since 1985, when the Company began providing
cellular service in Knoxville, Tennessee, the Company has expanded its cellular
networks and customer service operations to cover 141 managed markets in 26
states as of September 30, 1997. In total, the Company now operates nine market
clusters, of which five have a total population of more than two million, and
each of which has a total population of more than one million, plus one other
unclustered market. Overall, 82% of the Company's 25.1 million population
equivalents are in markets which are consolidated, 1% are in managed but not
consolidated markets and 17% are in markets in which the Company holds an
investment interest.
The Company conducts substantially all of its telephone operations through
its wholly owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom").
TDS Telecom currently operates 105 telephone companies serving 506,600 access
lines in 28 states. TDS Telecom is expanding by offering additional lines of
telecommunications products and services to existing customers and through the
selective acquisition of local exchange telephone companies serving rural and
suburban areas. TDS Telecom has acquired 22 telephone companies and divested one
telephone company since the beginning of 1992. These net acquisitions added
90,400 access lines during this five-year period, while internal growth added
112,200 lines.
The Company conducts substantially all of its broadband personal
communications services ("PCS") operations through its 82.6%-owned subsidiary,
Aerial Communications, Inc. [NASDAQ: AERL]. Aerial provides PCS service in the
Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and
Columbus Major Trading Areas ("MTAs") (collectively, the "PCS Markets"). The PCS
Markets include approximately 27.6 million population equivalents. Aerial has
commenced service in all its markets and provided service to nearly 65,000 PCS
telephones as of September 30,1997.
The Company conducts substantially all of its radio paging operations
through its 82.0%-owned subsidiary, American Paging, Inc. [AMEX: APP]. American
Paging offers radio paging and related services through its subsidiaries. Since
the beginning of 1992, the number of pagers in service increased from 236,800 to
792,800 at September 30, 1997, primarily from internal growth. APP provides
service in 21 states and the District of Columbia through 35 sales and service
offices. American Paging's service areas cover a total population of
approximately 76 million.
The Company was incorporated in Iowa in 1968. The Company's executive
offices are located at 30 North LaSalle Street, Chicago, Illinois 60602. Its
telephone number is 312-630-1900.
Unless the context indicates otherwise: (I) references to "TDS" or the
"Company" refer to Telephone and Data Systems, Inc., and its subsidiaries; (ii)
references to "USM" or "U.S. Cellular" refer to United States Cellular
Corporation and its subsidiaries; (iii) references to "TDS Telecom" refer to TDS
Telecommunications Corporation and its subsidiaries; (iv) references to "AERL"
or "Aerial" refer to Aerial Communications, Inc. and its subsidiaries;(v)
references to "APP" or "American Paging" refer to American Paging, Inc. and its
subsidiaries; (vi) references to "MSA" or to a particular city refer to the
Metropolitan Statistical Area, as designated by the U.S. Office of Management
and Budget and used by the Federal Communications Commission ("FCC") in
designating metropolitan cellular market areas; (vii) references to "RSA" refer
to the Rural Service Area, as used by the FCC in
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<PAGE>
designating non-MSA cellular market areas; (viii) references to cellular
"markets" or "systems" refer to MSAs, RSAs or both; (ix) references to "MTA"
refer to Major Trading Areas, as used by the FCC in designating Personal
Communications Services ("PCS") markets; (x) references to "population
equivalents" mean the population of a market, based on 1996 Donnelley Marketing
Service Estimates, multiplied by the percentage interests that the Company owns
or has the right to acquire in an entity licensed, designated to receive a
license or expected to receive a construction permit ("licensee") by the FCC to
construct or operate a cellular or a PCS system in such market.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
This business description, contains "forward- looking" statements, as
defined in the Private Securities Litigation Reform Act of 1995, that are based
on current expectations, estimates and projections. Statements that are not
historical facts, including statements about the Company's beliefs and
expectations are forward-looking statements. These statements contain potential
risks and uncertainties and therefore, actual results may differ materially. TDS
undertakes no obligation to update publicly any forward-looking statements
whether as a result of new information, future events or otherwise.
Important factors that may affect these projections or expectations include,
but are not limited to: changes in the overall economy; changes in competition
in markets in which TDS operates; advances in telecommunications technology;
changes in the telecommunications regulatory environment; pending and future
litigation; availability of future financing; start-up of PCS operations; and
unanticipated changes in growth in cellular and PCS customers, penetration
rates, churn rates and the mix of products and services offered in the Company's
markets. Readers should evaluate any statements in light of these important
factors.
CELLULAR TELEPHONE OPERATIONS
The Company's cellular operations are conducted through U.S. Cellular and
subsidiaries. U.S. Cellular serves 1,357,000 customers through 132
majority-owned and managed cellular systems at September 30, 1997. Overall, U.S.
Cellular owned 25.1 million population equivalents in 202 markets.
THE CELLULAR TELEPHONE INDUSTRY
Cellular telephone technology provides high-quality, high-capacity
communications services to in-vehicle and hand-held portable cellular
telephones. Cellular technology is a major improvement over earlier mobile
telephone technologies. Cellular telephone systems are designed for maximum
mobility of the customer. Access is provided through system interconnections to
local, regional, national and world-wide telecommunications networks. Cellular
telephone systems also offer a full range of ancillary services such as
conference calling, call-waiting, call-forwarding, voice mail, facsimile and
data transmission.
Cellular telephone systems divide each service area into smaller geographic
areas or "cells." Each cell is served by radio transmitters and receivers
operating on discrete radio frequencies licensed by the FCC. All of the cells in
a system are connected to a computer-controlled Mobile Telephone Switching
Office ("MTSO"). The MTSO is connected to the conventional ("landline")
telephone network and potentially other MTSOs. Each conversation on a cellular
phone involves a transmission over a specific set of radio frequencies from the
cellular phone to a transmitter/receiver at a cell site. The transmission is
forwarded from the cell site to the MTSO and from there may be forwarded to the
landline telephone network to complete the call. As the cellular telephone moves
from one cell to another, the MTSO determines radio signal strength and
transfers ("hands off") the call from one cell to the next. This hand-off is not
noticeable to either party on the phone call.
The FCC currently grants only two licenses to provide cellular telephone
service in each market. However, competition for customers includes competing
communications technologies such as conventional landline and mobile telephone,
Specialized Mobile Radio ("SMR") systems and radio paging. PCS has become
available in certain areas of the United States, including U.S. Cellular's
markets, and U.S. Cellular expects PCS competitors to initiate service in all of
its markets in the next one or two years. Additionally, emerging technologies
such as Enhanced Specialized Mobile Radio ("ESMR") and mobile satellite
communication systems may prove to be competitive with cellular service in the
future in some or all U.S. Cellular markets.
The services available to cellular customers and the sources of revenue
available to cellular system operators are similar to those provided by
conventional landline telephone companies. Customers are charged a separate fee
for system access, airtime, long-distance calls, and ancillary services.
Cellular system operators often provide service to customers of other operators'
cellular systems while the customers are temporarily located within the
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<PAGE>
operators' service areas. Customers using service away from their home system
are called "roamers." Roaming is available because technical standards require
that analog cellular telephones be compatible in all market areas in the United
States. The system that provides the service to these roamers will generate
usage revenue. Many operators, including U.S. Cellular, charge premium rates for
this roaming service.
There are a number of recent technical developments in the cellular
industry. Currently, while most of the MTSOs process information digitally, most
of the radio transmission is done on an analog basis. During 1992, a new
transmission technique was approved for implementation by the cellular industry.
Time Division Multiple Access ("TDMA") technology was selected as one industry
standard by the cellular industry and has been deployed in several markets,
including U.S. Cellular's operations in Tulsa, Oklahoma and in its
Florida/Georgia and New England market clusters. Another digital technology,
Code Division Multiple Access ("CDMA"), is being deployed by U.S. Cellular in
its Knoxville, Tennessee market. U.S. Cellular also expects to deploy some TDMA
and CDMA digital radio channels in other markets in the near future. Digital
radio technology offers several advantages, including greater privacy, less
transmission noise, greater system capacity and potentially lower incremental
costs for additional customers. The conversion from analog to digital radio
technology has begun on an industry-wide basis; however this process is expected
to take a number of years.
The cellular telephone industry is characterized by high initial fixed
costs. Accordingly, if and when revenues less variable costs exceed fixed costs,
incremental revenues should yield an operating profit. The amount of profit, if
any, under such circumstances is dependent on, among other things, prices and
variable marketing costs which in turn are affected by the amount and extent of
competition. Until technological limitations on total capacity are approached,
additional cellular system capacity can normally be added in increments that
closely match demand and at less than the proportionate cost of the initial
capacity.
CELLULAR OPERATIONS
A significant portion of the aggregate market value of TDS's Common Shares
is represented by the market value of TDS's interest in U.S. Cellular. From its
inception in 1983 until 1993, U.S. Cellular had principally been in a start-up
phase. Until that time, U.S. Cellular's activities had been concentrated
significantly on the acquisition of interests in cellular licensees and on the
construction and initial operation of cellular systems. The development of a
cellular system is capital-intensive and requires substantial investment prior
to and subsequent to initial operation. U.S. Cellular experienced operating
losses and net losses from its inception until 1993. Since 1994, U.S. Cellular
has generated operations-driven net income and has significantly increased its
operating cash flows during that time. Management anticipates increasing growth
in cellular units in service and revenues as U.S. Cellular continues to expand
through internal growth. Marketing and system operations expenses associated
with this expansion may reduce the rate of growth in operating cash flow and
operating income during the period of increased growth. In addition, U.S.
Cellular anticipates that the seasonality of revenue streams and operating
expenses may cause U.S. Cellular's operating income to vary from quarter to
quarter.
While U.S. Cellular produced operating income and net income during 1994,
1995, 1996 and through the first nine months of 1997, changes in any of several
factors may reduce U.S. Cellular's growth in operating income and net income
over the next few years. These factors include: (I) the growth rate in U.S.
Cellular's customer base; (ii) the usage and pricing of cellular services; (iii)
the churn rate; (iv) the cost of providing cellular services, including the cost
of attracting new customers; (v) the introduction of competition from PCS and
other emerging technologies; and (vi) continuing technological advances which
may provide competitive alternatives to cellular service.
U.S. Cellular is building a substantial presence in selected geographic
areas throughout the United States where it can efficiently integrate and manage
cellular telephone systems. Its cellular interests include regional market
clusters in the following areas: Iowa/Missouri, Wisconsin/Illinois/Indiana,
Eastern North Carolina/South Carolina, Virginia, West
Virginia/Maryland/Pennsylvania/Ohio, Oregon/California, Washington/Oregon/Idaho,
Maine/New Hampshire/Vermont, Eastern Tennessee/Western North Carolina,
Oklahoma/Missouri/Kansas, Texas/ Oklahoma, Florida/Georgia and Southwestern
Texas. See "U.S. Cellular's Cellular Interests." U.S. Cellular has acquired its
cellular interests through the wireline application process (17%), including
settlements and exchanges with other applicants, and through acquisitions (83%),
including acquisitions from TDS and third parties.
CELLULAR SYSTEMS DEVELOPMENT
ACQUISITIONS. During the last five years, U.S. Cellular has expanded its
size, particularly in contiguous or adjacent markets, through acquisitions which
have been aimed at strengthening U.S. Cellular's position in the
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cellular industry. This growth has resulted primarily from acquisitions of
interests in mid-sized and rural markets and has been based on obtaining
interests with rights to manage the underlying market.
U.S. Cellular has increased its population equivalents by 16% from
approximately 22.3 million at December 31, 1992, to approximately 25.9 million
at September 30, 1997. Markets managed by U.S. Cellular have increased from 116
markets at December 31, 1992, to 141 markets at September 30, 1997. As of
September 30, 1997, 89% of the Company's population equivalents represented
interests in markets U.S. Cellular manages compared to 84% at December 31, 1992.
Recently, the pace of acquisitions has slowed as industry-wide consolidation
has reduced the number of markets available for acquisition. U.S. Cellular's
population equivalents grew at a compound annual rate of only 3% over the last
five years due to the increased number of exchange and divestiture transactions
in the past few years.
U.S. Cellular may continue to make opportunistic acquisitions or exchanges
in markets that further strengthen its market clusters and in other attractive
markets. U.S. Cellular also seeks to acquire minority interests in markets where
it already owns the majority interest. There can be no assurance that U.S.
Cellular, or TDS for the benefit of U.S. Cellular, will be able to negotiate
additional acquisitions or exchanges on terms acceptable to it or that
regulatory approvals, where required, will be received. U.S. Cellular plans to
retain minority interests in certain cellular markets which it believes will
earn a favorable return on investment. Other minority interests may be exchanged
for interests in markets which enhance U.S. Cellular's market clusters or may be
sold for cash or other consideration. U.S. Cellular also continues to evaluate
the disposition of certain managed interests which are not essential to its
corporate development strategy.
U.S. Cellular, or TDS for the benefit of U.S. Cellular, has historically
negotiated acquisitions of cellular interests from third parties primarily in
consideration for U.S. Cellular's or TDS's equity securities. Cellular interests
acquired by TDS in these transactions have been assigned to U.S. Cellular. At
that time, U.S. Cellular reimbursed TDS for the value of TDS securities issued
in such transactions, generally by issuing Common Shares to TDS or by increasing
the balance due TDS under U.S. Cellular's Revolving Credit Agreement in amounts
equal to the value of TDS securities delivered at the time the acquisitions were
completed. The fair market value of the U.S. Cellular securities issued to TDS
in connection with these transactions was equal to the fair market value of the
TDS securities delivered in the transactions and was determined at the time the
transactions were completed.
In the past four years, U.S. Cellular has also negotiated substantial
divestitures and exchanges of cellular interests with third parties. The
consideration received from these divestitures of non-strategic markets has
primarily been cash, which has been used to reduce debt or for general corporate
purposes. The exchanges have included the divestiture of controlling interests
in non-strategic markets in exchange for controlling interests in markets which
further enhance U.S. Cellular's clusters.
COMPLETED ACQUISITIONS. During the first nine months of 1997, U.S. Cellular
completed the acquisition of a controlling interest in one market and several
additional minority interests representing approximately 327,000 population
equivalents for an aggregate consideration of $48.7 million in cash.
COMPLETED DIVESTITURES AND EXCHANGES. During the first nine months of 1997,
U.S. Cellular sold a controlling interest in one market partition and minority
interests in two other markets, representing approximately 183,000 population
equivalents, for an aggregate consideration of $34.5 million in cash.
PENDING ACQUISITIONS, DIVESTITURES, AND EXCHANGES. At September 30, 1997,
U.S. Cellular had entered into an agreement to acquire a majority interest in
one market, representing approximately 202,000 population equivalents, for
consideration totaling $32.5 million. The consideration paid to the sellers will
be approximately 759,000 TDS Common Shares. U.S. Cellular will reimburse TDS for
the value of these shares by issuing approximately 996,000 U.S. Cellular Common
Shares to TDS when the transaction is completed. U.S. Cellular also has an
agreement pending to divest a majority interest in the wireline licensee in one
market, representing 174,000 population equivalents, for $20.0 million in cash.
These acquisition and divestiture transactions are both expected to be completed
by year-end.
In October 1997, U.S. Cellular completed the exchange with BellSouth
Corporation it had announced earlier in 1997. Pursuant to the exchange, U.S.
Cellular received majority interest in 12 markets adjacent to its Iowa and
Wisconsin/Illinois clusters. In exchange, U.S. Cellular divested its majority
interest in 10 markets and minority interest in nine markets and paid a net
amount of $87 million in cash ($103 million paid in October less $16 million
received in September). Certain aspects of this transaction are taxable; the
amount of these taxes will be determined by year-end and will be paid in the
first quarter of 1998. No book gain or loss will be recorded on the
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transaction, which is being treated as a like-kind exchange. U.S. Cellular
received majority interests representing approximately 4.0 million pops in the
transaction and divested majority interests representing 2.0 million pops and
minority interests representing approximately 1.1 million pops.
U.S. Cellular expects that this transaction will have a net positive effect
on its operating cash flow after the transition of operations is complete, which
is expected to occur in the next 12 to 18 months. As it includes the divestiture
of investment interests in exchange for majority interests, the transaction may
also significantly reduce investment income in the future.
Additionally, in November 1997 U.S. Cellular and TDS entered into agreements
with AirTouch Communications, Inc. ("AirTouch") to divest certain minority
interests in 11 markets, nine of which are owned by U.S. Cellular and two of
which are owned by TDS. U.S. Cellular will receive approximately 4,000,000
shares of AirTouch common stock and approximately $50 million in cash. The nine
interests U.S. Cellular will divest represent approximately 750,000 pops. The
two interests owned by TDS which are being divested were to have been sold to
U.S. Cellular pursuant to an agreement entered into in 1996; these interests
will instead be sold directly to AirTouch by TDS. TDS will reimburse U.S.
Cellular so that U.S. Cellular will receive an equivalent amount of
consideration and record an equivalent book and tax gain as though it had made
the sale and not TDS. All of the previously mentioned divestiture transactions
with AirTouch are expected to be completed by early 1998. U.S. Cellular
anticipates that these divestitures, in the aggregate, will result in a
substantial book gain. The completion of all of the divestiture transactions
with AirTouch may significantly reduce investment income and cash distributions
from investment entities in the future.
TDS and U.S. Cellular maintain shelf registration of their respective Common
Shares and Preferred Shares under the Securities Act of 1933 for issuance
specifically in connection with acquisitions.
The Company has had voting control of U.S. Cellular since U.S. Cellular's
incorporation. TDS owned an aggregate of 69,747,348 shares of common stock of
U.S. Cellular at September 30, 1997, representing over 80% of the combined total
of U.S. Cellular's outstanding Common and Series A Common Shares and over 95% of
their combined voting power.
CELLULAR INTERESTS AND CLUSTERS
U.S. Cellular operates clusters of adjacent cellular systems in nearly all
of its markets, enabling its customers to benefit from larger service areas than
otherwise possible. Where U.S. Cellular offers wide-area coverage, its customers
enjoy uninterrupted service within the designated area. Customers may also make
outgoing calls and receive incoming calls within this area without special
roaming arrangements. In addition to benefits to customers, clustering also has
provided to U.S. Cellular certain economies in its capital and operating costs.
These economies are made possible through increased sharing of facilities,
personnel and other costs and have resulted in a reduction of U.S. Cellular's
per customer cost of service. The extent to which U.S. Cellular benefits from
these revenue enhancements and economies of operation is dependent on market
conditions, population size of each cluster and engineering considerations.
U.S. Cellular may continue to make opportunistic acquisitions and exchanges
which will complement its established market clusters. From time to time, U.S.
Cellular may also consider exchanging or selling its interests in markets which
are not essential to its long-term strategies.
U.S. Cellular owned interests in cellular telephone systems in 202 markets
at September 30, 1997, representing 25.1 million population equivalents.
Including all pending acquisition, exchange and divestitures transactions,
I-5
<PAGE>
U.S. Cellular owned or had the right to acquire interests in cellular telephone
systems in 192 markets at September 30, 1997, representing 25.9 million
population equivalents. The following table summarizes the growth in U.S.
Cellular's population equivalents in recent years and the development status of
these population equivalents.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- --------- --------- --------- --------- ---------
(THOUSANDS OF POPULATION EQUIVALENTS)(1)
<S> <C> <C> <C> <C> <C> <C>
Operational Markets:
Majority-Owned and Managed.............................. 20,461 20,276 19,958 18,556 18,807 14,749
Minority-Owned and Managed (2).......................... 401 401 513 1,206 1,179 2,069
Markets to be Managed, Net of Markets to be Divested (3)
To Be Majority-Owned.................................. 2,042 213 272 2,212 1,026 1,859
To Be Minority-Owned (2).............................. -- -- -- -- 8 5
------- --------- --------- --------- --------- ---------
Total Markets Managed and to be Managed............... 22,904 20,890 20,743 21,974 21,020 18,682
Minority Interest in Markets Managed by
Others................................................ 2,953 4,501 3,990 3,745 3,547 3,642
------- --------- --------- --------- --------- ---------
Total................................................. 25,857 25,391 24,733 25,719 24,567 22,324
------- --------- --------- --------- --------- ---------
------- --------- --------- --------- --------- ---------
</TABLE>
- ---------
(1) Based on 1996 Donnelley Marketing Services estimates for all years.
(2) Includes markets where U.S. Cellular has the right to acquire an interest
but does not currently own an interest.
(3) Includes markets which are operational but which are currently managed by
third parties.
The following section details U.S. Cellular's cellular interests, including
those it owned or had the right to acquire as of September 30, 1997. The table
presented therein lists clusters of markets that U.S. Cellular manages or
anticipates managing. U.S. Cellular's market clusters show the areas in which
U.S. Cellular is currently focusing its development efforts. These clusters have
been devised with a long-term goal of allowing delivery of cellular service to
areas of economic interest and along corridors of economic activity. The number
of population equivalents represented by U.S. Cellular's cellular interests may
have no direct relationship to the number of potential cellular customers or the
revenues that may be realized from the operation of the related cellular
systems.
I-6
<PAGE>
U.S. CELLULAR'S CELLULAR INTERESTS
The table below sets forth certain information with respect to the interests
in cellular markets which U.S. Cellular and TDS owned or had the right to
acquire pursuant to definitive agreements as of September 30, 1997.
<TABLE>
<CAPTION>
TOTAL CURRENT
AND
ACQUIRABLE
1996 POPULATION
CLUSTER/MAJOR SERVICE AREA POPULATION EQUIVALENTS
- ------------------------------------------------------------------------------------------------ ------------- -------------
<S> <C> <C>
MIDWEST REGIONAL MARKET CLUSTER:
Iowa/Missouri................................................................................. 3,418,000 3,201,000
Wisconsin/Illinois/Indiana.................................................................... 6,067,000 5,738,000
------------- -------------
Total Midwest Regional Market Cluster....................................................... 9,485,000 8,939,000
------------- -------------
MID-ATLANTIC REGIONAL MARKET CLUSTER:
Eastern North Carolina/South Carolina......................................................... 2,349,000 2,319,000
Virginia...................................................................................... 1,151,000 1,143,000
West Virginia/Maryland/Pennsylvania/Ohio...................................................... 1,387,000 1,260,000
------------- -------------
Total Mid-Atlantic Regional Market Cluster.................................................. 4,887,000 4,722,000
------------- -------------
NORTHWEST REGIONAL MARKET CLUSTER:
Oregon/California............................................................................. 1,029,000 957,000
Washington/Oregon/Idaho....................................................................... 1,471,000 1,256,000
------------- -------------
Total Northwest Regional Market Cluster..................................................... 2,500,000 2,213,000
------------- -------------
MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER:..................................................... 1,689,000 1,632,000
------------- -------------
FLORIDA/GEORGIA MARKET CLUSTER:................................................................. 1,520,000 1,373,000
------------- -------------
TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET CLUSTER:
Oklahoma/Missouri/Kansas...................................................................... 1,412,000 874,000
Texas/Oklahoma................................................................................ 694,000 498,000
------------- -------------
Total Texas/Oklahoma/Missouri/Kansas Regional Market Cluster:............................... 2,106,000 1,372,000
------------- -------------
EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET CLUSTER:........................................ 1,610,000 1,299,000
SOUTHWESTERN TEXAS MARKET CLUSTER:.............................................................. 1,224,000 1,213,000
------------- -------------
Other Operations:............................................................................... 141,000 141,000
------------- -------------
Total Managed Markets........................................................................... 25,162,000 22,904,000
Markets Managed by Others....................................................................... 2,953,000
-------------
Total Population Equivalents.................................................................... 25,857,000
-------------
-------------
</TABLE>
I-7
<PAGE>
Pursuant to the completion of the exchange transaction with BellSouth in
October 1997, U.S. Cellular acquired and divested interests in certain markets.
The effect on population and population equivalents owned is summarized below.
(The BellSouth transaction is included in the U.S. Cellular's Cellular Interests
table presented above.)
<TABLE>
<CAPTION>
TOTAL
POPULATION
EQUIVALENTS
TO BE
1996 ACQUIRED
POPULATION (DIVESTED)
----------- -------------
<S> <C> <C>
Markets acquired from BellSouth.................................................................. 4,050,000 3,971,000
Markets traded to BellSouth:
Markets Managed by U.S. Cellular (1)............................................................. 1,960,000 (1,957,000)
Markets Managed by Others........................................................................ (1,085,000)
-------------
Total Markets traded to BellSouth............................................................ (3,042,000)
Markets to be Divested (2)
Markets Managed by U.S. Cellular................................................................. 236,000 (174,000)
Markets Managed by Others........................................................................ (287,000)
-------------
Total Markets to be Divested................................................................. (461,000)
-------------
Net Population Equivalents to be Acquired Related to BellSouth Transaction................. 468,000
-------------
-------------
</TABLE>
- ------------
(1) In addition to these interests, TDS delivered directly to BellSouth
interests in two markets.
(2) As a result of the transaction with BellSouth, U.S. Cellular expects to
divest its interest in these markets.
SYSTEM DESIGN AND CONSTRUCTION. U.S. Cellular designs and constructs its
systems in a manner it believes will permit it to provide high-quality service
to mobile, transportable and portable cellular telephones, generally based on
market and engineering studies which relate to specific markets. Engineering
studies are performed by U.S. Cellular personnel or independent engineering
firms. U.S. Cellular's switching equipment is digital, which reduces noise and
crosstalk and is capable of interconnecting in a manner which reduces costs of
operation. While digital microwave interconnections are typically made between
the MTSO and cell sites, primarily analog radio transmission is used between
cell sites and the cellular telephones themselves.
In accordance with its strategy of building and strengthening market
clusters, U.S. Cellular has selected high capacity digital cellular switching
systems that are capable of serving multiple markets through a single MTSO. U.S.
Cellular's cellular systems are designed to facilitate the installation of
equipment which will permit microwave interconnection between the MTSO and the
cell site. U.S. Cellular has implemented such microwave interconnection in most
of the cellular systems it manages. In other systems in which U.S. Cellular owns
a majority interest and where it is believed to be cost-efficient, such
microwave technology will also be implemented. Otherwise, such systems will rely
upon landline telephone connections or microwave links owned by others to link
cell sites with the MTSO. Although the installation of microwave network
interconnection equipment requires a greater initial capital investment, a
microwave network enables a system operator to avoid the current and future
charges associated with leasing telephone lines from the landline telephone
company, while generally improving system reliability. In addition, microwave
facilities can be used to connect separate cellular systems to allow shared
switching, which reduces the aggregate cost of the equipment necessary to
operate both systems.
U.S. Cellular expanded its internal network in 1996 to encompass all of its
managed markets. This network provides automatic call delivery for U.S.
Cellular's customers and handoff between adjacent markets. The network has also
been extended through links with certain systems operated by several other
carriers, including GTE, US West, Ameritech, BellSouth, Centennial Cellular
Corp., Southwestern Bell, AT&T Wireless Communications, Vanguard Cellular
Systems and others. Additionally, U.S. Cellular has implemented certain Signal
Transfer Points which have allowed it to interconnect efficiently with network
providers such as Illuminet and the North American Cellular Network.
During 1997, U.S. Cellular has extended the network for its customers
through interconnection with additional system operators for call delivery and
hand-off. This expanded network increases the area in which customers can
automatically receive incoming calls, and should also reduce the incidence of
"tumbling" electronic serial number fraud due to the pre-call validation feature
of networked systems. In addition, the extension of these networks will allow
for the termination of wireless-to-wireless traffic without the inherent costs
that are otherwise incurred if this traffic is routed through the landline
network.
I-8
<PAGE>
U.S. Cellular believes that currently available technologies will allow
sufficient capacity on U.S. Cellular's networks to meet anticipated demand over
the next few years.
COSTS OF SYSTEM CONSTRUCTION AND FINANCING
Construction of cellular systems is capital-intensive, requiring substantial
investment for land and improvements, buildings, towers, MTSOs, cell site
equipment, microwave equipment, engineering and installation. U.S. Cellular,
consistent with FCC control requirements, uses primarily its own personnel to
engineer and oversee construction of each cellular system it owns and operates.
In so doing, U.S. Cellular expects to improve the overall quality of its systems
and to reduce the expense and time required to make them operational.
The costs (exclusive of license costs) of the systems in which U.S. Cellular
owns an interest have historically been financed through capital contributions
or intercompany loans from U.S. Cellular to the entities owning the systems, and
through certain vendor financing.
MARKETING
U.S. Cellular's marketing plan is centered around rapid penetration of its
market clusters, increasing customer awareness of cellular service and reducing
churn through both the building of brand awareness and the implementation of
marketing programs. The marketing plan stresses the value of U.S. Cellular's
service offerings and incorporates combinations of rate plans and cellular
telephone equipment which are designed to meet the needs of a variety of
customer segments and their usage patterns. U.S. Cellular's distribution
channels include direct sales personnel, agents and retail service centers in
the vast majority of its markets. In late 1996, U.S. Cellular implemented its
new site on the WorldWideWeb to support its marketing efforts and to be a future
distribution channel. Customers may now order U.S. Cellular service through this
web site. These U.S. Cellular-owned and managed locations are designed to market
cellular service to the consumer segment in a familiar setting.
U.S. Cellular manages each cluster of markets from an administrative office
with a local staff, which typically includes sales, customer service,
engineering and in some cases installation personnel. Direct sales consultants
market cellular service to business customers throughout each cluster. Retail
associates work out of the retail locations and market cellular service
primarily to the consumer and small business segment. U.S. Cellular maintains an
ongoing training program to improve the effectiveness of sales consultants and
retail associates by focusing their efforts on obtaining customers and
maximizing the sale of high-user packages. These packages provide for customers
to obtain a minimum amount of usage at discounted rates per minute, at fixed
prices which are charged even if usage falls below a defined monthly minimum
amount.
U.S. Cellular continues to expand its relationships with agents, dealers and
non-U.S. Cellular retailers to obtain customers. Agents and dealers are
independent business people who obtain customers for U.S. Cellular on a
commission basis. U.S. Cellular's agents are generally in the business of
selling cellular telephones, cellular service packages and other related
products. U.S. Cellular's dealers include car stereo companies and other
companies whose customers are also potential cellular customers. The non-U.S.
Cellular retailers include car dealers, major appliance dealers, office supply
dealers and mass merchants.
U.S. Cellular opened its first retail locations in late 1993, expanding to
240 stand-alone retail stores by September 30, 1997. These U.S. Cellular-owned
and operated businesses utilize rental facilities in high-traffic areas. U.S.
Cellular has implemented a uniform appearance of these stores, with all having
similar displays and layouts. The retail centers' hours of business match those
of the retail trade in the local marketplace, often staying open on weekends and
later in the evening than a typical business supplier. To fully serve customer
needs, these stores sell accessories to complement the phones and services U.S.
Cellular has traditionally provided. During 1996, U.S. Cellular further expanded
its retail presence by opening smaller retail kiosks within larger merchandiser
and grocery stores. At September 30, 1997, U.S. Cellular had opened over 140
"stores within a store," primarily in Wal-Mart locations.
In addition to its own retail centers, U.S. Cellular actively pursues
national retail accounts, as agents for U.S. Cellular, which yield new customer
additions in multiple markets. Agreements have been entered into with such
national distributors as Ford Motor Company, General Motors, Radio Shack, Best
Buy, Circuit City, Staples, Office Depot and Sears, Roebuck & Co. in certain of
U.S. Cellular's markets. Upon the sale of a cellular telephone by one of these
national distributors, U.S. Cellular receives, often exclusively within the
territories served, the resulting cellular customer.
I-9
<PAGE>
U.S. Cellular uses a variety of direct mail, billboard, radio, television
and newspaper advertising to stimulate interest by prospective customers in
purchasing its cellular service and to establish familiarity with U.S.
Cellular's name. In 1997, U.S. Cellular increased its focus on brand
advertising, using the tag line "The Way People Talk Around Here"(SM) to promote
the United States Cellular-Registered Trademark- brand. Advertising is directed
at gaining customers, improving customers' awareness of the United States
Cellular brand, increasing existing customers usage and increasing the public
awareness and understanding of the cellular services offered by U.S. Cellular.
U.S. Cellular attempts to select the advertising and promotion media that are
most appealing to the targeted groups of potential customers in each local
market. U.S. Cellular utilizes local advertising media and public relations
activities and establishes programs to enhance public awareness of U.S.
Cellular, such as providing telephones and service for public events and
emergency uses.
CUSTOMERS AND SYSTEM USAGE
Cellular customers come from a wide range of occupations. They typically
include a large proportion of individuals who work outside of their offices,
such as people in the construction, real estate, wholesale and retail
distribution businesses, and professionals. Increasingly, U.S. Cellular is
providing cellular service to consumers and to customers who use their cellular
telephones for security purposes. Although many of U.S. Cellular's customers
still use in-vehicle cellular telephones, most new customers are selecting
portable cellular telephones. These units have become more compact and fully
featured as well as more attractively priced, and they appeal to newer segments
of the customer population.
U.S. Cellular's cellular systems are used most extensively during normal
business hours between 7:00 am and 6:00 pm. On average, the local retail
customers in U.S. Cellular's consolidated systems used their cellular systems
approximately 105 minutes per unit each month and generated retail revenue of
approximately $37 per month during the first nine months of 1997, compared to
106 minutes and $41 per month in the first nine months of 1996. Revenue
generated by roamers, together with local retail, toll and other revenues,
brought U.S. Cellular's total average monthly service revenue per customer unit
in consolidated markets to $57 during the first nine months of 1997. Average
monthly service revenue per customer unit decreased approximately 13% during the
first nine months of 1997 compared to the same period in 1996. This decrease is
related to the industry-wide trend of newer customers tending to use fewer
minutes during peak business hours, which has reduced the average local retail
revenue per minute, and to declining contribution of inbound roaming revenue per
customer. U.S. Cellular believes that its customer base is growing faster than
that of the cellular industry as a whole, which has a dilutive effect on inbound
roaming revenue per customer. U.S. Cellular anticipates that average monthly
service revenue per customer unit will continue to decline as its distribution
channels provide additional customers who generate lower revenue per local
minute of use and as roaming revenues grow more slowly. However, this effect is
more than offset by U.S. Cellular's increasing number of customers; therefore,
U.S. Cellular expects total revenues to continue to grow for the next few years.
In addition to revenue from local retail customers, U.S. Cellular generates
revenue from roaming customers and other services. U.S. Cellular's roaming
service allows a customer to place or receive a call in a cellular service area
away from the customer's home market area. U.S. Cellular has entered into
"roaming agreements" with operators of other cellular systems covering virtually
all systems in the United States and Canada. These agreements offer customers
the opportunity to roam in these systems. These reciprocal agreements
automatically pre-register the customers of U.S. Cellular's systems in the other
carriers' systems. Also, a customer of a participating system roaming (i.e.
traveling) in a U.S. Cellular market where this arrangement is in effect is able
to make and receive calls on U.S. Cellular's system. The charge for this service
is typically at premium rates and is billed by U.S. Cellular to the customer's
home system, which then bills the customer. U.S. Cellular has entered into
agreements with other cellular carriers to transfer roaming usage at agreed-upon
rates. In some instances, based on competitive factors, U.S. Cellular may charge
a lower amount to its customers than the amount actually charged to U.S.
Cellular by another cellular carrier for roaming.
I-10
<PAGE>
The following table summarizes certain information about customers and
market penetration in U.S. Cellular's managed operations.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED OR AT YEAR ENDED OR AT DECEMBER 31,
SEPTEMBER 30, ----------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Majority-owned and managed markets:
Cellular markets in operation (1)........... 132 131 137 130 116
Total population of markets in service
(000s).................................... 21,844 21,712 22,309 21,314 19,383
Customer Units:
at beginning of period (2)................ 1,073,000 710,000 421,000 261,000 150,800
additions during period (2)............... 494,000 561,000 426,000 250,000 165,300
disconnects during period (2)............. 210,000 198,000 137,000 90,000 55,100
at end of period (2)...................... 1,357,000 1,073,000 710,000 421,000 261,000
Market penetration at end
of period (3)............................. 6.21% 4.94% 3.18% 1.98% 1.35%
Consolidated revenues (4)..................... $ 634,122 $ 680,068 $ 480,316 $ 327,630 $ 210,344
Depreciation expense.......................... 68,735 74,631 57,302 39,520 25,665
Amortization expense.......................... 25,906 34,208 32,156 25,934 19,362
Operating income (loss)....................... 110,511 87,366 42,755 17,385 (8,656)
Construction expenditures..................... 247,957 248,123 210,878 167,164 92,915
Identifiable assets........................... $ 2,340,079 $ 2,116,592 $ 1,890,621 $ 1,584,142 $ 1,275,569
<CAPTION>
1992
-----------
<S> <C>
Majority-owned and managed markets:
Cellular markets in operation (1)........... 92
Total population of markets in service
(000s).................................... 15,014
Customer Units:
at beginning of period (2)................ 97,000
additions during period (2)............... 88,600
disconnects during period (2)............. 34,800
at end of period (2)...................... 150,800
Market penetration at end
of period (3)............................. 1.00%
Consolidated revenues (4)..................... $ 139,929
Depreciation expense.......................... 16,606
Amortization expense.......................... 13,033
Operating income (loss)....................... (12,705)
Construction expenditures..................... 56,033
Identifiable assets........................... $ 858,795
</TABLE>
- ---------
(1) Represents the number of markets in which U.S. Cellular owned at least a 50%
interest and which it managed, including its reseller operation in 1992. The
revenues and expenses of these cellular markets are included in U.S.
Cellular's consolidated revenues and expenses.
(2) Represents the approximate number of revenue-generating cellular telephones
served by the cellular markets referred to in footnote (1). The revenue
generated by such cellular telephones is included in consolidated revenues.
(3) Computed by dividing the number of customer units at the end of the period
by the total population of markets in service as estimated by Donnelley
Marketing Service for the respective years.
(4) Consolidated revenues for 1997 reflect U.S. Cellular's change in financial
reporting presentation of certain credits given to customers on their
monthly bills. 1993-1996 consolidated revenues have been reclassified to
conform to 1997 presentation.
I-11
<PAGE>
The following table summarizes, by operating cluster, the total population,
U.S. Cellular's customer units and penetration for U.S. Cellular's consolidated
markets as of September 30, 1997.
<TABLE>
<CAPTION>
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION
- ------------------------------------------------------------------------------------ ------------- ----------- -----------
<S> <C> <C> <C>
Iowa/Missouri....................................................................... 3,148,000 224,000 7.12%
Wisconsin/Illinois/Indiana.......................................................... 1,951,000 106,000 5.43
Eastern North Carolina/South Carolina............................................... 2,349,000 119,000 5.07
Virginia............................................................................ 949,000 55,000 5.80
West Virginia/Maryland/Pennsylvania/Ohio............................................ 1,138,000 62,000 5.45
Oregon/California................................................................... 1,029,000 63,000 6.12
Washington/Oregon/Idaho............................................................. 1,370,000 93,000 6.79
Indiana/Kentucky.................................................................... 1,801,000 114,000 6.33
Maine/New Hampshire/Vermont......................................................... 1,689,000 94,000 5.57
Eastern Tennessee/Western North Carolina............................................ 1,429,000 108,000 7.56
Oklahoma/Missouri/Kansas............................................................ 1,412,000 104,000 7.37
Texas/Oklahoma...................................................................... 694,000 42,000 6.05
Florida/Georgia..................................................................... 1,520,000 105,000 6.91
Southwestern Texas.................................................................. 1,224,000 52,000 4.25
Other Operations.................................................................... 141,000 16,000 11.35
------------- ----------- -----------
21,844,000 1,357,000 6.21%
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
PRODUCTS AND SERVICES
CELLULAR TELEPHONES AND INSTALLATION. There are a number of different types
of cellular telephones, all of which are currently compatible with cellular
systems nationwide. U.S. Cellular offers a full range of vehicle-mounted,
transportable and hand-held portable cellular telephones. Features offered in
some of the cellular telephones include hands-free calling, repeat dialing, horn
alert and others.
U.S. Cellular negotiates volume discounts from its cellular telephone
suppliers. U.S. Cellular discounts cellular telephones to meet competition or to
stimulate sales by reducing the cost of becoming a cellular customer. In these
instances, where permitted by law, customers are generally required to sign a
service contract with U.S. Cellular. U.S. Cellular also cooperates with cellular
equipment manufacturers in local advertising and promotion of cellular
equipment.
U.S. Cellular has established service and/or installation facilities in many
of its local markets to ensure quality installation and service of the cellular
telephones it sells. These facilities allow U.S. Cellular to improve its service
by promptly assisting customers who experience equipment problems. Additionally,
U.S. Cellular maintains a repair facility in Tulsa, Oklahoma, which handles more
complex service and repair issues.
CELLULAR SERVICES U.S. Cellular's customers are able to choose from a
variety of packaged pricing plans which are designed to fit different calling
patterns. U.S. Cellular has developed and introduced its new consumer line of
products under the CarryPhone brand. These products include a) Express, a
pre-packaged phone plus price plan aimed at the convenience buyer; b)
TalkTracker, a cellular phone with usage prepaid; and c) Home and Away, a
combination cordless and cellular phone in a single package. U.S. Cellular's
customer bills typically show separate charges for custom-calling features,
airtime in excess of the packaged amount, and toll calls. Custom-calling
features provided by U.S. Cellular include wide-area call delivery, call
forwarding, call waiting, three-way calling and no-answer transfer. U.S.
Cellular also offers a voice message service in many of its markets. This
service, which functions like a sophisticated answering machine, allows
customers to receive messages from callers when they are not available to take
calls.
REGULATION
REGULATORY ENVIRONMENT. The operations of U.S. Cellular are subject to FCC
and state regulation. The cellular telephone licenses held by U.S. Cellular are
granted by the FCC for the use of radio frequencies and are an important
component of the overall value of the assets of the Company. The construction,
operation and transfer of cellular systems in the United States are regulated to
varying degrees by the FCC pursuant to the Communications Act of 1934 (the
"Communications Act"). In 1996, Congress enacted the Telecommunications Act of
1996 (the "1996 Act"), which amended the Communications Act. The 1996 Act
mandates significant changes in existing telecommunications rules and policies
to promote competition, ensure the availability of telecommunications services
to all parts of the nation and to streamline regulation of the
telecommunications industry to remove
I-12
<PAGE>
regulatory burdens, as competition develops and makes regulation unnecessary.
The FCC has promulgated regulations governing construction and operation of
cellular systems, licensing (including renewal of licenses) and technical
standards for the provision of cellular telephone service under the
Communications Act, and is implementing the legislative objectives of the 1996
Act, as discussed below.
LICENSING. For cellular telephone licensing purposes, the FCC has divided
the United States into separate geographic markets (MSAs and RSAs). In each
market, the allocated cellular frequencies are divided into two equal blocks.
During the application process, the FCC reserved one block of frequencies for
non-wireline applicants and another block for wireline applicants. Subject to
FCC approval, a cellular system may be sold to either a wireline or non-wireline
entity, but no entity which controls a cellular system may own an interest in
another cellular system in the same MSA or RSA.
The completion of acquisitions involving the transfer of control of a
cellular system requires prior FCC approval. Acquisitions of minority interests
generally do not require FCC approval. Whenever FCC approval is required, any
interested party may file a petition to dismiss or deny the application for
approval of the proposed transfer.
The FCC must be notified each time an additional cell is constructed which
enlarges the service area of a given market. The FCC's rules also generally
require persons or entities holding cellular construction permits or licenses to
coordinate their proposed frequency usage with neighboring cellular licensees in
order to avoid electrical interference between adjacent systems. The height and
power of base stations in the cellular system are regulated by FCC rules, as are
the types of signals emitted by these stations. In addition to regulation by the
FCC, cellular systems are subject to certain Federal Aviation Administration
("FAA") regulations with respect to the siting and construction of cellular
transmitter towers and antennas as well as local zoning requirements.
Beginning in 1996, the FCC has also imposed a requirement that all licensees
register and obtain FCC registration numbers for all of their antenna towers
which require prior FAA clearance. U.S. Cellular is currently engaged in this
registration process. All new towers must be registered at the time of
construction and existing towers are being registered on a staggered
state-by-state basis, to be concluded in May 1998. The FCC is currently
considering whether to take action to pre-empt moratoria imposed by certain
localities on the construction of wireless towers. U.S. Cellular has supported
such FCC action.
Beginning in October, 1997, cellular systems, which previously were
"categorically excluded" from having to evaluate their facilities to ensure
their compliance with federal "radio frequency" (RF) radiation requirements,
were made subject to those requirements. After October, 1997, all new cellular
facilities must be in compliance when they are brought into service. Existing
facilities must be brought into compliance with the requirements when their
licenses are renewed. U.S. Cellular believes that the great majority of its
existing facilities already comply with the requirements and the remainder will
be brought into compliance as required.
Initial cellular telephone licenses were granted for ten-year periods. The
FCC has established standards for conducting comparative renewal proceedings
between a cellular licensee seeking renewal of its license and challengers
filing competing applications. The FCC has: (I) established criteria for
comparing the renewal applicant to challengers, including the standards under
which a renewal expectancy will be granted to the applicant seeking license
renewal; (ii) established basic qualifications standards for challengers; and
(iii) provided procedures for preventing possible abuses in the comparative
renewal process. The FCC has concluded that it will award a renewal expectancy
if the licensee has (i) provided "substantial" performance, which is defined as
"sound, favorable and substantially above a level of mediocre service just
minimally justifying renewal," and (ii) complied with FCC rules, policies and
the Communications Act. If a renewal expectancy is awarded to an existing
licensee, its license is renewed and competing applications are not considered.
U.S. Cellular's Tulsa and Knoxville licenses were renewed in 1995, and U.S.
Cellular's Des Moines, Iowa; Peoria, Illinois; and Roanoke, Virginia licenses
were renewed in 1996. In September, 1997, U.S. Cellular filed license renewal
applications for its Davenport, Iowa; Tallahassee, Florida; Asheville, North
Carolina; Manchester, New Hampshire; Columbia, Missouri; Wichita Falls, Texas;
Gainesville, Florida; Lewiston, Maine; Joplin, Missouri; Cedar Rapids, Iowa;
LaCrosse, Wisconsin; Bangor, Maine; Fort Pierce, Florida; Victoria, Texas;
Evansville, Indiana and Owensboro, Kentucky licenses. Those applications were
unopposed and are now grantable. On October 30, 1997, U.S. Cellular assigned its
Evansville and Owensboro licenses to a subsidiary of BellSouth Cellular
Corporation as part of the larger U.S. Cellular-BellSouth transaction. As part
of the same transaction, BellSouth assigned its Appleton, Wisconsin; Rockford,
Illinois; Green Bay, Wisconsin and Janesville, Wisconsin licenses to U.S.
Cellular. Unopposed grantable renewal applications are pending for those
licenses as well. U.S. Cellular expects all of those license renewal
applications to be granted shortly.
I-13
<PAGE>
U.S. Cellular conducts and plans to conduct its operations in accordance
with all relevant FCC rules and regulations and anticipates being able to
qualify for a renewal expectancy in its upcoming renewal filings. Accordingly,
U.S. Cellular believes that current regulations will have no significant effect
on its operations and financial condition. However, changes in the regulation of
cellular operators or their activities and of other mobile service providers
could have a material adverse effect on U.S. Cellular's operations.
The FCC has also provided that five years after the initial licenses are
granted, unserved areas within markets previously granted to licensees may be
applied for by both wireline and non-wireline entities and by third parties.
Accordingly, many unserved area applications have been filed by U.S. Cellular
and others. U.S. Cellular's strategy with respect to system construction in its
markets has been and will be to build cells covering areas within such markets
that U.S. Cellular considers economically feasible to serve or might conceivably
wish to serve and to do so within the five-year period following issuance of the
license. In cases where applications for unserved areas are filed which are
mutually exclusive and would result in overlapping service areas, the FCC
decides between the competing applicants by an auction process.
Pursuant to 1993 amendments to the Communications Act, cellular service is
classified as a Commercial Mobile Radio Service ("CMRS"), in that it is service
offered to the public, for a fee, which is interconnected to the public switched
telephone network. The FCC has determined that it will forebear from requiring
CMRS carriers to comply with a number of statutory provisions otherwise
applicable to common carriers, such as the filing of tariffs.
RECENT EVENTS. There are certain regulatory proceedings currently pending
before the FCC which are of particular importance to the cellular industry. In
one proceeding, the FCC has imposed new "enhanced 911" regulations on cellular
carriers. Enhanced 911 capabilities would enable cellular systems to determine
the precise location of the person making the emergency call. The new rules will
require cellular carriers to work with local public safety officials to process
911 calls, including those made from mobile telephones not registered with the
cellular system, and will require cellular systems to improve their ability to
locate wireless 911 callers over a five-year period.
The FCC has adopted a limited expansion of the obligation of cellular
carriers to serve the subscribers of broadband PCS providers, among others, even
though the subscribers involved have no pre-existing service relationship with
that carrier. Under these new policies, broadband PCS providers may offer their
subscribers handsets which are capable of operating over broadband PCS and
cellular networks so that when their subscribers are out of range of broadband
PCS networks, they will be able to obtain non-automatic access to cellular
networks. The FCC expects that implementation of these roaming capabilities will
promote competition between broadband PCS and cellular service providers.
The FCC has adopted requirements which will make it possible for subscribers
to retain, at the same location, their existing telephone numbers when they
switch from one service provider to another. This numbering portability will
include switching between Local Exchange Carriers ("LECs") and other wireline
providers, between wireless service providers and between LEC/wireline and
wireless providers. LECs have implementation deadlines by the end of 1998.
Broadband PCS, cellular and certain other wireless providers have phased
implementation deadlines in 1998 and 1999.
In another proceeding, the FCC in 1996 adopted rules regarding the method by
which cellular carriers and LECs shall compensate each other for interconnecting
cellular and local exchange facilities. The FCC rules provided for symmetrical
and reciprocal compensation between LECs and cellular carriers, and also
prescribed interim interconnection proxy rates, which are much lower than the
rates formerly paid by cellular carriers to LECs. Symmetrical and reciprocal
compensation means they must pay each other at the same rate. The U.S. Court of
Appeals for the Eighth Circuit has vacated the FCC's rules. However, the FCC's
rules requiring reciprocal and symmetrical compensation remain in effect as
applied to the cellular industry. Interconnection rate issues will be decided by
the states. Whether the issue is decided by the states or the federal
government, cellular carriers in the future can be expected to pay lower rates
to LECs than they previously paid. This result is expected to be favorable to
the wireless industry and somewhat unfavorable to LECs.
The FCC is also proceeding to implement the 1996 Act. The 1996 Act provides
that implementing its legislative objectives will be the task of the FCC, the
state public utilities commissions and a Federal-state Joint Board. Much of this
implementation is proceeding in numerous, concurrent proceedings with aggressive
deadlines. The Company cannot predict the full extent, nature and
interrelationships among state and federal implementation and other responses to
the 1996 Act.
I-14
<PAGE>
The primary purpose and effect of the new law is to open all
telecommunications markets to competition. The 1996 Act makes most direct or
indirect state and local barriers to competition unlawful. It directs the FCC to
preempt all inconsistent state and local laws and regulations, after notice and
comment proceedings. It also enables electric and other utilities to engage in
telecommunications service through qualifying subsidiaries.
Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the 1996 Act's universal service
provisions and necessary for universal services, public safety and welfare,
continued service quality and consumer rights. While a state may not impose
requirements that effectively function as barriers to entry, it retains limited
authority to regulate certain competitive practices in rural telephone company
service areas.
The 1996 Act establishes principles and a process for implementing a
modified "universal service" policy. This policy seeks nationwide, affordable
service and access to advanced telecommunications and information services. It
calls for reasonably comparable urban and rural rates and services. The 1996 Act
also requires universal service to schools, libraries and rural health
facilities at discounted rates. The FCC has implemented the mandate of the 1996
Act to create a new universal service support mechanism "to ensure that all
Americans have access to telecommunications services." The 1996 Act requires all
interstate telecommunications providers, including wireless service providers,
to "make an equitable and non-discriminatory contribution," to support the cost
of providing universal service, unless their contribution would be de minimis.
At present, the provision of landline telephone service in high cost areas is
subsidized by access charges and other payments by interexchange carriers to
LECs. The obligation to make payments to support universal service has been
expanded to include other telecommunications service providers, including
cellular carriers. Such payments, which are to be based on a percentage of the
total "billed revenue" of carriers for a given previous half year, are to begin
being made in the first quarter of 1998. Carriers are free to pass such charges
on to their customers. Cellular carriers are also eligible to receive universal
service support payments in certain circumstances under the new systems if they
provide specified services in "high cost" areas. U.S. Cellular has sought
designation as an "eligible telecommunications carrier" qualified to receive
universal service support in certain states.
The FCC has also allocated a total of 140 megahertz ("MHZ") to broadband
PCS, 20 MHZ to unlicensed operations and 120 MHZ to licensed operations,
consisting of two 30 MHZ blocks in each of the 51 Major Trading Areas ("MTAs")
and one 30 MHZ block and three 10 MHZ blocks in each of 493 Basic Trading Areas
("BTAs"). Cellular operators and those entities under common ownership with them
are permitted to participate in the ownership of PCS licenses, except for those
PCS licenses reserved for small businesses, and licenses for PCS service areas
in which the cellular operator owns a 20% or greater interest in a cellular
licensee, the service area of which covers 10% or more of the population of the
PCS service area. In the latter case, the cellular license is limited to two 10
MHZ PCS channel blocks.
PCS technology is currently under development and is similar in some
respects to cellular technology. Where it has become commercially available,
this technology is capable of offering increased capacity for wireless two-way
and one-way voice, data and multimedia communications services and will result
in increased competition with U.S. Cellular's operations. The ability of these
future PCS licensees to complement or compete with existing cellular licensees
will be affected by future FCC rule-makings. These and other future
technological and regulatory developments in the wireless telecommunications
industry and the enhancement of current technologies will likely create new
products and services that are competitive with the services currently offered
by U.S. Cellular. There can be no assurance that U.S. Cellular will not be
adversely affected by such technological and regulatory developments.
Media reports have suggested that certain radio frequency ("RF") emissions
from portable cellular telephones might be linked to cancer. U.S. Cellular has
reviewed relevant scientific information and, based on such information, is not
aware of any credible evidence linking the usage of portable cellular telephones
with cancer. As noted above, FCC rules went into effect in October 1997,
dealing, INTER ALIA, with RF emissions from cellular towers of less than 10
meters in height, building mounted antennas and cellular telephones. It is
anticipated that U.S. Cellular will be able to comply with RF tower emission
standards and U.S. Cellular believes that the cellular telephones it currently
sells comply with the standards.
STATE AND LOCAL REGULATION. U.S. Cellular is also subject to state and
local regulation in some instances. In 1981, the FCC preempted the states from
exercising jurisdiction in the areas of licensing, technical standards and
market structure. In 1993, Congress preempted states from regulating the entry
of cellular systems into service and the rates charged by cellular systems to
customers. The siting and construction of the cellular facilities, including
transmitter towers, antennas and equipment shelters are still subject to state
or local zoning and land use
I-15
<PAGE>
regulations. However, in 1996, Congress amended the Communications Act to
provide that states could not discriminate against wireless carriers in tower
zoning proceedings and had to decide on zoning requests with reasonable speed.
In addition, states may still regulate other terms and conditions of cellular
service.
The FCC is required to forbear from applying any statutory or regulatory
provision that is not necessary to keep telecommunications rates and terms
reasonable or to protect consumers. A state may not apply a statutory or
regulatory provision that the FCC decides to forbear from applying. In addition,
the FCC must review its telecommunications regulations every two years and
change any that are no longer necessary. Further, the FCC is empowered under
certain circumstances to preempt state regulatory authorities if a state is
obstructing the Communications Act's basic purposes.
U.S. Cellular and its subsidiaries have been and intend to remain active
participants in proceedings before the FCC and, through its membership in state
associations of wireless providers, before state regulatory authorities.
Proceedings with respect to the foregoing policy issues before the FCC and state
regulatory authorities could have a significant impact on the competitive market
structure among wireless providers and the relationships between wireless
providers and other carriers. U.S. Cellular is unable to predict the scope, pace
or financial impact of policy changes which could be adopted in these
proceedings.
COMPETITION
U.S. Cellular's principal competitor for cellular telephone service in each
market is the licensee of the second cellular system in that market. Since each
competitor operates its cellular system on a 25 MHZ frequency block licensed by
the FCC using comparable technology and facilities, competition for customers
between the two systems in each market is principally on the basis of quality of
service, price, size of area covered, services offered and responsiveness of
customer service. The competing entities in many of the markets in which U.S.
Cellular has an interest have financial resources which are substantially
greater than those of U.S. Cellular and its partners in such markets.
The FCC's rules require all operational cellular systems to provide, on a
nondiscriminatory basis, cellular service to resellers which purchase blocks of
mobile telephone numbers from an operational system and then resell them to the
public.
In addition to competition from the other cellular licensee in each market,
there is also competition from, among other technologies, conventional mobile
telephone and SMR systems, both of which are able to connect with the landline
telephone network. U.S. Cellular believes that conventional mobile telephone
systems and conventional SMR systems are competitively disadvantaged because of
technological limitations on the capacity of such systems. The FCC has
previously given approval, through waivers of its rules, to ESMR, an enhanced
SMR system. ESMR systems may have cells and frequency reuse like cellular
thereby potentially eliminating any current technological limitation. The first
ESMR systems were implemented in 1993 in Los Angeles and are being implemented
in many other cities across the United States. ESMR providers have initiated
service in several areas where U.S. Cellular operates cellular systems. Although
less directly a substitute for cellular service, wireless data services and
one-way paging service (and in the future, two-way paging services) may be
adequate for those who do not need full two-way voice service.
PCS providers have initiated service in many markets across the United
States, including a number of markets where U.S. Cellular has operations. PCS
providers offer digital, wireless communications services to their customers.
Similar technological advances or regulatory changes in the future may make
available other alternatives to cellular service, thereby creating additional
sources of competition. U.S. Cellular expects PCS operators to continue
deployments of PCS across all of the U.S. Cellular markets over the next one or
two years. U.S. Cellular anticipates that PCS competitors will build out the
larger metropolitan areas before the mid-sized metropolitan and rural areas
where U.S. Cellular operates. As a result, the effects of PCS competition may
not reach U.S. Cellular's markets as quickly as they may reach other cellular
operators' markets.
Continuing technological advances in the communications field make it
difficult to predict the extent of additional future competition for cellular
systems. For example, the FCC has allocated radio channels to a mobile satellite
system in which transmissions from mobile units to satellites would augment or
replace transmissions to cell sites, and several consortia to provide such
service have been formed. Such a system is designed primarily to serve the
communications needs of remote locations and a mobile satellite system could
provide viable competition for land-based cellular systems in such areas. It is
also possible that the FCC may in the future assign additional frequencies to
cellular telephone service to provide for more than two cellular telephone
systems per market.
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<PAGE>
TELEPHONE OPERATIONS
The Company's telephone operations are conducted through TDS Telecom and 105
telephone subsidiaries. These telephone companies, ranging in size from less
than 500 to more than 50,000 access lines, serve 506,600 access lines in 28
states.
TDS Telecom provides modern, high-quality local and long-distance telephone
service. Local service is provided by TDS Telecom's operating telephone
subsidiaries. Long-distance or toll service is provided through connections with
long-distance carriers, primarily AT&T and the Bell Operating Companies
("BOCs").
Future growth in telephone operations is expected to be derived from
providing service to new or presently unserved establishments, from business
expansion in the areas served by TDS Telecom and others, from upgrading existing
customers to higher grades of service, from increased usage of the network
through both local and long-distance calling, from providing additional services
made possible by advances in technology and from the acquisition of additional
telephone companies.
The following table summarizes certain information regarding TDS Telecom's
telephone operations.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED OR AT YEAR ENDED OR AT DECEMBER 31,
SEPTEMBER 30, -------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- ------------- ------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Telephone Operations
Access lines*........................... 506,600 484,500 425,900 392,500 356,200 321,700
% Residential........................... 78.7 79.9 80.6 81.3 82.0 83.1
% Business (nonresidential)............. 21.3 20.1 19.4 18.7 18.0 16.9
Total revenues.......................... $ 338,700 $ 402,629 $ 354,841 $ 306,341 $ 268,122 $ 238,095
% Local service......................... 26.8 27.4 26.8 26.8 26.9 27.4
% Network access and long-distance...... 56.5 58.5 61.6 60.0 59.3 57.9
Depreciation and amortization expense... $ 74,241 $ 88,967 $ 77,354 $ 68,878 $ 59,562 $ 51,946
Operating income........................ 76,708 103,358 98,240 91,606 78,585 72,218
Construction expenditures............... 96,717 144,440 104,372 115,483 80,818 65,652
Total identifiable assets............... $ 1,192,035 $ 1,181,084 $ 1,058,241 $ 984,563 $ 829,489 $ 723,855
</TABLE>
- ---------
* An "access line" is a single or multi-party circuit between the customer's
establishment and the central switching office.
TELEPHONE ACQUISITIONS
TDS continually reviews attractive opportunities to acquire operating
telephone companies. Since January 1, 1992, TDS has acquired 22 telephone
companies serving a total of 90,400 access lines for an aggregate consideration
totaling $297.1 million. Historically, TDS has assigned the acquired telephone
companies to TDS Telecom as an equity contribution. The consideration, paid by
TDS, consisted of $59.5 million in cash and notes, 155,000 Preferred Shares and
5.2 million Common Shares of TDS. TDS Telecom also sold one telephone company
serving 1,100 access lines in 1995.
The Company continually evaluates acquisition opportunities. Telephone
holding companies and others actively compete for the acquisition of telephone
companies and such acquisitions are subject to the consent or approval of
regulatory agencies in most states and, in some cases, to federal waivers that
may affect the form of regulation or amount of interstate cost recovery of
acquired telephone exchanges. While management believes that it will be
successful in making additional acquisitions, there can be no assurance that the
Company will be able to negotiate additional acquisitions on terms acceptable to
it or that regulatory approvals, where required, will be received.
The Company maintains shelf registration of its Common Shares and Preferred
Shares under the Securities Act of 1933 for issuance specifically in connection
with acquisitions.
I-17
<PAGE>
It is the Company's policy to preserve, insofar as possible, the local
management of each telephone company it acquires. The Company provides the
telephone subsidiaries with centralized purchasing and general management and
other services, at cost plus a reasonable rate of return on invested capital.
These services afford the subsidiaries expertise in the following areas:
finance, accounting and treasury services; marketing; customer service; traffic;
engineering and construction; customer billing; rate administration; credit and
collection; and the development of administrative and procedural practices.
CONSTRUCTION AND DEVELOPMENT PROGRAM
In accordance with TDS Telecom's strategy of providing its customers with
first-to-market telecommunications solutions and then maintaining a high quality
of on-going service, TDS Telecom has continued through 1997 and into 1998 its
program of enhancing and expanding its service providing network. By building
its network to take full advantage of advanced telecommunications technologies
such as Signaling System 7 (SS7), fiber optic fed Digital Serving Areas (DSAs),
Integrated Services Digital Network (ISDN), and Advanced Calling Services (ACS),
TDS Telecom intends meet competition by providing its customers with
high-quality telecommunications services. In 1997 TDS Telecom brought 105,900
more customers the capabilities of SS7, 130,500 more customers the functionality
of ACS, deployed 310 route miles of fiber optic cable, deployed 210 DSAs, and
enabled 67,900 more customers to subscribe to the advanced performance of ISDN.
By the end of 1997 the cumulative statistics, as presented in the following
table, show that TDS Telecom will have enabled a large majority of its customers
to subscribe to these advanced telecommunications capabilities:
<TABLE>
<CAPTION>
# EQUIPPED % EQUIPPED
LINES LINES
----------- ---------------
1997 1997
----------- ---------------
<S> <C> <C>
Signaling System 7............................................................. 483,157 88%
Advanced Calling Services...................................................... 483,157 88%
Integrated Services Digital Network............................................ 383,043 57%
</TABLE>
As TDS Telecom upgrades and expands its service providing network to provide
advanced and reliable telecommunications services, TDS Telecom is also
standardizing its network for the most efficient and effective mode of
operation. At the heart of TDS Telecom's efforts to standardize network elements
is the initiative to reduce costs and improve service reliability by
centralizing the monitoring and management of TDS Telecom's service providing
network. Strategic alliances with Lucent Technologies and Siemens
Stromberg-Carlson to modernize and standardize TDS Telecom's switching platform
with the Lucent 5ESS-2000 and Siemens EWSD switches will assist TDS Telecom in
implementing its 24 hour-a-day/7 day-per-week Network Management Center. In
return, the Network Management Center will continuously monitor TDS Telecom's
service providing network in an effort to proactively identify and correct
network faults prior to the customer being alerted to any interruption or
degradation of service. During 1997 an additional 2 host and 8 remote Lucent
switches and 9 host and 32 remote Siemens switches were deployed representing
33,501 and 46,227 lines respectively. In 1998, plans have been developed to
upgrade older switching platforms with the installation of 2 host and 6 remote
Lucent switches and 4 host and 9 remote Siemens switches, representing 9,695
Lucent and 21,335 Siemens equipped lines. By the end of 1998 the Network
Management Center will be proactively monitoring 100% of TDS Telecom's service
providing network.
While continually working to improve its core operations of its Local
Exchange Carrier (LEC) business, TDS Telecom is also seeking to recognize the
opportunities that are presenting themselves in adjacent areas of the
telecommunications industry. In 1997 TDS Telecom has continued to expand its
investments into its competitive businesses: TDS DATACOM, the structured wiring
entity, TDSNET its Internet service provider, and TDS METROCOM its Competitive
Local Exchange Company (CLEC). In 1997, TDS DATACOM operated in 15 markets.
TDSNET expanded its operation in 1997 by adding an additional 15 operating
markets to bring its total markets to 90. TDS METROCOM began building its
facilities in 1997 and is expected to be operational in the Madison, WI. market
in 1998. TDS Telecom seeks to recognize supplemental revenue opportunities that
the newer business operations of TDS DATACOM, TDSNET, and TDS METROCOM present
to TDS Telecom as it faces an increasingly competitive telecommunications
industry.
TDS Telecom's total 1997 capital budget is $130.0 million compared to actual
capital expenditures of $144.4 million in 1996 and $104.4 million in 1995.
Financing for the 1997 capital additions are expected to be primarily provided
by internally generated funds and supplemented by federal long-term financing.
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<PAGE>
FEDERAL FINANCING
TDS Telecom's primary sources of long-term financing for additions to
telephone plant and equipment have been the Rural Utilities Service ("RUS"), the
Rural Telephone Bank ("RTB") and the Federal Financing Bank ("FFB"), agencies of
the United States of America. The RUS has made primarily 35-year loans to
telephone companies since 1949, at interest rates of 2% and 5%, for the purpose
of improving telephone service in rural areas. Currently, the RUS is authorized
to issue hardship loans at a 5% interest rate and other loans at an interest
rate approximating the government's rate for instruments of comparable maturity.
The RTB, established in 1971, makes loans at interest rates based on its average
cost of money (6.54% for its fiscal year ended September 30, 1997), and in some
cases makes loans concurrently with RUS loans. In addition, the RUS guarantees
loans made to telephone companies by the FFB at the federal cost of money (6.55%
for a 35-year note at September 30, 1997).
Substantially all of TDS Telecom's telephone plant is pledged or is subject
to mortgages securing obligations of the operating telephone companies to the
RUS, RTB and FFB. The amount of dividends on common stock that may be paid by
the operating telephone companies is limited by certain financial requirements
set forth in the mortgages.
Effective October 6, 1997, the RUS has revised its regulations on the amount
of allowable distributions a borrower can make in any calendar year. For those
companies with greater than 40% net worth to total assets, the amount of
distribution is now unlimited. The majority of the telephone subsidiaries exceed
this percentage. However, actual determination of allowable distributions under
the new procedures cannot be made pending State regulatory approval, if
required.
At September 30, 1997, TDS Telecom's operating telephone companies had
unadvanced loan commitments under the RUS, RTB and FFB loan programs aggregating
approximately $118.7 million, at a weighted average annual interest rate of
6.04%, to finance specific construction activities in 1997 and future years.
These loan commitments are generally issued for five-year periods and may be
extended under certain circumstances. TDS Telecom's operating telephone
companies intend to make further applications for additional loans from the RUS,
RTB and FFB as their needs arise. There is no assurance that these applications
will be accepted or what the terms or interest rates of any future loan
commitments will be.
ACCESS REVENUES
TDS Telecom's operating telephone subsidiaries receive access revenue as
compensation for carrying interstate and intrastate long-distance traffic on its
network. The interstate and intrastate access rates charged include the cost of
providing service plus a fair rate of return. Access revenues account for
approximately 55% of the revenue generated by TDS Telecom's local exchange
carrier ("LEC") subsidiaries.
TDS Telecom filed an interstate access rate tariff for one of its operating
subsidiaries in 1997. TDS Telecom concurs in the National Exchange Carrier
Association ("NECA") interstate common line and traffic sensitive tariffs for
the remainder of its LEC subsidiaries. These operating companies participate in
the access revenue pools administered by NECA, which collect and distribute
revenue from interstate access services. The FCC created NECA and it operates
subject to FCC rules and oversight.
The FCC regulates interstate toll rates and other matters relating to
interstate telephone service. On May 16,1997, the FCC released its Order on
access reform. The Order applies primarily to price cap LECs. However, non-price
cap companies, such as TDS Telecom, were also affected in a few areas by this
Order. The FCC is expected to release an order for non-price cap companies in
early 1998. Depending on the outcome of the order for non-price cap companies,
the source and nature of the operating companies' recovery of costs from the
interstate jurisdiction will be affected.
The 1996 Act provides for reciprocal compensation for parties to any
interconnection arrangement. The FCC issued a 1996 order governing the
compensation arrangements between LECs and wireless providers. LECs must charge
wireless carriers cost-based rates and must now pay access charges to wireless
carriers to terminate calls from LEC customers. Since this order raises
interconnection costs, the operating companies may adjust their charges to
recover such increased costs.
On October 7, 1997, the FCC released a Notice of Proposed Rulemaking
("NPRM") on jurisdictional separations reform. In the NPRM, the FCC reviews the
current procedures for separating LECs' service costs between the state and
federal jurisdictions. Many of the proposals in the NPRM seek to limit costs
assigned to the interstate jurisdiction and seek to assign greater costs to the
intrastate jurisdiction. To the extent that the costs are not made
I-19
<PAGE>
up in the new federal and state universal service mechanisms, TDS Telecom may
seek rate increases to offset any reductions in interstate revenues.
Where applicable and subject to state regulatory approval, TDS Telecom's LEC
subsidiaries utilize intrastate access tariffs and participate in intrastate
revenue pools. However, many intrastate toll revenue pooling arrangements, a
source of substantial revenues to TDS Telecom's LECs, have been replaced with
access-charge-based arrangements. In these cases, access charges are typically
set to generate revenue flows similar to those realized in the pooling process.
The impact of the 1996 Act has accelerated the pace of regulatory re-evaluation
at both the state and federal level. To the extent that state-ordered access
charge revisions reduce revenues, TDS Telecom may seek adjustments in other
rates. Given the many regulatory issues still unresolved, TDS Telecom cannot
predict the cumulative nature or extent of impacts from regulatory reform.
FEDERAL SUPPORT REVENUES
To promote universal service, the FCC developed a number of federal support
mechanisms to keep telephone rates affordable for both high-cost, rural areas
and low-income customers. Many of TDS Telecom's LEC subsidiaries provide
telephone service in rural areas and all of them offer service to low-income
customers.
The 1996 Act codified universal service; set forth clear principles for
ensuring affordable access to modern telephone service nationwide; established
discounts for schools, libraries and rural health care facilities; and
established a federal-state joint board to make recommendations to the FCC
regarding implementation of the universal service provisions of the 1996 Act. On
May 8, 1997, the FCC released its Order on universal service, adopting many of
the joint board's recommendations. The FCC adopted the use of forward-looking
proxy cost models to determine costs rather than relying on actual costs.
However, rural LECs will continue to receive support based on their actual costs
for a three year period, beginning January 1, 1998. After December 31, 2000,
rural LECs will transition to the use of proxy cost models over an additional
three year period. To date, no proxy cost models have proven to provide
sufficient and predictable support for rural LECS.
The FCC's Order also mandated that all telecommunications providers
contribute to the universal service fund beginning January 1, 1998. However, the
Order allows companies to recover these contributions through their interstate
access rates.
The final rules to implement the universal service provisions of the 1996
Act will involve development of new support mechanisms and changes in the
eligibility criteria. In addition, some of TDS Telecom's LEC subsidiaries
operate in states where support and rate structures are either being
re-evaluated or have already been changed. Full recovery of universal service
costs in the future through interstate and intrastate mechanisms is uncertain.
If interstate or intrastate support decrease, TDS Telecom's LEC subsidiaries may
pursue local service rate increases to recover the difference.
In the past, telephone company acquisition and investment decisions assumed
the ability to recover the cost and a reasonable rate of return through local
service, access and support revenues. Significant changes in the universal
service funding system will affect the Company's acquisition strategy. The
company can no longer assume it will recover its acquisition and investment
costs and a reasonable rate of return given the changes in universal service,
access reform, and separations reform. TDS Telecom is pursuing a strategy of
network modernization to maintain a strong competitive position. The speed of
such network modernization may depend on favorable support and access policies
on the federal and state levels.
REGULATION
TDS Telecom's LEC subsidiaries are regulated by state regulatory agencies
and TDS Telecom seeks to maintain positive relationships with these regulators.
Rate setting, including local rates, intrastate toll rates and intrastate access
charges, is subject to state commission approval. TDS Telecom will continue to
pursue necessary changes in rate structures to ensure affordable rates and
reasonable earnings.
State regulators can approve service areas, service standards, accounting
and related matters. In some states, construction plans, borrowing, depreciation
rates, affiliated charge transactions and certain other financial transactions
are also subject to regulatory approval. States have traditionally regulated
entry into local markets by designating a single carrier to be the universal
service provider. However, the 1996 Act has almost completely pre-empted state
authority over market entry. Each state retains the power to impose
competitively neutral requirements that are consistent with the 1996 Act's
universal service provision and necessary for universal services,
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public safety, and welfare, continued service quality and consumer rights. While
a state may not impose requirements that effectively function as barriers to
entry, it retains limited authority to regulate certain competitive practices in
rural telephone company service areas.
The 1996 Act establishes a general duty for all telecommunications carriers,
including wireless providers, to interconnect with other carriers. Congress
prescribed a more specific list of interconnection requirements for all LECs
including resale, number portability, dialing parity, access to rights-of-way
and reciprocal compensation. The FCC has adopted or is considering rules and
policies implementing the provisions of the 1996 Act.
Unless exempted, or granted suspension or modification, incumbent LECs have
additional obligations: (a) to negotiate in good faith terms of interconnection;
(b) to comply with more detailed interconnection terms, including
non-discrimination and unbundling their network and service components so
competitors may provide only those elements they choose to provide; -C- to offer
their retail services at wholesale rates to facilitate resale by their
competitors; and (d) to allow other carriers to place equipment necessary for
interconnection or access on their premises.
Many of the FCC determinations made to implement the 1996 law and to
facilitate competition in local service and other telephone services involve
investment and upgrades to TDS LECs' networks. These investments and upgrades
include requirements to implement local number portability so subscribers may
change to competitors' services without changing their telephone numbers,
network signaling information that must be provided to certain other carriers
and payphone providers and other changes that require additional investments and
expenses. TDS Telecom is seeking to comply with these requirements, and is
pursuing policies that provide a fair opportunity to recover its costs, but in
some cases is asking for waivers or delayed implementation deadlines. A new law
also requires LECs to provide certain communications for law enforcement
purposes. The full cost and the adequacy of the government compensation are not
yet known, but the LEC industry is pursuing regulatory policies that cover any
shortfall in available government compensation.
As defined in the 1996 Act, TDS Telecom's LEC subsidiaries qualify as rural
telephone companies. Therefore, they enjoy an exemption from the incumbent LEC
requirements until they receive a bonafide request for interconnection and the
state commission lifts the exemption. The FCC has also adopted extensive rules
for state commissions to follow in mediating and arbitrating interconnection
negotiations between incumbent LECs and carriers requesting interconnection,
services or network elements. The 1996 Act establishes deadlines, standards for
state commission approval of interconnection agreements and recourse to the FCC
if a state commission fails to act. A federal appellate decision striking down
FCC pricing regulations for interconnection and several rules that limited the
TDS telephone companies' ability to obtain regulatory relief from stricter
interconnection requirements for incumbent telephone companies has been taken to
the U.S. Supreme Court in petitions for certiorari. TDS cannot predict the
outcome of this or the numerous other court and FCC proceedings stemming from
the 1996 Act.
TDS Telecom seeks to maintain and enhance existing revenue streams despite
heightened earnings review activity by state regulators and the advent of local
exchange competition sparked by the 1996 Act. TDS Telecom is preparing for
competition even though its operating subsidiaries remain governed by state
regulators. For example, TDS Telecom is seeking the necessary pricing
flexibility to adjust its rate structures to a more competitive model. TDS
Telecom is also participating in state regulatory and legislative processes to
ensure that any telecommunications reform measures treat rural areas fairly and
continue to provide sufficient contributions to high cost rural service areas to
keep TDS LEC's rates affordable. The ongoing changes in public policy and
introduction of competition might affect the earnings of the operating
subsidiaries and TDS Telecom is not able to predict the impact.
While the majority of TDS Telecom's LEC subsidiaries continue to operate in
a rate-of-return environment, a number of state commissions are negotiating, or
have agreed to alternative regulation plans with LECs. Price regulation, the
most common form of alternative regulation, focuses on the price of
telecommunication services. TDS Telecom's LEC subsidiaries in Alabama, Arkansas
and Michigan are currently operating in a price-regulated environment, whereby
the commissions in those states are no longer reviewing earnings. For several
years, the RBOCs and some of the nation's larger LECs have operated under an FCC
"price cap" plan, where earnings can only be increased through productivity
improvements. When LECs achieve a rate of return above an allowed return, taking
into account required productivity gains, they must share the excess gains with
their customers.
For 1997, TDS Telecom's telephone subsidiaries have neither elected price
caps nor an alternative FCC plan, which was designed for smaller LECs. Instead,
the operating subsidiaries will continue to abide by traditional rate-of-return
regulation for interstate purposes. Since approximately one-third of TDS
Telecom's telephone subsidiaries serve high-cost areas, important averaging
mechanisms associated with the NECA pooling process would be lost if
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TDS Telecom elected either of the alternatives to traditional rate-of-return
regulation. However, the FCC periodically considers whether to initiate a
proceeding to lower the allowed rate-of-return for rate-of-return LECs. The FCC
also plans to reform the rules that govern how LECs, on their own or through the
National Exchange Carrier Association, charge interstate companies for local
distribution of their long distance calls. Some of the reforms already adopted
for price cap regulated LECs, if expanded to cover the TDS LECs, could reduce
the interstate costs recovered.
NECA is requesting access charge changes from the FCC which would use a
"banded" rate structure to help pool members with lower costs charge more
competitive rates. The FCC has not acted on this matter yet.
Access to affordable long-distance service in rural areas was achieved
because the FCC ordered AT&T to provide nationwide average rates. As a result of
increasing competition, the FCC lifted all regulations relating to AT&T's
interstate services in 1996. However, the 1996 Act preserves interstate toll
rate averaging and endorses a nationwide policy that interstate and intrastate
long- distance rates of all long-distance carriers should not be higher in rural
areas than in urban areas they serve. The statute is intended to ensure
affordable long distance services even in TDS Telecom's most remote exchanges.
COMPETITION
The 1996 Act will help introduce a new wave of competition in the
telecommunications industry. The 1996 Act embraced competition in
telecommunications as a national policy and also started the process of
deregulation. The 1996 Act applies expanded interconnection and other
requirements to local exchange telephone companies for the purpose of
stimulating competition. The Act establishes a framework for local service
competition and it establishes different standards for different types of
telecommunications carriers. The Act defines rural telephone companies ("RTC")
and provides them with an exemption from certain incumbent LEC obligations. All
TDS Telecom LECs meet the RTC definition and fall under the exemption. At a
minimum, this may delay certain forms of competition occurring in TDS Telecom
LEC service areas while additional regulatory issues are resolved. However, some
TDS Telecom LECs already face requests, filed by potential competitors, seeking
to terminate their exemptions.
TDS Telecom believes there will eventually be open entry into nearly every
aspect of the telephone industry, including local service, interstate and
intrastate toll, switched and special access services and customer premises
equipment. Accordingly, TDS Telecom expects competition in the telephone
business to be dynamic and intense as a result of the entrance of new
competitors and the development of new technologies, products and services. To
face this increasing competition, TDS Telecom's strategy is to positioned itself
to provide high-quality customer relationships and to provide complete solutions
to customers' telecommunication needs.
To position TDS Telecom as a customer-intimate organization with
high-quality customer relationships, TDS Telecom is dedicating resources to
establishing a Virtual Business Office ("VBO"). The VBO is an environment that
is technically equipped to enable multiple local business offices to perform
customer contact functions as if they were a "virtual" office in the eyes of the
customer. VBO is TDS Telecom's solution to connect offices together to better
use resources and preserve local presence. Through extended availability that
coincides with customers' schedules and expectations, VBO will help provide
greater market coverage and customer service on the customer's terms. It will
also enable the business office teams to deliver high-quality service to the
customer through more efficient call answering capabilities, provide continued
focused local service to walk-in customers, and leverage voice and customer
service application technology.
TDS Telecom is providing its operating telephone companies with the most
advanced central office switching equipment possible in order to offer customers
up-to-date technology such as Advanced Calling Services, high-
speed data access, ISDN and Internet access and services. TDS Telecom plans to
provide its customers bundled service offerings and become a single source for
their telecommunications needs. Developing these services also provides an
opportunity to provide a greater range of service in both the basic telephony
and the more competitive marketplaces. In 1997, TDS Telecom significantly grew
its competitive market offerings with products and services like LAN and data
structured wiring, Internet access and web hosting, and resale of Direct
Broadcast Satellite. TDS Telecom also decided to enter the Madison, Wisconsin
market as a facility based competitive local exchange carrier through its
subsidiary TDS Metrocom. TDS Metrocom has begun construction of a switched SONET
fiber optic network in the Madison area. TDS Metrocom will provide advanced
voice and data services to the Madison marketplace in 1998. TDS Telecom will
continue to seek additional attractive opportunities in competitive markets
during 1998.
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BROADBAND PCS OPERATIONS
The Company's broadband PCS operations are conducted through Aerial
Communications, Inc. and subsidiaries. Aerial is a provider of Personal
Communications Services in the Minneapolis, Tampa-St. Petersburg-Orlando,
Houston, Pittsburgh, Kansas City and Columbus Major Trading Areas. The PCS
Markets include approximately 27.6 million population equivalents. Aerial has
constructed networks for its PCS Markets using Global System for Mobile
Communication ("GSM") technology. Aerial has commenced service in all its
markets and serves nearly 65,000 PCS telephones at September 30, 1997. By year
end 1997, Aerial expects its system coverage to total approximately 80% of the
six MTAs' total population.
THE WIRELESS TELECOMMUNICATIONS INDUSTRY
OVERVIEW. Wireless service is currently available using analog or digital
technology. Most wireless services currently transmit voice and data signals
over analog-based networks by varying the amplitude or frequency of one
continuous electronic signal transmitted over a single radio channel. Analog
technology currently has several limitations, including inconsistent service
quality, lack of privacy, limited capacity and less reliability in transferring
data without errors. Aerial has chosen GSM, which utilizes a digital technology,
for use in the PCS Markets. Digital systems convert voice or data signals into a
stream of digits that is compressed before transmission, enabling a single radio
channel to carry multiple simultaneous signal transmissions. This additional
capacity, along with improvements in digital protocols, allows digital-based
wireless technologies to offer new and enhanced services, such as greater call
privacy and more robust data transmission features, such as "mobile office"
applications (including facsimile, electronic mail and wireless connections to
computer/data networks, including the Internet).
While digital technology serves generally to reduce transmission
interference relative to analog technology, coding methods in the 8 Kb vocoder
cellular digital handsets which have been deployed by several digital wireless
operators using TDMA technology cause a perceptible decline in voice quality.
This gap in voice quality has proven to be a significant barrier to cellular
operators attempting to switch their customers from analog to digital service.
Manufacturers have developed enhanced 13 Kb vocoder digital handsets for both
PCS and digital cellular networks using GSM or CDMA technology and an 8Kb
vocoder using TDMA technology. These new handsets are expected to offer digital
voice transmission comparable to wireline quality.
PCS spectrum differs from existing cellular and specialized mobile radio
("SMR") spectrum in three basic ways: frequency, spectrum and geographic
division. PCS networks will operate in a higher-frequency range (1850-1990 MHZ)
compared to the cellular and SMR frequency (800-900 MHZ). PCS is comprised of 30
or 10 MHZ spectrum versus 25 MHZ spectrum for cellular networks. As a result of
the improved capacity of the infrastructure and large allocation of spectrum in
the A, B and C PCS frequency Blocks, PCS will have more capacity for new
wireless services such as data and video transmission. Finally, the geographic
areas for PCS licenses are divided differently than for cellular licenses. PCS
is segmented among 51 MTAs and 493 Basic Trading Areas ("BTAs") as opposed to
cellular's 306 Metropolitan Statistical Areas ("MSAs") and 428 Rural Service
Areas ("RSAs"). An MTA license generally covers a much larger geographic area
than a BTA, MSA or RSA license.
OPERATION OF WIRELESS NETWORKS. Wireless service areas are divided into
smaller geographic areas called "cells", each of which contains an antenna and a
base transceiver station ("BTS") consisting of a low-power transmitter, a
receiver and signaling equipment. The cells are typically configured on a grid
in a honeycomb-like pattern, although terrain factors (including natural and
man-made obstructions) and signal coverage patterns may result in irregularly
shaped cells and overlaps or gaps in coverage. The BTS in each cell is connected
by microwave, fiber optic cable or telephone wires to a switching office
("mobile switching center" or "MSC"). The MSC controls the operation of the
wireless telephone network for its entire service area, performing inter-BTS
hand-offs, managing call delivery to handsets, allocating calls among the cells
within the network and connecting calls to local landline telephone systems or
to long-distance telephone carriers. Wireless service providers have
interconnection agreements with various local exchange carriers and
interexchange carriers, thereby integrating the wireless telephone network with
landline telecommunications systems. Because two-way wireless networks are fully
interconnected with landline telephone networks and long-distance networks,
customers can receive and originate both local and long-distance calls from
their wireless telephones.
The signal strength of a transmission between a handset and a BTS antenna
declines as the handset moves away from the BTS antenna. The MSC and the BTSs
monitor the signal strength of calls in process. When the signal strength of a
call declines to a predetermined level, the call may be "handed off" to another
BTS that can establish a stronger signal with the handset. If a handset leaves
the service area of the wireless service provider, the call is
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disconnected unless an appropriate technical interface is established to hand
off the call to an adjacent service provider's system.
Operators of wireless networks frequently agree to provide service to
customers from other compatible networks who are temporarily located or
traveling through the operator's service area. Such customers are called
"roamers." Agreements among network operators allocate revenues received from
roamers. With automatic roaming, wireless customers are preregistered in certain
networks outside their home service area and receive service automatically while
they are roaming. Other roaming features permit calls to a customer to follow
the customer into different networks, so that the customer will continue to
receive calls in a different network just as if the customer were within his or
her service area.
Wireless customers generally are charged separately for monthly access, air
time, long-distance calls and custom-calling features (although custom-calling
features may be included in monthly access charges in certain pricing plans).
Wireless network operators pay fees to local exchange and long-distance
telephone companies for access to their networks and toll charges based on
standard or negotiated rates. When wireless operators provide service to roamers
from other networks, they generally charge roamer air-time usage rates, which
usually are higher than standard air-time usage rates for their own customers,
and additionally may charge daily access fees. Special, discounted rate roaming
arrangements, often between neighboring operators who wish to stimulate usage in
their respective territories, provide for reduced roaming fees and no daily
access fees.
TECHNOLOGY
With GSM technology, Aerial offers easy-to-use, interactive menu-driven
phones, and advanced features such as caller identification and a smart card, as
well as more complex features such as text messaging, which allows the GSM
handset to function as a two-way messaging device. In the future, Aerial intends
to increasingly emphasize services which are expected to increase the size and
scope of the wireless market such as wireless data and information services as
well as wireless local loop services. Aerial anticipates that PCS will
ultimately offer a competitive alternative to wireline telephone service as PCS
networks are constructed and PCS operators form strategic alliances.
GSM is not compatible with other PCS or cellular technologies. However,
compatibility can be achieved through the use of handsets that support multiple
technologies. Aerial expects that compatibility between GSM and the existing
analog cellular systems will be achieved with the use of dual-mode handsets.
Dual-mode handsets are expected to be available in 1998. Because analog cellular
service is available nationwide, Aerial expects that PCS customers will be able
to roam into service areas served by analog cellular providers.
To date, seventeen other North American PCS licensees have implemented or
announced their intention to utilize the GSM protocol in the construction of
their networks. GSM committed providers in the U.S. have licenses to cover
approximately 260 million POPs (representing approximately 98% of the population
of the United States) and approximately 25 million POPs in Canada, although
their can be no assurance that all the licensees will build-out their licensed
territory. GSM systems are currently in commercial operation in over 700 North
American cities with more than one million customers. Aerial anticipates that
its customers will be able to roam substantially throughout the United States,
either on other GSM-based PCS networks or by using dual-mode handsets that can
also be used on existing cellular networks.
Aerial is a member of the North American GSM Alliance LLC ("GSM Alliance"),
an all-digital wireless PCS network of U.S. and Canadian carriers. The GSM
Alliance was established to create a national network and develop seamless
wireless communications for customers, whether at home, away or abroad. The GSM
Alliance's collaborative efforts focus on serving the wireless customer
efficiently by addressing the areas of roaming, customer care, national
distribution, and data communications. Aerial is also a part of the GSM North
America consortium, which is the North American interest group for the GSM MoU
Association. Formed in 1995, GSM North America brings together service providers
and equipment manufacturers to identify and resolve issues related to making GSM
the premier PCS digital technology.
PRODUCTS AND SERVICES
Aerial offers coverage in those areas of the PCS Markets where most of the
population lives and works. Subsequent construction of its PCS networks will
provide urban and suburban coverage which is competitive with that of current
cellular operators. Aerial provides roaming capabilities, through agreements
with other GSM and cellular operators.
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Aerial's two primary sources of revenues are similar to those available to
other cellular system providers. Service revenue primarily consists of charges
for access, airtime and value-added services provided to Aerial's retail
customers who use the network operated by Aerial, and charges for long-distance
calls made on Aerial's systems. Equipment sales revenue consists of the sale of
handsets and related accessories to retailers, independent agents and end user
customers. At September 30, 1997, Aerial had nearly 65,000 customers. Service
revenues and equipment sales revenues totaled $12.9 million and $12.9 million,
respectively, for the nine months ended September 30, 1997.
Aerial provides the following services and features:
THE SMART CARD. GSM technology employs a Smart Card which contains a
microchip containing detailed information about a customer's service profile.
The Smart Card allows Aerial to initiate services or change a customer's service
package from a remote location. The Smart Card also allows customers to roam
onto other participating GSM-based networks by using their cards in handsets
compatible with the local network.
FEATURE-RICH HANDSETS. As part of its basic service package, Aerial
provides easy-to-use, interactive menu-driven phones that enable customers to
utilize the features available in a GSM network. These handsets primarily use
words and easy-to-use menus rather than numeric codes to operate handset
functions such as call-forwarding, call-waiting and text messaging.
SHORT TEXT MESSAGING. GSM technology allows for the capability to send and
receive short text messages, similar to two-way radio paging services. This
service allows Aerial to offer a quicker and less expensive form of wireless
communication when a full conversation is not necessary.
ENHANCED SECURITY. Aerial's service provides greater security from
eavesdropping and cloning than existing wireless service. Greater conversation
security is provided by the encryption code of the digital GSM signal. Greater
fraud protection is provided because GSM handsets require the use of a Smart
Card with a sophisticated authentication scheme, the replication of which is
virtually impossible.
As the market for wireless telecommunications services continues to develop,
Aerial expects to offer advanced wireless applications such as mobile data
services, wireless private branch exchange applications, wireless local loop
services and other individually customized wireless products and services.
MARKETING AND DISTRIBUTION
Aerial's marketing objective is to create demand for its PCS service by
clearly differentiating its service offerings. Aerial believes the strength of
its marketing efforts will be a key contributor to its success. Aerial has
developed overall marketing strategies as well as certain, specific local
marketing strategies for each PCS Market.
Aerial's mass marketing efforts emphasize the value of Aerial's
high-quality, innovative services and are supported by heavily promoting the
Aerial brand name. This is supported by a substantial advertising program.
Aerial offers its services and products through traditional cellular sales
channels as well as through new, lower cost channels. Aerial utilizes
traditional sales channels which include mass merchandisers and retail outlets,
company retail stores, sales agents and a direct sales force. National
distributors include Best Buy, Circuit City, Office Depot, Office Max and Radio
Shack in certain markets. Aerial currently also distributes its services and
products through over 50 company retail locations (mall stores, strip mall
stores and kiosks). Based in part upon the remote activation feature of the GSM
Smart Card, Aerial also intends to develop distribution innovations such as
simplified retail sales processes and lower-cost channels which include inbound
telesales, affinity marketing programs, neighborhood sales and on-line sales.
AERIAL'S PCS MARKETS
The PCS markets cover large areas which, in general, have attractive
demographic characteristics including growing populations, high population
densities, favorable commuting patterns, high median household incomes and
favorable business climates. Aerial believes the geographic diversity of the PCS
markets mitigates adverse consequences which may result from an economic
slowdown in one particular region.
COMPETITION
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of digital upgrades to
existing analog cellular networks, evolving industry standards, ongoing
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improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements, and changes in end-user
requirements and preferences. Accordingly, Aerial expects competition in the
wireless telecommunications business to be dynamic and intense as a result of
the entrance of new competitors and the development of new technologies,
products and services.
Aerial will compete directly with up to five other PCS providers in each of
its PCS Markets. The other successful bidders in the FCC's broadband Block A and
Block B PCS auction in each of the six PCS Markets were PCS PrimeCo (Houston and
Tampa-St. Petersburg-Orlando), Sprint Spectrum (Minneapolis, Pittsburgh and
Kansas City) and AT&T Wireless Services, Inc. (Columbus). Aerial also expects
that existing cellular providers in the PCS Markets, most of which have an
infrastructure in place and have been operational for a number of years, will
upgrade their networks to provide comparable services in competition with
Aerial. Principal cellular providers in the PCS Markets are AT&T Wireless
Services, Inc., BellSouth Mobility, Inc., GTE Mobile Communications Corporation,
AirTouch Communications, Inc., Southwestern Bell, Bell Atlantic-NYNEX Mobile and
Ameritech Cellular. Additionally, Aerial competes with SMR provider Nextel
Communications, Inc. in each of its six PCS Markets.
Aerial also expects to compete with other communications technologies that
now exist, such as paging, enhanced specialized mobile radio ("ESMR") and global
satellite networks, and expects to compete with cellular and PCS resellers. In
the future, cellular service and PCS will also compete more directly with
traditional landline telephone service providers and with cable operators who
expand into the offering of traditional communications services over their cable
systems. In addition, Aerial may face competition from technologies that may be
introduced in the future.
All of such competition is expected to be intense. There can be no assurance
that Aerial will be able to compete successfully in this environment or that new
technologies and products that are more commercially effective than Aerial's
technologies and products will not be developed. In addition, many of Aerial's
competitors have substantially greater financial, technical, marketing, sales
and distribution resources than those of Aerial and have significantly greater
experience than Aerial in testing new or improved telecommunications products
and services and obtaining regulatory approvals. Some competitors are expected
to market other services, such as cable television access, with their wireless
telecommunications service offerings. Several of Aerial's competitors are
operating, or planning to operate, through joint ventures and affiliation
arrangements, wireless telecommunications networks that cover most of the United
States.
Handsets used for GSM-based PCS networks will not be automatically
compatible with cellular systems, and vice versa. Aerial expects dual-mode
handsets to be available in 1998, which will permit its customers to roam by
using the existing cellular wireless network in other markets. Until then, this
lack of interoperability may impede Aerial's ability to attract current cellular
customers or potential new wireless communication customers that desire the
ability to access service providers in several markets.
Aerial anticipates that market prices for two-way wireless services
generally will decline in the future based on increased competition. Aerial will
compete to attract and retain customers principally on the basis of services and
enhancements, its customer service, the size and location of its service areas
and pricing. Aerial's ability to compete successfully will also depend, in part,
on its ability to anticipate and respond to various competitive factors
affecting the industry, including new services that may be introduced, changes
in consumer preferences, demographic trends, economic conditions and discount
pricing strategies by competitors, which could adversely affect Aerial's
operating margins.
REGULATION
REGULATORY ENVIRONMENT. The FCC regulates the licensing, construction,
operation and acquisition of wireless telecommunications systems in the U.S.
pursuant to the Communications Act, and the rules, regulations and policies
promulgated by the FCC thereunder. Under the Communications Act, the FCC is
authorized to allocate, grant and deny licenses for PCS frequencies, establish
regulations governing the interconnection of PCS networks with wireline and
other wireless carriers, grant or deny license renewals and applications for
transfer of control or assignment of PCS licenses, and impose forfeitures for
violations of FCC regulations.
In addition, the 1996 Act, which amended the Communications Act, mandates
significant changes in existing telecommunications rules and policies to promote
competition, ensure the availability of telecommunications services to all parts
of the nation and to streamline regulation of the telecommunications industry to
remove regulatory burdens, as competition develops and makes regulation less
necessary. The FCC promulgated and
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continues to promulgate regulations governing construction and operation of
wireless providers, licensing (including renewal of licenses) and technical
standards for the provision of PCS services under the Communications Act, and is
implementing the legislative objectives of the 1996 Act, as discussed below.
PCS LICENSING. The FCC established PCS service areas in the United States
and its possessions and territories based upon Rand McNally's market definition
of 51 MTAs comprised of 493 smaller BTAs. Each MTA consists of at least two
BTAs.
The FCC has allocated 120 MHz of radio spectrum in the 2 GHz band for
licensed broadband PCS services. The FCC divided the 120 MHz of spectrum into
six individual blocks, each of which is allocated to serve either MTAs or BTAs.
The spectrum allocation includes two 30 MHz blocks ("A" and "B" Blocks) licensed
for each of the 51 MTAs, one 30 MHz block ("C" Block) licensed for each of the
493 BTAs, and three 10 MHz blocks ("D," "E" and "F" Blocks) licensed for each of
the 493 BTAs. A PCS license has been awarded for each MTA and BTA in every
block, for a total of more than 2,000 licenses. This means that in any PCS
service area as many as six licensees could be operating separate PCS networks.
Under the FCC's rules, a broadband PCS licensee may own combinations of licenses
with total aggregate spectrum coverage of up to 45 MHz in a single geographic
area. The FCC adopted comprehensive rules that outlined the bidding process,
described the bidding application and payment process, established penalties for
certain bid withdrawals, default or disqualification and established regulatory
safeguards.
On November 9, 1995, in Cincinnati Bell Telephone Co. v. FCC (Case No.
94-3701/4113), the United States Court of Appeals for the Sixth Circuit granted
two petitions for review of an FCC order that had barred certain common
ownership of cellular and PCS interests in the same market, and remanded the
case to the FCC for further proceedings. Neither of the two petitioners had been
barred by cross interests from applying for any of the authorizations the FCC
later granted to Aerial. Aerial is watching the FCC proceedings closely.
The grants of licenses to Aerial are conditioned upon timely compliance with
the FCC's build-out requirements, I.E., coverage of one-third of the population
of a PCS market within five years of initial license grant and coverage of
two-thirds of that population within ten years.
The FCC also imposes a requirement that all licensees register and obtain
FCC registration numbers for all of their antenna towers which require prior FAA
clearance. Aerial is currently engaged in this registration process. All new
towers must be registered at the time of construction.
The FCC licenses granted to Aerial are issued for a ten-year period expiring
June 23, 2005 and may be renewed. In the event challengers file competing
applications in response to any of Aerial's renewal filings, the FCC has rules
and policies providing that the application of the licensee seeking renewal will
be granted and the application of the challenger will not be considered in the
event that the broadband PCS licensee involved has (i) provided "substantial"
performance, which is defined as "sound, favorable and substantially above a
level of mediocre service just minimally justifying renewal" and (ii)
substantially complied with FCC rules, policies and the Communications Act.
Although Aerial is unaware of any circumstances which would prevent the approval
of any future renewal applications, there can be no assurance that Aerial's
licenses will be renewed by the FCC in the future. Moreover, although revocation
and involuntary modification of licenses are extraordinary regulatory measures,
the FCC has the authority to restrict the operation of licensed facilities or
revoke or modify licenses.
The FCC has proceedings in process which could open up other frequency bands
for wireless telecommunications and PCS-like services. There can be no assurance
that such proceedings will not result in additional wireless competition.
In addition, there are citizenship requirements, assignment requirements and
other federal regulations and requirements which may affect the business of
Aerial.
RECENT EVENTS. There are certain regulatory proceedings currently pending
before the FCC which are of particular importance to the broadband PCS industry.
In one proceeding, the FCC has imposed new "enhanced 911" regulations in
broadband PCS systems to determine the precise location of the person making the
emergency call. The new rules require broadband PCS providers to work with local
public safety officials to process 911 calls, including those made from mobile
telephones not registered with the broadband PCS provider, and to meet phased
deadlines for implementing these capabilities.
The FCC has adopted a limited expansion of the obligation of cellular
carriers to serve the subscribers of broadband PCS providers, among others, even
though the subscribers involved have no pre-existing service
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relationship with that carrier. Under these new policies, broadband PCS
providers may offer their subscribers handsets which are capable of operating
over broadband PCS and cellular networks so that when their subscribers are out
of range of broadband PCS networks, they will be able to obtain non-automatic
access to cellular networks. The FCC expects that implementation of these
roaming capabilities will promote competition between broadband PCS and cellular
service providers.
The FCC has adopted requirements which will make it possible for subscribers
to retain, at the same location, their existing telephone numbers when they
switch from one service provider to another. This numbering portability will
include switching between LEC and other wireline providers, between wireless
service providers and between LEC/wireline and wireless providers. LECs have
implementation deadlines by the end of 1998. Broadband PCS, cellular and certain
other wireless providers have phased implementation deadlines in 1998 and 1999.
Beginning in October 1997, broadband PCS systems, which previously were
"categorically excluded" from having to evaluate their facilities to ensure
their compliance with federal "radio frequency" (RF) radiation requirements,
were made subject to those requirements. After October 1997, all new broadband
PCS facilities must be in compliance when they are brought into service.
The FCC is also proceeding to implement the 1996 Act. The 1996 Act provides
that implementing its legislative objectives will be the task of the FCC, the
state public utilities commissions and a Federal-state Joint Board. Much of this
implementation is proceeding in numerous, concurrent proceedings with aggressive
deadlines. Aerial cannot predict the full extent and nature of developments of
the 1996 Act, which will depend, in part, upon interrelationships among state
and federal regulators.
The primary purpose and effect of the new law is to open all
telecommunications markets to competition-including local telephone service. The
1996 Act makes most direct or indirect state and local barriers to competition
unlawful. It directs the FCC to preempt all inconsistent state and local laws
and regulations, after notice and comment proceedings. It also enables electric
and other utilities to engage in telecommunications service through qualifying
subsidiaries.
Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the 1996 Act's universal service provision
and necessary for universal services, public safety and welfare, continued
service quality and consumer rights. While a state may not impose requirements
that effectively function as barriers to entry, it retains limited authority to
regulate certain competitive practices of state and local regulators.
Since enactment, the FCC has adopted orders implementing the local
competition provisions of the 1996 Act. The FCC found that broadband PCS and
certain other wireless providers are entitled to reciprocal compensation, may
not be charged for LEC-originated traffic or for code opening/per-number fees,
and may obtain LEC interconnection subject to the terms of the 1996 Act. Appeals
were taken to the United States Court of Appeals for the Eighth Circuit from
these FCC orders by numerous parties alleging that the FCC has exceeded its
statutory mandate, among other matters. On July 18, 1997, the Eighth Circuit
vacated the FCC's rules prescribing interim rates for reciprocal compensation
because it has held that the 1996 Act requires that rate issues are to be
decided by the states. It upheld the authority of the FCC to order LECs to
interconnect with broadband PCS and other wireless providers and to issue rules
relating to certain terms of interconnection between LECs and such providers.
The 1996 Act establishes principles and a process for implementing a
modified "universal service" policy. This policy seeks nationwide, affordable
service and access to advanced telecommunications and information services. It
calls for reasonably comparable urban and rural rates and services. The 1996 Act
also requires universal service to schools, libraries and rural health
facilities at discounted rates. In a series of Orders adopted in May, July and
August, 1997, the FCC established universal service support mechanisms which
require telecommunications providers, including all wireless carriers, to
contribute. Aerial has made the required Universal Service Worksheet filings and
expects to make the required periodic payments starting in the first quarter of
1998.
STATE AND LOCAL REGULATION. The scope of state regulatory authority covers
such matters as the terms and conditions of interconnection between LECs and
wireless carriers with respect to intrastate services, customer billing
information and practices, billing disputes, other consumer protection matters,
facilities construction issues and transfers of control, among other matters. In
these areas, particularly the terms and conditions of interconnection between
LECs and wireless providers, the FCC and state regulatory authorities share
regulatory responsibilities with respect to interstate and intrastate issues,
respectively.
The FCC has pending numerous petitions for pre-emption of state and local
regulations which allege such regulations prohibit or impair the provision of
interstate or intrastate telecommunications services. It has also
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requested public comment on a petition requesting pre-emption of moratoria
imposed by state and local governments on siting of telecommunications
facilities, the imposition of state taxes on the gross receipts of CMRS
providers and other proposed state taxes based on the asset value of CMRS
licenses awarded by the FCC. The FCC has been actively involved in educating
state and local regulatory and zoning authorities as to the prohibitions in the
1996 Act against the creation of unreasonable and discriminatory zoning,
taxation or other barriers to new wireless providers.
The FCC is required to forbear from applying any statutory or regulatory
provision that is not necessary to keep telecommunications rates and terms
reasonable or to protect consumers. A state may not apply a statutory or
regulatory provision that the FCC decides to forbear from applying. In addition,
the FCC must review its telecommunications regulations every two years and
change any that are no longer necessary.
Aerial and its subsidiaries have been and intend to remain active
participants in proceedings before the FCC and before state and local regulatory
and zoning authorities. Proceedings with respect to the foregoing policy issues
before the FCC and state regulatory authorities could have significant impacts
on the competitive market structure among wireless providers and the
relationships between wireless providers and other carriers. Aerial is unable to
predict the scope, pace, or financial impact of policy changes which could be
adopted in these proceedings.
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RADIO PAGING OPERATIONS
The Company manages its radio paging business through American Paging, Inc.
and subsidiaries. American Paging provides wireless communications messaging
services in the United States with operations concentrated in Florida and in the
Mid-Atlantic and Midwest regions.
COMBINATION OF AMERICAN PAGING AND TSR PAGING
American Paging is currently an 82%-owned subsidiary of the Company which
offers radio paging and related services.
In December 1997, TDS announced an agreement with TSR Paging, Inc. ("TSR")
to combine their respective paging businesses. Pursuant to the agreement, TDS
made an offer to American Paging to negotiate and enter into a merger agreement
pursuant to which TDS would acquire all of the outstanding Common Shares of
American Paging held by persons other than TDS (the "Minority Shareholders") for
cash in an amount equal to $2.25 per American Paging Common Share. The TDS offer
was considered by a special committee of the Board of Directors of American
Paging, which consists of two independent directors of American Paging.
Following review of the offer by the special committee and negotiations between
the special committee and TDS, TDS increased its offer to $2.50 per American
Paging Common Share. On February 10, 1998, the special committee approved the
revised offer and recommended that the full Board of Directors of American
Paging approve the revised offer. As a result, on February 10, 1998, the Board
of Directors of each of American Paging and TDS approved a merger agreement
providing for the acquisition by TDS (through a wholly-owned subsidiary ("TDS
Sub")) of all the issued and outstanding American Paging Common Shares held by
the Minority Shareholders for cash in an amount equal to $2.50 per American
Paging Common Share.
The merger agreement provides that TDS Sub will initially commence a tender
offer for each of the American Paging Common Shares held by the Minority
Shareholders in exchange for $2.50 in cash. Following the offer, TDS will effect
a merger of American Paging and TDS Sub. In such merger, all Minority
Shareholders will receive $2.50 in cash for each American Paging Common Share.
Following the effectiveness of such merger, American Paging Common Shares will
cease to be traded on the American Stock Exchange and American Paging will cease
to be a reporting company under the Securities Exchange Act of 1934.
Upon consummation of the merger, TDS will cause American Paging to
contribute substantially all of its assets and certain, limited liabilities, and
TSR would contribute all of its assets and liabilities to a new limited
liability company. The asset contribution agreement provides that, subject to
adjustment, TDS will have a 30% interest and TSR will have a 70% interest in the
new company. The formation of the new company, while subject to a number of
conditions, including consummation of the merger and regulatory approvals, is
expected to occur in the first half of 1998. TDS will adopt the equity method of
accounting upon the completion of the merger.
WIRELESS MESSAGING INDUSTRY
Wireless communications messaging technology uses an assigned radio
frequency, licensed by the FCC, to contact a customer within a geographic
service area. Subscriber devices are small, lightweight, easy-to-use,
battery-operated devices which receive messages by the broadcast of a radio
signal. To contact a customer, a message is initiated by placing a telephone
call to the customer's subscriber device number or through computer software
which enables a computer to transmit a text message via the modem line. The
message is received by a computerized paging switch which generates a signal
sent to microprocessor-controlled radio transmitters within the service area.
These radio transmitters are connected to the paging terminal either through
land-line or satellite links. The transmitters broadcast a digital or analog
signal that is received by the pager and delivered as alphanumeric text,
numerical display, tone or voice message.
The wireless messaging industry started in 1949 when the FCC allocated
certain radio frequencies for exclusive use in providing one-way and two-way
types of mobile communications services. The industry grew slowly during its
first thirty years as the quality and reliability of equipment was developed and
the market began to perceive the benefits of wireless communications. Until the
1980s, the industry was highly fragmented with a large number of small, local
operators. During that decade, acquisitions of many firms by regional telephone
companies and others greatly consolidated the industry. Several large industry
acquisitions have occurred in the 1990s which has resulted in further
consolidation of the paging industry.
Manufacturers of subscriber devices and transmission equipment have produced
innovative technological advances which are expected to continue to broaden the
potential market size for wireless messaging services and
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support the industry's rapid growth rate. Micro circuitry, liquid crystal
display technology and digital signal processing have all expanded the
capability and capacity of messaging services while reducing equipment and
air-time costs and equipment size. Narrowband Personal Communication Services
("PCS") technology is expected to greatly expand the messaging capacity of the
infrastructure and provide advanced two-way messaging and data services.
Recent technological innovations in subscriber devices and transmission
protocols have resulted in the development of acknowledgment paging and two-way
paging. In acknowledgment paging, the subscriber devices can initiate a return
message to the original message sender, informing him or her that the message
was successfully received. In two-way paging, the subscriber devices enable the
user to initiate, receive and/or reply to messages and pages through a built-in
keyboard and miniaturized transmitter. In addition, the subscriber devices can
communicate with other devices such as pagers, fax machines, and computers
through electronic mail addresses.
The following table summarizes certain information about American Paging's
operations.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED OR AT YEAR ENDED OR AT DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- ----------- ----------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Pagers in service.............................. 792,800 777,400 784,500 652,800 460,900 322,200
Total revenues................................. $ 71,758 $ 104,187 $ 107,150 $ 92,065 $ 75,363 $ 54,716
Depreciation and amortization expense.......... 23,658 33,777 24,692 17,178 13,392 10,412
Operating (loss)............................... (24,845) (36,626) (8,997) (169) (721) (5,447)
Additions to property and equipment............ 13,594 32,517 26,527 28,966 21,454 14,277
Identifiable assets............................ $ 142,569 $ 153,374 $ 159,170 $ 146,107 $ 74,923 $ 57,080
</TABLE>
DEVELOPMENT
American Paging's business strategy is to enhance the customers' business
and solve their communications problems by utilizing quality employees and
leading-edge wireless messaging technology while creating excellent returns for
shareholders. American Paging also strives to be a company that people enjoy
doing business with through consistent positive customer interactions. American
Paging's business strategy is based on the following elements:
QUALITY CUSTOMER SERVICE. American Paging's centralized Customer Telecare
Center ("CTC") located in Oklahoma City, Oklahoma can provide full customer
service to the entire customer base 24-hours-per-day, seven-days-per-week.
Customer service representatives at the CTC, which are organized based on
geographic regions, have the capability to fulfill sales orders, add additional
services and answer technical and billing questions. American Paging experienced
difficulties in converting to the CTC in 1996, but has gradually improved
customer satisfaction levels throughout 1997 as a result of improvements in
customer communication and workflow processes.
SPECTRUM DEVELOPMENT. American Paging owns five regional narrowband PCS
licenses which provide coverage equivalent to that of a nationwide license. Each
of the five licenses consists of a 50 kHz outbound channel on frequency 930.625
MHZ paired with a 12.5 kHz return channel on frequency 901.80625 MHz. During
1997, American Paging launched North America's first commercial two-way paging
network utilizing the ReFLEX25-Registered Trademark-protocol in Pittsburgh,
Pennsylvania. Testing of the network occurred in the second half of 1997 with
commercial sales expected during the first quarter of 1998. The licenses enable
American Paging to introduce two-way wireless messaging communications services
including acknowledgment paging, data and telemetry services, wireless e-mail
and digitized voice messaging. These services will be initially available in the
Western Pennsylvania market with potential expansion throughout the rest of the
United States.
American Paging also owns an exclusive nationwide Private Carrier Paging
("PCP") channel on frequency 929.3375 MHZ. American Paging believes this license
will enable it to offer competitive regional and nationwide wireless messaging
services. American Paging's Minnesota, Oklahoma, Texas and Washington, DC
systems currently utilize this frequency.
The narrowband PCS licenses and the PCP license will provide American Paging
with significant spectrum capacity upon which to offer future wireless messaging
services. Significant funds will be required as American Paging proceeds with
development of its narrowband PCS licenses and PCP license. There can be no
assurance
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that American Paging will be successful in developing these licenses due to such
factors as the inability to obtain sufficient financing at a reasonable cost,
availability of the supporting infrastructure and related subscriber device
equipment, competition, regulatory developments or other factors.
TECHNOLOGICAL LEADERSHIP. American Paging invests in state-of-the-art
communication network technology which provides high transmission quality, data
speed and system capacity, while also providing strong system management tools
which allow American Paging to efficiently and effectively operate the systems.
American Paging utilizes FLEX-Registered Trademark- protocol technology for all
new transmitters installed on its one-way networks which increases system
capacity and will allow a more cost effective migration to narrowband PCS
technology and other future wireless messaging services. American Paging also
utilizes satellite-based digital technology which reduces maintenance and
eliminates more expensive terrestrial radio links, site costs and repeater
equipment. American Paging's satellite-controlled systems cover portions of
Arizona, Minnesota, Wisconsin, Illinois, Oklahoma, Florida, Texas and
Washington, DC. American Paging is converting all other wide-area systems to
this satellite-based digital technology.
In order to reduce the cost of providing service, American Paging
implemented a plan in 1997 to migrate the existing customer base from its
current 19 frequencies and 43 networks to no more than three frequencies
supported by six nationwide networks. During this three to four year migration
period, American Paging expects to dismantle and sell some of the older, less
efficient systems. In addition, American Paging intends to relocate some
existing transmitters to more heavily populated areas in order to expand
coverage, improve quality and gain new customers.
PAGING OPERATIONS
American Paging provides local, statewide, regional and nationwide advanced,
one-way digital wireless messaging communications services to customers in 21
states and the District of Columbia through its 35 sales and service offices.
American Paging offers local and regional paging coverage throughout Florida,
the Midwest (including all or parts of Minnesota, Wisconsin, Missouri, Illinois,
Indiana and Kentucky), the Mid-Atlantic (including all or parts of Maryland,
Pennsylvania, Virginia and Washington, D.C.) and in portions of Oklahoma, Texas,
Arizona and Utah. One-way paging services are also offered in portions of Ohio,
Iowa and Southern California, through various transmitter-sharing agreements
with nonaffiliated service providers. American Paging expects to begin
commercial sales on its two-way network in the Western Pennsylvania in the first
quarter of 1998. Nationwide one-way and two-way paging services are offered
through American Paging's alliances with nonaffiliated service providers.
Generally, a one-way wireless messaging system consists of a control center,
transmitters and dedicated links (wire, fiber optic, radio, or satellite)
between the control center and the transmitters and the subscriber devices
themselves. The control center is interconnected with the public switched
telephone network ("PSTN") and receives messages from landline telephones.
Messages received at the control center are matched to each subscriber device's
unique telephone number, or "cap code," translated into digital signals and
forwarded over dedicated links to transmitters that broadcast the message over a
specified frequency. If the subscriber device to which the message is directed
is in the transmitter coverage area, it will recognize its "cap code" and
indicate to its wearer that it has received a message.
A one-way wireless messaging system can be migrated to a two-way system
through modification of the control center and additional receivers. The new
network configuration provides continuity between existing one-way transmitters
and receivers and the narrowband PCS network. The network configuration also
provides the receiver network for return messages generated from two-way
subscriber devices. The narrowband PCS network will be capable of services such
as guaranteed delivery, short response messaging and gateways to the Internet.
A paging operator is generally assigned a block of numbers by the local
telephone company in its service area. These numbers are assigned to individual
subscriber devices. When the number assigned to the subscriber device is called
from the PSTN, messages can be transmitted automatically by terminal equipment
in the control center without the intervention of a live operator.
American Paging currently provides four types of subscriber devices in all
of its markets: alphanumeric text display, numeric, tone and voice. Alphanumeric
text display service allows customers to receive, store and display full text
messages, consisting of both numbers and letters up to 240 characters long,
which are sent from either a data entry device, message dispatch operator or via
computer modem through messaging software. A numeric display pager permits a
caller to transmit to the customer a numeric message that may consist of a
telephone number, an account number or coded numeric information. It has the
memory capability to store several such
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numeric messages which can be recalled by the customer when desired. A tone
pager notifies the customer that a message has been received by emitting an
audible beep, displaying a flashing light or vibrating. In the case of voice
service, the notification is followed by a brief voice message.
MARKETING STRATEGY
American Paging directs its marketing efforts at value-oriented customers
who appreciate its high degree of technical reliability and high level of
customer service. American Paging's marketing strategy is designed to increase
market share and operating cash flow by achieving rapid growth at modest cost
per net customer unit added. Continuing quality improvements, including new
services and products, help stimulate this growth while controlling costs.
American Paging generates its revenues from (I) service usage billed on a
flat-rate or measured-service basis, (ii) subscriber device rentals, (iii)
subscriber device warranties, maintenance and repair, (iv) loss protection, (v)
voice mail usage on a flat-rate or measured-service basis, (vi) activation fees,
(vii) the sale of subscriber device accessories and (viii) service usage of
value-added services such as information services, text dispatching, second
telephone numbers or group calls. Service to end users is provided directly by
American Paging in most cases.
American Paging markets its services directly through its direct sales
force, company-owned retail stores, and indirectly through third-party resellers
and agents. The direct sales staff is responsible for the development of large
and medium business accounts and for the promotion of nationwide paging
services. Company-owned retail stores focus on serving consumer and small
business accounts as do indirect agents. American Paging sells subscriber
devices to agents at a small mark-up or at cost. Agents then sell the subscriber
devices to customers who purchase the services directly from American Paging.
American Paging provides sales support to its agents, including promotional
material and end-user information.
American Paging provides services under marketing agreements with
third-party marketing organizations, or resellers. American Paging offers air
time in bulk quantities at wholesale rates to resellers who then "re-sell" the
air time to end users at a mark-up. Resellers incur the cost to acquire
customers as well as to service, bill and collect revenues from the customer.
They also assume the cost of the subscriber device for those who lease rather
than purchase.
COMPETITION
American Paging faces significant competition in all of its markets.
Competition for subscribers in most geographic markets American Paging serves is
based primarily on price, quality of services offered and the geographic area
covered. A number of American Paging's competitors, which include local,
regional and national paging companies and certain regional telephone companies,
possess greater financial, technical and other resources than American Paging.
Moreover, certain competitors in the wireless messaging business offer wider
coverage in certain geographic areas than does American Paging and certain
competitors follow a low-price discounting strategy to expand market share. If
any of such companies were to devote additional resources to the wireless
messaging business or increase competitive pressure in American Paging's
markets, American Paging's results of operations could be adversely affected.
A number of wireless communication technologies, including cellular
telephone service, broadband PCS, enhanced SMR and others, are competitive forms
of technology used in, or projected to be used for, wireless two-way
communications. Cellular telephone technology provides an alternative
communications system for customers who are frequently away from fixed-wire or
landline communications systems (i.e., ordinary telephones). American Paging
believes that paging will remain one of the lowest-cost forms of wireless
messaging due to the low-cost infrastructure associated with paging systems, as
well as advances in technology that will provide for reduced paging costs.
Broadband PCS technology is currently available in selected markets and
development continues in many other markets throughout the United States.
Broadband PCS Technology is similar in design to cellular technology and will
offer increased capacity for wireless two-way communication as well as
short-text messaging. Accordingly, this technology is expected to result in
increased competition for American Paging.
American Paging believes the services offered by narrowband PCS technology
will be complementary to the services and functionality of cellular and
broadband PCS. Future technological developments in the wireless
telecommunications industry and the enhancement of current technologies will
likely create new products and
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services that are competitive with the wireless messaging services currently
offered by American Paging. There can be no assurance that American Paging would
not be adversely affected by such technology changes.
REGULATION
REGULATORY ENVIRONMENT. American Paging's paging operations are subject to
regulation by the FCC and by state regulatory agencies. The FCC exercises broad
authority to regulate market entry and rates and shares responsibilities with
state regulatory authorities over a broad range of other matters.
The construction, operation and transfer of American Paging's systems in the
United States are regulated to varying degrees by the FCC pursuant to the
Communications Act. In addition, the 1996 Act, which amended the Communications
Act, mandates significant changes in existing telecommunications rules and
policies to promote competition, ensure the availability of telecommunications
services to all parts of the nation and to streamline regulation of the
telecommunications industry to remove regulatory burdens, as competition
develops and makes regulation unnecessary. The FCC has promulgated regulations
governing construction and operation of wireless systems, licensing (including
renewal of licenses) and technical standards for the provision of wireless
services under the Communications Act, and is implementing the legislative
objectives of the 1996 Act, as discussed below.
LICENSING. The FCC is responsible for awarding licenses for radio
frequencies used by American Paging and its subsidiaries to provide its one-way
and two-way message and other service offerings. It also establishes and
enforces the licensing, technical and operating rules which govern operations on
those frequencies, the terms and conditions under which the wireless systems of
American Paging and its subsidiaries are interconnected with and obtain services
and facilities from other service providers such as local exchange carriers and
others with respect to interstate services and adjudicates any consumer or other
complaints filed under the Communications Act with respect to service providers
subject to its jurisdiction. The FCC also imposes a requirement that all
licensees register and obtain FCC registration numbers for all of their antenna
towers which require prior FAA clearance. American Paging is currently engaged
in this registration process. All new towers must be registered at the time of
construction.
The FCC licenses granted to American Paging are issued for up to ten years
at the end of which time renewal applications must be filed with the FCC. Most
of American Paging's current licenses expire between 1998 and 2001. FCC renewals
are generally granted so long as American Paging is in compliance with FCC
regulations. Although American Paging is unaware of any circumstances which
would prevent the approval of any pending or future renewal applications, no
assurance can be given that American Paging's licenses will be renewed by the
FCC in the future. Moreover, although revocation and involuntary modification of
licenses are extraordinary regulatory measures, the FCC has the authority to
restrict the operation of licensed facilities or revoke or modify licenses. No
license granted to American Paging has ever been involuntarily revoked or
modified.
The Communications Act requires licensees, such as American Paging, to
obtain prior approval from the FCC for the assignment or transfer of control of
any construction permit or station license, or any rights thereunder. The
Communications Act also requires prior approval by the FCC of acquisitions of
other paging companies by American Paging. The FCC has approved all transfers of
control for which American Paging has sought approval. American Paging also
routinely applies for FCC authority to use frequencies, modify the technical
parameters of existing licenses, expand its service territory and provide new
services. Although there can be no assurance that any future requests for
approval or applications filed by American Paging will be approved or acted upon
in a timely manner by the FCC, or that the FCC will grant the relief requested,
American Paging has no reason to believe that any such requests, applications or
relief will not be approved or granted.
Pursuant to 1993 amendments to the Communications Act, a paging service is
classified as a CMRS, to the extent that it is a service offered to the public,
for a fee, which is interconnected to the public switched telephone network.
These 1993 amendments prohibit state and local authorities from limiting CMRS
market entry and regulating CMRS rates.
RECENT EVENTS. The FCC adopted certain significant decisions during 1997.
In one decision, the FCC amended its environmental protection rules to adopt new
guidelines and procedures for evaluating the environmental effects of RF
emissions. Beginning in October 1997, paging systems, which previously were
"categorically excluded" from having to evaluate their facilities to ensure
their compliance with federal "radio frequency" (RF) radiation requirements,
were made subject to those requirements. After October 1997, all new paging
facilities must be in compliance when they are brought into service.
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In addition, in February of 1997, the FCC adopted market area licensing
rules to replace site-by-site licensing of paging base stations and granted
nationwide exclusive authority for American Paging to operate on 929.3375 MHZ
under those new rules. The FCC has also recently announce its intention to hold
spectrum auctions for 929/931 MHZ paging channels in 1998.
The FCC also established a phased program which requires per-call
compensation to be paid to pay-phone service providers by subscribers to 800
numbers, among others. American Paging and numerous other paging providers who
offer 800 number calling features as a means of accessing their networks will be
required to compensate pay phone service providers under these new requirements.
During 1997 the FCC implemented significant changes in existing regulation
of the telecommunications industry under the 1996 Act. Some of these specific
changes, potentially affecting CMRS providers, including paging and narrowband
PCS providers, are summarized below.
The primary purpose and effect of the new law is to open all
telecommunications markets to competition. The 1996 Act makes most direct or
indirect state and local barriers to competition unlawful. It directs the FCC to
preempt all inconsistent state and local laws and regulations, after notice and
comment proceedings. It also enables electric and other utilities to engage in
telecommunications service through qualifying subsidiaries.
Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the 1996 Act's universal service provision
and necessary for universal services, public safety and welfare, continued
service quality and consumer rights. While a state may not impose requirements
that effectively function as barriers to entry, it retains limited authority to
regulate certain competitive practices in rural telephone company service areas.
Since enactment, the FCC has adopted orders implementing the local
competition provisions of the 1996 Act. The FCC found that certain wireless
providers are entitled to reciprocal compensation, may not be charged for LEC-
originated traffic or for code opening/per-number fees, and may obtain LEC
interconnection subject to the terms of the 1996 Act. Appeals were taken to the
United States Court of Appeals for the Eighth Circuit from these FCC orders by
numerous parties alleging that the FCC has exceeded its statutory mandate, among
other matters. On July 18, 1997, the Eighth Circuit vacated the FCC's rules
prescribing interim rates for reciprocal compensation because it has held that
the 1996 Act requires that rate issues are to be decided by the states. It
upheld the authority of the FCC to order LECs to interconnect with paging and
other wireless providers and to issue rules relating to certain terms of
interconnection between LECs and such providers.
The 1996 Act establishes principles and a process for implementing a
modified "universal service" policy. This policy seeks nationwide, affordable
service and access to advanced telecommunications and information services. It
calls for reasonably comparable urban and rural rates and services. The 1996 Act
also requires universal service to schools, libraries and rural health
facilities at discounted rates. The FCC has now concluded proceedings to address
recommendations made by the joint board with respect to the implementation of
the universal service provisions of the 1996 Act, including, among other issues,
the size of the universal service fund and the assessment mechanism to determine
how much individual wireless carriers will be required to contribute. In a
series of Orders adopted in May, July and August, 1997, the FCC established
universal service support mechanisms which require telecommunications providers,
including all wireless carriers, to contribute. American Paging has made the
required Universal Service Worksheet filings and expects to make the required
periodic payments starting in the first quarter of 1998.
STATE AND LOCAL REGULATION. The scope of state regulatory authority, while
excluding market entry and rate regulation, covers such matters as the terms and
conditions of interconnection between local exchange carriers and wireless
carriers with respect to intrastate services, customer billing information and
practices, billing disputes, other consumer protection matters, facilities setup
issues and transfers of control, among other matters. In these areas,
particularly the terms and conditions of interconnection between local exchange
carriers and wireless providers, the FCC and state regulatory authorities share
regulatory responsibilities with respect to interstate and intrastate issues,
respectively.
The FCC has pending numerous petitions for pre-emption of state and local
regulations which allege such regulations prohibit or impair the provision of
interstate or intrastate telecommunications services. It has also requested
public comment on a petition requesting pre-emption of moratoria imposed by
state and local governments on siting of telecommunications facilities, the
imposition of state taxes on the gross receipts of CMRS providers and other
proposed state taxes based on the asset value of CMRS licenses awarded by the
FCC.
I-35
<PAGE>
The FCC is required to forbear from applying any statutory or regulatory
provision that is not necessary to keep telecommunications rates and terms
reasonable or to protect consumers. A state may not apply a statutory or
regulatory provision that the FCC decides to forbear from applying. In addition,
the FCC must review its telecommunications regulations every two years and
change any that are no longer necessary.
American Paging and its subsidiaries have been and intend to remain active
participants in proceedings before the FCC and, through its membership in state
associations of wireless providers, before state regulatory authorities.
Proceedings with respect to the foregoing policy issues before the FCC and state
regulatory authorities could have a significant impact on the competitive market
structure among wireless providers and the relationships between wireless
providers and other carriers. American Paging is unable to predict the scope,
pace or financial impact of policy changes which could be adopted in these
proceedings.
EMPLOYEES
The Company enjoys satisfactory employee relations. As of September 30,
1997, 8,638 persons were employed by the Company, 155 of whom are represented by
unions.
I-36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
Telephone and Data Systems, Inc. ("TDS" or the "Company") provides
high-quality telecommunications services to over 2.3 million cellular telephone,
telephone and radio paging customer units in 37 states and the District of
Columbia.
The accompanying financial statements present the results of operations of
the Company's three primary businesses: United States Cellular Corporation
("U.S. Cellular"), an 80.6%-owned subsidiary, TDS Telecommunications Corporation
("TDS Telecom"), a wholly owned subsidiary, and American Paging, Inc. ("American
Paging"), an 82.3%-owned subsidiary, as well as its developing personal
communications services ("PCS") business, Aerial Communications, Inc. ("Aerial",
formerly American Portable Telecom, Inc.), an 82.8%-owned subsidiary.
TDS's long-term business development strategy is to expand its operations
through internal growth and acquisitions, and to explore and develop
telecommunications businesses that management believes utilize TDS's expertise
in customer-based telecommunications.
1996 MAJOR ACCOMPLISHMENTS
The Company made substantial progress during 1996 with excellent growth in
the cellular business and the rapid build out of the PCS business. The telephone
business continues to produce steady returns and strong cash flow, while the
paging business posted disappointing results.
U.S. Cellular continued its rapid growth during 1996. Customer units
increased 51%, exceeding the 1,000,000 mark, following a 69% increase in 1995.
The increase in customer units drove a 44% increase in revenues, a 48% increase
in cash flow and a 104% increase in operating income. The sale of non-strategic
cellular interests generated gains of $132.7 million and cash proceeds of $213.0
million. Capital expenditures to add cell sites, expand coverage and add
capacity totaled $219.4 million and expenditures for acquisitions totaled $56.1
million.
Aerial made substantial progress building its business this year. The focus
for 1996 was directed toward recruiting an experienced management team,
developing and executing a business plan, raising capital, and designing and
constructing networks in each of its markets. These activities significantly
increased expenses in 1996. PCS development expenses (included in "Investment
and Other Income (Expense)") increased to $43.9 million in 1996 from $7.8
million in 1995. Aerial had no revenues in 1996 as commercial service is not
expected to begin until March 1997.
Aerial's investment in property and equipment, including network design and
equipment, site acquisition and information system development costs, totaled
$312.6 million in 1996. To finance the development of its business, Aerial
completed an initial public offering in 1996 raising $195.3 million. Aerial also
negotiated a $200 million vendor financing arrangement for digital radio channel
and switching infrastructure equipment.
TDS Telecom continues to provide steady growth in revenues and cash flow.
Telephone access lines increased 14% resulting in a 13% increase in operating
revenues, a 10% increase in cash flow and a 5% increase in operating income. TDS
Telecom's investment in outside plant facilities and upgrades of recently
acquired companies for new customer growth and new digital switches totaled
$144.4 million, and expenditures for acquisitions totaled $88.1 million.
American Paging posted disappointing results for the year. During the third
quarter of 1995, American Paging launched a comprehensive restructuring
initiative relative to its sales and customer service organization. The
objectives of the restructuring were to increase sales through the direct
distribution channel, improve customer mix, lower administrative costs and
improve customer service.
The disruptions caused by the restructuring were more severe than
anticipated. Customer service and sales support was affected due to the
elimination of field service employees and problems with the customer management
and billing system. Sales and marketing activities, hurt by a high level of
employee turnover, produced no customer growth resulting in a 3% decline in
revenue. The decline in revenues combined with a 21% increase in operating
expenses caused operating losses to jump to $36.6 million in 1996 from $9.0
million in 1995.
To address these problems, American Paging appointed a new senior management
team, including a new President and CEO. The senior management team is in the
process of implementing a plan in 1997 centering on building a high quality,
focused sales and marketing organization, creating new, goal-oriented
distribution channel
I-37
<PAGE>
and pricing strategies, consolidating current systems to reduce the cost of
service and continually improving customer care practices.
RESULTS OF OPERATIONS
Telephone and Data Systems, Inc. reported net income available to common of
$126.3 million, or $2.08 per share, in 1996 compared to $102.0 million, or $1.74
per share, in 1995 and $58.0 million, or $1.06 per share, in 1994. Results of
operations primarily reflects significant cellular business unit growth and
steady telephone operations growth. Results of operations were negatively
impacted by Aerial's development costs as it proceeds to develop and construct
its PCS networks, as well as the losses incurred by American Paging. Gains on
sales of non-strategic cellular interests and other investments had a
significant impact on net income in 1996 and 1995.
Excluding PCS development costs and gains on the sales of cellular interests
and other investments, along with the related income taxes and minority
interest, net income available to common would have been $77.1 million or $1.27
per share, in 1996 compared to $68.1 million or $1.16 per share, in 1995 and
$53.2 million or $.98 per share in 1994.
OPERATING REVENUES increased 27% ($260.3 million) during 1996 and 31%
($223.6 million) during 1995 primarily as a result of growth in the cellular
telephone operations.
Cellular telephone revenues increased $215.4 million in 1996 and $160.0
million in 1995 on 51% and 69% increases in customer units, respectively, and
strong increases in inbound roaming revenues. Telephone revenues increased $47.8
million in 1996 and $48.5 million in 1995 as a result of acquisitions, increased
network usage, recovery of increased costs of providing long-distance services
and internal access line growth. Radio paging revenues decreased $3.0 million in
1996 and increased $15.1 million in 1995.
Cellular made up 58% of consolidated revenue in 1996, up from 45% in 1994.
Telephone and paging operations were 33% and 9% of consolidated revenue in 1996
and 42% and 13% in 1994, respectively.
OPERATING EXPENSES rose 29% ($238.2 million) in 1996 and 32% ($200.4
million) in 1995. Cellular telephone operating expenses increased $170.8 million
during 1996 and $134.6 million during 1995 due to the effects of additional
marketing and selling expenses to add new customers as well as the costs of
providing services to the larger customer base. Telephone operating expenses
increased $42.7 million during 1996 and $41.9 million during 1995 due to the
effects of acquisitions and growth in internal operations. Paging operating
expenses increased $24.7 million in 1996 and $23.9 million in 1995 due to
additional expenses to restructure certain business processes and additional
costs to serve current customers and to add new customers.
OPERATING INCOME increased 17% ($22.1 million) in 1996 and 21% ($23.2
million) in 1995. Cellular telephone operating income increased 104% ($44.6
million) in 1996 and 146% ($25.4 million) in 1995 reflecting the increase in
customers and revenues. Telephone operating income increased $5.1 million in
1996 and $6.6 million in 1995. Paging operating loss increased $27.6 million in
1996 and $8.8 million in 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Operating Income
Cellular telephone............................................... $ 87,366 $ 42,755 $ 17,385
Telephone........................................................ 103,358 98,240 91,606
Radio paging..................................................... (36,626) (8,997) (169)
----------- ----------- -----------
$ 154,098 $ 131,998 $ 108,822
----------- ----------- -----------
----------- ----------- -----------
Operating Margins
Cellular telephone............................................... 12.3% 8.7% 5.2%
Telephone........................................................ 25.7% 27.7% 29.9%
Radio paging..................................................... (35.2%) (8.4%) (.2%)
Consolidated..................................................... 12.7% 13.8% 14.9%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
In early 1997, Aerial expects to begin commercial service which will result
in Aerial's revenues and expenses being included in operating income. Operating
income is expected to decrease significantly in 1997 as a result of the
commencement of PCS operations.
I-38
<PAGE>
INVESTMENT AND OTHER INCOME totaled $140.5 million in 1996, $103.9 million
in 1995 and $33.7 million in 1994.
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 33% ($13.5 million) in 1996 and 56% ($14.6
million) in 1995 as income from the cellular markets increased. Cellular
investment income is net of amortization of license costs relating to these
minority interests.
GAIN ON SALE OF CELLULAR INTERESTS AND OTHER INVESTMENTS totaled $138.7
million in 1996, $86.6 million in 1995 and $7.5 million in 1994. TDS and U.S.
Cellular continue to assess the makeup of cellular holdings in order to maximize
the benefits derived from clustering markets. Certain markets, identified as
non-strategic, were sold or traded in the past few years resulting in the
recognition of gains.
PCS DEVELOPMENT COSTS totaled $43.9 million in 1996 and $7.8 million in
1995. Aerial 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. Costs incurred in the
development and administration of Aerial which do not relate to the design or
construction of specific identifiable assets have been expensed.
MINORITY SHARE OF INCOME, the minority shareholders' share of U.S.
Cellular's, American Paging's and Aerial's net income or loss and other minority
shareholders' and partners' share of subsidiaries' net income or loss, increased
$800,000 in 1996 and $16.8 million in 1995.
INTEREST EXPENSE decreased 16% ($8.0 million) in 1996 and increased 23%
($9.6 million) in 1995. Capitalized interest associated with expenditures for
PCS licenses and capitalized construction costs increased $14.4 million in 1996
and $13.2 million in 1995. Interest expense increased $6.9 million in 1996 and
$7.4 million in 1995 as a result of U.S. Cellular's convertible debt offering in
June of 1995. Interest expense from U.S. Cellular's vendor financing agreement
increased $5.3 million in 1995. TDS Telecom interest expense increased $1.2
million in 1996 and $1.4 million in 1995 due primarily to additional interest
expense of acquired telephone companies.
Corporate interest expense decreased $2.0 million in 1996 and increased $8.6
million in 1995 reflecting primarily changes in average short-term debt
balances. See "Financial Resources and Liquidity" for a further discussion of
short- and long-term debt.
TDS capitalized $27.6 million of interest expense in 1996 and $13.2 million
in 1995. Interest expense will increase significantly in 1997 when TDS
discontinues capitalizing interest upon commencement of Aerial's operations.
INCOME TAX EXPENSE increased 53% ($42.6 million) in 1996 and 99% ($40.3
million) in 1995, reflecting primarily the 36% and 83% increases in pretax
income, respectively. The effective income tax rates were 49% in 1996, 44% in
1995 and 40% in 1994. The increase in the 1996 effective tax rate reflects
additional income tax expense of approximately $10.0 million due to tax gains in
excess of book gains associated with the sale of certain cellular interests. The
lower 1994 rate reflects deferred income taxes provided on the book/tax basis
difference related to certain telephone acquisitions and certain income excluded
due to the dividend exclusion rules.
NET INCOME AVAILABLE TO COMMON was $126.3 million in 1996, $102.0 million in
1995 and $58.0 million in 1994. EARNINGS PER COMMON SHARE were $2.08 in 1996,
$1.74 in 1995 and $1.06 in 1994.
Net income available to common for 1996 and 1995 included significant gains
from the sale of cellular interest and other investments as well as significant
PCS development costs. The table below summarizes the effects of the
I-39
<PAGE>
gains and PCS development costs (along with the related impact on income taxes
and minority interest) on net income available to common and earnings per share.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
NET INCOME AVAILABLE TO COMMON
Core Business............................................................. $ 77.1 $ 68.1 $ 53.2
Gains..................................................................... 64.5 40.6 5.8
PCS Development Costs..................................................... (15.3) (6.7) (1.0)
--------- --------- ---------
$ 126.3 $ 102.0 $ 58.0
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE
Core Business............................................................. $ 1.27 $ 1.16 $ .98
Gains..................................................................... 1.06 .69 .10
PCS Development Costs..................................................... (.25) (.11) (.02)
--------- --------- ---------
$ 2.08 $ 1.74 $ 1.06
--------- --------- ---------
--------- --------- ---------
</TABLE>
TDS anticipates that start-up and development of high-quality networks and
the marketing of systems in Aerial's markets will reduce the rate of growth in
TDS's operating and net income from levels which would otherwise be achieved
during the next few years.
CELLULAR TELEPHONE OPERATIONS
TDS provides cellular telephone service through U.S. Cellular Corporation
[AMEX: USM]. Results of operations include 1,073,000 customer units at the end
of 1996 compared to 710,000 customer units at the end of 1995 and 421,000
customer units at the end of 1994.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
---------------------------------------
1996 1995 1994
------------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER
CUSTOMER AMOUNTS)
Operating Revenues
Local Retail................................................... $ 442,568 $ 289,518 $ 187,978
Inbound roaming................................................ 193,278 148,020 104,009
Long-distance and other........................................ 71,974 54,857 40,417
------------- ----------- -----------
707,820 492,395 332,404
------------- ----------- -----------
Operating Expenses
System operations.............................................. 117,368 70,442 46,869
Marketing and selling.......................................... 150,000 102,361 69,072
Cost of equipment sold......................................... 74,023 54,948 39,431
General and administrative..................................... 170,224 132,431 94,193
Depreciation................................................... 74,631 57,302 39,520
Amortization................................................... 34,208 32,156 25,934
------------- ----------- -----------
620,454 449,640 315,019
------------- ----------- -----------
Operating Income................................................. $ 87,366 $ 42,755 $ 17,385
------------- ----------- -----------
------------- ----------- -----------
Consolidated Markets:
Customers...................................................... 1,073,000 710,000 421,000
Markets........................................................ 131 137 130
Market penetration............................................. 4.94% 3.18% 1.98%
Cell sites in service.......................................... 1,328 1,116 790
Average monthly service revenue per customer................... $ 66.36 $ 72.48 $ 79.74
Churn rate per month........................................... 1.9% 2.1% 2.3%
Marketing cost per gross customer addition....................... $ 367 $ 361 $ 408
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
I-40
<PAGE>
OPERATING REVENUES increased 44% ($215.4 million) in 1996 and 48% ($160.0
million) in 1995. The revenue increases in 1996 and 1995 were driven by the 51%
and 69% growth in customer units and the 31% and 42% growth in inbound roaming
revenues, respectively. Acquisitions, which were not material in 1996, increased
operating revenues 13% ($44.2 million) in 1995. Average monthly revenue per
customer was $66.36 in 1996, $72.48 in 1995 and $79.74 in 1994.
LOCAL RETAIL REVENUE (charges to U.S. Cellular's customers for local system
usage) increased 53% ($153.0 million) in 1996 and 54% ($101.5 million) in 1995
due primarily to the 51% and 69% growth in customers, respectively. Local
minutes of use averaged 107 per month in 1996 and 95 per month in 1995 and 1994.
Average revenue per minute was $.40 in 1996, $.46 in 1995 and $.50 in 1994. U.S.
Cellular's use of incentive programs in 1996 and 1995 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. Average monthly local retail revenue per customer was $42.54
in 1996, $44.03 in 1995 and $47.04 in 1994.
INBOUND ROAMING REVENUE (charges to customers of other systems who use U.S.
Cellular's cellular systems when roaming) increased 31% ($45.3 million) in 1996
and 42% ($44.0 million) in 1995 due to increased minutes of use. Minutes of use
increased 38% in 1996 and 60% in 1995. Average revenue per minute of use was
$.94 in 1996, $.99 in 1995 and $1.11 in 1994. Average monthly inbound roaming
revenue per U.S. Cellular customer was $18.58, $22.51 and $26.03 in 1996, 1995
and 1994, respectively. The decrease is the result of roaming revenue growing at
a slower rate than U.S. Cellular's customer base and negotiated reductions in
roaming rates.
LONG-DISTANCE AND OTHER REVENUE, including equipment sales, increased 31%
($17.1 million) in 1996 and 36% ($14.4 million) in 1995 primarily due to
increased long-distance revenue from the growth in the volume of long-distance
calls billed by U.S. Cellular.
The industry trend of declining average monthly retail revenue per customer
is believed to be related to the tendency of early customers in a market to be
the heaviest users during peak business hours. Newer customers have been added
through continued penetration of the consumer market, which tends to include
fewer peak business hour usage customers.
Management anticipates that average monthly revenue per customer will
continue to decrease as local retail revenue per minute of use declines due to
the usage patterns of incrementally added customers and as the growth rate of
the Company's customer base exceeds the growth rate of inbound roaming revenue,
diluting the roaming contribution per customer.
OPERATING EXPENSES increased 38% ($170.8 million) in 1996 and 43% ($134.6
million) in 1995. Acquisitions, which were not material in 1996, increased
operating expenses 13% ($40.7 million) in 1995. The increase in operating
expenses, excluding acquisition effects, is primarily due to the costs to expand
the customer base ($66.7 million in 1996 and $33.6 million in 1995); cost of
providing service to the expanding customer base ($46.9 million in 1996 and
$16.0 million in 1995); increased administrative expenses ($37.8 million in 1996
and $27.1 million in 1995) additional depreciation on the increased investment
in cell sites and equipment ($17.3 million in 1996 and $13.2 million in 1995)
and additional fraud charges ($13.9 million in 1996).
SYSTEM OPERATIONS EXPENSES increased 67% ($46.9 million) in 1996 and 50%
($23.6 million) in 1995 (34%, or $16.0 million excluding acquisitions) as a
result of increases in customer usage expenses, including significant increases
in fraud, and costs associated with operating the increased number of cell
sites.
Customer usage expenses (charges from other service providers for land line
connection, toll and roaming costs incurred by customers' use of systems other
than their local systems) grew 86% ($26.6 million) in 1996 and 62% ($13.4
million) in 1995. The increase was due primarily to inbound roaming usage.
Fraudulent use of U.S. Cellular's customers' telephone numbers increased
expenses $13.9 million to $18.0 million in 1996. 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 grew 18% ($6.5 million) in 1996
and 40% ($10.2 million) in 1995 reflecting the 19% and 41% increase in the
number of cell sites, respectively. The number of cell sites operated increased
to 1,328 in 1996 from 1,116 in 1995 and 790 in 1994.
MARKETING AND SELLING EXPENSES increased 47% ($47.6 million) in 1996 and 48%
($33.3 million) in 1995 (35%, or $24.3 million excluding acquisitions) due to
the increase in customer activations. Cost of equipment sold increased 35%
($19.1 million) in 1996 and 39% ($15.5 million) in 1995 (23%, or $9.3 million
excluding acquisitions). Cost per
I-41
<PAGE>
gross customer addition (marketing and selling expenses and cost of equipment
sold less equipment revenues, divided by gross customer additions) totaled $367
in 1996, $361 in 1995 and $408 in 1994.
GENERAL AND ADMINISTRATIVE EXPENSES increased 29% ($37.8 million) in 1996
and 41% ($38.2 million) in 1995 (29%, or $27.1 million excluding acquisitions).
The increases include the effects of an increase in expenses required to serve
the growing customer base and an expansion of both local administrative office
and corporate staff, resulting from growth in U.S. Cellular's business.
Operating cash flow increased 48% to $196.2 million in 1996 compared to a
60% increase to $132.2 million in 1995. The improvement was primarily due to the
growth in customers and revenue. U.S. Cellular continues to provide increasing
operating cash flow to support its operating and construction activities.
DEPRECIATION EXPENSE increased 30% ($17.3 million) in 1996 and 45% ($17.8
million) in 1995 (33%, or $13.2 million excluding acquisitions), reflecting
increases in average fixed asset balances of 34% and 48%, respectively.
AMORTIZATION EXPENSE increased 6% ($2.1 million) in 1996 and 24% ($6.2 million)
in 1995 (15%, or $4.0 million excluding acquisitions) due to increases in
deferred systems development costs in both years and license costs in 1995.
OPERATING INCOME was $87.4 million in 1996 compared to $42.8 million in 1995
and $17.4 million in 1994. Operating margins improved to 12.3% in 1996 from 8.7%
in 1995 and 5.2% in 1994. The improvement was primarily due to the substantial
growth in customers and revenue.
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.
Competitors licensed to provide PCS services have initiated service in
certain U.S. Cellular markets in recent months. U.S. Cellular anticipates that
PCS operators will initiate service in several other of its markets in 1997 and
1998. 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.
TELEPHONE OPERATIONS
TDS manages its telephone service through TDS Telecommunications Corporation
("TDS Telecom"). TDS Telecom served 484,500 access lines at the end of 1996
compared to 425,900 access lines at the end of 1995 and 392,500 access lines at
the end of 1994 ("telephone operations"). TDS Telecom also manages a
long-distance provider, an Internet access provider and certain other
non-telephone operations ("other operations").
OPERATING REVENUE totaled $402.6 million in 1996, up 13% ($47.8 million)
from 1995 and totaled $354.8 million in 1995, up 16% ($48.5 million) from 1994.
The increases were due to the growth in telephone operations ($39.6 million in
1996 and $35.6 million in 1995) and additional other operations revenues ($8.0
million in 1996 and $13.3 million in 1995).
OPERATING EXPENSES totaled $299.3 million in 1996, up 17% ($42.7 million)
from 1995 and totaled $256.6 million in 1995, up 19% ($41.9 million) from 1994.
The increases were due to the growth in telephone operations ($33.6 million in
1996 and $29.8 million in 1995) and additional other operations expenses ($8.9
million in 1996 and $12.3 million in 1995).
Operating cash flow increased 10% to $192.3 million in 1996 compared to an
increase of 9% to $175.6 million in 1995 due primarily to the growth in
telephone operations. TDS Telecom continues to provide steadily growing
operating cash flow to support its construction activities.
OPERATING INCOME increased 5% ($5.1 million) in 1996 and increased 7% ($6.6
million) in 1995. The reduction in the growth rate of operating income was
caused by the reduction in the telephone operating margins and other operations
margins.
I-42
<PAGE>
Management expects TDS Telecom's revenues, operating income and operating
cash flow to increase modestly in 1997 from steady growth in operations. TDS
Telecom will continue to see pressures on revenue sources resulting from
regulatory changes and competitive pressures.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER
CUSTOMER AMOUNTS)
Telephone Operations
Operating Revenue................................................ $ 371,913 $ 332,287 $ 296,722
Operating Expenses
Network operations............................................. 67,521 54,964 45,412
Depreciation and amortization.................................. 85,575 74,758 67,956
Customer operations............................................ 53,764 46,818 42,617
Corporate and other............................................ 62,276 58,998 49,706
----------- ----------- -----------
269,136 235,538 205,691
----------- ----------- -----------
Telephone Operating Income......................................... 102,777 96,749 91,031
----------- ----------- -----------
Other operations
Revenues......................................................... 31,774 23,764 10,499
Expenses......................................................... 31,193 22,273 9,924
----------- ----------- -----------
Other Operations
Operating Income................................................. 581 1,491 575
----------- ----------- -----------
Intercompany Eliminations
Revenues......................................................... (1,058) (1,210) (880)
Expenses......................................................... (1,058) (1,210) (880)
----------- ----------- -----------
Operating Income................................................... $ 103,358 $ 98,240 $ 91,606
----------- ----------- -----------
----------- ----------- -----------
Companies.......................................................... 105 100 96
Access lines....................................................... 484,500 425,900 392,500
Growth in access lines from prior year-end:
Acquisitions..................................................... 33,100 13,500 19,700
Internal growth 25,500 19,900 16,600
Telephone plant in service per access line......................... $ 2,461 $ 2,356 $ 2,283
Average monthly revenue per access line............................ $ 67.12 $ 66.87 $ 66.66
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
OPERATING REVENUE from telephone operations increased 12% ($39.6 million) in
1996 and 12% ($35.6 million) in 1995. Acquisitions increased telephone revenues
$18.8 million in 1996 and $16.8 million in 1995. Internal growth and increases
in the sales of custom calling features increased revenue by $8.0 million in
1996 and $6.0 million in 1995. Increased network usage resulted in revenue
increases of $4.5 million in 1996 and $5.8 million in 1995. Recovery of
increased costs of providing long-distance services resulted in increases in
revenue of $8.1 million in 1996 and $4.5 million in 1995. Average monthly
revenue per access line was $67.12 in 1996, $66.87 in 1995 and $66.66 in 1994.
OPERATING EXPENSES from telephone operations increased 14% ($33.6 million)
in 1996 and 15% ($29.8 million) in 1995. The effects of acquisitions increased
expenses 6% ($14.6 million) in 1996 and 7% ($13.8 million) in 1995. Depreciation
and amortization expenses increased 14% ($10.8 million) in 1996 and 10% ($6.8
million) in 1995 due primarily to increased investment in plant and equipment.
The development of a centralized network management center to provide more
effective network monitoring and maintenance and the development of groups to
explore new service offerings caused expenses to increase by $3.4 million and
$3.2 million, respectively, in 1996. These expenditures are expected to begin
producing cost efficiencies and new revenues in the next several quarters and
beyond. Additional routine maintenance activity and equipment write-offs
increased network expenses by $2.0 million in 1995. The remaining increase in
each year was due primarily to growth in internal operations.
OPERATING INCOME from telephone operations increased 6% ($6.0 million) in
1996 and increased 6% ($5.7 million) in 1995. The effects of acquisitions
increased operating income 4% ($4.2 million) in 1996 and 3% ($3.0 million) in
1995. The telephone operating margin was 27.6% in 1996, 29.1% in 1995 and 30.7%
in 1994. The reduction in
I-43
<PAGE>
operating margin was caused by earnings pressures from regulatory agencies and
long-distance providers and increased costs associated with the development of
the centralized network management center.
TDS Telecom is subject to the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain
Types of Regulation." The Company periodically reviews the criteria for applying
these provisions to determine whether continuing application of SFAS No. 71 is
appropriate. The Company believes that such criteria are still being met and
therefore has no current plans to change its method of accounting.
In analyzing the effects of discontinuing the application of SFAS No. 71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles and therefore any adjustments to accumulated
depreciation would be immaterial, as would be the write-off of regulatory assets
and liabilities.
RADIO PAGING OPERATIONS
TDS manages its radio paging business through American Paging, Inc. [AMEX:
APP]. American Paging provided wireless messaging communications through its
digital radio transmission systems to 777,400 subscribers at the end of 1996
compared to 784,500 subscribers at the end of 1995 and 652,800 subscribers at
the end of 1994.
American Paging posted disappointing results for the year. During the third
quarter of 1995, American Paging launched a comprehensive restructuring
initiative relative to its sales and customer service organization. The
objectives of the restructuring were to increase sales through the direct
distribution channel, improve customer mix, lower administrative costs and
improve customer service. The restructuring initiative continued through 1996,
and had a more severe impact on American Paging's results of operations than
anticipated.
An integral part of the restructuring plan included the creation of a
Customer Telecare Center ("CTC"). The consolidation and transfer of back office
and customer service operations from 17 offices to the CTC created many
disruptions throughout American Paging. The process of eliminating field
administrative personnel and moving their duties to the CTC hurt customer
service and sales support due to early inefficiencies encountered in the
operation of the CTC. During the consolidation, it also became apparent that the
customer management and information system did not provide the flexibility
needed to support future customer growth and retention. American Paging is
currently assessing two potential customer management and billing systems.
Disruptions within the sales and marketing department led to an increase in
sales employee turnover which produced no customer growth and contributed to a
3% decline in revenue. The decline in revenues combined with a 21% increase in
expenses caused operating losses to jump to $36.6 million in 1996 from $9.0
million in 1995.
To address these problems, American Paging appointed a new senior management
team, including a new President and CEO. The senior management team began
implementing a plan in 1997 centering on building a high quality, focused sales
and marketing organization, creating new, goal-oriented distribution channel and
pricing strategies, consolidating current systems to reduce the cost of service
and continually improving customer care practices.
I-44
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER
UNIT AMOUNTS)
<S> <C> <C> <C>
Operating Revenue.................................................. $ 104,187 $ 107,150 $ 92,065
Costs and Expenses
Cost of services................................................. 30,092 24,062 19,347
Selling, general and administrative.............................. 67,060 53,296 41,196
Cost of goods sold............................................... 9,884 14,097 14,513
Depreciation and amortization.................................... 33,777 24,692 17,178
----------- ----------- -----------
140,813 116,147 92,234
----------- ----------- -----------
Operating (Loss)................................................... $ (36,626) $ (8,997) $ (169)
----------- ----------- -----------
----------- ----------- -----------
Pagers in service.................................................. 777,400 784,500 652,800
Average monthly revenue per unit................................... $ 9.88 $ 10.57 $ 11.92
Transmitters in service............................................ 1,048 1,018 943
Churn rate per month............................................... 3.1% 2.5% 2.6%
Marketing cost per gross customer unit addition.................... $ 94 $ 50 $ 41
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
OPERATING REVENUES decreased 3% ($3.0 million) in 1996 primarily as a result
of a 27% ($3.8 million) decline in equipment sales. Operating revenues increased
16% ($15.1 million) in 1995, primarily as a result of a 20% increase in the
number of pagers in service.
Average monthly revenue per unit declined 7% to $9.88 in 1996 and 11% to
$10.57 in 1995. The decline in average revenue per unit reflects competitive
pressures in 1996 and 1995 as well as a shift to lower revenue producing
reseller channels in 1995. As a part of the restructuring efforts, American
Paging is refocusing its marketing strategy to the higher revenue producing
direct distribution channel.
OPERATING EXPENSES increased 21% ($24.7 million) in 1996 and 26% ($23.9
million) in 1995. Restructuring costs totaled $9.3 million in 1996 and $2.9
million in 1995. Duplicate staffing, employee severance and legal and consulting
fees, included in selling, general and administrative expense, totaled $4.0
million in 1996 and $2.1 million in 1995. Write-offs of $5.3 million for
obsolete inventory, software and other assets, included in depreciation and
amortization expense, were recorded in 1996. During 1995, an $800,000 write-off
of assets retired was incurred as a result of the restructuring.
Operating expenses, excluding restructuring costs, increased 16% ($18.2
million) in 1996 and 23% ($21.0 million) in 1995. Costs of serving the customer
base and maintaining systems to provide system reliability and coverage
increased 25% ($6.0 million) in 1996 and 24% ($4.7 million) in 1995. Selling,
general and administrative expense increased 23% ($11.8 million) in 1996 and 24%
($10.0 million) in 1995. The cost per gross customer addition, excluding
customers added through acquisitions, was $94 in 1996 compared to $50 in 1995
and $41 in 1994. The large increase was due to the slow unit growth caused by
high employee turnover in the sales function coupled with the increase in sales
and marketing costs. Depreciation and amortization charges increased 19% ($4.6
million) in 1996 and 39% ($6.7 million) in 1995, reflecting increased investment
in pagers and related equipment. A change in useful lives of pagers and
transmitters adopted in 1994 increased depreciation expense by approximately
$1.7 million in 1995.
OPERATING LOSS was $36.6 million in 1996, $9.0 million in 1995 and $200,000
in 1994. Management expects American Paging to have modest success in attracting
and retaining new customers and holding down operating expenses. However,
management anticipates that American Paging will incur significant operating
losses again in 1997.
BROADBAND PERSONAL COMMUNICATIONS SERVICES TDS manages its broadband
personal communications services business through Aerial Communications, Inc.
[NASDAQ: AERL], formerly American Portable Telecom, Inc. Aerial's licenses
include the Major Trading Areas ("MTAs") of Minneapolis, Tampa-St. Petersburg-
Orlando, Houston, Pittsburgh, Kansas City and Columbus with 27.6 million
population equivalents.
Aerial's focus in 1996 has been the development of its PCS business in its
MTAs. This focus will continue until the expected launch of commercial service
in early 1997. As of December 31, 1996, a total of 150 microwave paths have been
cleared, with an additional 39 paths having agreements with incumbents to be
cleared. Management believes that sufficient paths have been cleared to allow
service launch in all six markets. Over 600 cell sites have
I-45
<PAGE>
been secured as zoning and installation work continues. The National Operations
Center in Tampa is complete. Friendly user (customer) trials are planned to
conclude in the first quarter of 1997, with roll-out of commercial service after
successful customer trials.
Upon commencement of commercial operations, Aerial's revenues and expenses
will be included in operating income. Management expects to incur significant
expenditures for the continued development of PCS activities and start-up
operating losses during 1997.
To finance the development of its business, Aerial completed an initial
public offering in 1996 raising $195.3 million. Aerial also negotiated a $200
million vendor financing arrangement for digital radio channel and switching
infrastructure equipment. As part of the vendor financing arrangement, Aerial
issued 10-year 8.34% Series A Zero Coupon Notes due in 2006 for $100 million of
digital radio channel and switching equipment.
INFLATION
Management believes that inflation affects TDS's business to no greater
extent than the general economy.
FINANCIAL RESOURCES
TDS and its subsidiaries operate relatively capital-intensive businesses.
Rapid growth has caused expenditures for construction, expansion and acquisitio
programs to exceed internally generated cash flow. Accordingly, TDS has obtained
substantial funds from external sources to finance construction of cellular
telephone systems, to acquire PCS licenses, to build-out PCS markets 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, Aerial's development and construction activities 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 19%
($62.2 million) to $385.7 million in 1996, and 24% ($63.2 million) to $323.5
million in 1995. The increases represent primarily cellular telephone operations
increases of 48% ($64.0 million) in 1996 and 60% ($49.4 million) in 1995. 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 $90.7 million in 1996, $112.6 million in 1995, and $35.6
million in 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating cash flow
Cellular telephone.............................................. $ 196,205 $ 132,213 $ 82,839
Telephone....................................................... 192,325 175,594 160,484
Radio paging.................................................... (2,849) 15,695 17,009
----------- ------------ -----------
385,681 323,502 260,332
Other operating activities........................................ (90,687) (112,626) (35,646)
----------- ------------ -----------
Cash flows from operating activities.............................. $ 294,994 $ 210,876 $ 224,686
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
CASH FLOWS FROM FINANCING ACTIVITIES. TDS' long-term strategy is to provide
a strong yet flexible financial foundation for each of its principal
subsidiaries. Consolidated equity capital (common equity, preferred stock and
minority interest) was 68% of total capitalization at December 31, 1996,
compared to 73% at December 31, 1994. The change is primarily a result of
significant increases in long-term debt at U.S. Cellular and Aerial as well as
increases in TDS short-term debt. TDS targets a ratio of equity to total capital
in the range of 55% to 65%.
TDS has used short-term debt to finance its PCS, cellular telephone and
radio paging 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, equity sales and sales of non-strategic
assets.
In 1996, Aerial received $195.3 million in an initial public offering of
Common Shares. In 1995, U.S. Cellular received approximately $221.5 million from
the sale of 20-year 6% zero coupon convertible debt and TDS sold $39.2 million
of Medium-Term Notes. In 1994, American Paging received $45.6 million in an
initial public offering of its Common Shares and TDS sold Common Shares for cash
totaling $4.9 million.
I-46
<PAGE>
Aerial, U.S. Cellular and TDS Telecom have also used long-term debt to
finance their construction and development activities. In 1996, Aerial issued
10-year 8.34% zero coupon notes for $100 million of digital radio channel and
switching equipment. U.S. Cellular financed cellular system equipment and
construction costs totaling $59.5 million in 1995 and $18.0 million in 1994
under vendor financing arrangements. TDS Telecom telephone subsidiaries borrowed
$12.2 million in 1996, $12.0 million in 1995 and $16.8 million in 1994 under the
Rural Utility Service and the Rural Telephone Bank long-term federal government
loan programs to finance their telephone construction programs.
Cash Flows From Investing Activities. TDS makes substantial investments each
year to acquire, construct, operate and maintain modern high-quality
communications networks and facilities with the intention of exceeding its
customers expectations as a basis for creating long-term value for shareowners.
In recent years, rapid changes in technology and new opportunities have required
substantial investments in revenue enhancing and cost reducing upgrades of the
Company's networks.
Cash expenditures for property, plant and equipment additions totaled $550.2
million in 1996, $360.0 million in 1995 and $319.7 million in 1994. In addition,
the acquisition and development of broadband and narrowband PCS licenses
required $26.5 million in 1996, $326.0 million in 1995 and $31.6 million in
1994. Cash used for acquisitions, excluding cash acquired, totaled $31.0 million
in 1996, $53.8 million in 1995 and $37.6 million in 1994. The sale of
non-strategic cellular assets and other investments provided $221.5 million in
net proceeds in 1996, $197.6 million in 1995 and $6.0 million in 1994.
PROPERTY, PLANT AND EQUIPMENT
The primary purpose of TDS's construction and expansion program is to
provide for significant customer growth, to upgrade service, to expand into new
communication areas, and to take advantage of service-enhancing and
cost-reducing technological developments. In 1996, the Company invested a
significant amount of money to develop and construct Aerial's systems. The
following table summarizes the Company's investments in its communications
networks and related facilities during the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cellular telephone
Cell sites and equipment......................................... $ 133,832 $ 150,340 $ 128,479
Switching equipment.............................................. 5,713 13,002 4,549
Systems development.............................................. 28,753 10,148 9,886
Other............................................................ 79,825 37,388 24,250
----------- ----------- -----------
248,123 210,878 167,164
----------- ----------- -----------
Telephone
Central office................................................... 47,208 38,697 46,618
Outside plant.................................................... 53,130 55,569 52,629
Other............................................................ 44,102 10,106 16,236
----------- ----------- -----------
144,440 104,372 115,483
----------- ----------- -----------
PCS
Cell sites and equipment......................................... 150,386 -- --
Switching equipment.............................................. 123,470 -- --
Other............................................................ 38,713 8,521 --
----------- ----------- -----------
312,569 8,521 --
Less noncash items............................................... (199,630) -- --
----------- ----------- -----------
Radio paging
Pagers........................................................... 12,081 15,582 15,641
Terminals and transmitters....................................... 4,595 6,353 11,056
Customer Telecare Center......................................... 10,216 -- --
Other............................................................ 5,625 4,592 2,269
----------- ----------- -----------
32,517 26,527 28,966
----------- ----------- -----------
Other............................................................ 12,185 9,698 8,088
----------- ----------- -----------
$ 550,204 $ 359,996 $ 319,701
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
I-47
<PAGE>
U.S. Cellular's capital additions include expenditures to add additional
cell sites and radio channels to expand coverage and add capacity. U.S. Cellular
constructed 242 cell sites in 1996, 292 in 1995 and 225 in 1994. TDS Telecom's
capital additions include expenditures for outside plant facilities and upgrades
of recently acquired companies for new customer growth and switch modernization.
TDS Telecom installed 35 digital switches in 1996, 39 in 1995 and 32 in 1994.
Aerial has completed the construction of the five planned switching centers and
the central Network Operations Center, cleared over 150 microwave paths and is
building over 600 cell sites.
The Company's expected 1997 property, plant and equipment additions reflect
the Company's construction and expansion programs and are anticipated to
aggregate approximately $810 million. In addition, Aerial's working capital and
operating expenses will require an estimated $255 million.
- The cellular capital additions budget totals approximately $300 million,
including about $258 million for new cell sites and about $30 million for
various information systems initiatives.
- The telephone capital additions budget totals approximately $130 million,
including about $56 million for new digital switches and other switching
facilities and $56 million for improvements to outside plant facilities.
- The PCS capital additions budget totals approximately $345 million,
including $255 million for switching equipment and $38 million for cell
sites. In addition, Aerial's working capital and operating expenses will
require an estimated $255 million.
- The radio paging capital additions are anticipated to total about $35
million, including $15 million for systems and transmitters and $16
million for pagers.
The Company expects to finance the budgeted additions to property, plant and
equipment primarily with internally generated cash, short-term and
intermediate-term financing, vendor financing and the sale of minority equity
interests in Aerial's MTAs to strategic investors.
ACQUISITIONS
TDS seeks to acquire cellular telephone and telephone interests which add
value to the organization. The table below summarizes interests acquired through
purchases and trades at the respective dates of acquisition during the last
three years and the aggregate consideration paid, net of cash acquired.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cellular interests acquired
Population equivalents (millions).................................... .6 1.6 1.5
Units................................................................ 17,000 79,000 18,000
Telephone interests acquired
Companies............................................................ 5 5 3
Access lines......................................................... 33,100 13,500 19,700
Paging units acquired................................................ -- 28,400 37,600
Consideration (millions)
Cash................................................................. $ 31.0 $ 53.8 $ 37.6
TDS Common Shares.................................................... 113.1 127.8 173.7
TDS Preferred Shares................................................. -- -- 12.5
USM Common Shares.................................................... -- 12.8 1.4
Other................................................................ -- -- 1.4
--------- --------- ---------
Total Consideration.................................................. $ 144.1 $ 194.4 $ 226.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company continually reviews attractive opportunities for the acquisition
of additional cellular and telephone companies.
TDS and U.S. Cellular continue to assess the makeup of cellular holdings in
order to maximize the benefits derived from clustering U.S. Cellular's markets.
As the number of opportunities for outright acquisitions of cellular interests
has decreased and as U.S. Cellular's clusters have grown to realize greater
economies of scale, U.S. Cellular's focus has shifted toward exchanges and sales
of non-strategic interests.
In February 1997, U.S. Cellular announced that it had entered into an
exchange agreement with BellSouth Corporation, pursuant to which U.S. Cellular
will receive controlling interests in twelve contiguous markets adjacent
I-48
<PAGE>
to its Iowa and Wisconsin/Illinois clusters. In exchange, U.S. Cellular will
transfer its controlling interests in ten markets, investment interests in 13
markets and pay cash, the amount of which is dependent upon certain factors.
U.S. Cellular will receive controlling interests representing approximately 3.9
million population equivalents ("pops") in the transaction, and will divest
controlling interests representing approximately 1.9 million pops and investment
interests representing 1.4 million pops. The transaction is subject to various
regulatory and other approvals.
U.S. Cellular expects that the completion of this transaction will have a
positive effect on its consolidated operations after the transition of operators
is complete. The transaction is also expected to significantly reduce investment
income immediately after it is completed. Because of the uncertainty of the
regulatory approval process, U.S. Cellular cannot estimate when the transaction
will be completed.
LIQUIDITY
The Company anticipates that the aggregate resources required for 1997 will
include approximately $810 million for capital spending and $255 million for
working capital and operating expenses for Aerial.
The Company is generating substantial internal funds from the rapid growth
in customer units and revenues. Operating cash flow (operating income plus
depreciation and amortization), primarily from cellular and telephone
operations, increased to $385.7 million in 1996 from $323.5 million in 1995 and
$260.3 million in 1994.
U.S. Cellular plans to finance its construction program primarily with
internally generated cash supplemented by short-term and intermediate-term
financing. TDS Telecom plans to finance its $130 million construction program
using internally generated cash supplemented by long-term financing from federal
government programs.
Aerial plans to finance its construction expenditures and working capital
requirements with short-term and intermediate-term financing, vendor financing
and sales of minority equity interests in MTAs to strategic investors.
TDS and its subsidiaries have cash and temporary investments totaling $119.3
million and longer-term investments totaling $32.4 million at December 31, 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 $653 million of bank lines of credit for
general corporate purposes at December 31, 1996. Unused amounts of such lines
totaled $496 million. These line of credit agreements provide for borrowings at
negotiated rates up to the prime rate.
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. As of December
31, 1996, $238.4 million remained unused on the universal shelf.
TDS and U.S. Cellular have shelf registration statements covering the
issuance of equity for acquisitions. In addition, the Company has issued Common
Shares for acquisitions pursuant to registration statements filed specifically
for particular acquisitions.
In December 1996, the Company authorized the repurchase of up to 3.0 million
TDS Common Shares over a period of three years. The Company plans to finance the
repurchase program using internally generated funds and borrowings under
short-term lines of credit. The Company may use repurchased shares to fund
acquisitions and for general corporate purposes. Subject to prevailing market
conditions, purchases may be made from time to time through open market
purchases or at negotiated prices in private transactions. The actual number of
Common Shares which may be repurchased will be subject to the trading price of
the Common Shares, the Company's financial position and other factors.
The Company anticipates requiring additional funding to finance Aerial's
expected capital expenditures and working capital requirements, to finance
acquisitions and for general corporate purposes. The timing and amount of such
funding requirements will depend on the timing of the completion of Aerial's
construction and operational plans, the timing of acquisitions, and other
relevant factors. There can be no assurance that sufficient funds will be
available to the Company on terms or at prices acceptable to the Company. If
sufficient funding is not made available to the Company on terms and prices
acceptable to the Company, the Company would have to reduce its construction,
development and acquisition programs. TDS and its subsidiaries anticipate
accessing public and private capital markets to issue debt and equity securities
only when capital requirements, financial market conditions and other factors
warrant.
I-49
<PAGE>
TDS has and continues to assess the impact of the Year 2000 Issue on its
reporting systems and operations. The Company believes that modifying its
reporting systems and operations is not a material event, and is taking steps to
make its systems Year 2000 compliant. The Year 2000 Issue exists because many
computer systems and applications abbreviate dates by eliminating the first two
digits of the year, assuming that these two digits would always be "19". Unless
corrected, this shortcut is expected to cause problems when the century date
occurs. On that date, some computer programs may recognize the date as January
1, 1900 instead of January 1, 2000. This may cause systems to incorrectly
process critical financial and operational information, or stop processing
altogether. The cost of addressing the Year 2000 Issue to date was not material
to the Company's results of operations or financial condition, and management
believes that the costs to be incurred in 1998 and 1999 will not be material to
future operating results or financial condition.
PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 SAFE HARBOR CAUTIONARY STATEMENT
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER SECTIONS OF THIS PROXY STATEMENT/PROSPECTUS CONTAIN
"FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995, THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL FACTS, INCLUDING STATEMENTS
ABOUT THE COMPANY'S BELIEFS AND EXPECTATIONS ARE FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS CONTAIN POTENTIAL RISKS AND UNCERTAINTIES AND, THEREFORE,
ACTUAL RESULTS MAY DIFFER MATERIALLY. TDS UNDERTAKES NO OBLIGATION TO UPDATE
PUBLICLY ANY FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE,
BUT ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION
IN MARKETS IN WHICH TDS OPERATES; ADVANCES IN TELECOMMUNICATIONS TECHNOLOGY;
CHANGES IN THE TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING AND FUTURE
LITIGATION; AVAILABILITY OF FUTURE FINANCING; START-UP OF PCS OPERATIONS; AND
UNANTICIPATED CHANGES IN GROWTH IN CELLULAR CUSTOMERS, PENETRATION RATES, CHURN
RATES AND THE MIX OF PRODUCTS AND SERVICES OFFERED IN OUR MARKETS. READERS
SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF THESE IMPORTANT FACTORS.
I-50
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
OPERATING REVENUES
Cellular telephone............................................................ $ 707,820 $ 492,395 $ 332,404
Telephone..................................................................... 402,629 354,841 306,341
Radio paging.................................................................. 104,187 107,150 92,065
------------- ------------- -------------
1,214,636 954,386 730,810
------------- ------------- -------------
OPERATING EXPENSES
Cellular telephone............................................................ 620,454 449,640 315,019
Telephone..................................................................... 299,271 256,601 214,735
Radio paging.................................................................. 140,813 116,147 92,234
------------- ------------- -------------
1,060,538 822,388 621,988
------------- ------------- -------------
OPERATING INCOME................................................................ 154,098 131,998 108,822
------------- ------------- -------------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest and dividend income.................................................. 15,569 13,024 10,612
Cellular investment income, net of license cost amortization.................. 54,150 40,666 26,018
PCS development costs......................................................... (43,950) (7,829) (1,709)
Gain on sale of cellular interests and other investments...................... 138,735 86,625 7,457
Other income (expense), net................................................... 2,726 (2,771) 387
Minority share of income...................................................... (26,690) (25,858) (9,079)
------------- ------------- -------------
140,540 103,857 33,686
------------- ------------- -------------
INCOME BEFORE INTEREST AND INCOME TAXES......................................... 294,638 235,855 142,508
Interest expense................................................................ 42,853 50,848 41,251
------------- ------------- -------------
INCOME BEFORE INCOME TAXES...................................................... 251,785 185,007 101,257
INCOME TAX EXPENSE.............................................................. 123,646 81,029 40,713
------------- ------------- -------------
NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE........................ 128,139 103,978 60,544
Cumulative Effect of Accounting Change.......................................... -- -- (723)
------------- ------------- -------------
NET INCOME...................................................................... 128,139 103,978 59,821
Preferred Dividend Requirement.................................................. (1,846) (1,934) (1,809)
------------- ------------- -------------
NET INCOME AVAILABLE TO COMMON.................................................. $ 126,293 $ 102,044 $ 58,012
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARES (000S)
EARNINGS PER COMMON SHARE:..................................................... 60,732 58,356 54,197
Before Cumulative Effect of Accounting Change................................... $ 2.08 $ 1.74 $ 1.07
Cumulative Effect of Accounting Change.......................................... -- -- (.01)
------------- ------------- -------------
Net Income...................................................................... $ 2.08 $ 1.74 $ 1.06
------------- ------------- -------------
------------- ------------- -------------
DIVIDENDS PER COMMON AND SERIES A COMMON SHARE.................................. $ .40 $ .38 $ .36
------------- ------------- -------------
------------- ------------- -------------
Pro forma (unaudited): (Note 16)
Net income Attributable to Common Stocks
United States Cellular Group Shares........................................... $ 78,563 $ 60,522 $ 10,240
TDS Telecommunications Group Shares........................................... 26,771 25,616 24,491
Aerial Communications Group Shares............................................ (24,733) (4,851) (962)
TDS Common and Series A Common Shares......................................... 45,692 20,757 24,243
Weighted Average Common Shares Outstanding
United States Cellular Group Shares........................................... 60,732 58,356 54,197
TDS Telecommunications Group Shares........................................... 40,488 38,904 36,131
Aerial Communications Group Shares............................................ 40,488 38,904 36,131
TDS Common and Series A Common Shares......................................... 60,732 58,356 54,197
Earnings per Common Share
United States Cellular Group Shares........................................... $ 1.29 $ 1.04 $ 0.19
TDS Telecommunications Group Shares........................................... 0.66 0.66 0.68
Aerial Communications Group Shares............................................ (0.61) (0.12) (0.03)
TDS Common and Series A Common Shares......................................... 0.75 0.36 0.45
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
I-51
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................ $ 128,139 $ 103,978 $ 59,821
Add (Deduct) adjustments to reconcile net income to net cash provided by operating
activities
Cumulative effect of accounting change.......................................... -- -- 723
Depreciation and amortization................................................... 231,583 191,504 151,511
Deferred taxes.................................................................. 75,015 19,602 14,529
Investment income............................................................... (58,455) (43,188) (30,083)
Minority share of income........................................................ 26,690 25,858 9,079
Gain on sale of cellular interests and other investments........................ (138,735) (86,625) (7,457)
Noncash interest expense........................................................ 17,042 12,761 26
Other noncash expense........................................................... 24,022 16,946 15,669
Change in accounts receivable................................................... (28,687) (33,346) (22,401)
Change in accounts payable...................................................... 23,531 (11,630) 31,714
Change in accrued taxes......................................................... (8,249) 6,252 (4,638)
Change in other assets and liabilities.......................................... 3,098 8,764 6,193
------------ ------------ ------------
294,994 210,876 224,686
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings....................................................... 15,846 334,323 36,916
Repayment of long-term debt..................................................... (34,200) (30,734) (33,710)
Change in notes payable......................................................... (27,133) 80,351 92,318
Proceeds from the issuance of common stock...................................... 5,114 6,921 11,185
Minority partner capital (distributions) contributions.......................... (4,100) 1,411 12,504
Redemption of preferred shares.................................................. (605) (638) (9)
Dividends paid.................................................................. (26,231) (23,972) (20,906)
Proceeds from the issuance of subsidiaries' stock............................... 196,205 1,812 45,714
------------ ------------ ------------
124,896 369,474 144,012
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment...................................... (550,204) (359,996) (319,701)
Investments in cellular minority interests and license costs.................... (23,134) (25,025) (25,494)
Distributions from partnerships................................................. 25,453 9,062 17,375
Investments in PCS licenses..................................................... (26,548) (326,035) (31,604)
Proceeds from investment sales.................................................. 221,542 197,558 6,000
Change in other investments..................................................... (2,666) (3,632) 492
Acquisitions, excluding cash acquired........................................... (31,019) (53,770) (37,552)
Change in temporary investments and marketable securities....................... (30,797) 11,871 (9,147)
------------ ------------ ------------
(417,373) (549,967) (399,631)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. 2,517 30,383 (30,933)
CASH AND CASH EQUIVALENTS
Beginning of period............................................................. 55,116 24,733 55,666
------------ ------------ ------------
End of period................................................................... $ 57,633 $ 55,116 $ 24,733
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
I-52
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................................................................ $ 57,633 $ 55,116
Temporary investments............................................................................ 61,664 25,735
Construction funds............................................................................... 1,405 1,588
Accounts receivable
Due from customers, less allowance of $6,090 and $5,104, respectively.......................... 97,093 77,148
Other, principally connecting companies.......................................................... 84,119 68,196
Materials and supplies, at average cost.......................................................... 29,125 20,738
Other............................................................................................ 15,031 12,689
------------ ------------
346,070 261,210
------------ ------------
INVESTMENTS
Cellular license acquisition costs, net of amortization.......................................... 1,088,409 1,075,820
Cellular minority interests...................................................................... 206,390 158,559
Broadband PCS license acquisition costs.......................................................... 322,420 301,196
Narrowband PCS license acquisition costs......................................................... 59,003 55,365
Franchise and other costs in excess of the underlying book value of subsidiaries, net of
amortization.................................................................................... 181,845 168,608
Other investments................................................................................ 84,537 87,726
------------ ------------
1,942,604 1,847,274
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Cellular Telephone
In service and under construction................................................................ 846,005 674,450
Less accumulated depreciation.................................................................... 195,251 144,423
------------ ------------
650,754 530,027
------------ ------------
Telephone
In service and under construction, substantially at original cost................................ 1,301,654 1,099,714
Less accumulated depreciation.................................................................... 527,266 442,699
------------ ------------
774,388 657,015
------------ ------------
PCS
Primarily under construction..................................................................... 324,703 12,025
Less accumulated depreciation.................................................................... 1,980 47
------------ ------------
322,723 11,978
------------ ------------
Radio Paging
In service and under construction................................................................ 113,000 102,385
Less accumulated depreciation.................................................................... 61,528 42,933
------------ ------------
51,472 59,452
------------ ------------
Other
In service and under construction................................................................ 74,906 75,910
Less accumulated depreciation.................................................................... 45,354 40,972
------------ ------------
29,552 34,938
------------ ------------
1,828,889 1,293,410
------------ ------------
OTHER ASSETS AND DEFERRED CHARGES................................................................ 83,406 67,188
------------ ------------
$ 4,200,969 $ 3,469,082
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
I-53
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and preferred shares........................................... $ 38,197 $ 49,233
Notes payable.................................................................................... 160,537 184,320
Accounts payable................................................................................. 205,427 113,995
Advance billings and customer deposits........................................................... 32,434 27,706
Accrued interest................................................................................. 11,777 11,573
Accrued taxes.................................................................................... 3,194 11,415
Other............................................................................................ 57,701 29,482
------------ ------------
509,267 427,724
------------ ------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability................................................................ 183,792 103,206
Postretirement benefits obligation other than pensions........................................... 11,451 12,146
Other............................................................................................ 19,663 22,943
------------ ------------
214,906 138,295
------------ ------------
LONG-TERM DEBT, excluding current portion........................................................ 982,232 858,857
------------ ------------
REDEEMABLE PREFERRED SHARES, excluding current portion........................................... 280 1,587
------------ ------------
MINORITY INTEREST in subsidiaries................................................................ 432,343 328,544
------------ ------------
NONREDEEMABLE PREFERRED SHARES................................................................... 29,000 29,710
------------ ------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share; authorized 100,000,000 shares; issued and outstanding
54,237,180 and 51,137,426 shares, respectively.................................................. 54,237 51,137
Series A Common Shares, par value $1 per share; authorized 25,000,000 shares; issued and
outstanding 6,916,546 and 6,893,101 shares, respectively........................................ 6,917 6,893
Common Shares issuable, 30,977 and 31,431 shares, respectively................................... 1,461 1,496
Capital in excess of par value................................................................... 1,661,093 1,417,513
Retained earnings................................................................................ 309,233 207,326
------------ ------------
2,032,941 1,684,365
------------ ------------
$ 4,200,969 $ 3,469,082
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
I-54
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
COMMON SHARES
Balance beginning of period....................................................... $ 51,137 $ 47,938 $ 43,504
Add
Acquisitions.................................................................... 2,649 2,960 4,041
Dividend reinvestment, incentive and benefit plans.............................. 100 186 175
Sales of Common Shares.......................................................... -- -- 100
Conversion of Preferred Shares.................................................. 348 41 116
Conversion of Series A Common Shares............................................ 3 12 2
------------ ------------ ------------
Balance end of period............................................................. $ 54,237 $ 51,137 $ 47,938
------------ ------------ ------------
SERIES A COMMON SHARES
Balance beginning of period....................................................... $ 6,893 $ 6,887 $ 6,881
Add (Deduct)
Dividend reinvestment plan...................................................... 27 18 8
Conversion to Common Shares..................................................... (3) (12) (2)
------------ ------------ ------------
Balance end of period............................................................. $ 6,917 $ 6,893 $ 6,887
------------ ------------ ------------
------------ ------------ ------------
COMMON SHARES ISSUABLE
Balance beginning of period....................................................... $ 1,496 $ 1,995 $ 15,189
Add (Deduct)
Acquisitions.................................................................... 464 -- 1,995
Shares issued pursuant to acquisition agreements................................ (499) (499) (15,189)
------------ ------------ ------------
Balance end of period............................................................. $ 1,461 $ 1,496 $ 1,995
------------ ------------ ------------
------------ ------------ ------------
CAPITAL IN EXCESS OF PAR VALUE
Balance beginning of period....................................................... $ 1,417,513 $ 1,288,453 $ 1,069,022
Add (Deduct)
Acquisitions.................................................................... 111,305 125,886 182,812
Dividend reinvestment, incentive and benefit plans.............................. 4,487 6,994 6,667
Sales of Common Shares.......................................................... -- -- 4,924
Capital stock expense........................................................... (25) (124) (53)
Conversion of Preferred Shares.................................................. 4,254 (3,127) 1,324
Gain on sale of subsidiary stock................................................ 123,246 714 21,184
Net unrealized gain (loss) on marketable equity securities...................... 142 (2,090) 2,100
Income tax effects of capital stock transactions................................ 171 807 473
------------ ------------ ------------
Balance end of period............................................................. $ 1,661,093 $ 1,417,513 $ 1,288,453
------------ ------------ ------------
------------ ------------ ------------
RETAINED EARNINGS
Balance beginning of period....................................................... $ 207,326 $ 127,765 $ 89,689
Add net income.................................................................... 128,139 103,978 59,821
------------ ------------ ------------
335,465 231,743 149,510
------------ ------------ ------------
Deduct
Dividends
Common and Series A Common Shares............................................. 24,274 21,910 19,287
Preferred Shares.............................................................. 1,958 2,507 2,458
------------ ------------ ------------
26,232 24,417 21,745
------------ ------------ ------------
Balance end of period............................................................. $ 309,233 $ 207,326 $ 127,765
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
I-55
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Telephone and Data Systems, Inc. and its
subsidiaries ("TDS" or the "Company") conform to generally accepted accounting
principles. The accounting records of the telephone subsidiaries are maintained
in accordance with the uniform systems of accounts prescribed by the regulatory
bodies under whose jurisdiction the subsidiaries operate.
NATURE OF OPERATIONS
TDS is a diversified telecommunications company which, at December 31, 1996,
provided high-quality telecommunications services to approximately 2.3 million
cellular telephone, telephone and radio paging customers in 37 states and the
District of Columbia. The Company conducts substantially all of its cellular
operations through its 80.6%-owned subsidiary, United States Cellular
Corporation [AMEX:USM], its telephone operations through its wholly owned
subsidiary, TDS Telecommunications Corporation ("TDS Telecom"), and its radio
paging operations through its 82.3%-owned subsidiary, American Paging, Inc.
[AMEX:APP]. The Company is developing its personal communications services
("PCS") operations through its 82.8%-owned subsidiary Aerial Communications,
Inc. [NASDAQ:AERL] (formerly American Portable Telecom, Inc.). PCS development
costs for each of the three years ended December 31, 1996 are set forth in the
Consolidated Statements of Income. See Note 14--Business Segment Information for
summary financial information on each business segment.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of TDS, its
majority-owned subsidiaries since acquisition and the cellular telephone
partnerships in which TDS has a majority general partnership interest. All
material intercompany items have been eliminated. Certain amounts reported in
prior years have been reclassified to conform to current period presentation.
TDS includes as investments in subsidiaries the value of the consideration
given and all direct and incremental costs relating to acquisitions accounted
for as purchases. All costs relating to unsuccessful negotiations for
acquisitions are expensed.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS AND TEMPORARY INVESTMENTS
Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. Those investments
with original maturities of more than three months to 12 months are classified
as temporary investments. Temporary investments are stated at cost, which
approximates market. Those investments with original maturities of more than 12
months are classified as marketable securities and are stated at amortized cost.
INVESTMENTS
Cellular license acquisition costs consist of costs incurred in acquiring
Federal Communications Commission ("FCC") licenses or minority interests which
have been awarded FCC licenses to provide cellular service. These costs include
amounts paid to license applicants and owners of interests in cellular entities
awarded licenses; amounts paid for legal, engineering, and consulting services;
amounts incurred by TDS in acquiring these interests; and goodwill. These costs
are capitalized and amortized through charges to expense over 40 years upon
commencement of operations. Amortization amounted to $28.5 million, $27.8
million and $24.2 million in 1996, 1995 and 1994, respectively. Accumulated
amortization of cellular license costs was $112.2 million and $90.6 million at
December 31, 1996 and 1995, respectively. Included in cellular license costs is
approximately $322 million and
I-56
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 (CONTINUED)
$363 million at December 31, 1996 and 1995, respectively, which resulted from
various acquisitions structured to be tax-free.
Investments in cellular minority interests consist of amounts invested in
cellular entities in which TDS holds a minority interest. The Company follows
the equity method of accounting, which recognizes TDS's proportionate share of
the income and losses accruing to it under the terms of its partnership or
shareholder agreements, for its long-term investments ($196.0 million and $146.1
million at December 31, 1996 and 1995, respectively). Income and losses from
these entities are reflected in the consolidated income statements on a pretax
basis. At December 31, 1996, the cumulative share of income from minority
cellular investments accounted for under the equity method was $184.3 million,
of which $94.7 million was undistributed. The cost method of accounting is
followed for certain minority interests managed by others ($10.4 million and
$12.5 million at December 31, 1996 and 1995, respectively).
Broadband and Narrowband PCS license acquisition costs consist of costs
incurred in acquiring PCS licenses ($341.8 million) and capitalized interest
($39.6 million). These costs will be amortized through charges to expense upon
commencement of operations.
Telephone franchise and other costs include the costs in excess of the
underlying book value of acquired telephone companies. Costs in excess of the
underlying book value relating to acquisitions initiated before November 1,
1970, aggregating $6.5 million, are not being amortized. Costs aggregating
$204.9 million and $186.9 million at December 31, 1996 and 1995, respectively,
relating to acquisitions since November 1, 1970, are being amortized on a
straight-line basis over a 40-year period. Amortization amounted to $4.9
million, $4.4 million and $3.3 million in 1996, 1995 and 1994, respectively.
Accumulated amortization of excess cost was $29.6 million and $24.7 million at
December 31, 1996 and 1995, respectively. Included in excess cost is
approximately $143 million and $142 million at December 31, 1996 and 1995,
respectively, which resulted from various acquisitions structured to be
tax-free.
Other investments consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Minority telephone and paging interests............................................ $ 20,989 $ 30,422
Long-term notes receivable......................................................... 14,974 16,419
Rural Telephone Bank Stock, at cost................................................ 6,639 6,350
Marketable equity securities....................................................... 2,673 346
Marketable non-equity securities................................................... 29,735 24,871
Other.............................................................................. 9,527 9,318
--------- ---------
$ 84,537 $ 87,726
--------- ---------
--------- ---------
</TABLE>
The equity method of accounting is followed for minority telephone and
paging interests in which TDS holds common stock ownership of at least 20% or
can influence the policies of the affiliated company. At December 31, 1996, the
cumulative share of income from minority telephone and paging investments
accounted for under the equity method was $4.1 million, of which $2.2 million
was undistributed.
The Company's investment in debt securities with original maturities of more
than 12 months are classified as marketable non-equity securities and
held-to-maturity. They are stated at amortized cost.
I-57
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 (CONTINUED)
Information regarding the Company's marketable non-equity securities is
summarized below.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Held-to-Maturity
U.S. Treasury and other U.S. government corporations and agencies
Aggregate Fair Value
Current.......................................................................... $ 46,622 $ 12,293
Noncurrent....................................................................... 29,882 25,200
Amortized Cost Basis
Current.......................................................................... 46,603 12,337
Noncurrent....................................................................... 29,735 24,871
Gross Unrealized
Holding Gains.................................................................... 175 343
Gross Unrealized
Holding Losses................................................................... $ 8 $ 58
--------- ---------
--------- ---------
</TABLE>
The noncurrent investments have contractual maturities of more than one to
five years at December 31, 1996. No sales or transfers of securities classified
as held-to-maturity occurred during 1996.
REVENUE RECOGNITION
TDS's revenues are recognized when earned. Telephone network access and
long-distance services are furnished jointly with other companies, primarily
AT&T and the Bell Operating Companies. Compensation for interstate access
services is based on tariffed access charges to interstate long-distance
carriers as filed by the National Exchange Carrier Association with the FCC on
behalf of TDS. Such compensation amounted to 32%, 33% and 31% of telephone
revenues in 1996, 1995 and 1994, respectively. Compensation for intrastate toll
and access services is based on tariffed access charges, cost separation
studies, nationwide average schedules or special settlement arrangements with
intrastate long-distance carriers. Network access and long-distance revenues
based on cost separation studies represent estimates pending completion and
acceptance of final cost studies. Management believes that recorded amounts
represent reasonable estimates of the final amounts.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs
totaled $29.8 million, $17.2 million and $13.7 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
EARNINGS PER COMMON SHARE
Earnings per Common Share were computed by dividing Net Income Available to
Common, less a minority income adjustment, by the weighted average number of
Common Shares, Series A Common Shares and dilutive common equivalent shares
outstanding during the year. The minority income adjustment, $271,000 and
$411,000 in 1995 and 1994, respectively, reflects the additional minority share
of USM's income computed as if all of USM's issuable securities were
outstanding. Dilutive common stock equivalents consist of Common Shares issuable
upon conversion of dilutive series of Preferred Shares and Common Share options.
Preferred dividend requirements include all dividends paid on Preferred
Shares which are not dilutive common stock equivalents. For the year ended
December 31, 1996, the preferred dividend requirement on all outstanding
Preferred Shares was $1.8 million.
I-58
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 (CONTINUED)
SUPPLEMENTAL CASH FLOW DISCLOSURES
Following are supplemental cash flow disclosures for interest and income
taxes paid, acquisitions and certain noncash transactions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest paid........................................................ $ 76,062 $ 49,414 $ 39,904
Income taxes paid.................................................... 67,907 60,515 27,644
Common Shares issued by TDS for conversion of TDS Preferred Shares... 4,602 948 1,714
Increase in PCS network equipment and prepaid infrastructure costs
through the issuance of long-term debt............................. 100,000 -- --
Additions to property, plant and equipment financed through accounts
payable and accrued expenses....................................... $ 87,109 $ 3,943 $ (9,958)
----------- --------- ---------
----------- --------- ---------
</TABLE>
TDS has acquired operating telephone and paging companies, certain cellular
licenses and operating companies and certain other assets since January 1, 1994.
In conjunction with these acquisitions, the following assets were acquired and
liabilities assumed, and Common Shares and Preferred Shares issued:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Property, plant and equipment................................... $ 55,692 $ 56,132 $ 47,400
Cellular licenses............................................... 95,447 129,510 169,845
Franchise and other costs....................................... 17,679 25,657 41,692
Minority interest............................................... (1,109) (1,941) (259)
Increase (decrease) in equity method investment in cellular
interests..................................................... (3,641) 977 (15,586)
Long-term debt.................................................. (22,979) (9,254) (21,571)
Deferred credits................................................ (6,205) (538) (6,225)
Other assets and liabilities, excluding cash and cash
equivalents................................................... 9,297 (6,143) 9,808
Common Shares issued and issuable............................... (113,128) (127,836) (173,658)
Preferred Shares issued......................................... -- -- (12,500)
USM Common Shares issued and issuable........................... (34) (12,794) (1,394)
------------ ------------ ------------
Decrease in cash due to acquisitions............................ $ 31,019 $ 53,770 $ 37,552
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company implemented the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Under SFAS No. 121, the Company is required to review long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the book value of an asset may not be recoverable.
An impairment loss would be recognized whenever the review demonstrates that the
book value of a long-lived asset is not recoverable. The implementation of SFAS
No. 121 did not have an impact on the Company's financial position or results of
operations.
I-59
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2
INCOME TAXES
TDS files a consolidated federal income tax return. Income tax provisions
charged to net income before the cumulative effect of an accounting change are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Current:
Federal............................................................ $ 31,356 $ 44,690 $ 20,921
State.............................................................. 17,275 16,736 4,873
Deferred:
Federal............................................................ 67,040 19,253 13,440
State.............................................................. 10,072 2,386 2,963
Amortization of deferred investment tax credits...................... (2,097) (2,036) (1,484)
----------- --------- ---------
Total income tax expense............................................. $ 123,646 $ 81,029 $ 40,713
----------- --------- ---------
----------- --------- ---------
</TABLE>
Investment tax credits resulting from investments in telephone plant and
equipment have been deferred and are being amortized over the service lives of
the related property.
The statutory federal income tax rate is reconciled to TDS's effective
income tax rate before the cumulative effect of an accounting change below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate............................................ 35.0% 35.0% 35.0%
State income taxes, net of federal benefit................................... 8.3 6.9 5.1
Amortization of license acquisition costs and costs in excess of book
value...................................................................... 1.7 2.4 3.5
Acquisition-related tax basis adjustment..................................... -- -- (2.7)
Dividend exclusion........................................................... -- (.1) (1.8)
Amortization of deferred investment tax credits.............................. (.8) (1.0) (1.5)
Effects of corporations not included in consolidated federal tax return...... 1.7 2.1 1.4
Sale of cellular interests................................................... 4.9 -- --
Other differences, net....................................................... (1.7) (1.5) 1.2
--- --- ---
Effective income tax rate.................................................... 49.1% 43.8% 40.2%
--- --- ---
--- --- ---
</TABLE>
The increase in the 1996 effective tax rate reflects additional income tax
expense due to tax gains in excess of book gains associated with the sale of
certain cellular interests. The lower 1994 rate reflects deferred income taxes
provided on the book/tax basis difference related to certain telephone
acquisitions and certain income excluded due to the dividend exclusion rules.
The total income tax expense for the year ended December 31, 1994, including
the cumulative effect of an accounting change was $40.3 million. The effective
income tax rate including the cumulative effect of an accounting change was
40.3% in 1994.
Deferred income taxes are provided for the temporary differences between the
amount of the Company's assets and liabilities for financial reporting purposes
and their tax bases.
I-60
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 (CONTINUED)
The Company's current net deferred tax assets totaled $2.7 million and $3.2
million as of December 31, 1996 and 1995, respectively. The net current deferred
tax asset primarily represents the deferred tax effects of unearned revenues.
The temporary differences that gave rise to the noncurrent deferred tax
assets and liabilities as of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Deferred Tax Asset:
Alternative minimum tax credit carryforward................................... $ 10,433 $ 10,316
State operating loss carryforwards............................................ 17,055 10,537
Postretirement benefits....................................................... 4,819 4,502
Other......................................................................... 15,059 9,075
----------- -----------
47,366 34,430
Less valuation allowance........................................................ (16,891) (10,061)
----------- -----------
Net Deferred Tax Asset.......................................................... 30,475 24,369
----------- -----------
Deferred Tax Liability:
Property, plant and equipment................................................. 86,056 83,131
Partnership investments....................................................... 26,965 20,047
Investment in equity securities............................................... 40,540 2,572
Minority share of USM income.................................................. (7,122) (1,500)
Effects of corporations not included in consolidated federal tax return....... 3,945 3,642
Licenses...................................................................... 38,656 16,001
Other......................................................................... 25,227 3,682
----------- -----------
Total Deferred Tax Liability.................................................... 214,267 127,575
----------- -----------
Net Deferred Income Tax Liability............................................... $ 183,792 $ 103,206
----------- -----------
----------- -----------
</TABLE>
At December 31, 1996, TDS had $10.4 million of federal alternative minimum
tax credit carryforward available to offset regular income tax payable in future
years. In addition, TDS had $267.7 million of state net operating loss
carryforward at December 31, 1996, expiring between 1996 and 2010, which
generated a $17.1 million deferred tax asset. A valuation allowance was
established for the state operating loss carryforwards since it is more likely
than not that a portion will expire before such carryforwards can be utilized.
TDS's telephone subsidiaries have recorded deferred income tax liabilities
related primarily to temporary differences not deferred under rate-making
policy. As of December 31, 1996, a corresponding net regulatory liability of
$200,000 has been established to reflect recovery through future rates. This
amount is being amortized over the lives of the related temporary differences.
NOTE 3
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost.
Telephone plant in service and under construction is stated at the original
cost of construction including the capitalized costs of certain taxes,
payroll-related expenses, and an allowance for funds used during construction
("AFUDC"). The composite weighted average AFUDC rates were 7.3%, 9.3% and 10.4%
in 1996, 1995 and 1994, respectively.
I-61
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 (CONTINUED)
Renewals and betterments of units of property are added to telephone plant
in service. The original cost of depreciable property retired is removed from
plant in service and, together with removal cost less any salvage realized, is
charged to accumulated depreciation. Repairs and renewals of minor items of
property are included in plant operations expense. No gain or loss is recognized
on ordinary retirements of depreciable telephone property.
AERL capitalizes interest ($1.2 million in 1996) on certain work in process
expenditures. When the assets are placed in service, they will be depreciated
over their respective useful lives.
Certain costs relating to the development of computer software for internal
use are capitalized and are amortized over the estimated five-year life of the
software.
Depreciation is provided for book purposes using the straight-line method.
Composite depreciation rates, as applied to the average cost of depreciable
property, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cellular Telephone........................................................... 10.4% 10.0% 10.5%
Telephone.................................................................... 7.2 7.1 7.5
PCS.......................................................................... 20.2 2.2 --
Radio Paging................................................................. 27.9 22.1 23.1
Other........................................................................ 15.9 10.0 12.8
--- --- ---
--- --- ---
</TABLE>
NOTE 4
ACQUISITIONS AND SALES
During 1996, 1995 and 1994, TDS and its subsidiaries completed the following
business combinations:
<TABLE>
<CAPTION>
CONSIDERATION
-------------------------------------
TDS AND USM COMMON
STOCK, TDS PREFERRED
SHARES, AND
CASH, NOTES AND SUBSIDIARY PREFERRED
LONG-TERM DEBT STOCK
--------------- --------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Acquisitions During 1996
Cellular interests.............................................. $ 13,596 $ 42,499
Majority interests in five telephone companies.................. 17,423 70,663
Acquisitions During 1995
Cellular interests.............................................. $ 41,885 $ 94,542
Majority interests in five telephone companies.................. 250 46,087
Paging interests................................................ 5,656 --
Acquisitions During 1994
Cellular interests.............................................. $ 29,599 $ 110,732
Majority interests in three telephone companies................... 7,386 71,945
Paging interest................................................. 4,875 4,875
--------------- ----------
--------------- ----------
</TABLE>
I-62
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 (CONTINUED)
Assuming that these acquisitions had taken place on January 1, 1995,
unaudited pro forma results of operations from continuing operations would have
been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Operating revenues.......................................................... $ 1,229,053 $ 1,013,326
Net income.................................................................. 129,199 105,926
Earnings per share.......................................................... $ 2.08 $ 1.69
------------- -------------
------------- -------------
</TABLE>
SALES OF CELLULAR AND OTHER INVESTMENTS
The $138.7 million gain in 1996 reflects the sales of non-strategic cellular
and other investments. USM sold its majority interests in eight markets and
minority interests in two other markets, received cash from the settlement of
two separate legal matters and received cash in an exchange of markets with
another cellular operator. AERL sold its majority interests in two markets.
These transactions, along with the sales of certain other investments by TDS,
generated net cash proceeds of $221.5 million.
The $86.6 million gain in 1995 reflects the sales and exchanges of
non-strategic cellular and other investments. USM sold its majority interests in
six markets and its minority interests in six markets during 1995. These sales,
along with the sales of marketable equity securities and certain other
investments by TDS, generated net cash proceeds of $197.6 million.
The $7.5 million gain in 1994 reflects the sale and exchange of
minority-owned cellular and telephone interests. The cellular gain represents
the excess of the fair market value of the cellular interests traded over the
book value of such interests. The Company also sold its minority interest in a
telephone company for preferred shares of the telephone company having a face
value of $5.9 million and $6.0 million in cash.
NOTE 5
NOTES PAYABLE
TDS has used short-term debt to finance its investments in PCS, cellular
telephone and radio paging operations, for acquisitions, and for general
corporate purposes. Long-term debt and equity financing from time to time have
retired such short-term debt. Proceeds from an AERL initial public offering
retired $131.2 million of short-term debt in 1996. (See Note 7-Sale of Stock by
Subsidiaries.) Proceeds from the sales of non-strategic cellular and other
investments from time to time in 1996 and 1995 have been used to retire
short-term debt. Proceeds from a USM convertible debt offering retired $131.4
million of short-term debt in 1995. Proceeds from an APP initial public offering
and TDS's sales of Common Shares retired $21.2 million of short-term debt in
1994.
TDS and its subsidiaries had $678.4 million of bank lines of credit for
general corporate purposes at December 31, 1996, $653.4 million of which were
committed. Unused amounts of such lines totalled $521.0 million, $496.0 million
of which were committed. These line-of-credit agreements provide for borrowings
at negotiated rates up to the prime rate.
I-63
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 (CONTINUED)
Information concerning notes payable is shown in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at end of period........................................... $ 160,537 $ 184,320 $ 98,608
Weighted average interest rate at end of period.................... 6.0% 6.3% 6.5%
Maximum amount outstanding during the period....................... $ 204,140 $ 184,320 $ 106,077
Average amount outstanding during the period (1)................... $ 112,341 $ 139,671 $ 50,499
Weighted average interest rate during the period (1)............... 5.8% 6.4% 5.2%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ---------
(1) The average was computed based on month-end balances.
NOTE 6
LONG-TERM DEBT
Long-term debt as of December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Telephone and Data Systems, Inc. (Parent)
Medium-term notes, 8% to 10%, due through 2025.............................. $ 239,200 $ 239,200
Purchase contracts and other long-term notes 8% to 9.6%, due through 2003... 3,175 3,676
------------ ------------
242,375 242,876
Less current portion........................................................ 232 418
------------ ------------
Total parent debt............................................................. 242,143 242,458
------------ ------------
Subsidiaries
RUS, RTB and FFB Mortgage Notes, due through 2031
0% to 2%.................................................................. 24,859 26,350
4% to 6%.................................................................. 178,499 172,231
6.04% to 9%............................................................... 103,800 84,464
9.5% to 11%............................................................... 1,213 1,233
------------ ------------
308,371 284,278
------------ ------------
6% zero coupon convertible debentures, matures June 15, 2015.................. 745,000 745,000
Unamortized discount.......................................................... (494,893) (509,250)
------------ ------------
250,107 235,750
------------ ------------
Vendor financing, approximating 90-day Commercial Paper Rate plus 1.4% due
through 2002................................................................ 103,654 119,998
8.34% zero coupon notes, matures November 1, 2006............................. 226,245 --
Unamortized discount........................................................ (122,502) --
------------ ------------
103,743 --
------------ ------------
Other long-term notes, 0% to 12.6%, due through 2009........................ 10,601 11,682
------------ ------------
776,476 651,708
Less current portion........................................................ 36,387 35,309
------------ ------------
Total subsidiaries' debt...................................................... 740,089 616,399
------------ ------------
Total long-term debt.......................................................... $ 982,232 $ 858,857
------------ ------------
------------ ------------
</TABLE>
I-64
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 (CONTINUED)
The Company sold $39.2 million of senior unsecured debt securities in 1995
under its Medium-Term Note Program. The proceeds were used principally to retire
short-term debt, as well as for working capital and general corporate purposes.
The mortgage notes issued under certain loan agreements with the Rural
Utilities Service ("RUS"), Rural Telephone Bank ("RTB") and Federal Financing
Bank ("FFB"), agencies of the United States of America, are to be repaid in
equal monthly or quarterly installments covering principal and interest
beginning six months to three years after dates of issue and expiring through
2031. Substantially all telephone plant is pledged under RUS and RTB mortgage
notes and various other obligations of the telephone subsidiaries.
USM sold $745 million principal amount at maturity of 20-year zero coupon 6%
yield to maturity convertible redeemable debt in June 1995 with proceeds to the
Company of $221.5 million. No debt has been converted as of December 31, 1996.
USM has financing arrangements with an equipment vendor for cellular system
equipment and construction costs. The borrowings are collateralized by a secured
interest in some or all of the assets of USM's operating subsidiaries.
Borrowings have terms of seven years at an interest rate of 1.4% over the 90-day
Commercial Paper Rate (for a rate of 7.03% at December 31, 1996).
AERL sold $226 million principle amount at maturity of 10-year zero coupon
8.34% yield to maturity debt in November 1996 at an issue price of $100 million.
The proceeds were paid to AERL's equipment vendor in satisfaction of all
outstanding and future obligations up to $100 million. The notes are fully and
unconditionally guaranteed by TDS.
The annual requirements for principal payments on long-term debt are
approximately $36.6 million, $39.3 million, $36.8 million, $31.8 million and
$27.9 million for the years 1997 through 2001, respectively.
NOTE 7
MINORITY INTEREST IN SUBSIDIARIES
The following table summarizes the minority shareholders' and partners'
interests in the equity of consolidated subsidiaries.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
USM
USM shareholders'............................................................. $ 285,835 $ 259,719
USM subsidiaries' partners'................................................... 48,715 45,303
----------- -----------
334,550 305,022
TDS Telecom telephone subsidiaries'............................................. 21,810 17,108
AERL shareholders'.............................................................. 75,897 --
APP shareholders'............................................................... -- 6,280
Other........................................................................... 86 134
----------- -----------
$ 432,343 $ 328,544
----------- -----------
----------- -----------
</TABLE>
SALE OF STOCK BY SUBSIDIARIES
USM issued Common Shares during 1996, 1995 and 1994 in connection with
acquisitions and employee stock purchase plans. AERL issued 12.3 million Common
Shares in an initial public offering (at a price of $17 per share) in 1996. The
initial public offering reduced TDS's ownership percentage from 100% to 82.8%.
APP issued Common Shares during 1996 and 1995 in connection with employee stock
purchase plans, and in 1994 issued 3.5 million Common Shares in an initial
public offering (at a price of $14 per share). The initial public offering
reduced TDS's
I-65
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 (CONTINUED)
ownership percentage from 100% to 82.5%. The USM, AERL and APP Common Share
transactions were recorded at fair market values which were either less than or
in excess of TDS's book value investment in USM, AERL and APP. TDS adjusted its
book value investment as a result of these issues and increased capital in
excess of par value $123.2 million, $714,000 and $21.2 million in 1996, 1995 and
1994, respectively.
NOTE 8
PREFERRED SHARES
TDS Cumulative Voting Preferred Shares have a stated value of $100 per
share. The 5,000,000 authorized Preferred Shares are issuable in series by the
Board of Directors who establish the terms of the issue. Those issues which
contain mandatory redemption features or which are redeemable at the option of
the holder are classified as Redeemable Preferred Shares. Those issues which are
not redeemable or which are redeemable at the option of TDS are classified as
Nonredeemable Preferred Shares.
REDEEMABLE PREFERRED SHARES
Redeemable Preferred Shares include outstanding series of TDS Cumulative
Voting Preferred Shares with mandatory redemption features or which are
redeemable at the option of the holder. At December 31, 1996, 18,581 shares of
Redeemable Preferred Shares were outstanding, redeemable at $100 per share. All
other dividends are payable in cash.
The annual requirements for redemption of Redeemable Preferred Shares are
$1.6 million, $103,000, $100,000 and $77,000 for the years 1997 through 2000,
respectively.
The following is a schedule of the Redeemable Preferred Shares' activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance, beginning of period........................................... $ 15,093 $ 25,001 $ 27,367
Add:
Stock dividends...................................................... 113 546 839
Less:
Redemption of preferred.............................................. (9,456) (9,608) (1,005)
Conversion of preferred.............................................. (3,872) -- (1,000)
Expiration of redemption feature..................................... (20) (839) (1,200)
Change in redemption feature......................................... -- (7) --
--------- --------- ---------
1,858 15,093 25,001
Less current portion................................................... 1,578 13,506 11,792
--------- --------- ---------
Balance, end of period................................................. $ 280 $ 1,587 $ 13,209
--------- --------- ---------
--------- --------- ---------
</TABLE>
NONREDEEMABLE PREFERRED SHARES
Nonredeemable Preferred Shares include outstanding series of TDS Cumulative
Voting Preferred Shares which have no mandatory redemption features. At December
31, 1996, 290,002 shares of Nonredeem-able Preferred Shares were outstanding.
Outstanding Nonredeemable Preferred Shares are generally redeemable at the
option of TDS at $100 per share, plus accrued and unpaid dividends. At December
31, 1996, certain series of Preferred Shares are convertible into TDS Common
Shares. (See Note 9--Convertible Preferred Shares)
I-66
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 (CONTINUED)
The following is a schedule of the Nonredeemable Preferred Shares activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance, beginning of period........................................... $ 29,710 $ 29,819 $ 16,833
Add:
Acquisitions......................................................... -- -- 12,500
Reclassification from Redeemable Preferred Shares.................... 20 839 1,200
Less:
Conversion of preferred.............................................. (730) (948) (714)
--------- --------- ---------
Balance, end of period................................................. $ 29,000 $ 29,710 $ 29,819
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 9
COMMON STOCK ACQUISITIONS
During 1996, 1995 and 1994, TDS issued 2.6 million, 3.0 million and 4.0
million Common Shares, respectively, for the acquisition of cellular and
telephone interests.
COMMON SHARES ISSUABLE
Certain acquisition agreements require TDS to deliver 20,497 and 10,480
Common Shares in 1997 and 1998, respectively.
DIVIDEND REINVESTMENT, INCENTIVE AND BENEFIT PLANS
The following table summarizes Common and Series A Common Shares issued for
the employee stock ownership plans and dividend reinvestment plans described
below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Common Shares
Tax-deferred savings plan............................................ 36,269 40,624 30,764
Dividend reinvestment plan........................................... 28,827 105,001 85,754
Employee stock options, awards, stock appreciation rights and
employee stock purchase plan....................................... 35,273 40,025 59,278
--------- --------- ---------
100,369 185,650 175,796
--------- --------- ---------
--------- --------- ---------
Series A Common Shares
Dividend reinvestment plan........................................... 26,445 17,855 7,783
--------- --------- ---------
--------- --------- ---------
</TABLE>
TAX-DEFERRED SAVINGS PLAN. TDS has reserved 110,965 Common Shares for issue
under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing plan
pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code.
Participating employees have the option of investing their contributions in TDS
Common Shares, USM Common Shares, AERL Common Shares, APP Common Shares or five
nonaffiliated funds.
I-67
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 (CONTINUED)
DIVIDEND REINVESTMENT PLANS. TDS has reserved 486,015 Common Shares for
issue under the Automatic Dividend Reinvestment and Stock Purchase Plan and
192,254 Series A Common Shares for issue under the Series A Common Share
Automatic Dividend Reinvestment Plan. These plans enable holders of TDS's Common
Shares and Preferred Shares to reinvest cash dividends in newly issued Common
Shares and holders of Series A Common Shares to reinvest cash dividends in newly
issued Series A Common Shares. The purchase price of the shares is 95% of the
market value, based on the average of the daily high and low sales prices for
TDS's Common Shares on the American Stock Exchange for the ten trading days
preceding the date on which the purchase is made.
STOCK-BASED COMPENSATION PLANS
TDS has reserved 1,316,196 Common Shares for options granted and to be
granted to key employees. TDS has established certain plans that provide for the
grant of stock options and stock appreciation rights for the officers and
employees. The options are exercisable over a specified period not in excess of
ten years. The options expire from 1997 to 2006 or the date of the employee's
termination of employment, if earlier.
TDS accounts for stock options, stock appreciation rights ("SARS") and
employee stock purchase plans under Accounting Principles Board ("APB") Opinion
No. 25. No compensation costs have been recognized for the stock option and
employee stock purchase plans. Compensation expense for SARS, measured on the
difference between the year-end market price of the Common Shares and SAR
prices, was $263,000, $408,000 and $218,000 in 1996, 1995 and 1994,
respectively. Had compensation cost for all plans been determined consistent
with Financial Accounting Standards Board Statement of Accounting Standards
("SFAS") No. 123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
Net Income
As Reported................................................................... $ 126,139 $ 103,978
Pro Forma..................................................................... $ 126,495 $ 103,316
Earnings per Common Share
As Reported................................................................... $ 2.08 $ 1.74
Pro Forma..................................................................... $ 2.05 $ 1.73
----------- -----------
----------- -----------
</TABLE>
Because SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
I-68
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 (CONTINUED)
A summary of the status of the Company's stock option plans at December 31,
1996, 1995 and 1994 and changes during the years ended is presented in the table
and narrative below:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE
OF SHARES OPTION PRICES FAIR VALUES
--------- ----------------- -----------------
<S> <C> <C> <C>
Stock Options:
Outstanding January 1, 1994 (107,661 exercisable)....... 302,685 $ 15.35
Granted............................................... 221,275 $ 47.59
Exercised............................................. (25,876) $ 5.30
Cancelled............................................. (12,487) $ 27.47
---------
Outstanding December 31, 1994 (172,689 exercisable)..... 485,597 $ 30.25
Granted............................................... 59,995 $ 38.67 $ 14.84
Exercised............................................. (26,101) $ 5.52
Cancelled............................................. (3,046) $ 43.32
---------
Outstanding December 31, 1995 (240,160 exercisable)..... 516,445 $ 32.47
Granted............................................... 89,228 $ 41.00 $ 13.30
Exercised............................................. (11,025) $ 13.10
Cancelled............................................. (3,210) $ 39.89
---------
Outstanding December 31, 1996 (405,996 exercisable)..... 591,438 $ 34.08
--------- ------- -------
--------- ------- -------
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 5.6% and 6.6%; expected dividend yields of 1.0% and 1.0%; expected
lives of 5.1 years and 6.9 years and expected volatility of 20.5% and 25.0%.
Stock appreciation rights allow the grantee to receive an amount in cash or
Common Shares, or a combination thereof, equivalent to the difference between
the exercise price and the fair market value of the Common Shares on the
exercise date. The following table summarizes the SARs outstanding at $4.43 to
$36.60 per share. These rights expire March 1997, or the date of the employee's
termination of employment, if earlier. The fair value of each stock appreciation
right grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used for grants in
1996 and 1995, respectively: risk-free interest rates of 5.2% and 5.5%; expected
dividend yields of 1.0% and 1.0%; expected lives of 0.2 years and 0.7 years; and
expected volatility of 18.4% and 20.2%.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Outstanding beginning of period........................................... 16,034 12,096 9,100
Granted................................................................. 5,923 8,174 7,796
Exercised............................................................... (11,887) (4,236) (4,800)
--------- --------- ---------
Outstanding end of period................................................. 10,070 16,034 12,096
--------- --------- ---------
--------- --------- ---------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. TDS has reserved 201,638 Common Shares for
sale to the employees of TDS and its subsidiaries. The fair value of the
employees' purchase rights is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants rights in
I-69
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 (CONTINUED)
1996: risk-free interest rate of 5.6%; expected dividend yield of 1.0%; expected
life of 0.5 year; and expected volatility of 15.3%.
CONVERTIBLE PREFERRED SHARES
TDS convertible Preferred Shares are convertible into 933,838 Common Shares
(See Note 8--Nonredeemable Preferred Shares). TDS issued 347,707, 40,734 and
115,542 Common Shares in 1996, 1995 and 1994, respectively, for shares of TDS
and subsidiary preferred stock converted.
SERIES A COMMON SHARES
The holders of Common Shares and the outstanding Preferred Shares are
entitled to one vote per share. The holders of Series A Common Shares are
entitled to ten votes per share. Series A Common Shares are convertible, on a
share-for-share basis, into Common Shares. TDS has reserved 6,916,546 Common
Shares for possible issuance upon such conversion.
COMMON SHARE REPURCHASE PROGRAM
In December 1996, the Company authorized the repurchase of up to 3.0 million
TDS Common Shares over a period of three years. The Company plans to finance the
repurchase program using internally generated funds and borrowings under
short-term lines of credit. The Company may use repurchased shares to fund
acquisitions and for general corporate purposes. Subject to prevailing market
conditions, purchases may be made from time to time through open market
purchases or at negotiated prices in private transactions. The actual number of
Common Shares which may be repurchased will be subject to the trading price of
the Common Shares, the Company's financial position and other factors.
NOTE 10
COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
The primary purpose of TDS's construction and expansion program is to
provide for normal growth, to upgrade telephone service, to expand into new
communication areas, and to take advantage of service-enhancing and cost-
reducing technological developments. The cellular capital additions budget
totals approximately $300 million for 1997, including about $258 million for new
cell sites and $30 million for various information systems initiatives. The
telephone capital additions budget totals approximately $130 million for 1997,
including about $56 million for new digital switches and other switching
facilities and $56 million for improvements to outside plant facilities. The PCS
capital additions budget totals approximately $345 million for 1997, including
$255 million for switching equipment and $38 million for cell sites. The radio
paging capital additions are anticipated to total approximately $35 million in
1997, including $15 million for systems and transmitters and $16 million for
pagers.
PENDING ACQUISITIONS
At December 31, 1996, TDS has entered into definitive agreements to acquire
a controlling interest in one cellular market and one telephone company for an
aggregate consideration of approximately $39.8 million, primarily cash and TDS
Common Shares.
LEASE COMMITMENTS
TDS and its subsidiaries have leases for certain cellular plant facilities,
office space and data processing equipment, most of which are classified as
operating leases. For the years 1996, 1995 and 1994, rent expense for term
leases was $20.9 million, $13.6 million and $10.4 million, respectively, and
rent expense under cancelable and
I-70
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 (CONTINUED)
short-term leases was $7.6 million, $7.5 million and $6.5 million, respectively.
At December 31, 1996, the aggregate minimum rental commitments under
noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
MINIMUM FUTURE
RENTAL PAYMENTS
---------------
<S> <C>
(DOLLARS IN
THOUSANDS)
1997..................................................................................... $ 21,917
1998..................................................................................... 19,428
1999..................................................................................... 17,353
2000..................................................................................... 15,348
2001..................................................................................... 13,367
Thereafter............................................................................... $ 56,028
---------------
---------------
</TABLE>
LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings before the FCC and
various state and federal courts. In some cases, the litigation involves
disputes regarding rights to certain cellular telephone systems and other
interests. Management does not believe that any of such proceedings should have
a material adverse impact on the financial position or results of operations of
the Company.
NOTE 11
RESTRICTION ON COMMON STOCK DIVIDENDS
Under TDS's loan agreements at December 31, 1996, all of the consolidated
retained earnings were available for the payment of cash dividends on shares of
TDS common stock.
Certain regulated telephone subsidiaries may not transfer funds to the
parent in the form of cash dividends, loans or advances until certain financial
requirements of their mortgages have been met. All of the $326.6 million
underlying retained earnings of all TDS subsidiaries at December 31, 1996, was
available for the payment of dividends on the subsidiaries common stock. Of the
$2.7 billion underlying net assets of the TDS subsidiaries at December 31, 1996,
$2.1 billion was available for transfer to TDS.
I-71
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12
INVESTMENTS IN UNCONSOLIDATED ENTITIES
The following summarizes the unaudited combined assets, liabilities and
equity, and the unaudited results of operations of the cellular and telephone
companies in which TDS's investments are accounted for by the equity method.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Assets
Current assets............................................................ $ 324,780 $ 266,967
Due from affiliates....................................................... 6,232 24,765
Property and other........................................................ 1,121,676 937,609
------------- -------------
$ 1,452,688 $ 1,229,341
------------- -------------
------------- -------------
Liabilities and Equity
Current liabilities....................................................... $ 277,743 $ 240,480
Due to affiliates......................................................... 21,020 31,501
Deferred credits.......................................................... 3,380 5,766
Long-term debt............................................................ 41,591 40,220
Partners' capital and stockholders' equity................................ 1,108,954 911,374
------------- -------------
$ 1,452,688 $ 1,229,341
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Results of Operations......................................... $ 1,394,781 $ 1,173,559
Revenues.................................................... 1 9 $ 892,530
Costs and expenses.......................................... (958,257) (808,008) (652,918)
Other income................................................ 8,558 8,249 7,952
Interest expense............................................ (6,306) (6,414) (5,650)
Income taxes................................................ (3,530) (4,670) (1,824)
Extraordinary item.......................................... (2,211) -- --
------------- ------------- ------------
Net income.................................................. $ 433,035 $ 362,716 $ 240,090
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
NOTE 13
EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company sponsors two qualified noncontributory defined contribution
pension plans. One plan (the "TDS Plan") provides benefits for the employees of
TDS, TDS Telecom and substantially all of the telephone company subsidiaries.
(Employees of certain telephone subsidiaries are covered under other pension
plans or receive direct pension payments.) The other plan provides pension
benefits for USM and AERL employees. Under these plans, pension costs are
calculated separately for each participant and are funded currently. TDS also
sponsors an unfunded non-qualified deferred compensation plan to supplement the
benefits under these plans to offset the reduction of benefits caused by the
limitation on annual employee compensation under the tax laws.
Total pension costs were $4.6 million, $4.6 million and $4.8 million in
1996, 1995 and 1994, respectively.
I-72
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 (CONTINUED)
OTHER POSTRETIREMENT BENEFITS
The Company sponsors two defined benefit postretirement plans that cover
most of the employees of TDS and its telephone subsidiaries. One plan provides
medical benefits and the other plan provides life insurance benefits. Both plans
are contributory, with retiree contributions adjusted annually. The medical plan
anticipates future cost sharing changes that are consistent with the Company's
intent to increase retiree contributions by the health care cost trend rate. An
amount not to exceed 25% of the total contribution to the TDS Plan will be
contributed to fund the cost of the medical benefits annually. An additional
contribution equal to a reasonable amortization of the past service cost may be
made without regard to the 25% limitation described above. The Company will
limit overall contributions to the aggregate accruals recorded by its
subsidiaries. The Company's postretirement medical and life insurance plans are
currently underfunded. Total contributions to fund postretirement medical and
life insurance plans were $2.2 million, $3.1 million and $1.1 million in 1996,
1995 and 1994, respectively.
The following table sets forth the plans' funded status reconciled with the
amount shown in the Company's consolidated balance sheet at December 31, 1996:
<TABLE>
<CAPTION>
LIFE
INSURANCE HEALTH CARE
PLAN PLAN TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees............................................................. $ 1,725 $ 3,144 $ 4,869
Fully eligible active plan participants.............................. 522 2,123 2,645
Other active plan participants....................................... 939 9,328 10,267
----------- ----------- ---------
3,186 14,595 17,781
Plan assets at fair value.............................................. 1,305 8,954 10,259
----------- ----------- ---------
Accumulated postretirement benefit obligation in excess of plan
assets............................................................... 1,881 5,641 7,522
Unrecognized prior service cost........................................ (68) (649) (717)
Unrecognized net gain from past experience different from that assumed
and from changes in assumptions...................................... 46 4,600 4,646
----------- ----------- ---------
Accrued postretirement benefit cost at December 31, 1996............... $ 1,859 $ 9,592 $ 11,451
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
Net postretirement cost for 1996, 1995 and 1994 includes the following
components:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Service cost............................................................... $ 796 $ 588 $ 810
Interest cost on accumulated postretirement benefit obligation............. 1,125 1,082 1,116
Actual return on plan assets............................................... (753) (656) --
Net amortization and deferral.............................................. 99 204 (224)
--------- --------- ---------
Net postretirement cost.................................................... $ 1,267 $ 1,218 $ 1,702
--------- --------- ---------
--------- --------- ---------
</TABLE>
For measurement purposes, a 10.2% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996; the rate was assumed
to decrease over seven years to 6.1% and to remain at 6.1% thereafter. The
assumed rates of compensation increases and return on plan assets were 5.0% and
8.0%, respectively. The health care cost trend rate assumption has a significant
effect on the amounts reported. Increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1996, by $2.7 million and
the aggregate of the service and interest cost components of postretirement
expense for the year then ended by $419,000.
I-73
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 (CONTINUED)
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0%.
NOTE 14
BUSINESS SEGMENT INFORMATION
TDS's businesses are classified into four principal segments: Cellular
Telephone, Telephone, PCS and Radio Paging operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Revenues
Cellular.................................................. $ 707,820 $ 492,395 $ 332,404
Telephone................................................. 402,629 354,841 306,341
Paging.................................................... 104,187 107,150 92,065
------------- ------------- -------------
Total................................................... $ 1,214,636 $ 954,386 $ 730,810
------------- ------------- -------------
------------- ------------- -------------
Operating Income (Loss)
Cellular.................................................. $ 87,366 $ 42,755 $ 17,385
Telephone................................................. 103,358 98,240 91,606
Paging.................................................... (36,626) (8,997) (169)
------------- ------------- -------------
Total................................................... $ 154,098 $ 131,998 $ 108,822
------------- ------------- -------------
------------- ------------- -------------
Depreciation and Amortization Expense
Cellular.................................................. $ 108,839 $ 89,458 $ 65,454
Telephone................................................. 88,967 77,354 68,879
Paging.................................................... 33,777 24,692 17,178
------------- ------------- -------------
Total................................................... $ 231,583 $ 191,504 $ 151,511
------------- ------------- -------------
------------- ------------- -------------
Identifiable Assets
Cellular.................................................. $ 2,116,592 $ 1,890,621 $ 1,584,142
Telephone................................................. 1,181,084 1,058,241 984,563
PCS....................................................... 638,412 318,265 20,473
Paging.................................................... 153,374 159,170 146,107
Parent and Other.......................................... 111,507 42,785 54,842
------------- ------------- -------------
Total................................................... $ 4,200,969 $ 3,469,082 $ 2,790,127
------------- ------------- -------------
------------- ------------- -------------
Capital Expenditures
Cellular.................................................. $ 248,123 $ 210,878 $ 167,164
Telephone................................................. 144,440 104,372 115,483
PCS....................................................... 112,939 8,521 --
Paging.................................................... 32,517 26,527 28,966
Parent and Other.......................................... 12,185 9,698 8,088
------------- ------------- -------------
Total................................................... $ 550,204 $ 359,996 $ 319,701
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
NOTE 15
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of Cash and Cash Equivalents, Temporary Investments and
Short-term Debt approximate fair value due to the short-term nature of these
instruments.
I-74
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 (CONTINUED)
The carrying value and estimated fair value of the Company's long-term debt
was $1.0 billion and $969.5 million, respectively, at December 31, 1996, and
$894.6 million and $932.6 million, respectively, at December 31, 1995. The fair
value was estimated using discounted cash flow analysis based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements.
The decrease in estimated fair value in 1996 was due to a change in the
incremental borrowing rate related to RUS, RTB and FFB Mortgage Notes.
At December 31, 1996 and 1995, the carrying value of the Company's
Redeemable Preferred Shares, $1.9 million, and $15.1 million, respectively, was
approximately equal to its fair value. The fair value was estimated using
discounted cash flow analysis based on the Company's current dividend yield on
issues of its non-convertible preferred shares and, for convertible series, the
net present value of the common stock to be issued upon conversion (valued at
quoted market prices).
It was not practicable to estimate the fair value of the Company's cost
method investments in other companies because of the lack of quoted market
prices. The carrying amounts at December 31, 1996 and 1995 represent the
original cost of the investments, which management believes is not impaired.
NOTE 16
PRO FORMA BASIS OF PRESENTATION
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal (the "Tracking Stock Proposal") which, if approved by
shareholders and implemented by the Board, would authorize the Board to issue
three new classes of common stock designated as United States Cellular Group
Common Shares (the "Cellular Group Shares"), TDS Telecommunications Group Common
Shares (the "Telecom Group Shares") and Aerial Communications Group Common
Shares (the "Aerial Group Shares"), and change the state of incorporation of
Telephone and Data Systems, Inc. from Iowa to Delaware. While each of the new
classes of common stock would constitute common stock of Telephone and Data
Systems, Inc., each is intended to reflect the separate performance of Telephone
and Data Systems, Inc.'s cellular telephone, landline telephone and personal
communications services businesses ("Tracking Stocks"). The Cellular Group
Shares, when issued, are intended to reflect the separate performance of the
United States Cellular Group (the "Cellular Group"), which includes Telephone
and Data Systems, Inc.'s interest in United States Cellular Corporation, an
81%-owned subsidiary of Telephone and Data Systems, Inc. which operates and
invests in cellular telephone companies and properties. The Telecom Group
Shares, when issued, are intended to reflect the separate performance of the TDS
Telecommunications Group (the "Telecom Group"), which primarily includes
Telephone and Data Systems, Inc.'s interest in TDS Telecommunications
Corporation, a wholly-owned subsidiary of Telephone and Data Systems, Inc. which
operates landline telephone companies. The Aerial Group Shares, when issued, are
intended to reflect the separate performance of the Aerial Communications Group
(the "Aerial Group"), which includes Telephone and Data Systems, Inc.'s interest
in Aerial Communications, Inc., an 83%-owned subsidiary of Telephone and Data
Systems, Inc. which is developing broadband personal communications services.
The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the United States
Cellular Group, the TDS Telecommunications Group, and the Aerial Communications
Group to the extent of the Retained Interests in the respective groups, and to
reflect the performance of the TDS Group. The TDS Group includes Telephone and
Data Systems, Inc. and all of its subsidiaries and their respective properties
and assets other than (except with respect to the Retained Interests): United
States Cellular and its subsidiaries (which are included in the United States
Cellular Group), TDS Telecom and its subsidiaries (which are included in the TDS
Telecommunications Group), and Aerial and its subsidiaries (which are included
in the Aerial Communications Group) and any other assets or liabilities or
subsidiaries of Telephone and Data Systems, Inc. attributed to the United States
Cellular Group, the TDS Telecommunications Group or the Aerial Communications
Group. The TDS Group reflects primarily the TDS Group's Retained Interest in the
United States Cellular Group, the TDS Telecom Group and the Aerial Group, the
Corporate operations (including corporate management, intercompany financing,
cash management and intercompany income tax allocation activities) and the
operations of American Paging, Inc., an 82%-owned subsidiary.
I-75
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 (CONTINUED)
Following approval by shareholders of the Tracking Stock Proposal, Telephone
and Data Systems, Inc. currently intends to a) offer and sell Telecom Group
Shares in a public offering for cash, subject to prevailing market and other
conditions (the "Telecom Public Offering"), and to allocate the net proceeds
thereof to the Telecom Group, b) issue Cellular Group Shares in exchange for all
of the Common Shares of United States Cellular Corporation which are not owned
by Telephone and Data Systems, Inc., subject to approval by the board of
directors and the shareholders of United States Cellular Corporation (the "U.S.
Cellular Merger"), c) issue Aerial Group Shares in exchange for all of the
Common Shares of Aerial Communications, Inc. which are not owned by Telephone
and Data Systems, Inc., subject to approval by the board of directors and the
shareholders of Aerial Communications, Inc. (the "Aerial Merger"), and d)
distribute one Cellular Group Share, two-thirds of a Telecom Group Share and
two-thirds of an Aerial Group Share in the form of a stock dividend with respect
to each outstanding Series A Common Share and Common Share of Telephone and Data
Systems, Inc. (the "Distribution"). It is currently expected that the
Distribution would take place in June 1998 or later, after the completion of the
Telecom Public Offering, the U.S. Cellular Merger and the Aerial Merger,
although the Board reserves the right to effect all or any part of the
Distribution at any time, or not to make the Distribution, regardless of whether
or not such other transactions have taken place.
The shares of Tracking Stock which would be issued in the Distribution would
represent an approximately 75% interest of the common equity value of TDS in
each Tracking Group (the "Outstanding Interest"). When considering the shares of
Tracking Stock which would also be issued in the Telecom Public Offering, the U.
S. Cellular Merger and the Aerial Merger, as well as the Distribution, the
Outstanding Interest would initially represent in the aggregate an approximately
80% interest in each Tracking Group. Upon completion of all of the Transactions
as contemplated, approximately 20% of the common shareholders' value of each
Tracking Group would initially be retained (the "Retained Interest") in a
residual group (the "TDS Group"), along with all other interests held by
Telephone and Data Systems, Inc.
Following the Distribution, subject to the legal restrictions on the payment
of dividends, the Board currently intends to establish an annual dividend on the
Telecom Group Shares in an amount equal to $.48 per share. The Board also
currently intends to establish an annual dividend on the Common Shares and
Series A Common Shares in an amount equal to $.10 per share. (Based on the
expected distribution ratio of two-thirds of a Telecom Group Share for each
existing Common Share and Series A Common Share, the dividend on Telecom Group
shares would equate to a per share dividend of $.32 per existing Common Share
and Series A Common Share. The total of the dividend on Common Shares and Series
A Common Shares of $.10 and the equivalent dividend on Telecom Group Shares of
$.32 equals the existing current annual dividend on the existing Common Shares
and Series A Common Shares of $.42). With regard to the Cellular Group and the
Aerial Group Shares, the Board currently intends to retain future earnings, if
any, for the development of the businesses of the Cellular Group and Aerial
Group, respectively, and does not anticipate paying dividends on the Cellular
Group or the Aerial Group Shares in the foreseeable future. Future dividends on
the shares of common stock will be payable when, as and if declared by the Board
out of the lessor of (1) all funds of Telephone and Data Systems, Inc. legally
available therefor and (2) the available dividend amount with respect to the
relevant Group.
Funds of the Company legally available for the payment of dividends
("Surplus") (approximately $2,031 million as of December 31, 1996, based on the
financial statements) is an amount approximately equal to the Total Common and
Preferred Equity of the Company less the par or stated value of all shares of
common and preferred stock outstanding (204,155,000 shares as of December 31,
1996 after the Distribution). With respect to any Tracking Group, the Available
Dividend Amount (approximately $1,107 million for the Cellular Group, $258
million for the Telecom Group and $328 million for the Aerial Group as of
December 31, 1996, based on the financial statements) is an amount approximately
equal to the Outstanding Interest Fraction of such Tracking Group (approximately
75% after the Distribution) times the respective Tracking Group Equity less the
par value of the respective outstanding Tracking Group shares. With respect to
the TDS Group, the Available Dividend Amount (approximately $610 million as of
December 31, 1996) is an amount approximately equal to the greater of a) an
amount (approximately $339 million) which is approximately equal to the Surplus
of the Company less the sum of all Available Dividend Amounts of all Tracking
Groups or b) an amount (approximately $610 million) which is
I-76
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 (CONTINUED)
approximately equal to the TDS Group Equity and Preferred Stock less the par or
stated value of all Common and Series A Common Shares and Preferred Stock
outstanding.
The financial statements of the Groups comprise all of the accounts included
in the corresponding consolidated financial statements of Telephone and Data
Systems, Inc. The separate Cellular Group, Telecom Group, Aerial Group, and TDS
Group financial statements give effect to the management and accounting policies
that would be applicable upon implementation of the Tracking Stock Proposal.
Subject to the completion of the U.S. Cellular Merger and the Aerial Merger,
Telephone and Data Systems, Inc. intends to terminate certain intercompany
agreements between Telephone and Data Systems, Inc. and U.S. Cellular and
Aerial, respectively. Thereafter, all of the relationships between Telephone and
Data Systems, Inc. and such subsidiaries would be determined solely by methods
that management of Telephone and Data Systems, Inc. believes to be reasonable.
Many of such policies would continue the arrangements which presently exist
between Telephone and Data Systems, Inc. and U.S. Cellular or Aerial pursuant to
the intercompany agreements, but Telephone and Data Systems, Inc. would have no
contractual obligation to continue such policies after the intercompany
agreements have been terminated. The separate Group financial statements have
been prepared on a basis that management believes to be reasonable and
appropriate and include (1) the historical financial position, results of
operations and cash flows of the businesses that comprise each of the Groups,
(2) any assets and liabilities (including contingent liabilities) which have
been attributed to any Group from any other Group, and (3) with respect to the
TDS Group, the Retained Interest in each of the Tracking Groups. The effects of
the issuance of the Tracking Stocks have not been reflected in these historical
financial statements.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, Telephone and Data
Systems, Inc. will prepare and file with the Securities and Exchange Commission,
consolidated financial statements of Telephone and Data Systems, Inc., and
financial statements of the Cellular Group, the Telecom Group, and the Aerial
Group for so long as the respective Tracking Stock is outstanding, and the TDS
Group for as long as any Tracking Stock is outstanding. Although the financial
statements of the Cellular Group, the Telecom Group, the Aerial Group, and the
TDS Group will separately report the assets, liabilities (including contingent
liabilities) and shareholders' equity of Telephone and Data Systems, Inc.
attributed to the Cellular Group, the Telecom Group, the Aerial Group, and the
TDS Group, such attribution will not affect the legal title to such assets or
responsibility for such liabilities. Holders of Cellular Group, Telecom Group,
and Aerial Group Common Shares will be, and holders of Telephone and Data
Systems, Inc. Common Shares and Series A Common Shares are, shareholders of
Telephone and Data Systems, Inc. Telephone and Data Systems, Inc. and its
subsidiaries would each continue to be responsible for their respective
liabilities.
Financial effects arising from the Cellular Group, Telecom Group, Aerial
Group or TDS Group that affect the consolidated results of operations or
financial condition of Telephone and Data Systems, Inc. could affect the results
of operations or financial condition of the Cellular Group, Telecom Group,
Aerial Group or TDS Group, or could affect the market price of any or all
classes of Common Stock. In addition, any net losses of Telephone and Data
Systems, Inc., or the Cellular Group, the Telecom Group, the Aerial Group or the
TDS Group, and dividends or distributions on, or repurchases of, any class of
Common Stock will reduce the assets of Telephone and Data Systems, Inc. legally
available for payment of dividends on any class of Common Stock. Accordingly,
Telephone and Data Systems, Inc.'s consolidated financial statements should be
read in conjunction with the Cellular Group, the Telecom Group, the Aerial Group
and the TDS Group financial information.
The management and accounting policies applicable to the preparation of the
financial statements of the TDS Group could be modified or rescinded by the
Board, in its sole discretion and without the approval of shareholders, although
there is no present intention to do so. The Board could also adopt additional
policies depending upon the circumstances. Any determination by the Board to
modify or rescind such policies, or to adopt additional policies, including any
such decision that could have disparate effects upon the holders of different
series of common stock, would be made by the Board in good faith and in the
honest belief that such decision is in the best interests of Telephone and Data
Systems, Inc. In addition, generally accepted accounting principles require that
changes in accounting policy must be preferable (in accordance with such
principles) to the policy previously in place.
I-77
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 (CONTINUED)
PRO FORMA EARNINGS PER SHARE
Pro forma net income attributable to the United States Cellular Group, the
TDS Telecommunications Group, the Aerial Communications Group and to the TDS
Group through Retained Interest assumes that the U.S. Cellular Merger, Aerial
Merger and the Telecom Public Offering has not taken place and therefore 75% of
net income of each Group (except for the TDS Group) is attributable to the
United States Cellular Group Shares, the TDS Telecommunciations Group Shares and
the Aerial Communications Group Shares and 25% of net income is attributable to
the Retained Interest for the TDS Group. A portion of the net income in the
United States Cellular Group and the Aerial Communications Group is allocated to
the minority public shareholders of the respective Groups prior to attributing
the net income to the Groups and the TDS Group through Retained Interest.
NOTE 17
SUBSEQUENT EVENTS
SALE OF NOTES. USM filed a shelf Registration Statement on Form S-3 in July
1997 for the sale of up to $400 million of unsecured debt. USM issued $250
million of 7.25% Notes due August 15, 2007 (the "Notes") under the shelf
registration in August 1997. The Company used the net proceeds from the sale of
the Notes of approximately $247.0 million to repay notes payable and long-term
debt.
TDS filed a shelf Registration Statement on Form S-3 in October 1997 for the
sale of up to $400 million of Trust Originated Preferred Securties-SM-
("TOPrS-SM-"). TDS issued $150 million aggregate principle amount of 8.5% TOPrS,
due to mature on December 31, 2037 but may be extended to December 31, 2046 by
TDS, on November 14, 1997. The Company used the net proceeds to repay certain
short-term indebtedness.
LINE OF CREDIT. In August of 1997 USM established a $500 million, seven
year, revolving credit facility with a group of banks.
EXCHANGE OF MARKETS WITH ANOTHER CELLULAR OPERATOR. In October 1997, USM
completed the exchange with BellSouth it had announced earlier in 1997. Pursuant
to the exchange,USM received majority interests in 12 markets adjacent to its
Iowa and Wisconsin/Illinois clusters. In exchange, USM divested its majority
interests in 10 markets and minority interests in nine markets and paid a net
amount of $87 million in cash ($103 million paid in October less $16 million
received in September). Certain aspects of this transaction are taxable; the
amount of these taxes will be determined by year-end and will be paid in the
first quarter of 1998. No book gain or loss will be recorded on the transaction.
USM received majority interests representing approximately 4.0 milliion pops in
the transaction, and divested majority interests representing 2.0 million pops
and minority interests representing approximately 1.1 million pops.
SALE OF MINORITY INTERESTS. In December, 1997 USM announced that AirTouch
Communications, Inc. [NYSE:ATI] will acquire interests owned by USM and TDS, in
cellular systems serving Seattle and Olympia, Washington; Tucson, Arizona;
Duluth, Minnesota; and rural areas in Arizona, Colorado and Idaho. ATI will
issue approximately 5,000,000 shares of its common stock and approximately $50
million in cash to USM and TDS in exchange for these interests, which represent
approximately 900,000 pops (the population of a market multiplied by a company's
ownership interest in a cellular licensee in that market).
- ---------
- -SM-"Trust Originated Preferred Securities" and "TOPrS" are service marks of
Merrill Lynch & Co., Inc.
I-78
<PAGE>
CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996
Operating Revenues................................................... $ 263,387 $ 298,951 $ 315,924 $ 336,374
Operating Income..................................................... 30,957 49,081 41,263 32,797
Gain on Sale of Cellular and Other Investments....................... 41,758 86,494 7,797 2,686
Net Income........................................................... 33,689 59,692 22,669 12,089
Net Income Available to Common....................................... 33,267 59,450 22,200 11,606
Net Income Available to Common--Operations......................... 12,959 18,969 19,271 10,852
Net Income Available to Common--Gains.............................. $ 20,308 $ 40,481 $ 2,929 $ 754
Weighted Average Common Shares (000s)................................ 59,393 61,259 1,321 61,305
Earnings per Common Share............................................ $ .56 $ .97 $ .36 $ .19
Earnings per Common Share--Operations................................ .22 .31 .31 .18
Earnings per Common Share--Gains..................................... $ .34 $ .66 $ .05 $ .01
1995
Operating Revenues................................................... $ 209,975 $ 232,091 $ 256,508 $ 255,812
Operating Income..................................................... 29,156 33,825 40,560 28,457
Gain on Sale of Cellular and Other Investments....................... 19,488 16,886 43,375 6,876
Net Income........................................................... 23,193 22,580 42,596 15,609
Net Income Available to Common....................................... 22,701 22,086 42,338 15,100
Net Income Available to Common--Operations........................... 13,908 12,185 21,256 14,227
Net Income Available to Common--Gains................................ $ 8,793 $ 9,901 $ 21,082 $ 873
Weighted Average Common Shares (000s)................................ 57,292 58,508 59,038 58,741
Earnings per Common Share............................................ $ .39 $ .38 $ .72 $ .26
Earnings per Common Share--Operations................................ .24 .21 .36 .24
Earnings per Common Share--Gains..................................... $ .15 $ .17 $ .36 $ .02
</TABLE>
Note: Certain 1996 quarterly amounts were reclassified for current period
presentation.
Net Income Available to Common for 1996 and 1995 included significant gains
from the sales of cellular and other investments. The table above summarizes the
effect of the gains on Net Income Available to Common and Earnings per Common
Share.
Management believes there exists a seasonality at USM in both service
revenues, which tend to increase more slowly in the first and fourth quarters,
and operating expenses, which tend to be higher in the fourth quarter due to
increased marketing activities and customer growth. This seasonality may cause
operating income to vary from quarter to quarter.
In the first part of 1997, AERL is expected to begin commercial service
which will result in AERL's revenue and expenses being included in operating
income. Operating income is expected to decrease significantly in 1997 as a
result of the commencement of PCS operations.
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Telephone and Data Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Telephone
and Data Systems, Inc. (an Iowa corporation) and Subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Telephone and Data Systems,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 29, 1997
(except with respect to the matters discussed in
Note 16 and Note 17, as to which the date is December 15, 1997)
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<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Telephone and Data Systems, Inc. ("TDS" or the "Company") is a diversified
telecommunications company which provides high-quality telecommunications
services to over 2.7 million cellular telephone, local telephone, personal
communications service ("PCS") and radio paging customer units. TDS's long-term
business development strategy is to expand its operations through internal
growth and acquisitions, and to explore and develop telecommunications
businesses that management believes utilize TDS's expertise in customer-based
telecommunications.
During the first nine months of 1997, U.S. Cellular continued with strong
growth in customers, revenues and earnings, Aerial launched service in all of
its markets, TDS Telecom continued with steady growth and American Paging
continued its turnaround efforts. Revenues increased 24% primarily as a result
of a 23% increase in customer units. The commencement of PCS operations
significantly reduced operating cash flows, operating income and net income as
compared to the first nine months of 1996. Strong increases in cash flow from
U.S. Cellular and solid growth from TDS Telecom were offset by Aerial's start-up
activities which resulted in an 11% decline in operating cash flow and a 62%
decline in operating income. Net income to common declined 79% to $24.0 million
as a result of the losses incurred in the start-up of the PCS markets and
smaller gains on the sale of cellular interests and other investments.
United States Cellular Corporation ("U.S. Cellular"), TDS's 80.9%-owned
cellular subsidiary, continued its rapid growth during the first nine months of
1997. Customer units increased 44% to 1,357,000. The increase in customer units
resulted in a 29% increase in revenues, a 33% increase in operating cash flow
and a 47% increase in operating income.
TDS Telecommunications Corporation ("TDS Telecom"), TDS's wholly owned
telephone subsidiary, continued to provide solid growth with a 17% increase in
revenues, a 10% increase in operating cash flow and a 4% increase in operating
income. Telephone access lines increased by 6% to 506,600.
Aerial Communications, Inc. ("Aerial"), TDS's 82.6%-owned PCS subsidiary,
launched service in all six of its markets between March and June of 1997.
Customer units totaled nearly 65,000 at September 30, 1997. Aerial's revenues
and expenses incurred subsequent to the launching of service have been included
in operating income. Operating cash flow was a negative $96.3 million while
operating loss totaled $116.2 million. Costs incurred prior to the launch of
service, (PCS development costs included in "Investment and Other Income
(Expense)") totaled $21.6 million in 1997 and $24.3 million in 1996.
American Paging, Inc. ("American Paging"), TDS's 82.0%-owned paging
subsidiary, reported a 1% increase in units in service to 792,800. Revenues
declined by 9% primarily as a result of competitive pricing pressures. Operating
loss totaled $24.8 million for the first nine months of 1997.
RESULTS OF OPERATIONS
NINE MONTHS ENDED 9/30/97 COMPARED TO NINE MONTHS ENDED 9/30/96
Telephone and Data Systems, Inc. reported net income available to common of
$24.0 million, or $.40 per share, in the first nine months of 1997, compared to
$115.3 million, or $1.89 per share, in the first nine months of 1996. Net income
available to common from U.S. Cellular and TDS Telecom increased 62% to $114.8
million, or $1.90 per share, in the first nine months of 1997, from $70.7
million, or $1.16 per share, in the first nine months of 1996. Aerial's PCS
development and start-up activities reduced net income and earnings per share by
$79.7 million, or $1.32 per share, in 1997 and $8.7 million, or $.14 per share,
in 1996. American Paging's activities reduced net income and earnings per share
by $23.5 million, or $.39 per share, in 1997 and $10.5 million, or $.17 per
share in 1996. Net income included gains on the sale of cellular interests and
other investments of $12.5 million, or $.21 per share in 1997 and $63.7 million,
or $1.04 per share in 1996.
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<PAGE>
The table below summarizes the effects of the business units and gains
(along with the related impact of income taxes and minority interest) on net
income available to common and earnings per share.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Net Income Available to Common
U.S. Cellular and TDS Telecom..................................................................... $ 114,836 $ 70,748
Aerial............................................................................................ (79,709) (8,711)
American Paging................................................................................... (23,542) (10,474)
Gains............................................................................................. 12,450 63,718
----------- -----------
$ 24,035 $ 115,281
----------- -----------
----------- -----------
Earnings Per Share
U.S. Cellular and TDS Telecom..................................................................... $ 1.90 $ 1.16
Aerial............................................................................................ (1.32) (.14)
American Paging................................................................................... (.39) (.17)
Gains............................................................................................. .21 1.04
----------- -----------
$ .40 $ 1.89
----------- -----------
----------- -----------
</TABLE>
OPERATING REVENUES increased 24% ($209.1 million) during the first nine
months of 1997 primarily as a result of a 23% increase in customer units served
to over 2.7 million units at September 30, 1997. U.S. Cellular contributed 67%
($140.8 million) of the total increase in revenues and most of the increase in
customer units, while TDS Telecom contributed 24% ($49.9 million) and Aerial
contributed 12% ($25.8 million) of the total increase in revenues.
U.S. Cellular revenues increased 29% ($140.8 million) in 1997 on a 44%
increase in customer units and strong inbound roaming revenues. Cellular
customers increased to 1,357,000 at September 30, 1997 from 940,000 at September
30, 1996. Total average monthly service revenue per customer was $56.58 in the
first nine months of 1997 and $64.96 in 1996. Average monthly service revenue
per customer continues to decline due to roaming revenues increasing at a slower
rate than the U.S. Cellular customer base, competitive pricing pressures,
incentive programs and consumer market penetration.
LOCAL RETAIL REVENUE increased 36% ($107.6 million) in the first nine months
of 1997 due primarily to the 44% customer growth. Average monthly local retail
revenue per customer was $37.30 in the first nine months of 1997 and $40.54 in
1996. Average local minutes of use per retail customer decreased slightly to 105
in 1997 from 106 in 1996, while average local retail revenue per minute totaled
$.36 in 1997 compared to $.38 in 1996. U.S. Cellular's increasing use of
incentive programs that encourage lower-priced weekend and off-peak usage, in
order to stimulate overall usage and the increased amounts of bill credits given
to customers as incentives to become or remain customers resulted in the
decrease in average monthly local retail revenue per minute which in turn caused
the decrease in average monthly local retail revenue per customer. INBOUND
ROAMING REVENUE (charges to customers of other systems who use U.S. Cellular's
cellular systems when roaming) increased 17% ($23.9 million) in the first nine
months of 1997. The growth in roaming revenue is due to a 28% increase in
minutes used offset somewhat by negotiated reductions in roaming rates. Average
inbound roaming revenue per minute totaled $.86 in 1997 and $.93 in 1996.
Average monthly inbound roaming revenue per customer was $14.97 in 1997 compared
to $18.88 in 1996. The decrease is related to the faster growth of U.S.
Cellular's customer base as compared to the growth of inbound roaming revenues.
Beginning on January 1, 1997, U.S. Cellular changed its income statement
presentation of certain credits for free or reduced-price air time or access
given to customers on their monthly bills. The foregone revenues are now
reported as a reduction of local retail revenue instead of marketing and selling
expense (for new customers) and general and administrative expense (for current
customers). Amounts in the affected revenue and expense categories have been
reclassified for previous years, throughout this Form 10-Q. Operating income and
net income are not affected by this change.
TDS Telecom revenues increased 17% ($49.9 million) in 1997 due to growth in
telephone operations ($32.0 million) and growth in other operations ($17.9
million). Telephone operations revenues increased as a result of the
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<PAGE>
effects of recovery of increased costs of providing long-distance services ($9.7
million), acquisitions ($8.1 million), internal access line growth ($4.4
million), increased network usage ($4.1 million) and increased sale of customer
premise equipment ($3.1 million). The number of telephone access lines increased
6% to 506,600 at September 30, 1997 from 479,700 at September 30, 1996. Average
monthly revenue per access line increased to $67.90 for the first nine months of
1997 from $66.16 in 1996. Other operations include the revenues of a
long-distance provider, a recently acquired cellular interest as well as TDS
Telecom's new business ventures which include an Internet access provider and a
structured wiring business. The increase in other operations revenues is
primarily related to the effects of the acquisition of the cellular interest
($11.2 million) and from the Internet access provider and the structured wiring
business ($5.3 million).
Aerial revenues totaled $25.8 million in 1997 consisting of service revenues
of $12.9 million and equipment sales revenues of $12.9 million for units sold to
retailers, independent agents and customers. At September 30, 1997, Aerial had
nearly 65,000 customers in service. Average revenue per unit was over $70.00 for
the third quarter of 1997, the first full quarter of operations.
American Paging revenues decreased 9% ($7.4 million) in 1997 due to
competitive pricing declines, a decrease in the average number of units in
service and lower equipment sales revenue. Average revenue per unit decreased 6%
to $9.31 in 1997 from $9.92 in 1996. As of September 30, 1997, units in service
increased to 792,800 from 788,300 a year ago. However, over the past twelve
months units in service reached a low of 767,400 at March 31, 1997 resulting in
a decrease in average number of units in service.
OPERATING EXPENSES rose 38% ($284.2 million) in the first nine months of
1997 due primarily to added expenses to serve the growing customer base and
expenses attributable to the Aerial's start-up activities. Aerial's start-up
activities represented 50% ($142.0 million) of the increase while U.S. Cellular
represented 37% ($105.2 million) and TDS Telecom represented 16% ($46.9
million), primarily due to the increase in customers.
U.S. Cellular expenses increased 25% ($105.2 million) during 1997. SYSTEM
OPERATIONS EXPENSES increased 37% ($29.8 million) in 1997 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 46% ($22.1 million) primarily due to increased roaming usage and increased
minutes of use, primarily related to the 44% increase in customer units. Net
outbound roaming usage expense is a result of offering U.S. Cellular's customers
increasingly larger service footprints in which their calls are billed at local
rates. In certain cases these service footprints include other operators'
service areas. U.S. Cellular pays roaming rates to the other carriers for calls
its customers make in these areas, while charging those customers a local rate
which is usually lower than the roaming rate. Maintenance, utility and cell site
expenses increased 24% ($7.7 million) reflecting primarily the increase in the
number of cell sites to 1,556 in 1997 from 1,270 in 1996. MARKETING AND SELLING
EXPENSES incurred to add new customers increased 29% ($39.1 million), including
a $5.8 million increase in cost of equipment sold. Cost per gross customer
addition declined to $322 in 1997 from $331 in 1996 while gross customer
activations increased to 494,000 in 1997 from 373,000 in 1996. GENERAL AND
ADMINISTRATIVE EXPENSES increased 17% ($20.9 million) due to the growing
customer base in existing markets and an expansion of local office and corporate
staff necessitated by U.S. Cellular's growth. DEPRECIATION AND AMORTIZATION
increased 19% ($15.4 million) primarily due to the increase in average fixed
assets since September 30, 1996.
TDS Telecom expenses increased 22% ($46.9 million) during 1997 primarily due
to growth in telephone operations ($26.7 million) and growth in other operations
($20.2 million). Telephone operations increased primarily due to the effects of
growth in internal operations ($10.7 million), increased depreciation and
amortization ($7.1 million) and acquisitions ($6.2 million). Other operations
include the expenses of a long-distance provider, a recently acquired cellular
interest as well as TDS Telecom's new business ventures which include an
Internet access provider and a structured wiring business. The increase in other
operations expenses is primarily related to the effects of the acquisition of
the cellular interest ($10.3 million) and from the Internet access provider and
the structured wiring business ($6.9 million).
Aerial expenses, included in operating expenses, totaled $142.0 million in
the first nine months of 1997. Expenses incurred in the first quarter of 1997 of
$21.6 million, prior to the launch of the first market, are included in PCS
Development Costs as part of Other Income. SYSTEM OPERATIONS EXPENSES totaled
$13.9 million reflecting the costs of operating Aerial's network, primarily cell
site expenses, landline interconnection charges and wages. MARKETING AND SELLING
EXPENSES reflecting an aggressive advertising campaign that accompanied the
launch of service and continued throughout the third quarter, totaled $27.0
million while cost of equipment sold totaled $40.8 million. GENERAL AND
ADMINISTRATIVE EXPENSES totaled $33.7 million reflecting the expenses associated
with the
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<PAGE>
management and operating teams as well as overhead expenses. CUSTOMER SERVICE
EXPENSES totaled $6.8 million primarily for the staffing to support the PCS
markets. DEPRECIATION AND AMORTIZATION totaled $19.8 million.
American Paging expenses decreased 9% ($9.9 million) in the first nine
months of 1997. During the first nine months of 1996, American Paging recorded
restructuring expenses of $9.3 million related to subleasing office space,
employee severance, out placement services and consulting services ($4.0
million) and write-offs of certain assets ($5.3 million).
OPERATING INCOME decreased 62% ($75.1 million) in the first nine months of
1997 reflecting the effects of Aerial's start-up activities offset somewhat by
strong (47%) growth in U.S. Cellular's operating results. The strong growth in
cellular operating income is reflected in the cellular margin improvements. TDS
Telecom's margin decreased due primarily to TDS Telecom's new business ventures.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1997 1996 CHANGE
------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Income
U.S. Cellular...................................................................... $ 110,511 $ 74,937 $ 35,574
TDS Telecom........................................................................ 76,708 73,711 2,997
Aerial............................................................................. (116,170) -- (116,170)
American Paging.................................................................... (24,845) (27,347) 2,502
------------ ----------- ------------
$ 46,204 $ 121,301 $ (75,097)
------------ ----------- ------------
------------ ----------- ------------
Operating Margins
U.S. Cellular...................................................................... 17.4% 15.2%
TDS Telecom........................................................................ 22.6% 25.5%
Aerial............................................................................. N/M N/M
American Paging.................................................................... N/M N/M
Consolidated....................................................................... 4.3% 14.1%
</TABLE>
- ---------
N/M = Not Meaningful
INVESTMENT AND OTHER INCOME (EXPENSE) totaled $67.1 million in 1997 and
$136.6 million in 1996. GAIN ON SALE OF CELLULAR INTERESTS AND OTHER INVESTMENTS
totaled $24.4 million in the first nine months of 1997 and $136.0 million in
same period of 1996 as the Company has sold or traded certain non-strategic
cellular interests and sold other investments. PCS DEVELOPMENT COSTS totaled
$21.6 million in 1997 and $24.3 million in 1996. Effective with the beginning of
the second quarter of 1997, all costs associated with Aerial's markets are
included in operating income. 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 53% ($20.2 million) to $58.4
million in the first nine months of 1997 as income from the cellular markets
increased. Cellular investment income is net of amortization of license costs
relating to these minority interests. Future cellular investment income is
expected to decrease as a result of the recent completion of the exchange
transaction with BellSouth Corporation. See "Financial Resources and Liquidity"
for further discussion of this transaction.
MINORITY SHARE OF INCOME includes the minority shareholders' share of U.S.
Cellular's, Aerial's and American Paging's net income or loss, minority
partners' share of U.S. Cellular's operating markets and other minority
shareholders' and partners' share of subsidiaries' net income or loss. The
decrease in 1997 is primarily related to the increase in Aerial's net loss
allocated to its minority shareholders and the decrease in U.S. Cellular's net
income
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<PAGE>
(due to the reduction in gains) allocated to its minority shareholders. Minority
shareholders of American Paging are not allocated losses in 1997 because
American Paging's shareholders' equity is negative.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1997 1996 CHANGE
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Minority Share of (Income) Loss
United States Cellular
Minority Shareholders' Share......................................................... $ (16,478) $ (22,914) $ 6,436
Minority Partners' Share............................................................. (10,271) (8,615) (1,656)
---------- ---------- ---------
(26,749) (31,529) 4,780
Aerial................................................................................... 26,840 2,500 24,340
American Paging.......................................................................... -- 5,722 (5,722)
Telephone Subsidiaries and Other......................................................... (1,526) (1,090) (436)
---------- ---------- ---------
$ (1,435) $ (24,397) $ 22,962
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
INTEREST EXPENSE increased 100% ($30.2 million) in the first nine months of
1997 primarily due to the increase in short-term debt outstanding used to fund
Aerial's start-up costs and the recently approved TDS stock repurchase program,
decreased capitalized interest and the increase in long-term debt outstanding at
Aerial and U.S. Cellular.
INCOME TAX EXPENSE decreased 76% ($84.2 million) in 1997 compared with 1996
primarily due to the decrease in pretax income. The effective income tax rate
was 52% in the first nine months of 1997 and 49% in 1996.
NET INCOME AVAILABLE TO COMMON decreased $91.2 million to $24.0 million in
the first nine months of 1997 from $115.3 million in the first nine months of
1996. Net income available to common included significant gains from the sale of
cellular interests and other investments in 1996 as well as significant PCS
development costs in 1997 and 1996 as explained previously.
EARNINGS PER COMMON SHARE were $.40 in the first nine months of 1997 and
$1.89 in the first nine months of 1996.
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, which may cause
operating income to vary from quarter-to-quarter. Additionally, competitors
licensed to provide PCS services have initiated service in certain of U.S.
Cellular's markets over the past fifteen months. U.S. Cellular expects PCS
operators to complete initial deployment of PCS across all of its markets by the
end of 1998. U.S. Cellular's management is monitoring these and other wireless
communications providers' strategies to determine what effect this additional
competition will have on U.S. Cellular's future strategies and results. While
the effects of additional wireless competition have slowed customer growth in
certain of U.S. Cellular's markets, the overall effect on operations to date has
not been material.
TDS anticipates that start-up and development of high-quality networks and
the marketing of systems in Aerial's markets will reduce the rate of growth in
TDS's operating and net income from levels which would otherwise be achieved
during the next few years. TDS also expects that American Paging will continue
to incur operating losses in the fourth quarter of 1997 and in 1998.
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. Accordingly, in recent years,
TDS has obtained substantial funds from external sources to acquire PCS
licenses, to build-out PCS markets, to fund acquisitions and to repurchase
common shares. Although increasing internal cash flow from U.S. Cellular and
steady internal cash flow from TDS Telecom have reduced the need for external
financing, Aerial's development and construction activities will require
significant 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 in the U.S.
Cellular and TDS Telecom business units. U.S. Cellular's operating cash flow
(operating income plus depreciation and amortization) increased 33% ($51.0
million) in the first nine months of 1997 compared to the same period in 1997
while TDS Telecom's operating cash flow increased 10% ($13.3 million).
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<PAGE>
These increases, however, were offset by Aerial's $96.3 million negative cash
flow as a result of its start-up activities. As a result, operating cash flow
decreased 11% to $258.6 million in the first nine months of 1997 from $291.4
million in the same period of 1996. Cash flows for other operating activities
(investment and other income, interest and income tax expense, and changes in
working capital and other assets and liabilities) required $108.9 million in the
first nine months of 1997 and $105.4 million in 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1997 1996 CHANGE
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating cash flow
U.S. Cellular...................................................................... $ 205,152 $ 154,153 $ 50,999
TDS Telecom........................................................................ 150,949 137,652 13,297
Aerial............................................................................. (96,313) -- (96,313)
American Paging.................................................................... (1,187) (360) (827)
------------ ------------ ----------
258,601 291,445 (32,844)
Other operating activities........................................................... (108,872) (105,418) (3,454)
------------ ------------ ----------
$ 149,729 $ 186,027 $ (36,298)
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
CASH FLOWS FROM FINANCING ACTIVITIES. TDS has used short-term debt to
finance its PCS and radio paging operations, for acquisitions and for general
corporate purposes. TDS has taken advantage of attractive opportunities from
time-to-time to retire short-term debt with the proceeds from long-term debt and
equity sales and sales of non-strategic assets. Cash flows from financing
activities totaled $339.2 million in the first nine months of 1997 compared to
$69.8 million in 1996. Increases in short-term debt and U.S. Cellular's sale of
notes provided most of the financing during 1997. In 1996, most of the financing
was from Aerial's net proceeds of $195.3 million from an initial public offering
offset somewhat by decreases in short-term debt.
Increases in short-term debt of $292.7 million during the first nine months
of 1997 were used primarily to fund expenditures for PCS construction and
development activities, stock repurchases and American Paging operating and
capital requirements. U.S. Cellular received $247 million on the sale of 7.25%
notes in August 1997. The proceeds were used to repay notes payable and
long-term debt.
Through September 30, 1997, TDS purchased 1,798,100 TDS Common Shares for
$69.9 million. In December 1996, the Company authorized the repurchase of up to
three million TDS Common Shares over a period of three years. TDS also purchased
350,000 U.S. Cellular Common Shares for $9.8 million in 1997.
CASH FLOWS FROM INVESTING ACTIVITIES. TDS makes substantial investments
each year to acquire, construct, operate and maintain modern high-quality
communications networks and facilities as a basis for creating long-term value
for shareowners. Cash flows from investing activities required $499.3 million in
the first nine months of 1997 compared to $198.2 million in 1996, primarily for
additions to property, plant and equipment of $579.1 million in 1997 and $347.7
million in 1996. The sales of non-strategic cellular interests and other
investments provided $53.9 million in 1997 and $212.5 million in 1996 and
distributions from cellular partnerships provided $42.7 million in 1997 and
$15.0 million in 1996.
PROPERTY, PLANT AND EQUIPMENT. The primary purpose of TDS's construction
and expansion program is to provide for significant customer 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 increased to $579.1 million in the first nine
months of 1997 from $347.7 million in 1996 primarily related to the increases in
Aerial's and U.S. Cellular's construction expenditures of $152.0 million and
$75.0 million, respectively. U.S. Cellular had capital expenditures of $248.0
million primarily for cell sites, equipment and systems development. TDS Telecom
incurred $96.7 million for central office and outside plant and equipment while
Aerial incurred $203.4 million primarily for cell sites, digital switching and
microwave relocation in its markets.
ACQUISITIONS. TDS continually reviews attractive opportunities for the
acquisition of additional cellular and telephone companies which add value to
the organization. As the number of opportunities for outright acquisitions of
cellular interests has decreased and as U.S. Cellular's clusters have grown to
realize greater economies of scale, U.S. Cellular's focus has shifted toward
exchanges and sales of non-strategic interests.
In October 1997, U.S. Cellular completed the exchange with BellSouth
Corporation it had announced earlier in 1997. Pursuant to the exchange, U.S.
Cellular received majority interests in 12 markets adjacent to its Iowa and
I-86
<PAGE>
Wisconsin/Illinois clusters. In exchange, U.S. Cellular divested its majority
interests in 10 markets and minority interests in nine markets and paid a net
amount of $87 million in cash. Certain aspects of this transaction are taxable;
the amount of these taxes will be determined by year-end and will be paid in the
first quarter of 1998. No book gain or loss will be recorded on the transaction.
U.S. Cellular received majority interests representing approximately 4.0 million
pops in the transaction, and divested majority interests representing 2.0
million pops and minority interests representing approximately 1.1 million pops.
U.S. Cellular has an agreement to sell a majority interest in one market in
which it owned both licenses upon the completion of the exchange agreement. A
waiver from the Federal Communications Commission has been received by U.S.
Cellular to own both licenses until this divestiture is completed.
In December, 1997 U.S. Cellular announced that AirTouch Communications, Inc.
[NYSE:ATI] will acquire interests owned by U.S. Cellular and its parent
organization, TDS, in cellular systems serving Seattle and Olympia, Washington;
Tucson, Arizona; Duluth, Minnesota; and rural areas in Arizona, Colorado and
Idaho. ATI will issue approximately 5,000,000 shares of its common stock and
approximately $50 million in cash to U.S. Cellular and TDS in exchange for these
interests, which represent approximately 900,000 pops (the population of a
market multiplied by a company's ownership interest in a cellular licensee in
that market). The interests being sold to ATI by TDS were subject to an existing
purchase agreement between U.S. Cellular and TDS. TDS will retain the ATI common
stock it receives from this sale, approximately 1,000,000 shares, and pay U.S.
Cellular approximately $20 million to terminate those purchase rights. In
exchange for the interests it will sell to ATI, U.S. Cellular will receive the
remaining 4,000,000 shares of ATI common stock and approximately $50 million in
cash.
LIQUIDITY
TDS anticipates that the aggregate resources required for 1997 will include
approximately $815 million for capital spending, consisting of $300 million for
cellular capital additions, $130 million for telephone capital additions, $365
million for PCS capital additions, $20 million for radio paging capital
additions, and $255 million for working capital and operating expenses for
Aerial. The Company anticipates financing these expenditures with internally
generated funds, short-term, intermediate-term and long-term financing.
U.S. Cellular plans to finance its cellular construction program using
primarily internally generated cash supplemented by short-term and
intermediate-term financing. U.S. Cellular's operating cash flow totaled $247.2
million for the twelve months ended September 30, 1997, up 33% ($62.0 million)
from 1996. In August 1997, U.S. Cellular issued $250 million principal amount of
7.25% notes under a $400 million shelf registration statement, priced to yield
7.33% to maturity. The proceeds of the offering were used to repay notes payable
and long-term debt. U.S. Cellular had $500 million of bank lines of credit for
general corporate purposes at September 30, 1997, all of which was available.
TDS Telecom plans to finance its construction program using internally
generated cash supplemented by long-term financing from federal government
programs. Operating cash flow totaled $205.6 million for the twelve months ended
September 30, 1997, up 13% ($23.0 million) from 1996. At September 30, 1997, TDS
Telecom telephone subsidiaries had $111.5 million in unadvanced loan funds from
federal government programs.
Aerial plans to finance its construction expenditures and working capital
requirements with short-term and intermediate-term financing and vendor
financing. Aerial is currently contemplating a private placement offering in
connection with a refinancing arrangement relating to its existing vendor
financing. The proceeds from the offering are to be paid to Nokia
Telecommunications, Inc. in satisfaction of all outstanding obligations and
future obligations of Aerial. Aerial continues to seek an investment from a
minority equity investor.
TDS and its subsidiaries have cash and temporary investments totaling $74.9
million and longer-term cash investments totaling $36.2 million at September 30,
1997. 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 had $644 million of bank lines of credit for general corporate
purposes at September 30, 1997. Unused amounts of such lines totaled $194.5
million. These line of credit agreements provide for borrowings at negotiated
rates up to the prime rate.
I-87
<PAGE>
TDS filed a shelf Registration Statement on Form S-3 on October 21, 1997 for
the sale of up to $400 million of Trust Originated Preferred Securities-SM-
("TOPrS-SM-")(1). On November 14, 1997, TDS issued $150 million aggregate
principle amount of 8.5% TOPrS, due to mature on December 31, 2037 but may be
extended to December 31, 2046 by TDS. The Company used the net proceeds to repay
certain short-term indebtedness.
The Company anticipates requiring additional funding to finance Aerial's
expected capital expenditures and working capital requirements, to finance
acquisitions and for general corporate purposes. The timing and amount of such
funding requirements will depend on the timing of Aerial's construction and
operational requirements, the timing of acquisitions, and other relevant
factors. There can be no assurance that sufficient funds will be available to
the Company on terms or at prices acceptable to the Company. If sufficient
funding is not made available to the Company on terms and prices acceptable to
the Company, the Company would have to reduce its construction, development and
acquisition programs. TDS and its subsidiaries anticipate accessing public and
private capital markets to issue debt and equity securities only when capital
requirements, financial market conditions and other factors warrant.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTAIN "FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, THAT ARE BASED ON CURRENT
EXPECTATIONS, ESTIMATES AND PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL
FACTS, INCLUDING STATEMENTS ABOUT THE COMPANY'S BELIEFS AND EXPECTATIONS ARE
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS CONTAIN POTENTIAL RISKS AND
UNCERTAINTIES AND, THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY. TDS
UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE,
BUT ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION
IN MARKETS IN WHICH TDS OPERATES; ADVANCES IN TELECOMMUNICATIONS TECHNOLOGY;
CHANGES IN THE TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING AND FUTURE
LITIGATION; AVAILABILITY OF FUTURE FINANCING; START-UP OF PCS OPERATIONS; AND
UNANTICIPATED CHANGES IN GROWTH IN CELLULAR AND PCS CUSTOMERS, PENETRATION
RATES, CHURN RATES AND THE MIX OF PRODUCTS AND SERVICES OFFERED IN TDS'S
MARKETS. READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF THESE IMPORTANT
FACTORS.
- ---------
(1) -SM- "Trust Originated Preferred Securities" and "TOPrS" are service marks
of Merrill Lynch & Co., Inc.
I-88
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
OPERATING REVENUES
Cellular telephone........................................................ $ 634,122 $ 493,331
Telephone................................................................. 338,700 288,836
PCS....................................................................... 25,791 --
Radio paging.............................................................. 71,758 79,145
------------- -------------
1,070,371 861,312
------------- -------------
OPERATING EXPENSES
Cellular telephone........................................................ 523,611 418,394
Telephone................................................................. 261,992 215,125
PCS....................................................................... 141,961 --
Radio paging.............................................................. 96,603 106,492
------------- -------------
1,024,167 740,011
------------- -------------
OPERATING INCOME............................................................ 46,204 121,301
------------- -------------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest and dividend income.............................................. 9,922 10,048
Cellular investment income, net of license cost amortization.............. 58,372 38,221
PCS development costs..................................................... (21,614) (24,312)
Gain on sale of cellular interests and other investments.................. 24,365 136,049
Other (expense), net...................................................... (2,461) 979
Minority share of income.................................................. (1,435) (24,397)
------------- -------------
67,149 136,588
------------- -------------
INCOME BEFORE INTEREST AND INCOME TAXES..................................... 113,353 257,889
Interest expense............................................................ 60,579 30,343
------------- -------------
INCOME BEFORE INCOME TAXES.................................................. 52,774 227,546
Income tax expense.......................................................... 27,317 111,496
------------- -------------
NET INCOME.................................................................. 25,457 116,050
Preferred Dividend Requirement.............................................. (1,422) (769)
------------- -------------
NET INCOME AVAILABLE TO COMMON.............................................. $ 24,035 $ 115,281
------------- -------------
------------- -------------
WEIGHTED AVERAGE COMMON SHARES (000s)....................................... 60,395 60,856
EARNINGS PER COMMON SHARE................................................... $ .40 $ 1.89
------------- -------------
------------- -------------
DIVIDENDS PER COMMON AND SERIES A COMMON SHARE.............................. $ .315 $ .30
------------- -------------
------------- -------------
Pro forma: (Note 2)
Net Income Attributable Common Stocks
United States Cellular Group Shares..................................... $ 52,428 $ 71,751
TDS Telecommunications Group Shares..................................... 17,345 18,604
Aerial Communications Group Shares...................................... (95,680) (15,905)
TDS Common and Series A Common Shares................................... 49,942 40,831
Weighted Average Common Shares Outstanding
United States Cellular Group Shares..................................... 60,395 60,856
TDS Telecommunications Group Shares..................................... 40,263 40,571
Aerial Communications Group Shares...................................... 40,263 40,571
TDS Common and Series A Common Shares................................... 60,395 60,856
Earnings per Common Share
United States Cellular Group Shares..................................... $ 0.87 $ 1.18
TDS Telecommunications Group Shares..................................... 0.43 0.46
Aerial Communications Group Shares...................................... (2.38) (0.39)
TDS Common and Series A Common Shares................................... 0.83 0.67
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
I-89
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................. $ 25,457 $ 116,050
Add (Deduct) adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization........................................... 212,397 170,143
Deferred taxes.......................................................... 2,593 45,122
Investment income....................................................... (62,754) (40,747)
Minority share of income................................................ 1,435 24,397
Gain on sale of cellular interests and other investments................ (24,365) (136,049)
Noncash interest expense................................................ 17,676 11,952
Other noncash expense................................................... 16,618 15,226
Change in accounts receivable........................................... (46,389) (27,724)
Change in materials and supplies........................................ (29,300) 2,513
Change in accounts payable.............................................. 16,617 (7,369)
Change in accrued taxes................................................. 22,088 11,984
Change in other assets and liabilities.................................. (2,344) 529
------------- -----------
149,729 186,027
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings................................................... 260,236 8,904
Repayments of long-term debt................................................ (115,853) (23,161)
Change in notes payable..................................................... 292,727 (89,434)
Dividends paid.............................................................. (20,363) (19,639)
Repurchase of Common Shares................................................. (69,942) --
Purchase of subsidiary common stock......................................... (9,801) --
Proceeds from the issuance of subsidiaries' stock........................... -- 194,262
Other financing activities.................................................. 2,149 (1,134)
------------- -----------
339,153 69,798
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment.................................. (579,138) (347,709)
Investments in and advances to cellular minority partnerships............... (499) (14,931)
Distributions from partnerships............................................. 42,695 14,959
Investments in PCS licenses................................................. (5,034) (21,009)
Proceeds from investment sales.............................................. 53,865 212,549
Change in other investments................................................. 1,475 (2,020)
Acquisitions, net of cash acquired.......................................... (39,169) (33,892)
Change in temporary investments and marketable securities................... 26,510 (6,140)
------------- -----------
(499,295) (198,193)
------------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.......................... (10,413) 57,632
CASH AND CASH EQUIVALENTS--
Beginning of period......................................................... 57,633 55,116
------------- -----------
End of period............................................................... $ 47,220 $ 112,748
------------- -----------
------------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
I-90
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.................................................................... $ 47,220 $ 57,633
Temporary investments........................................................................ 27,635 61,664
Accounts receivable from customers and others................................................ 227,776 181,212
Materials and supplies, at average cost, and other current assets............................ 80,238 45,561
-------------- -------------
382,869 346,070
-------------- -------------
INVESTMENTS
Cellular license acquisition costs, net of amortization...................................... 1,085,458 1,088,409
Cellular minority interests.................................................................. 220,776 206,390
PCS license acquisition costs................................................................ 378,624 382,724
Franchise costs and other costs in excess of the underlying book value of subsidiaries,
net........................................................................................ 178,928 181,845
Other investments............................................................................ 89,006 84,536
-------------- -------------
1,952,792 1,943,904
-------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Cellular telephone, net...................................................................... 792,279 650,754
Telephone, net............................................................................... 787,975 769,361
PCS, net..................................................................................... 548,191 322,723
Radio paging, net............................................................................ 47,038 51,472
Other, net................................................................................... 44,604 34,579
-------------- -------------
2,220,087 1,828,889
-------------- -------------
OTHER ASSETS AND DEFERRED CHARGES.............................................................. 105,323 82,106
-------------- -------------
TOTAL ASSETS............................................................................. $ 4,661,071 $ 4,200,969
-------------- -------------
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt and preferred shares....................................... $ 14,793 $ 38,197
Notes payable................................................................................ 451,329 160,537
Accounts payable............................................................................. 210,962 205,427
Advance billings and customer deposits....................................................... 33,171 32,434
Accrued interest............................................................................. 8,488 11,777
Accrued taxes................................................................................ 27,081 3,194
Other current liabilities.................................................................... 45,135 57,701
-------------- -------------
790,959 509,267
-------------- -------------
DEFERRED LIABILITIES AND CREDITS............................................................... 220,547 214,906
-------------- -------------
LONG-TERM DEBT, excluding current portion...................................................... 1,228,175 982,232
-------------- -------------
REDEEMABLE PREFERRED SHARES, excluding current portion......................................... 279 280
-------------- -------------
MINORITY INTEREST in subsidiaries.............................................................. 424,615 432,343
-------------- -------------
NONREDEEMABLE PREFERRED SHARES................................................................. 28,217 29,000
-------------- -------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share........................................................ 54,401 54,237
Series A Common Shares, par value $1 per share............................................... 6,927 6,917
Common Shares issuable (10,480 and 30,977 shares, respectively).............................. 499 1,461
Capital in excess of par value............................................................... 1,661,892 1,661,093
Treasury Shares, at cost (1,793,358 shares).................................................. (69,767) --
Retained earnings............................................................................ 314,327 309,233
-------------- -------------
1,968,279 2,032,941
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................... $ 4,661,071 $ 4,200,969
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
I-91
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's latest annual report on Form 10-K.
The accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring items) necessary to present
fairly the financial position as of September 30, 1997 and December 31,
1996, and the results of operations and cash flows for the nine months ended
September 30, 1997 and 1996. The results of operations for the nine months
ended September 30, 1997 and 1996, are not necessarily indicative of the
results to be expected for the full year.
2. PRO FORMA
BASIS OF PRESENTATION
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal (the "Tracking Stock Proposal") which, if approved by
shareholders and implemented by the Board, would authorize the Board to
issue three new classes of common stock designated as United States Cellular
Group Common Shares (the "Cellular Group Shares"), TDS Telecommunications
Group Common Shares (the "Telecom Group Shares") and Aerial Communications
Group Common Shares (the "Aerial Group Shares"), and change the state of
incorporation of Telephone and Data Systems, Inc. from Iowa to Delaware.
While each of the new classes of common stock would constitute common stock
of Telephone and Data Systems, Inc., each is intended to reflect the
separate performance of Telephone and Data Systems, Inc.'s cellular
telephone, landline telephone and personal communications services
businesses ("Tracking Stocks"). The Cellular Group Shares, when issued, are
intended to reflect the separate performance of the United States Cellular
Group (the "Cellular Group"), which includes Telephone and Data Systems,
Inc.'s interest in United States Cellular Corporation, an 81%-owned
subsidiary of Telephone and Data Systems, Inc. which operates and invests in
cellular telephone companies and properties. The Telecom Group Shares, when
issued, are intended to reflect the separate performance of the TDS
Telecommunications Group (the "Telecom Group"), which primarily includes
Telephone and Data Systems, Inc.'s interest in TDS Telecommunications
Corporation, a wholly-owned subsidiary of Telephone and Data Systems, Inc.
which operates landline telephone companies. The Aerial Group Shares, when
issued, are intended to reflect the separate performance of the Aerial
Communications Group (the "Aerial Group"), which includes Telephone and Data
Systems, Inc.'s interest in Aerial Communications, Inc., an 83%-owned
subsidiary of Telephone and Data Systems, Inc. which is developing broadband
personal communications services.
The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the United States
Cellular Group, the TDS Telecommunications Group, and the Aerial
Communications Group to the extent of the Retained Interests in the
respective groups, and to reflect the performance of the TDS Group. The TDS
Group includes Telephone and Data Systems, Inc. and all of its subsidiaries
and their respective properties and assets other than (except with respect
to the Retained Interests): United States Cellular and its subsidiaries
(which are included in the United States Cellular Group), TDS Telecom and
its subsidiaries (which are included in the TDS Telecommunications Group),
and Aerial and its subsidiaries (which are included in the Aerial
Communications Group) and any other assets or liabilities or subsidiaries of
Telephone and Data Systems, Inc. attributed to the United States Cellular
Group, the TDS Telecommunications Group or the Aerial Communications Group.
The TDS Group reflects primarily the TDS Group's Retained Interest in the
United States Cellular Group, the TDS Telecom Group and the Aerial Group,
the Corporate operations (including corporate management, intercompany
financing, cash management and
I-92
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
intercompany income tax allocation activities) and the operations of
American Paging, Inc., an 82%-owned subsidiary.
Following approval by shareholders of the Tracking Stock Proposal, Telephone
and Data Systems, Inc. currently intends to a) offer and sell Telecom Group
Shares in a public offering for cash, subject to prevailing market and other
conditions (the "Telecom Public Offering"), and to allocate the net proceeds
thereof to the Telecom Group, b) issue Cellular Group Shares in exchange for
all of the Common Shares of United States Cellular Corporation which are not
owned by Telephone and Data Systems, Inc., subject to approval by the board
of directors and the shareholders of United States Cellular Corporation (the
"U.S. Cellular Merger"), c) issue Aerial Group Shares in exchange for all of
the Common Shares of Aerial Communications, Inc. which are not owned by
Telephone and Data Systems, Inc., subject to approval by the board of
directors and the shareholders of Aerial Communications, Inc. (the "Aerial
Merger"), and d) distribute one Cellular Group Share, two-thirds of a
Telecom Group Share and two-thirds of an Aerial Group Share in the form of a
stock dividend with respect to each outstanding Series A Common Share and
Common Share of Telephone and Data Systems, Inc. (the "Distribution"). It is
currently expected that the Distribution would take place in June 1998 or
later, after the completion of the Telecom Public Offering, the U.S.
Cellular Merger and the Aerial Merger, although the Board reserves the right
to effect all or any part of the Distribution at any time, or not to make
the Distribution, regardless of whether or not such other transactions have
taken place.
The shares of Tracking Stock which would be issued in the Distribution would
represent an approximately 75% interest of the common equity value of TDS in
each Tracking Group (the "Outstanding Interest"). When considering the
shares of Tracking Stock which would also be issued in the Telecom Public
Offering, the U. S. Cellular Merger and the Aerial Merger, as well as the
Distribution, the Outstanding Interest would initially represent in the
aggregate an approximately 80% interest in each Tracking Group. Upon
completion of all of the Transactions as contemplated, approximately 20% of
the common shareholders' value of each Tracking Group would initially be
retained (the "Retained Interest") in a residual group (the "TDS Group"),
along with all other interests held by Telephone and Data Systems, Inc.
Following the Distribution, subject to the legal restrictions on the payment
of dividends, the Board currently intends to establish an annual dividend on
the Telecom Group Shares in an amount equal to $.48 per share. The Board
also currently intends to establish an annual dividend on the Common Shares
and Series A Common Shares in an amount equal to $.10 per share. (Based on
the expected distribution ratio of two-thirds of a Telecom Group Share for
each existing Common Share and Series A Common Share, the dividend on
Telecom Group shares would equate to a per share dividend of $.32 per
existing Common Share and Series A Common Share. The total of the dividend
on Common Shares and Series A Common Shares of $.10 and the equivalent
dividend on Telecom Group Shares of $.32 equals the existing current annual
dividend on the existing Common Shares and Series A Common Shares of $.42).
With regard to the Cellular Group and the Aerial Group Shares, the Board
currently intends to retain future earnings, if any, for the development of
the businesses of the Cellular Group and Aerial Group, respectively, and
does not anticipate paying dividends on the Cellular Group or the Aerial
Group Shares in the foreseeable future. Future dividends on the shares of
common stock will be payable when, as and if declared by the Board out of
the lessor of (1) all funds of Telephone and Data Systems, Inc. legally
available therefor and (2) the available dividend amount with respect to the
relevant Group.
Funds of the Company legally available for the payment of dividends
("Surplus") (approximately $1,966 million as of September 30, 1997, based on
the financial statements) is an amount approximately equal to the Total
Common and Preferred Equity of the Company less the par or stated value of
all shares of common and preferred stock outstanding (204,725,0000 shares as
of September 30, 1997 after the Distribution). With respect to any Tracking
Group, the Available Dividend Amount (approximately $1,178 million for the
Cellular Group, $280 million for the Telecom Group and $213 million for the
Aerial Group as of September 30, 1997, based on the financial statements) is
an amount approximately equal to the Outstanding Interest Fraction of such
Tracking Group (approximately 75% after the Distribution) times the
respective Tracking Group Equity less the par value of the respective
outstanding Tracking Group shares. With respect to the TDS Group, the
Available Dividend Amount (approximately $557 million as of September 30,
1997) is an amount approximately
I-93
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
equal to the greater of a) an amount (approximately $295 million) which is
approximately equal to the Surplus of the Company less the sum of all
Available Dividend Amounts of all Tracking Groups or b) an amount
(approximately $557 million) which is approximately equal to the TDS Group
Equity and Preferred Stock less the par or stated value of all Common and
Series A Common Shares and Preferred Stock outstanding.
The financial statements of the Groups comprise all of the accounts included
in the corresponding consolidated financial statements of Telephone and Data
Systems, Inc. The separate Cellular Group, Telecom Group, Aerial Group, and
TDS Group financial statements give effect to the management and accounting
policies that would be applicable upon implementation of the Tracking Stock
Proposal. Subject to the completion of the U.S. Cellular Merger and the
Aerial Merger, Telephone and Data Systems, Inc. intends to terminate certain
intercompany agreements between Telephone and Data Systems, Inc. and U.S.
Cellular and Aerial, respectively. Thereafter, all of the relationships
between Telephone and Data Systems, Inc. and such subsidiaries would be
determined solely by methods that management of Telephone and Data Systems,
Inc. believes to be reasonable. Many of such policies would continue the
arrangements which presently exist between Telephone and Data Systems, Inc.
and U.S. Cellular or Aerial pursuant to the intercompany agreements, but
Telephone and Data Systems, Inc. would have no contractual obligation to
continue such policies after the intercompany agreements have been
terminated. The separate Group financial statements have been prepared on a
basis that management believes to be reasonable and appropriate and include
(1) the historical financial position, results of operations and cash flows
of the businesses that comprise each of the Groups, (2) any assets and
liabilities (including contingent liabilities) which have been attributed to
any Group from any other Group, and (3) with respect to the TDS Group, the
Retained Interest in each of the Tracking Groups. The effects of the
issuance of the Tracking Stocks have not been reflected in these historical
financial statements.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, Telephone and
Data Systems, Inc. will prepare and file with the Securities and Exchange
Commission, consolidated financial statements of Telephone and Data Systems,
Inc., and financial statements of the Cellular Group, the Telecom Group, and
the Aerial Group for so long as the respective Tracking Stock is
outstanding, and the TDS Group for as long as any Tracking Stock is
outstanding. Although the financial statements of the Cellular Group, the
Telecom Group, the Aerial Group, and the TDS Group will separately report
the assets, liabilities (including contingent liabilities) and shareholders'
equity of Telephone and Data Systems, Inc. attributed to the Cellular Group,
the Telecom Group, the Aerial Group, and the TDS Group, such attribution
will not affect the legal title to such assets or responsibility for such
liabilities. Holders of Cellular Group, Telecom Group, and Aerial Group
Common Shares will be, and holders of Telephone and Data Systems, Inc.
Common Shares and Series A Common Shares are, shareholders of Telephone and
Data Systems, Inc. Telephone and Data Systems, Inc. and its subsidiaries
would each continue to be responsible for their respective liabilities.
Financial effects arising from the Cellular Group, Telecom Group, Aerial
Group or TDS Group that affect the consolidated results of operations or
financial condition of Telephone and Data Systems, Inc. could affect the
results of operations or financial condition of the Cellular Group, Telecom
Group, Aerial Group or TDS Group, or could affect the market price of any or
all classes of Common Stock. In addition, any net losses of Telephone and
Data Systems, Inc., or the Cellular Group, the Telecom Group, the Aerial
Group or the TDS Group, and dividends or distributions on, or repurchases
of, any class of Common Stock will reduce the assets of Telephone and Data
Systems, Inc. legally available for payment of dividends on any class of
Common Stock. Accordingly, Telephone and Data Systems, Inc.'s consolidated
financial statements should be read in conjunction with the Cellular Group,
the Telecom Group, the Aerial Group and the TDS Group financial information.
The management and accounting policies applicable to the preparation of the
financial statements of the TDS Group could be modified or rescinded by the
Board, in its sole discretion and without the approval of shareholders,
although there is no present intention to do so. The Board could also adopt
additional policies depending upon the circumstances. Any determination by
the Board to modify or rescind such policies, or to adopt additional
policies, including any such decision that could have disparate effects upon
the holders of different series of common stock, would be made by the Board
in good faith and in the honest belief that such
I-94
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
decision is in the best interests of Telephone and Data Systems, Inc. In
addition, generally accepted accounting principles require that changes in
accounting policy must be preferable (in accordance with such principles) to
the policy previously in place.
PRO FORMA EARNINGS PER SHARE
Pro forma net income attributable to the United States Cellular Group, the
TDS Telecommunications Group, the Aerial Communications Group and to the TDS
Group through Retained Interest assumes that the U.S. Cellular Merger,
Aerial Merger and the Telecom Public Offering has not taken place and
therefore 75% of net income of each Group (except for the TDS Group) is
attributable to the United States Cellular Group Shares, the TDS
Telecommunications Group Shares and the Aerial Communications Group Shares
and 25% of net income is attributable to the Retained Interest for the TDS
Group. A portion of the net income in the United States Cellular Group and
the Aerial Communications Group is allocated to the minority public
shareholders of the respective Groups prior to attributing the net income to
the Groups and the TDS Group through Retained Interest.
3. Certain amounts reported in prior periods have been reclassified to conform
to the current period presentation.
4. 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, 1997 consist of dilutive Common Share options.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" in March 1997
which will become effective in December 1997. Earnings per share would not
change if SFAS No. 128 had been in effect as of January 1, 1996.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash and cash equivalents include cash and those short-term, highly liquid
investments with original maturities of three months or less. Those
investments with original maturities of more than three months to twelve
months are classified as temporary investments. Temporary investments are
stated at cost, which approximates market. Those investments with original
maturities of more than 12 months are classified as marketable securities
and are stated at amortized cost.
TDS acquired certain cellular licenses, operating companies and telephone
companies in 1997 and 1996. In conjunction with these acquisitions, the
following assets were acquired and liabilities assumed and Common Shares
issued.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
--------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Property, plant and equipment................................................... $ -- $ 55,692
Cellular licenses............................................................... 37,258 94,454
Increase in equity method investment in cellular interests...................... -- 8,356
Franchise costs................................................................. -- 12,847
Long-term debt.................................................................. -- (22,979)
Deferred credits................................................................ -- (7,363)
Other assets and liabilities, excluding cash and cash equivalents............... -- 9,613
Minority interest............................................................... 1,911 (3,036)
Common Shares issued and issuable............................................... -- (113,658)
USM Stock issued and issuable................................................... -- (34)
--------- ------------
Decrease in cash due to acquisitions............................................ $ 39,169 $ 33,892
--------- ------------
--------- ------------
</TABLE>
I-95
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes interest and income taxes paid, and other
noncash transactions.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Interest Paid...................................................................... $ 56,526 $ 44,674
Income Taxes Paid.................................................................. 9,286 65,466
Common Shares issued by TDS for conversion of TDS Preferred
Stock............................................................................ $ 762 $ 4,545
</TABLE>
6. DEBT SECURITIES
U.S. Cellular filed a shelf Registration Statement on Form S-3 in July 1997
for the sale of up to $400 million of unsecured debt. U.S. Cellular issued
$250 million of 7.25% Notes due August 15, 2007 (the "Notes") under the
shelf registration statement in August 1997. The net proceeds for the sale
of the Notes of approximately $247.0 million was used to repay notes payable
and long-term debt.
7. SUBSEQUENT EVENTS
TDS filed a shelf Registration Statement on Form S-3 on October 21, 1997 for
the sale of up to $400 million of Trust Originated Preferred
Securities-SM-("TOPrS-SM-"). TDS issued $150 million aggregate principle
amount of 8.5% TOPrS, due to mature on December 31, 2037 but may be extended
to December 31, 2046 by TDS, on November 14, 1997. The Company used the net
proceeds to repay certain short-term indebtedness.
In October 1997, U.S. Cellular completed the exchange with BellSouth
Corporation it had announced earlier in 1997. Pursuant to the exchange, U.S.
Cellular received majority interests in 12 markets adjacent to its Iowa and
Wisconsin/Illinois clusters. In exchange, U.S. Cellular divested its
majority interests in 10 markets and minority interests in nine markets and
paid a net amount of $87 million in cash. Certain aspects of the transaction
are taxable; the amount of these taxes will be determined by year-end and
will be paid in the first quarter of 1998. No book gain or loss will be
recorded on the transaction. U.S. Cellular received majority interests
representing approximately 4.0 million pops in the transaction, and divested
majority interests representing 2.0 million pops and minority interests
representing approximately 1.1 million pops.
In December, 1997 USM announced that AirTouch Communications, Inc.
[NYSE:ATI] will acquire interests owned by USM and TDS, in cellular systems
serving Seattle and Olympia, Washington; Tucson, Arizona; Duluth, Minnesota;
and rural areas in Arizona, Colorado and Idaho. ATI will issue approximately
5,000,000 shares of its common stock and approximately $50 million in cash
to USM and TDS in exchange for these interests, which represent
approximately 900,000 pops (the population of a market multiplied by a
company's ownership interest in a cellular licensee in that market).
8. BUSINESS SEGMENT INFORMATION
The following tables summarize business segment information for the nine
months ended or at September 30, 1997, and 1996.
I-96
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CELLULAR OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED OR AT
SEPTEMBER 30,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating Revenues
Local service............................................................. $ 407,591 $ 299,951
Inbound roaming........................................................... 163,576 139,689
Long-distance and other................................................... 62,955 53,691
------------- -------------
634,122 493,331
------------- -------------
Operating Expenses
System operations......................................................... 109,545 79,728
Marketing and selling..................................................... 119,728 86,455
Cost of equipment sold.................................................... 55,473 49,631
General and administrative................................................ 144,224 123,364
Depreciation and amortization............................................. 94,641 79,216
------------- -------------
523,611 418,394
------------- -------------
Operating Income............................................................ $ 110,511 $ 74,937
------------- -------------
------------- -------------
Additions to property, plant and equipment.................................. $ 247,957 $ 172,916
Identifiable assets......................................................... $ 2,340,079 $ 2,067,259
</TABLE>
I-97
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TELEPHONE OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED OR AT
SEPTEMBER 30,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Telephone Operations
Operating Revenues
Local Service........................................................... $ 91,383 $ 81,148
Network access and long distance........................................ 174,821 155,272
Miscellaneous........................................................... 37,091 34,902
------------- -------------
303,295 271,322
------------- -------------
Operating Expenses
Network operations...................................................... 56,541 51,671
Depreciation and amortization........................................... 71,043 61,907
Customer operations..................................................... 48,080 39,960
Corporate and other..................................................... 49,330 44,733
------------- -------------
224,994 198,271
------------- -------------
Telephone Operating Income................................................ 78,301 73,051
------------- -------------
Other Operations
Revenues.................................................................. 36,654 18,351
Expenses.................................................................. 38,247 17,691
------------- -------------
Other Operating Income.................................................... (1,593) 660
------------- -------------
Intercompany Eliminations
Revenues.................................................................. (1,249) (837)
Expenses.................................................................. (1,249) (837)
------------- -------------
Operating Income............................................................ $ 76,708 $ 73,711
------------- -------------
------------- -------------
Additions to property, plant and equipment.................................. $ 96,717 $ 91,131
Identifiable assets......................................................... $ 1,192,035 $ 1,164,783
</TABLE>
I-98
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PCS OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED OR AT
SEPTEMBER 30,
-------------------------
1997 1996
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating Revenues............................................................. $ 25,791 $ --
------------ -----------
Operating Expenses
Systems operations........................................................... 13,857 --
Marketing and selling........................................................ 27,003 --
Cost of equipment sold....................................................... 40,770 --
General and administrative................................................... 33,717 --
Customer service............................................................. 6,757 --
Depreciation................................................................. 17,282 --
Amortization................................................................. 2,575 --
------------ -----------
141,961 --
------------ -----------
Operating (Loss)............................................................... $ (116,170) $ --
------------ -----------
------------ -----------
Additions to property, plant and equipment..................................... $ 203,374 $ 51,337
Identifiable assets............................................................ $ 899,580 $ 431,103
</TABLE>
RADIO PAGING OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED OR AT
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating Revenues.............................................................. $ 71,758 $ 79,145
----------- -----------
Costs and expenses
Cost of services.............................................................. 20,482 19,418
Selling, general and administrative........................................... 45,703 52,327
Cost of equipment sold........................................................ 6,760 7,760
Depreciation and amortization................................................. 23,658 26,987
----------- -----------
96,603 106,492
----------- -----------
Operating (Loss)................................................................ $ (24,845) $ (27,347)
----------- -----------
----------- -----------
Additions to property, plant and equipment...................................... $ 13,594 $ 26,330
Identifiable assets............................................................. $ 142,569 $ 158,804
</TABLE>
OTHER OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED OR AT
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Additions to property, plant and equipment...................................... $ 17,496 $ 5,995
Identifiable Assets............................................................. $ 86,809 $ 111,353
</TABLE>
I-99
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECENT DEVELOPMENTS
RECENT FINANCIAL RESULTS
TDS's operating revenues for the three- and twelve-month periods ended
December 31, 1997 increased 29% and 25% to $412.3 million and $1,471.5 million,
respectively, compared to the same periods in 1996. The increases in 1997 were
attributable primarily to the growth in customer units. TDS's operating (loss)
income for the three- and twelve-month periods ended December 31, 1997 was
($49.0) million and ($3.7) million, respectively, compared to $32.1 million and
$153.4 million for the same periods in 1996. The decreases in 1997 were
attributable primarily to costs associated with the launch of service in
Aerial's markets of ($80.4) million and ($196.6) million for the three-and
twelve-month periods ended December 31, 1997, respectively. TDS's net (loss)
income available to common for the three- and twelve-month periods ended
December 31, 1997 was ($35.5) million and ($11.4) million, respectively,
compared to $11.6 million and $126.2 million for the same periods in 1996.
After-tax gains from asset sales contributed $3.5 million and $15.9 million for
the three- and twelve-month periods ended December 31, 1997, respectively, as
compared to $755,000 and $64.5 million for the same periods in 1996.
U.S. Cellular reported 30% and 29% increases in operating revenues for the
three- and twelve-month periods ended December 31, 1997 to $242.8 million and
$877.0 million, respectively, as compared to the same periods in 1996. The
revenue increases were primarily related to increases in cellular customer
units, which grew by 59% during the twelve-month period ended December 31, 1997.
USM's operating income increased 53% and 48% for the three- and twelve-month
periods ended December 31, 1997 to $19.0 million and $129.5 million,
respectively, as compared to the same periods in 1996.
TDS Telecom reported 9% and 12% increases in operating revenues for the
three- and twelve-month periods ended December 31, 1997 to $116.7 million and
$444.2 million, respectively, as compared to the same periods in 1996. Access
lines grew by 6% in the twelve month period ended December 31, 1997. TDS
Telecom's operating income decreased 21% and 4% for the three- and twelve-month
periods ended December 31, 1997 to $22.8 million and $98.6 million,
respectively, as compared to the same periods in 1996. The decreases in the
three- and twelve-month periods reflect losses incurred in start-up ventures,
such as the internet, structured wiring and CLEC operations, as well as higher
operating expenses and downward pressures on certain revenue streams in the
landline telephone business. In addition, the three-month period in 1996
included non-recurring, one-time expense reductions which increased operating
income in 1996.
Aerial reported operating revenues of $30.2 million and $56.0 million for
the three- and twelve-month periods ended December 31, 1997, respectively. All
of Aerial's markets are now in service. TDS anticipates that costs to build
Aerial's customer base will continue to reduce TDS's operating and net income
from levels which would otherwise be achieved during 1998.
American Paging, Inc. ("American Paging"), TDS's majority-owned subsidiary,
reported declines of 10% and 9% in operating revenues for the three- and
twelve-month periods ended December 31, 1997 to $22.7 million and $94.4 million,
respectively, as compared to the same periods in 1996. Revenues at American
Paging declined during such periods primarily due to competitive price pressures
in the direct distribution channel. American Paging's operating loss increased
13% and declined 4% for the three- and twelve-month periods ended December 31,
1997 to ($10.5) million and ($35.3) million, respectively, as compared to the
same periods in 1996.
On December 29, 1997, Airmont Plaza Associates, which claims to be a holder
of common shares of USM, filed a putative class action complaint on behalf of
the minority shareholders of USM in the Court of Chancery of the State of
Delaware in New Castle County. The complaint names as defendants TDS, USM and
the directors of USM. The complaint alleges a breach of fiduciary duties by the
defendants in connection with the proposed USM Merger and seeks to have the USM
Merger enjoined or, if it is consummated, to have it rescinded and to recover
unspecified damages, fees and expenses. On January 5, 1998, Richard Greenfield,
who claims to be a holder of common shares of Aerial, filed a putative class
action complaint on behalf of the minority shareholders of Aerial in the Court
of Chancery of the State of Delaware in New Castle County. The complaint names
as defendants TDS, Aerial and the directors of TDS and Aerial. The complaint
alleges a breach of fiduciary duties by the defendants in connection with the
proposed Aerial Merger and seeks to have the Aerial Merger enjoined or, if it is
consummated, to have it
I-100
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
rescinded and to recover unspecified damages, fees and expenses. TDS intends to
vigorously defend against these lawsuits.
COMBINATION OF AMERICAN PAGING AND TSR PAGING
American Paging is currently an 82%-owned subsidiary of the Company which
offers radio paging and related services.
In December 1997, TDS announced an agreement with TSR Paging, Inc. ("TSR")
to combine their respective paging businesses. Pursuant to the agreement, TDS
made an offer to American Paging to negotiate and enter into a merger agreement
pursuant to which TDS would acquire all of the outstanding Common Shares of
American Paging held by persons other than TDS (the "Minority Shareholders") for
cash in an amount equal to $2.25 per American Paging Common Share. The TDS offer
was considered by a special committee of the Board of Directors of American
Paging, which consists of two independent directors of American Paging.
Following review of the offer by the special committee and negotiations between
the special committee and TDS, TDS increased its offer to $2.50 per American
Paging Common Share. On February 10, 1998, the special committee approved the
revised offer and recommended that the full Board of Directors of American
Paging approve the revised offer. As a result, on February 10, 1998, the Board
of Directors of each of American Paging and TDS approved a merger agreement
providing for the acquisition by TDS (through a wholly-owned subsidiary ("TDS
Sub")) of all the issued and outstanding American Paging Common Shares held by
the Minority Shareholders for cash in an amount equal to $2.50 per American
Paging Common Share.
The merger agreement provides that TDS Sub will initially commence a tender
offer for each of the American Paging Common Shares held by the Minority
Shareholders in exchange for $2.50 in cash. Following the offer, TDS will effect
a merger of American Paging and TDS Sub. In such merger, all Minority
Shareholders will receive $2.50 in cash for each American Paging Common Share.
Following the effectiveness of such merger, American Paging Common Shares will
cease to be traded on the American Stock Exchange and American Paging will cease
to be a reporting company under the Securities Exchange Act of 1934.
Upon consummation of the merger, TDS will cause American Paging to
contribute substantially all of its assets and certain, limited liabilities, and
TSR would contribute all of its assets and liabilities to a new limited
liability company. The asset contribution agreement provides that, subject to
adjustment, TDS will have a 30% interest and TSR will have a 70% interest in the
new company. The formation of the new company, while subject to a number of
conditions, including consummation of the merger and regulatory approvals, is
expected to occur in the first half of 1998. TDS will adopt the equity method of
accounting for American Paging upon the completion of the merger.
I-101
<PAGE>
ANNEX II
DESCRIPTION OF THE UNITED STATES CELLULAR GROUP
The United States Cellular Group ("Cellular Group") consists solely of
United States Cellular Corporation ("U.S. Cellular"), an 81%-owned subsidiary of
Telephone and Data Systems, Inc. ("TDS") which operates and invests in cellular
telephone companies and properties. The Cellular Group may in the future also
include such other assets and liabilities of TDS as the Board of Directors of
TDS may determine to attribute to the Cellular Group and such other businesses,
assets and liabilities as TDS or any of its subsidiaries may in the future
acquire for the Cellular Group, as determined by the Board of Directors of TDS.
U.S. Cellular serves 1,357,000 customers through 132 majority-owned and
managed cellular systems at September 30, 1997. Overall, U.S. Cellular owned
25.1 million population equivalents in 202 markets.
THE CELLULAR TELEPHONE INDUSTRY
Cellular telephone technology provides high-quality, high-capacity
communications services to in-vehicle and hand-held portable cellular
telephones. Cellular technology is a major improvement over earlier mobile
telephone technologies. Cellular telephone systems are designed for maximum
mobility of the customer. Access is provided through system interconnections to
local, regional, national and world-wide telecommunications networks. Cellular
telephone systems also offer a full range of ancillary services such as
conference calling, call-waiting, call-forwarding, voice mail, facsimile and
data transmission.
Cellular telephone systems divide each service area into smaller geographic
areas or "cells." Each cell is served by radio transmitters and receivers
operating on discrete radio frequencies licensed by the FCC. All of the cells in
a system are connected to a computer-controlled Mobile Telephone Switching
Office ("MTSO"). The MTSO is connected to the conventional ("landline")
telephone network and potentially other MTSOs. Each conversation on a cellular
phone involves a transmission over a specific set of radio frequencies from the
cellular phone to a transmitter/receiver at a cell site. The transmission is
forwarded from the cell site to the MTSO and from there may be forwarded to the
landline telephone network to complete the call. As the cellular telephone moves
from one cell to another, the MTSO determines radio signal strength and
transfers ("hands off") the call from one cell to the next. This hand-off is not
noticeable to either party on the phone call.
The FCC currently grants only two licenses to provide cellular telephone
service in each market. However, competition for customers includes competing
communications technologies such as conventional landline and mobile telephone,
Specialized Mobile Radio ("SMR") systems and radio paging. PCS has become
available in certain areas of the United States, including U.S. Cellular's
markets, and U.S. Cellular expects PCS competitors to initiate service in all of
its markets in the next one or two years. Additionally, emerging technologies
such as Enhanced Specialized Mobile Radio ("ESMR") and mobile satellite
communication systems may prove to be competitive with cellular service in the
future in some or all U.S. Cellular markets.
The services available to cellular customers and the sources of revenue
available to cellular system operators are similar to those provided by
conventional landline telephone companies. Customers are charged a separate fee
for system access, airtime, long-distance calls, and ancillary services.
Cellular system operators often provide service to customers of other operators'
cellular systems while the customers are temporarily located within the
operators' service areas. Customers using service away from their home system
are called "roamers." Roaming is available because technical standards require
that analog cellular telephones be compatible in all market areas in the United
States. The system that provides the service to these roamers will generate
usage revenue. Many operators, including U.S. Cellular, charge premium rates for
this roaming service.
There are a number of recent technical developments in the cellular
industry. Currently, while most of the MTSOs process information digitally, most
of the radio transmission is done on an analog basis. During 1992, a new
transmission technique was approved for implementation by the cellular industry.
Time Division Multiple Access ("TDMA") technology was selected as one industry
standard by the cellular industry and has been deployed in several markets,
including U.S. Cellular's operations in Tulsa, Oklahoma and in its
Florida/Georgia and New England market clusters. Another digital technology,
Code Division Multiple Access ("CDMA"), is being deployed by U.S. Cellular in
its Knoxville, Tennessee market. U.S. Cellular also expects to deploy some TDMA
and CDMA digital radio channels in other markets in the near future. Digital
radio technology offers several advantages, including greater privacy, less
transmission noise, greater system capacity and potentially lower incremental
costs
II-1
<PAGE>
for additional customers. The conversion from analog to digital radio technology
has begun on an industry-wide basis; however this process is expected to take a
number of years.
The cellular telephone industry is characterized by high initial fixed
costs. Accordingly, if and when revenues less variable costs exceed fixed costs,
incremental revenues should yield an operating profit. The amount of profit, if
any, under such circumstances is dependent on, among other things, prices and
variable marketing costs which in turn are affected by the amount and extent of
competition. Until technological limitations on total capacity are approached,
additional cellular system capacity can normally be added in increments that
closely match demand and at less than the proportionate cost of the initial
capacity.
CELLULAR OPERATIONS
From its inception in 1983 until 1993, U.S. Cellular had principally been in
a start-up phase. Until that time, U.S. Cellular's activities had been
concentrated significantly on the acquisition of interests in cellular licensees
and on the construction and initial operation of cellular systems. The
development of a cellular system is capital-intensive and requires substantial
investment prior to and subsequent to initial operation. U.S. Cellular
experienced operating losses and net losses from its inception until 1993. Since
1994, U.S. Cellular has generated operations-driven net income and has
significantly increased its operating cash flows during that time. Management
anticipates increasing growth in cellular units in service and revenues as U.S.
Cellular continues to expand through internal growth. Marketing and system
operations expenses associated with this expansion may reduce the rate of growth
in operating cash flow and operating income during the period of increased
growth. In addition, U.S. Cellular anticipates that the seasonality of revenue
streams and operating expenses may cause U.S. Cellular's operating income to
vary from quarter to quarter.
While U.S. Cellular produced operating income and net income during 1994,
1995, 1996 and through the first nine months of 1997, changes in any of several
factors may reduce U.S. Cellular's growth in operating income and net income
over the next few years. These factors include: (i) the growth rate in U.S.
Cellular's customer base; (ii) the usage and pricing of cellular services; (iii)
the churn rate; (iv) the cost of providing cellular services, including the cost
of attracting new customers; (v) the introduction of competition from PCS and
other emerging technologies; and (vi) continuing technological advances which
may provide competitive alternatives to cellular service.
U.S. Cellular is building a substantial presence in selected geographic
areas throughout the United States where it can efficiently integrate and manage
cellular telephone systems. Its cellular interests include regional market
clusters in the following areas: Iowa/Missouri, Wisconsin/Illinois/Indiana,
Eastern North Carolina/South Carolina, Virginia, West
Virginia/Maryland/Pennsylvania/Ohio, Oregon/California, Washington/Oregon/Idaho,
Maine/New Hampshire/Vermont, Eastern Tennessee/Western North Carolina,
Oklahoma/Missouri/Kansas, Texas/ Oklahoma, Florida/Georgia and Southwestern
Texas. See "U.S. Cellular's Cellular Interests." U.S. Cellular has acquired its
cellular interests through the wireline application process (17%), including
settlements and exchanges with other applicants, and through acquisitions (83%),
including acquisitions from TDS and third parties.
CELLULAR SYSTEMS DEVELOPMENT
ACQUISITIONS. During the last five years, U.S. Cellular has expanded its
size, particularly in contiguous or adjacent markets, through acquisitions which
have been aimed at strengthening U.S. Cellular's position in the cellular
industry. This growth has resulted primarily from acquisitions of interests in
mid-sized and rural markets and has been based on obtaining interests with
rights to manage the underlying market.
U.S. Cellular has increased its population equivalents by 16% from
approximately 22.3 million at December 31, 1992, to approximately 25.9 million
at September 30, 1997. Markets managed by U.S. Cellular have increased from 116
markets at December 31, 1992, to 141 markets at September 30, 1997. As of
September 30, 1997, 89% of the Company's population equivalents represented
interests in markets U.S. Cellular manages compared to 84% at December 31, 1992.
Recently, the pace of acquisitions has slowed as industry-wide consolidation
has reduced the number of markets available for acquisition. U.S. Cellular's
population equivalents grew at a compound annual rate of only 3% over the last
five years due to the increased number of exchange and divestiture transactions
in the past few years.
U.S. Cellular may continue to make opportunistic acquisitions or exchanges
in markets that further strengthen its market clusters and in other attractive
markets. U.S. Cellular also seeks to acquire minority interests in markets where
it already owns the majority interest. There can be no assurance that U.S.
Cellular, or TDS for the benefit of the Cellular Group, will be able to
negotiate additional acquisitions or exchanges on terms acceptable to it or that
II-2
<PAGE>
regulatory approvals, where required, will be received. U.S. Cellular plans to
retain minority interests in certain cellular markets which it believes will
earn a favorable return on investment. Other minority interests may be exchanged
for interests in markets which enhance U.S. Cellular's market clusters or may be
sold for cash or other consideration. U.S. Cellular also continues to evaluate
the disposition of certain managed interests which are not essential to its
corporate development strategy.
U.S. Cellular, or TDS for the benefit of the Cellular Group, has
historically negotiated acquisitions of cellular interests from third parties
primarily in consideration for U.S. Cellular's or TDS's equity securities.
Cellular interests acquired by TDS in these transactions have been assigned to
U.S. Cellular. At that time, U.S. Cellular reimbursed TDS for the value of TDS
securities issued in such transactions, generally by issuing Common Shares to
TDS or by increasing the balance due TDS under U.S. Cellular's Revolving Credit
Agreement in amounts equal to the value of TDS securities delivered at the time
the acquisitions were completed. The fair market value of the U.S. Cellular
securities issued to TDS in connection with these transactions was equal to the
fair market value of the TDS securities delivered in the transactions and was
determined at the time the transactions were completed.
In the past four years, U.S. Cellular has also negotiated substantial
divestitures and exchanges of cellular interests with third parties. The
consideration received from these divestitures of non-strategic markets has
primarily been cash, which has been used to reduce debt or for general corporate
purposes. The exchanges have included the divestiture of controlling interests
in non-strategic markets in exchange for controlling interests in markets which
further enhance U.S. Cellular's clusters.
COMPLETED ACQUISITIONS. During the first nine months of 1997, U.S. Cellular
completed the acquisition of a controlling interest in one market and several
additional minority interests representing approximately 327,000 population
equivalents for an aggregate consideration of $48.7 million in cash.
COMPLETED DIVESTITURES AND EXCHANGES. During the first nine months of 1997,
U.S. Cellular sold a controlling interest in one market partition and minority
interests in two other markets, representing approximately 183,000 population
equivalents, for an aggregate consideration of $34.5 million in cash.
PENDING ACQUISITIONS, DIVESTITURES, AND EXCHANGES. At September 30, 1997,
U.S. Cellular had entered into an agreement to acquire a majority interest in
one market, representing approximately 202,000 population equivalents, for
consideration totaling $32.5 million. The consideration paid to the sellers will
be approximately 759,000 TDS Common Shares. U.S. Cellular will reimburse TDS for
the value of these shares by issuing approximately 996,000 U.S. Cellular Common
Shares to TDS when the transaction is completed. U.S. Cellular also has an
agreement pending to divest a majority interest in the wireline licensee in one
market, representing 174,000 population equivalents, for $20.0 million in cash.
These acquisition and divestiture transactions are both expected to be completed
by year-end.
In October 1997, U.S. Cellular completed the exchange with BellSouth
Corporation it had announced earlier in 1997. Pursuant to the exchange, U.S.
Cellular received majority interest in 12 markets adjacent to its Iowa and
Wisconsin/Illinois clusters. In exchange, U.S. Cellular divested its majority
interest in 10 markets and minority interest in nine markets and paid a net
amount of $87 million in cash ($103 million paid in October less $16 million
received in September). Certain aspects of this transaction are taxable; the
amount of these taxes will be determined by year-end and will be paid in the
first quarter of 1998. No book gain or loss will be recorded on the transaction,
which is being treated as a like-kind exchange. U.S. Cellular received majority
interests representing approximately 4.0 million pops in the transaction and
divested majority interests representing 2.0 million pops and minority interests
representing approximately 1.1 million pops.
U.S. Cellular expects that this transaction will have a net positive effect
on its operating cash flow after the transition of operations is complete, which
is expected to occur in the next 12 to 18 months. As it includes the divestiture
of investment interests in exchange for majority interests, the transaction may
also significantly reduce investment income in the future.
Additionally, in November 1997 U.S. Cellular and TDS entered into agreements
with AirTouch Communications, Inc. ("AirTouch") to divest certain minority
interests in 11 markets, nine of which are owned by U.S. Cellular and two of
which are owned by TDS. U.S. Cellular will receive approximately 4,000,000
shares of AirTouch common stock and approximately $50 million in cash. The nine
interests U.S. Cellular will divest represent approximately 750,000 pops. The
two interests owned by TDS which are being divested were to have been sold to
U.S. Cellular pursuant to an agreement entered into in 1996; these interests
will instead be sold directly to AirTouch by TDS. TDS will reimburse U.S.
Cellular so that U.S. Cellular will receive an equivalent amount of
consideration and record an equivalent book and tax gain as though it had made
the sale and not TDS. All of the previously mentioned
II-3
<PAGE>
divestiture transactions with AirTouch are expected to be completed by early
1998. It is anticipated that these divestitures, in the aggregate, will result
in a substantial book gain by U.S. Cellular. The completion of all of the
divestiture transactions with AirTouch may significantly reduce investment
income and cash distributions from investment entities in the future.
TDS and U.S. Cellular maintain shelf registration of their respective Common
Shares and Preferred Shares under the Securities Act of 1933 for issuance
specifically in connection with acquisitions.
TDS has had voting control of U.S. Cellular since U.S. Cellular's
incorporation. TDS owned an aggregate of 69,747,348 shares of common stock of
U.S. Cellular at September 30, 1997, representing over 80% of the combined total
of U.S. Cellular's outstanding Common and Series A Common Shares and over 95% of
their combined voting power.
CELLULAR INTERESTS AND CLUSTERS
U.S. Cellular operates clusters of adjacent cellular systems in nearly all
of its markets, enabling its customers to benefit from larger service areas than
otherwise possible. Where U.S. Cellular offers wide-area coverage, its customers
enjoy uninterrupted service within the designated area. Customers may also make
outgoing calls and receive incoming calls within this area without special
roaming arrangements. In addition to benefits to customers, clustering also has
provided to U.S. Cellular certain economies in its capital and operating costs.
These economies are made possible through increased sharing of facilities,
personnel and other costs and have resulted in a reduction of U.S. Cellular's
per customer cost of service. The extent to which U.S. Cellular benefits from
these revenue enhancements and economies of operation is dependent on market
conditions, population size of each cluster and engineering considerations.
U.S. Cellular may continue to make opportunistic acquisitions and exchanges
which will complement its established market clusters. From time to time, U.S.
Cellular may also consider exchanging or selling its interests in markets which
are not essential to its long-term strategies.
U.S. Cellular owned interests in cellular telephone systems in 202 markets
at September 30, 1997, representing 25.1 million population equivalents.
Including all pending acquisition, exchange and divestitures transactions, U.S.
Cellular owned or had the right to acquire interests in cellular telephone
systems in 192 markets at September 30, 1997, representing 25.9 million
population equivalents. The following table summarizes the growth in U.S.
Cellular's population equivalents in recent years and the development status of
these population equivalents.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- --------- --------- --------- --------- ---------
(THOUSANDS OF POPULATION EQUIVALENTS)(1)
<S> <C> <C> <C> <C> <C> <C>
Operational Markets:
Majority-Owned and Managed.............................. 20,461 20,276 19,958 18,556 18,807 14,749
Minority-Owned and Managed (2).......................... 401 401 513 1,206 1,179 2,069
Markets to be Managed, Net of Markets to be Divested (3)
To Be Majority-Owned.................................... 2,042 213 272 2,212 1,026 1,859
To Be Minority-Owned (2)................................ -- -- -- -- 8 5
------- --------- --------- --------- --------- ---------
Total Markets Managed and to be Managed................. 22,904 20,890 20,743 21,974 21,020 18,682
Minority Interest in Markets Managed by Others............ 2,953 4,501 3,990 3,745 3,547 3,642
------- --------- --------- --------- --------- ---------
Total................................................... 25,857 25,391 24,733 25,719 24,567 22,324
------- --------- --------- --------- --------- ---------
------- --------- --------- --------- --------- ---------
</TABLE>
- ------------
(1) Based on 1996 Donnelley Marketing Services estimates for all years.
(2) Includes markets where U.S. Cellular has the right to acquire an interest
but does not currently own an interest.
(3) Includes markets which are operational but which are currently managed by
third parties.
The following section details U.S. Cellular's cellular interests, including
those it owned or had the right to acquire as of September 30, 1997. The table
presented therein lists clusters of markets that U.S. Cellular manages or
anticipates managing. U.S. Cellular's market clusters show the areas in which
U.S. Cellular is currently focusing its development efforts. These clusters have
been devised with a long-term goal of allowing delivery of cellular
II-4
<PAGE>
service to areas of economic interest and along corridors of economic activity.
The number of population equivalents represented by U.S. Cellular's cellular
interests may have no direct relationship to the number of potential cellular
customers or the revenues that may be realized from the operation of the related
cellular systems.
UNITED STATES CELLULAR GROUP'S CELLULAR INTERESTS
The table below sets forth certain information with respect to the interests
in cellular markets which U.S. Cellular and TDS owned or had the right to
acquire pursuant to definitive agreements as of September 30, 1997.
<TABLE>
<CAPTION>
TOTAL CURRENT
AND
ACQUIRABLE
1996 POPULATION
CLUSTER/MAJOR SERVICE AREA POPULATION EQUIVALENTS
- ------------------------------------------------------------------------------------------------ ------------- -------------
<S> <C> <C>
MIDWEST REGIONAL MARKET CLUSTER:
Iowa/Missouri................................................................................. 3,418,000 3,201,000
Wisconsin/Illinois/Indiana.................................................................... 6,067,000 5,738,000
------------- -------------
Total Midwest Regional Market Cluster....................................................... 9,485,000 8,939,000
------------- -------------
MID-ATLANTIC REGIONAL MARKET CLUSTER:
Eastern North Carolina/South Carolina......................................................... 2,349,000 2,319,000
Virginia...................................................................................... 1,151,000 1,143,000
West Virginia/Maryland/Pennsylvania/Ohio...................................................... 1,387,000 1,260,000
------------- -------------
Total Mid-Atlantic Regional Market Cluster.................................................. 4,887,000 4,722,000
------------- -------------
NORTHWEST REGIONAL MARKET CLUSTER:
Oregon/California............................................................................. 1,029,000 957,000
Washington/Oregon/Idaho....................................................................... 1,471,000 1,256,000
------------- -------------
Total Northwest Regional Market Cluster..................................................... 2,500,000 2,213,000
------------- -------------
MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER...................................................... 1,689,000 1,632,000
------------- -------------
FLORIDA/GEORGIA MARKET CLUSTER.................................................................. 1,520,000 1,373,000
------------- -------------
TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET CLUSTER:
Oklahoma/Missouri/Kansas...................................................................... 1,412,000 874,000
Texas/Oklahoma................................................................................ 694,000 498,000
------------- -------------
Total Texas/Oklahoma/Missouri/Kansas Regional Market Cluster:............................... 2,106,000 1,372,000
------------- -------------
EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET CLUSTER......................................... 1,610,000 1,299,000
------------- -------------
SOUTHWESTERN TEXAS MARKET CLUSTER............................................................... 1,224,000 1,213,000
------------- -------------
Other Operations................................................................................ 141,000 141,000
------------- -------------
Total Managed Markets........................................................................... 25,162,000 22,904,000
Markets Managed by Others....................................................................... 2,953,000
-------------
Total Population Equivalents.................................................................... 25,857,000
-------------
-------------
</TABLE>
II-5
<PAGE>
Pursuant to the completion of the exchange transaction with BellSouth in
October 1997, U.S. Cellular acquired and divested interests in certain markets.
The effect on population and population equivalents owned is summarized below.
(The BellSouth transaction is included in the U.S. Cellular's Cellular Interests
table presented above.)
<TABLE>
<CAPTION>
TOTAL
POPULATION
EQUIVALENTS
TO BE
1996 ACQUIRED
POPULATION (DIVESTED)
----------- -------------
<S> <C> <C>
Markets acquired from BellSouth.................................................................. 4,050,000 3,971,000
Markets traded to BellSouth:
Markets Managed by U.S. Cellular (1)........................................................... 1,960,000 (1,957,000)
Markets Managed by Others...................................................................... (1,085,000)
-------------
Total Markets traded to BellSouth.............................................................. (3,042,000)
Markets to be Divested (2)
Markets Managed by U.S. Cellular............................................................... 236,000 (174,000)
Markets Managed by Others...................................................................... (287,000)
-------------
Total Markets to be Divested................................................................... (461,000)
-------------
Net Population Equivalents to be Acquired Related to BellSouth Transaction................... 468,000
-------------
-------------
</TABLE>
- ------------
(1) In addition to these interests, TDS delivered directly to BellSouth
interests in two markets.
(2) As a result of the transaction with BellSouth, U.S. Cellular expects to
divest its interest in these markets.
SYSTEM DESIGN AND CONSTRUCTION. U.S. Cellular designs and constructs its
systems in a manner it believes will permit it to provide high-quality service
to mobile, transportable and portable cellular telephones, generally based on
market and engineering studies which relate to specific markets. Engineering
studies are performed by U.S. Cellular personnel or independent engineering
firms. U.S. Cellular's switching equipment is digital, which reduces noise and
crosstalk and is capable of interconnecting in a manner which reduces costs of
operation. While digital microwave interconnections are typically made between
the MTSO and cell sites, primarily analog radio transmission is used between
cell sites and the cellular telephones themselves.
In accordance with its strategy of building and strengthening market
clusters, U.S. Cellular has selected high capacity digital cellular switching
systems that are capable of serving multiple markets through a single MTSO. U.S.
Cellular's cellular systems are designed to facilitate the installation of
equipment which will permit microwave interconnection between the MTSO and the
cell site. U.S. Cellular has implemented such microwave interconnection in most
of the cellular systems it manages. In other systems in which U.S. Cellular owns
a majority interest and where it is believed to be cost-efficient, such
microwave technology will also be implemented. Otherwise, such systems will rely
upon landline telephone connections or microwave links owned by others to link
cell sites with the MTSO. Although the installation of microwave network
interconnection equipment requires a greater initial capital investment, a
microwave network enables a system operator to avoid the current and future
charges associated with leasing telephone lines from the landline telephone
company, while generally improving system reliability. In addition, microwave
facilities can be used to connect separate cellular systems to allow shared
switching, which reduces the aggregate cost of the equipment necessary to
operate both systems.
U.S. Cellular expanded its internal network in 1996 to encompass all of its
managed markets. This network provides automatic call delivery for U.S.
Cellular's customers and handoff between adjacent markets. The network has also
been extended through links with certain systems operated by several other
carriers, including GTE, US West, Ameritech, BellSouth, Centennial Cellular
Corp., Southwestern Bell, AT&T Wireless Communications, Vanguard Cellular
Systems and others. Additionally, U.S. Cellular has implemented certain Signal
Transfer Points which have allowed it to interconnect efficiently with network
providers such as Illuminet and the North American Cellular Network.
During 1997, U.S. Cellular has extended the network for its customers
through interconnection with additional system operators for call delivery and
hand-off. This expanded network increases the area in which customers can
automatically receive incoming calls, and should also reduce the incidence of
"tumbling" electronic serial number fraud due to the pre-call validation feature
of networked systems. In addition, the extension of these networks will allow
for the termination of wireless-to-wireless traffic without the inherent costs
that are otherwise incurred if this traffic is routed through the landline
network.
II-6
<PAGE>
U.S. Cellular believes that currently available technologies will allow
sufficient capacity on U.S. Cellular's networks to meet anticipated demand over
the next few years.
COSTS OF SYSTEM CONSTRUCTION AND FINANCING
Construction of cellular systems is capital-intensive, requiring substantial
investment for land and improvements, buildings, towers, MTSOs, cell site
equipment, microwave equipment, engineering and installation. U.S. Cellular,
consistent with FCC control requirements, uses primarily its own personnel to
engineer and oversee construction of each cellular system it owns and operates.
In so doing, U.S. Cellular expects to improve the overall quality of its systems
and to reduce the expense and time required to make them operational.
The costs (exclusive of license costs) of the systems in which U.S. Cellular
owns an interest have historically been financed through capital contributions
or intercompany loans from U.S. Cellular to the entities owning the systems, and
through certain vendor financing.
MARKETING
U.S. Cellular's marketing plan is centered around rapid penetration of its
market clusters, increasing customer awareness of cellular service and reducing
churn through both the building of brand awareness and the implementation of
marketing programs. The marketing plan stresses the value of U.S. Cellular's
service offerings and incorporates combinations of rate plans and cellular
telephone equipment which are designed to meet the needs of a variety of
customer segments and their usage patterns. U.S. Cellular's distribution
channels include direct sales personnel, agents and retail service centers in
the vast majority of its markets. In late 1996, U.S. Cellular implemented its
new site on the WorldWideWeb to support its marketing efforts and to be a future
distribution channel. Customers may now order U.S. Cellular service through this
web site. These U.S. Cellular-owned and managed locations are designed to market
cellular service to the consumer segment in a familiar setting.
U.S. Cellular manages each cluster of markets from an administrative office
with a local staff, which typically includes sales, customer service,
engineering and in some cases installation personnel. Direct sales consultants
market cellular service to business customers throughout each cluster. Retail
associates work out of the retail locations and market cellular service
primarily to the consumer and small business segment. U.S. Cellular maintains an
ongoing training program to improve the effectiveness of sales consultants and
retail associates by focusing their efforts on obtaining customers and
maximizing the sale of high-user packages. These packages provide for customers
to obtain a minimum amount of usage at discounted rates per minute, at fixed
prices which are charged even if usage falls below a defined monthly minimum
amount.
U.S. Cellular continues to expand its relationships with agents, dealers and
non-U.S. Cellular retailers to obtain customers. Agents and dealers are
independent business people who obtain customers for U.S. Cellular on a
commission basis. U.S. Cellular's agents are generally in the business of
selling cellular telephones, cellular service packages and other related
products. U.S. Cellular's dealers include car stereo companies and other
companies whose customers are also potential cellular customers. The non-U.S.
Cellular retailers include car dealers, major appliance dealers, office supply
dealers and mass merchants.
U.S. Cellular opened its first retail locations in late 1993, expanding to
240 stand-alone retail stores by September 30, 1997. These U.S. Cellular-owned
and operated businesses utilize rental facilities in high-traffic areas. U.S.
Cellular has implemented a uniform appearance of these stores, with all having
similar displays and layouts. The retail centers' hours of business match those
of the retail trade in the local marketplace, often staying open on weekends and
later in the evening than a typical business supplier. To fully serve customer
needs, these stores sell accessories to complement the phones and services U.S.
Cellular has traditionally provided. During 1996, U.S. Cellular further expanded
its retail presence by opening smaller retail kiosks within larger merchandiser
and grocery stores. At September 30, 1997, U.S. Cellular had opened over 140
"stores within a store," primarily in Wal-Mart locations.
In addition to its own retail centers, U.S. Cellular actively pursues
national retail accounts, as agents for U.S. Cellular, which yield new customer
additions in multiple markets. Agreements have been entered into with such
national distributors as Ford Motor Company, General Motors, Radio Shack, Best
Buy, Circuit City, Staples, Office Depot and Sears, Roebuck & Co. in certain of
U.S. Cellular's markets. Upon the sale of a cellular telephone by one of these
national distributors, U.S. Cellular receives, often exclusively within the
territories served, the resulting cellular customer.
II-7
<PAGE>
U.S. Cellular uses a variety of direct mail, billboard, radio, television
and newspaper advertising to stimulate interest by prospective customers in
purchasing its cellular service and to establish familiarity with U.S.
Cellular's name. In 1997, U.S. Cellular increased its focus on brand
advertising, using the tag line "The Way People Talk Around Here"-SM- to promote
the United States Cellular-Registered Trademark- brand. Advertising is directed
at gaining customers, improving customers' awareness of the United States
Cellular brand, increasing existing customers usage and increasing the public
awareness and understanding of the cellular services offered by U.S. Cellular.
U.S. Cellular attempts to select the advertising and promotion media that are
most appealing to the targeted groups of potential customers in each local
market. U.S. Cellular utilizes local advertising media and public relations
activities and establishes programs to enhance public awareness of U.S.
Cellular, such as providing telephones and service for public events and
emergency uses.
CUSTOMERS AND SYSTEM USAGE
Cellular customers come from a wide range of occupations. They typically
include a large proportion of individuals who work outside of their offices,
such as people in the construction, real estate, wholesale and retail
distribution businesses, and professionals. Increasingly, U.S. Cellular is
providing cellular service to consumers and to customers who use their cellular
telephones for security purposes. Although many of U.S. Cellular's customers
still use in-vehicle cellular telephones, most new customers are selecting
portable cellular telephones. These units have become more compact and fully
featured as well as more attractively priced, and they appeal to newer segments
of the customer population.
U.S. Cellular's cellular systems are used most extensively during normal
business hours between 7:00 am and 6:00 pm. On average, the local retail
customers in U.S. Cellular's consolidated systems used their cellular systems
approximately 105 minutes per unit each month and generated retail revenue of
approximately $37 per month during the first nine months of 1997, compared to
106 minutes and $41 per month in the first nine months of 1996. Revenue
generated by roamers, together with local retail, toll and other revenues,
brought U.S. Cellular's total average monthly service revenue per customer unit
in consolidated markets to $57 during the first nine months of 1997. Average
monthly service revenue per customer unit decreased approximately 13% during the
first nine months of 1997 compared to the same period in 1996. This decrease is
related to the industry-wide trend of newer customers tending to use fewer
minutes during peak business hours, which has reduced the average local retail
revenue per minute, and to declining contribution of inbound roaming revenue per
customer. U.S. Cellular believes that its customer base is growing faster than
that of the cellular industry as a whole, which has a dilutive effect on inbound
roaming revenue per customer. U.S. Cellular anticipates that average monthly
service revenue per customer unit will continue to decline as its distribution
channels provide additional customers who generate lower revenue per local
minute of use and as roaming revenues grow more slowly. However, this effect is
more than offset by U.S. Cellular's increasing number of customers; therefore,
U.S. Cellular expects total revenues to continue to grow for the next few years.
In addition to revenue from local retail customers, U.S. Cellular generates
revenue from roaming customers and other services. U.S. Cellular's roaming
service allows a customer to place or receive a call in a cellular service area
away from the customer's home market area. U.S. Cellular has entered into
"roaming agreements" with operators of other cellular systems covering virtually
all systems in the United States and Canada. These agreements offer customers
the opportunity to roam in these systems. These reciprocal agreements
automatically pre-register the customers of U.S. Cellular's systems in the other
carriers' systems. Also, a customer of a participating system roaming (i.e.
traveling) in a U.S. Cellular market where this arrangement is in effect is able
to make and receive calls on U.S. Cellular's system. The charge for this service
is typically at premium rates and is billed by U.S. Cellular to the customer's
home system, which then bills the customer. U.S. Cellular has entered into
agreements with other cellular carriers to transfer roaming usage at agreed-upon
rates. In some instances, based on competitive factors, U.S. Cellular may charge
a lower amount to its customers than the amount actually charged to U.S.
Cellular by another cellular carrier for roaming.
II-8
<PAGE>
The following table summarizes certain information about customers and
market penetration in U.S. Cellular's managed operations.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED OR AT YEAR ENDED OR AT DECEMBER 31,
SEPTEMBER 30, ----------------------------------
1997 1996 1995 1994 1993 1992
-------------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Majority-owned and managed markets:
Cellular markets in operation (1)........... 132 131 137 130 116 92
Total population of markets in service
(000s).................................... 21,844 21,712 22,309 21,314 19,383 15,014
Customer Units:
at beginning of period (2)................ 1,073,000 710,000 421,000 261,000 150,800 97,000
additions during period (2)............... 494,000 561,000 426,000 250,000 165,300 88,600
disconnects during period (2)............. 210,000 198,000 137,000 90,000 55,100 34,800
at end of period (2)...................... 1,357,000 1,073,000 710,000 421,000 261,000 150,800
Market penetration at end of period (3)..... 6.21% 4.94% 3.18% 1.98% 1.35% 1.00%
Consolidated revenues (4)..................... $ 634,122 $ 680,068 $ 480,316 $ 327,630 $ 210,344 $ 139,929
Depreciation expense.......................... 68,735 74,631 57,302 39,520 25,665 16,606
Amortization expense.......................... 25,906 34,208 32,156 25,934 19,362 13,033
Operating income (loss)....................... 110,511 87,366 42,755 17,385 (8,656) (12,705)
Construction expenditures..................... 247,957 248,123 210,878 167,164 92,915 56,033
Identifiable assets........................... $ 2,340,079 $2,116,592 $1,890,621 $1,584,142 $1,275,569 $ 858,795
</TABLE>
- ------------
(1) Represents the number of markets in which U.S. Cellular owned at least a 50%
interest and which it managed, including its reseller operation in 1992. The
revenues and expenses of these cellular markets are included in U.S.
Cellular's consolidated revenues and expenses.
(2) Represents the approximate number of revenue-generating cellular telephones
served by the cellular markets referred to in footnote (1). The revenue
generated by such cellular telephones is included in consolidated revenues.
(3) Computed by dividing the number of customer units at the end of the period
by the total population of markets in service as estimated by Donnelley
Marketing Service for the respective years.
(4) Consolidated revenues for 1997 reflect U.S. Cellular's change in financial
reporting presentation of certain credits given to customers on their
monthly bills. 1993-1996 consolidated revenues have been reclassified to
conform to 1997 presentation.
The following table summarizes, by operating cluster, the total population,
U.S. Cellular's customer units and penetration for U.S. Cellular's consolidated
markets as of September 30, 1997.
<TABLE>
<CAPTION>
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION
- ----------------------------------------------------------------------------------- ------------- ----------- -------------
<S> <C> <C> <C>
Iowa/Missouri...................................................................... 3,148,000 224,000 7.12%
Wisconsin/Illinois/Indiana......................................................... 1,951,000 106,000 5.43
Eastern North Carolina/South Carolina.............................................. 2,349,000 119,000 5.07
Virginia........................................................................... 949,000 55,000 5.80
West Virginia/Maryland/Pennsylvania/Ohio........................................... 1,138,000 62,000 5.45
Oregon/California.................................................................. 1,029,000 63,000 6.12
Washington/Oregon/Idaho............................................................ 1,370,000 93,000 6.79
Indiana/Kentucky................................................................... 1,801,000 114,000 6.33
Maine/New Hampshire/Vermont........................................................ 1,689,000 94,000 5.57
Eastern Tennessee/Western North Carolina........................................... 1,429,000 108,000 7.56
Oklahoma/Missouri/Kansas........................................................... 1,412,000 104,000 7.37
Texas/Oklahoma..................................................................... 694,000 42,000 6.05
Florida/Georgia.................................................................... 1,520,000 105,000 6.91
Southwestern Texas................................................................. 1,224,000 52,000 4.25
Other Operations................................................................... 141,000 16,000 11.35
------------- ----------- -----
21,844,000 1,357,000 6.21%
------------- ----------- -----
------------- ----------- -----
</TABLE>
PRODUCTS AND SERVICES
CELLULAR TELEPHONES AND INSTALLATION. There are a number of different types
of cellular telephones, all of which are currently compatible with cellular
systems nationwide. U.S. Cellular offers a full range of vehicle-mounted,
II-9
<PAGE>
transportable and hand-held portable cellular telephones. Features offered in
some of the cellular telephones include hands-free calling, repeat dialing, horn
alert and others.
U.S. Cellular negotiates volume discounts from its cellular telephone
suppliers. U.S. Cellular discounts cellular telephones to meet competition or to
stimulate sales by reducing the cost of becoming a cellular customer. In these
instances, where permitted by law, customers are generally required to sign a
service contract with U.S. Cellular. U.S. Cellular also cooperates with cellular
equipment manufacturers in local advertising and promotion of cellular
equipment.
U.S. Cellular has established service and/or installation facilities in many
of its local markets to ensure quality installation and service of the cellular
telephones it sells. These facilities allow U.S. Cellular to improve its service
by promptly assisting customers who experience equipment problems. Additionally,
U.S. Cellular maintains a repair facility in Tulsa, Oklahoma, which handles more
complex service and repair issues.
CELLULAR SERVICES. U.S. Cellular's customers are able to choose from a
variety of packaged pricing plans which are designed to fit different calling
patterns. U.S. Cellular has developed and introduced its new consumer line of
products under the CarryPhone brand. These products include a) Express, a
pre-packaged phone plus price plan aimed at the convenience buyer; b)
TalkTracker, a cellular phone with usage prepaid; and c) Home and Away, a
combination cordless and cellular phone in a single package. U.S. Cellular's
customer bills typically show separate charges for custom-calling features,
airtime in excess of the packaged amount, and toll calls. Custom-calling
features provided by U.S. Cellular include wide-area call delivery, call
forwarding, call waiting, three-way calling and no-answer transfer. U.S.
Cellular also offers a voice message service in many of its markets. This
service, which functions like a sophisticated answering machine, allows
customers to receive messages from callers when they are not available to take
calls.
REGULATION
REGULATORY ENVIRONMENT. The operations of U.S. Cellular are subject to FCC
and state regulation. The cellular telephone licenses held by U.S. Cellular are
granted by the FCC for the use of radio frequencies and are an important
component of the overall value of the assets of the Company. The construction,
operation and transfer of cellular systems in the United States are regulated to
varying degrees by the FCC pursuant to the Communications Act of 1934 (the
"Communications Act"). In 1996, Congress enacted the Telecommunications Act of
1996 (the "1996 Act"), which amended the Communications Act. The 1996 Act
mandates significant changes in existing telecommunications rules and policies
to promote competition, ensure the availability of telecommunications services
to all parts of the nation and to streamline regulation of the
telecommunications industry to remove regulatory burdens, as competition
develops and makes regulation unnecessary. The FCC has promulgated regulations
governing construction and operation of cellular systems, licensing (including
renewal of licenses) and technical standards for the provision of cellular
telephone service under the Communications Act, and is implementing the
legislative objectives of the 1996 Act, as discussed below.
LICENSING. For cellular telephone licensing purposes, the FCC has divided
the United States into separate geographic markets (MSAs and RSAs). In each
market, the allocated cellular frequencies are divided into two equal blocks.
During the application process, the FCC reserved one block of frequencies for
non-wireline applicants and another block for wireline applicants. Subject to
FCC approval, a cellular system may be sold to either a wireline or non-wireline
entity, but no entity which controls a cellular system may own an interest in
another cellular system in the same MSA or RSA.
The completion of acquisitions involving the transfer of control of a
cellular system requires prior FCC approval. Acquisitions of minority interests
generally do not require FCC approval. Whenever FCC approval is required, any
interested party may file a petition to dismiss or deny the application for
approval of the proposed transfer.
The FCC must be notified each time an additional cell is constructed which
enlarges the service area of a given market. The FCC's rules also generally
require persons or entities holding cellular construction permits or licenses to
coordinate their proposed frequency usage with neighboring cellular licensees in
order to avoid electrical interference between adjacent systems. The height and
power of base stations in the cellular system are regulated by FCC rules, as are
the types of signals emitted by these stations. In addition to regulation by the
FCC, cellular systems are subject to certain Federal Aviation Administration
("FAA") regulations with respect to the siting and construction of cellular
transmitter towers and antennas as well as local zoning requirements.
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<PAGE>
Beginning in 1996, the FCC has also imposed a requirement that all licensees
register and obtain FCC registration numbers for all of their antenna towers
which require prior FAA clearance. U.S. Cellular is currently engaged in this
registration process. All new towers must be registered at the time of
construction and existing towers are being registered on a staggered state-by-
state basis, to be concluded in May 1998. The FCC is currently considering
whether to take action to pre-empt moratoria imposed by certain localities on
the construction of wireless towers. U.S. Cellular has supported such FCC
action.
Beginning in October, 1997, cellular systems, which previously were
"categorically excluded" from having to evaluate their facilities to ensure
their compliance with federal "radio frequency" (RF) radiation requirements,
were made subject to those requirements. After October, 1997, all new cellular
facilities must be in compliance when they are brought into service. Existing
facilities must be brought into compliance with the requirements when their
licenses are renewed. U.S. Cellular believes that the great majority of its
existing facilities already comply with the requirements and the remainder will
be brought into compliance as required.
Initial cellular telephone licenses were granted for ten-year periods. The
FCC has established standards for conducting comparative renewal proceedings
between a cellular licensee seeking renewal of its license and challengers
filing competing applications. The FCC has: (i) established criteria for
comparing the renewal applicant to challengers, including the standards under
which a renewal expectancy will be granted to the applicant seeking license
renewal; (ii) established basic qualifications standards for challengers; and
(iii) provided procedures for preventing possible abuses in the comparative
renewal process. The FCC has concluded that it will award a renewal expectancy
if the licensee has (i) provided "substantial" performance, which is defined as
"sound, favorable and substantially above a level of mediocre service just
minimally justifying renewal," and (ii) complied with FCC rules, policies and
the Communications Act. If a renewal expectancy is awarded to an existing
licensee, its license is renewed and competing applications are not considered.
U.S. Cellular's Tulsa and Knoxville licenses were renewed in 1995, and U.S.
Cellular's Des Moines, Iowa; Peoria, Illinois; and Roanoke, Virginia licenses
were renewed in 1996. In September, 1997, U.S. Cellular filed license renewal
applications for its Davenport, Iowa; Tallahassee, Florida; Asheville, North
Carolina; Manchester, New Hampshire; Columbia, Missouri; Wichita Falls, Texas;
Gainesville, Florida; Lewiston, Maine; Joplin, Missouri; Cedar Rapids, Iowa;
LaCrosse, Wisconsin; Bangor, Maine; Fort Pierce, Florida; Victoria, Texas;
Evansville, Indiana and Owensboro, Kentucky licenses. Those applications were
unopposed and are now grantable. On October 30, 1997, U.S. Cellular assigned its
Evansville and Owensboro licenses to a subsidiary of BellSouth Cellular
Corporation as part of the larger U.S. Cellular-BellSouth transaction. As part
of the same transaction, BellSouth assigned its Appleton, Wisconsin; Rockford,
Illinois; Green Bay, Wisconsin and Janesville, Wisconsin licenses to U.S.
Cellular. Unopposed grantable renewal applications are pending for those
licenses as well. U.S. Cellular expects all of those license renewal
applications to be granted shortly.
U.S. Cellular conducts and plans to conduct its operations in accordance
with all relevant FCC rules and regulations and anticipates being able to
qualify for a renewal expectancy in its upcoming renewal filings. Accordingly,
U.S. Cellular believes that current regulations will have no significant effect
on its operations and financial condition. However, changes in the regulation of
cellular operators or their activities and of other mobile service providers
could have a material adverse effect on U.S. Cellular's operations.
The FCC has also provided that five years after the initial licenses are
granted, unserved areas within markets previously granted to licensees may be
applied for by both wireline and non-wireline entities and by third parties.
Accordingly, many unserved area applications have been filed by U.S. Cellular
and others. U.S. Cellular's strategy with respect to system construction in its
markets has been and will be to build cells covering areas within such markets
that U.S. Cellular considers economically feasible to serve or might conceivably
wish to serve and to do so within the five-year period following issuance of the
license. In cases where applications for unserved areas are filed which are
mutually exclusive and would result in overlapping service areas, the FCC
decides between the competing applicants by an auction process.
Pursuant to 1993 amendments to the Communications Act, cellular service is
classified as a Commercial Mobile Radio Service ("CMRS"), in that it is service
offered to the public, for a fee, which is interconnected to the public switched
telephone network. The FCC has determined that it will forebear from requiring
CMRS carriers to comply with a number of statutory provisions otherwise
applicable to common carriers, such as the filing of tariffs.
RECENT EVENTS. There are certain regulatory proceedings currently pending
before the FCC which are of particular importance to the cellular industry. In
one proceeding, the FCC has imposed new "enhanced 911" regulations on cellular
carriers. Enhanced 911 capabilities would enable cellular systems to determine
the precise location of the person making the emergency call. The new rules will
require cellular carriers to work with local
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public safety officials to process 911 calls, including those made from mobile
telephones not registered with the cellular system, and will require cellular
systems to improve their ability to locate wireless 911 callers over a five-year
period.
The FCC has adopted a limited expansion of the obligation of cellular
carriers to serve the subscribers of broadband PCS providers, among others, even
though the subscribers involved have no pre-existing service relationship with
that carrier. Under these new policies, broadband PCS providers may offer their
subscribers handsets which are capable of operating over broadband PCS and
cellular networks so that when their subscribers are out of range of broadband
PCS networks, they will be able to obtain non-automatic access to cellular
networks. The FCC expects that implementation of these roaming capabilities will
promote competition between broadband PCS and cellular service providers.
The FCC has adopted requirements which will make it possible for subscribers
to retain, at the same location, their existing telephone numbers when they
switch from one service provider to another. This numbering portability will
include switching between Local Exchange Carriers ("LECs") and other wireline
providers, between wireless service providers and between LEC/wireline and
wireless providers. LECs have implementation deadlines by the end of 1998.
Broadband PCS, cellular and certain other wireless providers have phased
implementation deadlines in 1998 and 1999.
In another proceeding, the FCC in 1996 adopted rules regarding the method by
which cellular carriers and LECs shall compensate each other for interconnecting
cellular and local exchange facilities. The FCC rules provided for symmetrical
and reciprocal compensation between LECs and cellular carriers, and also
prescribed interim interconnection proxy rates, which are much lower than the
rates formerly paid by cellular carriers to LECs. Symmetrical and reciprocal
compensation means they must pay each other at the same rate. The U.S. Court of
Appeals for the Eighth Circuit has vacated the FCC's rules. However, the FCC's
rules requiring reciprocal and symmetrical compensation remain in effect as
applied to the cellular industry. Interconnection rate issues will be decided by
the states. Whether the issue is decided by the states or the federal
government, cellular carriers in the future can be expected to pay lower rates
to LECs than they previously paid. This result is expected to be favorable to
the wireless industry and somewhat unfavorable to LECs.
The FCC is also proceeding to implement the 1996 Act. The 1996 Act provides
that implementing its legislative objectives will be the task of the FCC, the
state public utilities commissions and a Federal-state Joint Board. Much of this
implementation is proceeding in numerous, concurrent proceedings with aggressive
deadlines. The Company cannot predict the full extent, nature and
interrelationships among state and federal implementation and other responses to
the 1996 Act.
The primary purpose and effect of the new law is to open all
telecommunications markets to competition. The 1996 Act makes most direct or
indirect state and local barriers to competition unlawful. It directs the FCC to
preempt all inconsistent state and local laws and regulations, after notice and
comment proceedings. It also enables electric and other utilities to engage in
telecommunications service through qualifying subsidiaries.
Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the 1996 Act's universal service
provisions and necessary for universal services, public safety and welfare,
continued service quality and consumer rights. While a state may not impose
requirements that effectively function as barriers to entry, it retains limited
authority to regulate certain competitive practices in rural telephone company
service areas.
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The 1996 Act establishes principles and a process for implementing a
modified "universal service" policy. This policy seeks nationwide, affordable
service and access to advanced telecommunications and information services. It
calls for reasonably comparable urban and rural rates and services. The 1996 Act
also requires universal service to schools, libraries and rural health
facilities at discounted rates. The FCC has implemented the mandate of the 1996
Act to create a new universal service support mechanism "to ensure that all
Americans have access to telecommunications services." The 1996 Act requires all
interstate telecommunications providers, including wireless service providers,
to "make an equitable and non-discriminatory contribution," to support the cost
of providing universal service, unless their contribution would be de minimis.
At present, the provision of landline telephone service in high cost areas is
subsidized by access charges and other payments by interexchange carriers to
LECs. The obligation to make payments to support universal service has been
expanded to include other telecommunications service providers, including
cellular carriers. Such payments, which are to be based on a percentage of the
total "billed revenue" of carriers for a given previous half year, are to begin
being made in the first quarter of 1998. Carriers are free to pass such charges
on to their customers. Cellular carriers are also eligible to receive universal
service support payments in certain circumstances under the new systems if they
provide specified services in "high cost" areas. U.S. Cellular has sought
designation as an "eligible telecommunications carrier" qualified to receive
universal service support in certain states.
The FCC has also allocated a total of 140 megahertz ("MHZ") to broadband
PCS, 20 MHZ to unlicensed operations and 120 MHZ to licensed operations,
consisting of two 30 MHZ blocks in each of the 51 Major Trading Areas ("MTAs")
and one 30 MHZ block and three 10 MHZ blocks in each of 493 Basic Trading Areas
("BTAs"). Cellular operators and those entities under common ownership with them
are permitted to participate in the ownership of PCS licenses, except for those
PCS licenses reserved for small businesses, and licenses for PCS service areas
in which the cellular operator owns a 20% or greater interest in a cellular
licensee, the service area of which covers 10% or more of the population of the
PCS service area. In the latter case, the cellular license is limited to two 10
MHZ PCS channel blocks.
PCS technology is currently under development and is similar in some
respects to cellular technology. Where it has become commercially available,
this technology is capable of offering increased capacity for wireless two-way
and one-way voice, data and multimedia communications services and will result
in increased competition with U.S. Cellular's operations. The ability of these
future PCS licensees to complement or compete with existing cellular licensees
will be affected by future FCC rule-makings. These and other future
technological and regulatory developments in the wireless telecommunications
industry and the enhancement of current technologies will likely create new
products and services that are competitive with the services currently offered
by U.S. Cellular. There can be no assurance that U.S. Cellular will not be
adversely affected by such technological and regulatory developments.
Media reports have suggested that certain radio frequency ("RF") emissions
from portable cellular telephones might be linked to cancer. U.S. Cellular has
reviewed relevant scientific information and, based on such information, is not
aware of any credible evidence linking the usage of portable cellular telephones
with cancer. As noted above, FCC rules went into effect in October 1997,
dealing, inter alia, with RF emissions from cellular towers of less than 10
meters in height, building mounted antennas and cellular telephones. It is
anticipated that U.S. Cellular will be able to comply with RF tower emission
standards and U.S. Cellular believes that the cellular telephones it currently
sells comply with the standards.
STATE AND LOCAL REGULATION. U.S. Cellular is also subject to state and
local regulation in some instances. In 1981, the FCC preempted the states from
exercising jurisdiction in the areas of licensing, technical standards and
market structure. In 1993, Congress preempted states from regulating the entry
of cellular systems into service and the rates charged by cellular systems to
customers. The siting and construction of the cellular facilities, including
transmitter towers, antennas and equipment shelters are still subject to state
or local zoning and land use regulations. However, in 1996, Congress amended the
Communications Act to provide that states could not discriminate against
wireless carriers in tower zoning proceedings and had to decide on zoning
requests with reasonable speed. In addition, states may still regulate other
terms and conditions of cellular service.
The FCC is required to forbear from applying any statutory or regulatory
provision that is not necessary to keep telecommunications rates and terms
reasonable or to protect consumers. A state may not apply a statutory or
regulatory provision that the FCC decides to forbear from applying. In addition,
the FCC must review its telecommunications regulations every two years and
change any that are no longer necessary. Further, the FCC is empowered under
certain circumstances to preempt state regulatory authorities if a state is
obstructing the Communications Act's basic purposes.
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<PAGE>
U.S. Cellular and its subsidiaries have been and intend to remain active
participants in proceedings before the FCC and, through its membership in state
associations of wireless providers, before state regulatory authorities.
Proceedings with respect to the foregoing policy issues before the FCC and state
regulatory authorities could have a significant impact on the competitive market
structure among wireless providers and the relationships between wireless
providers and other carriers. U.S. Cellular is unable to predict the scope, pace
or financial impact of policy changes which could be adopted in these
proceedings.
COMPETITION
U.S. Cellular's principal competitor for cellular telephone service in each
market is the licensee of the second cellular system in that market. Since each
competitor operates its cellular system on a 25 MHZ frequency block licensed by
the FCC using comparable technology and facilities, competition for customers
between the two systems in each market is principally on the basis of quality of
service, price, size of area covered, services offered and responsiveness of
customer service. The competing entities in many of the markets in which U.S.
Cellular has an interest have financial resources which are substantially
greater than those of U.S. Cellular and its partners in such markets.
The FCC's rules require all operational cellular systems to provide, on a
nondiscriminatory basis, cellular service to resellers which purchase blocks of
mobile telephone numbers from an operational system and then resell them to the
public.
In addition to competition from the other cellular licensee in each market,
there is also competition from, among other technologies, conventional mobile
telephone and SMR systems, both of which are able to connect with the landline
telephone network. U.S. Cellular believes that conventional mobile telephone
systems and conventional SMR systems are competitively disadvantaged because of
technological limitations on the capacity of such systems. The FCC has
previously given approval, through waivers of its rules, to ESMR, an enhanced
SMR system. ESMR systems may have cells and frequency reuse like cellular
thereby potentially eliminating any current technological limitation. The first
ESMR systems were implemented in 1993 in Los Angeles and are being implemented
in many other cities across the United States. ESMR providers have initiated
service in several areas where U.S. Cellular operates cellular systems. Although
less directly a substitute for cellular service, wireless data services and
one-way paging service (and in the future, two-way paging services) may be
adequate for those who do not need full two-way voice service.
PCS providers have initiated service in many markets across the United
States, including a number of markets where U.S. Cellular has operations. PCS
providers offer digital, wireless communications services to their customers.
Similar technological advances or regulatory changes in the future may make
available other alternatives to cellular service, thereby creating additional
sources of competition. U.S. Cellular expects PCS operators to continue
deployments of PCS across all of the U.S. Cellular markets over the next one or
two years. U.S. Cellular anticipates that PCS competitors will build out the
larger metropolitan areas before the mid-sized metropolitan and rural areas
where U.S. Cellular operates. As a result, the effects of PCS competition may
not reach U.S. Cellular's markets as quickly as they may reach other cellular
operators' markets.
Continuing technological advances in the communications field make it
difficult to predict the extent of additional future competition for cellular
systems. For example, the FCC has allocated radio channels to a mobile satellite
system in which transmissions from mobile units to satellites would augment or
replace transmissions to cell sites, and several consortia to provide such
service have been formed. Such a system is designed primarily to serve the
communications needs of remote locations and a mobile satellite system could
provide viable competition for land-based cellular systems in such areas. It is
also possible that the FCC may in the future assign additional frequencies to
cellular telephone service to provide for more than two cellular telephone
systems per market.
EMPLOYEES
As of September 30, 1997, U.S. Cellular had a total of 4,089 employees. None
of its employees are represented by a labor union and employees relations are
considered good.
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<PAGE>
EXPLANATORY NOTE REGARDING FINANCIAL INFORMATION
Effective upon completion of the Transactions, Telephone and Data Systems,
Inc. will have outstanding five classes of Common Stock: United States Cellular
Group Common Shares, which are intended to reflect the performance of the United
States Cellular Group; TDS Telecommunications Group Common Shares, which are
intended to reflect the performance of the TDS Telecommunications Group; Aerial
Communications Group Common Shares, which are intended to reflect the
performance of the Aerial Communications Group; and Common Shares and Series A
Common Shares which are intended to reflect the performance of a residual group
(the TDS Group) (which will also reflect the performance of the United States
Cellular Group, the TDS Telecommunications Group, and the Aerial Communications
Group to the extent of the Retained Interest in those groups.)
Although the financial statements of the United States Cellular Group will
separately report the assets, liabilities (including contingent liabilities) and
shareholders' equity of Telephone and Data Systems, Inc. attributed to the
United States Cellular Group such attribution will not affect the legal title to
such assets or responsibility for such liabilities. Holders of United States
Cellular Group Common Shares will be, and holders of Telephone and Data Systems,
Inc. Common Shares and Series A Common Shares are, shareholders of Telephone and
Data Systems, Inc. Telephone and Data Systems, Inc. and its subsidiaries would
each continue to be responsible for their respective liabilities. Financial
results arising from the business of Telephone and Data Systems, Inc. (including
its Retained Interest in the United States Cellular Group) or from the business
of the United States Cellular Group could affect the market price of all classes
of Common Stock. In addition, any net losses of any of the Telephone and Data
Systems, Inc. Groups, including the United States Cellular Group, and dividends
or distributions on, or repurchases of, any class of Common Stock will reduce
the assets of Telephone and Data Systems, Inc. legally available for payment of
dividends on all classes of Common Stock. Accordingly, Telephone and Data
Systems, Inc.'s consolidated financial statements should be read in conjunction
with the United States Cellular Group's financial information.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
The United States Cellular Group ("Cellular Group") consists solely of
United States Cellular Corporation, an 81%-owned subsidiary of Telephone and
Data Systems, Inc. ("TDS") which operates and invests in cellular telephone
companies and properties. The Cellular Group may in the future also include such
other assets and liabilities of TDS as the Board of Directors of TDS may
determine to attribute to the Cellular Group and such other businesses, assets
and liabilities as TDS or any of its subsidiaries may in the future acquire for
the Cellular Group, as determined by the Board of Directors of TDS.
RESULTS OF OPERATIONS
United States Cellular Corporation ("U.S. Cellular") owns, operates and
invests in cellular markets throughout the United States. U.S. Cellular owned
both majority and minority interests in 204 cellular markets at December 31,
1996, representing 25,074,000 population equivalents ("pops"). U.S. Cellular
included the operations of 131 majority-owned and managed cellular markets in
consolidated operations ("consolidated markets") at December 31, 1996.
Noncontrolling interests in 44 markets, representing 4.3 million pops, were
accounted for using the equity method and were included in investment income at
that date. Noncontrolling interests in 29 other markets, representing 489,000
pops, were accounted for using the cost method. Following is a table of
summarized operating data for U.S. Cellular's consolidated operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
---------------------------------------
1996 1995 1994
------------- ----------- -----------
<S> <C> <C> <C>
Total market population (in thousands) (1)........................................... 21,712 22,309 21,314
Customers............................................................................ 1,073,000 710,000 421,000
Market penetration................................................................... 4.94% 3.18% 1.98%
Markets in operation................................................................. 131 137 130
Cell sites in service................................................................ 1,328 1,116 790
Average monthly revenue per customer................................................. $ 66 $ 72 $ 80
Churn rate per month................................................................. 1.9% 2.1% 2.3%
Marketing cost per net customer addition............................................. $ 566 $ 555 $ 667
------------- ----------- -----------
</TABLE>
- ---------
(1) Calculated using the respective Donnelley Marketing Service estimates for
each year.
U.S. Cellular's revenues and expenses include 100% of the revenues and
expenses of the systems serving majority-owned and managed markets plus its
corporate office operations. Investment income includes U.S. Cellular's share of
the net income or loss of each of the markets for which U.S. Cellular follows
the equity method of accounting.
Operating results for 1996 reflect improvement in U.S. Cellular's overall
operations, primarily resulting from growth in its customer base and revenues
coupled with increasing economies of scale. Operating revenues, driven by
increases in customers served, rose $215.4 million, or 44%. Operating expenses
rose $170.8 million, or 38%. Operating cash flow (operating income before
minority share plus depreciation and amortization expense) increased $64.0
million, or 48%.
Investment and other income increased $66.4 million, or 53%, due primarily
to a 59% increase in gains on the sales of cellular and other investments and a
29% increase in investment income. Interest expense decreased $4.2 million, or
15%, in 1996 primarily due to a decrease in effective interest rates. Net income
totaled $129.9 million in 1996 compared to $99.7 million in 1995, reflecting
increased gains on the sales of cellular and other investments, improved
operating results, increased investment income and decreased interest expense.
In 1996 and 1995, net
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income included significant gains on sales of cellular and other investments. A
summary of the after-tax effect of these gains on net income is shown below.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
---------------------------------
1996 1995 1994
----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income before after-tax effects of gains............................................. $ 62,504 $ 43,918 $ 13,071
Add: After-tax effects of gains.......................................................... 67,425 55,824 3,322
----------- --------- ---------
Net income as reported................................................................... $ 129,929 $ 99,742 $ 16,393
----------- --------- ---------
----------- --------- ---------
</TABLE>
OPERATING REVENUES
Operating revenues totaled $707.8 million in 1996, an increase of $215.4
million, or 44%, over 1995. Operating revenues totaled $492.4 million in 1995,
an increase of $160.0 million, or 48%, over 1994. The net effect of acquisitions
and divestitures ("net acquisitions") increased operating revenues $10.8
million, or 2%, in 1996 and $44.2 million, or 13%, in 1995.
Service revenues primarily consist of: (I) charges for access, airtime and
value-added services provided to U.S. Cellular's local retail customers who use
the local systems operated by U.S. Cellular; (ii) charges to customers of other
systems who use U.S. Cellular's cellular systems when roaming ("inbound
roaming"); and (iii) charges for long-distance calls made on U.S. Cellular's
systems. Service revenues totaled $690.4 million in 1996, up $213.8 million, or
45%, over 1995. Service revenues totaled $476.6 million in 1995, up $158.0
million, or 50%, over 1994. The increase was primarily due to the growing number
of local retail customers and the growth in inbound roaming revenue. Average
monthly revenue per customer declined 8% to $66 in 1996 and 9% to $72 in 1995.
Net acquisitions increased service revenues $10.3 million, or 2%, in 1996 and
$42.7 million, or 13%, in 1995.
The 8% decrease in average monthly service revenue per customer in 1996 was
primarily a result of a decrease in average revenue per minute of use from both
local retail customers and inbound roamers. Although average monthly local
minutes of use per retail customer totaled 107 in 1996 and 95 in both 1995 and
1994, U.S. Cellular's use of incentive programs in 1996 and 1995 that encourage
weekend and off peak usage, in order to stimulate overall usage, resulted in a
decrease in average revenue per minute of use during those years. Inbound
roaming revenue has been growing at a slower rate than U.S. Cellular's customer
base (31% compared to 51%). U.S. Cellular believes that its customer base is
growing faster than that of the industry as a whole, which has a dilutive effect
on inbound roaming revenue per customer. Also, U.S. Cellular's average inbound
roaming revenue per minute of use decreased in 1996 and 1995, in line with the
ongoing trend toward reduced per minute prices for roaming negotiated between
U.S. Cellular and other cellular operators. The 9% decrease in average monthly
service revenue per customer in 1995 was for primarily the same reasons as in
1996.
Local retail revenue increased $153.0 million, or 53%, in 1996 and $101.5
million, or 54%, in 1995. Growth in U.S. Cellular's customer base was the
primary reason for the increase in local revenue. The number of customers
increased 51% to 1,073,000 at December 31, 1996 from 710,000 at December 31,
1995. The number of customers increased 69% in 1995, up from 421,000 at December
31, 1994. Excluding the effect of acquisitions and dispositions, U.S. Cellular
added 365,000 customers in 1996 and 255,000 customers in 1995. While the
percentage increase in customer additions is expected to be lower in the future,
management anticipates that the number of customers served will continue to
increase in the next few years. Net acquisitions increased local revenue $13.7
million, or 5%, in 1996 and $26.3 million, or 14%, in 1995.
Average monthly local retail revenue per customer declined to $43 in 1996
from $44 in 1995 and $47 in 1994. Monthly local retail minutes of use per
customer increased 13% to 107 in 1996 from 95 in both 1995 and 1994. While there
was an increase in average local retail minutes of use from 1995 to 1996,
average revenue per minute of use decreased as a result of the incentive
programs stated previously. Average local retail revenue per minute totaled $.40
in 1996, $.46 in 1995 and $.50 in 1994. The decrease in average monthly local
retail revenue is part of an industry-wide trend and is believed to be related
to the tendency of the early customers in a market to be the heaviest users
during peak business hours. It also reflects U.S. Cellular's and the industry's
continued penetration of the consumer market, which tends to include fewer peak
business hour-usage customers. Local retail revenues in 1996 increased 58%, or
$168.5 million, due to customer growth and declined 5%, or $15.5 million, due to
decreases in average monthly service revenue per customer.
Inbound roaming revenue increased $45.3 million, or 31%, in 1996 and $44.0
million, or 42%, in 1995. This increase was attributable to the rise in the
number of minutes used by customers from other systems when roaming
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<PAGE>
in U.S. Cellular's systems. Also contributing were the increased number of cell
sites within U.S. Cellular's systems. These effects were offset somewhat by the
decrease in average revenue per minute due to the downward trend in negotiated
rates. Average inbound roaming revenue per minute totaled $.94 in 1996, $.99 in
1995 and $1.11 in 1994. Monthly inbound roaming revenue per U.S. Cellular
customer averaged $19 in 1996, $22 in 1995 and $26 in 1994. This decrease is
related to both the decrease in roaming revenue per minute and the faster
increase in U.S. Cellular's customer base than in inbound roaming revenue. Net
acquisitions decreased inbound roaming revenue $2.9 million, or 2%, in 1996
compared to an increase of $13.6 million, or 13%, in 1995.
Long-distance revenue increased $17.3 million, or 49%, in 1996 and $12.4
million, or 55%, in 1995 as the volume of long-distance calls billed by U.S.
Cellular increased. Monthly long-distance revenue per customer averaged $5 in
both 1996 and 1995 and $6 in 1994. Net acquisitions increased long-distance
revenue $933,000, or 3%, in 1996 and $3.5 million, or 16%, in 1995.
Equipment sales revenues totaled $17.4 million in 1996, an increase of $1.6
million, or 10%, over 1995. Equipment sales revenues totaled $15.8 million in
1995, an increase of $2.0 million, or 15%, over 1994. Equipment sales reflect
the sale of 449,000, 296,000 and 153,000 cellular telephone units in 1996, 1995
and 1994, respectively, plus installation and accessories revenue. The average
revenue per unit was $39 in 1996 compared to $53 in 1995 and $90 in 1994. The
average revenue per unit decline partially reflects U.S. Cellular's decision to
reduce sales prices on cellular telephones to stimulate growth in the number of
customers, to maintain its market position and to meet competitive prices as
well as to pass through reduced manufacturers' prices to customers. Also, U.S.
Cellular uses promotions which are 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. Net acquisitions increased
equipment sales revenues $499,000, or 3%, in 1996 and $1.5 million, or 11%, in
1995.
OPERATING EXPENSES
Operating expenses totaled $620.5 million in 1996, up $170.8 million, or
38%, over 1995. Operating expenses totaled $449.6 million in 1995, up $134.6
million, or 43%, over 1994. Net acquisitions increased operating expenses $11.0
million, or 2%, in 1996 and $40.7 million, or 13%, in 1995.
System operations expenses increased $46.9 million, or 67%, in 1996 and
$23.6 million, or 50%, in 1995, as a result of increases in customer usage
expenses and costs associated with U.S. Cellular's increased number of
customers, increased expenses related to roaming fraud and the growing number of
cell sites within U.S. Cellular's systems. In total, system operations costs are
expected to continue to increase as the number of cell sites within and the
number of customers using U.S. Cellular's systems grows. Net acquisitions
increased system operations expenses $944,000, or 1%, in 1996 and $7.6 million,
or 16%, in 1995.
Customer usage expenses represent charges from other telecommunications
service providers for U.S. Cellular's customers' use of their facilities as well
as for U.S. Cellular's inbound roaming traffic on these facilities. These
expenses also include local interconnection to the landline network, toll
charges and roaming expenses from U.S. Cellular's customers' use of systems
other than their local systems, offset somewhat by pass-through roaming revenue.
Customer usage expenses were $75.3 million in 1996 compared to $34.9 million in
1995 and $21.6 million in 1994. Contributing to the increases in 1996 and 1995
were additional costs related to fraudulent use of U.S. Cellular's customers'
cellular telephone numbers. These fraud-related costs totaled $18.0 million in
1996, $4.1 million in 1995 and an immaterial amount in 1994. U.S. Cellular
continues to implement procedures in its markets to combat this fraud, which is
primarily related to roaming usage. Customer usage expenses represented 11% of
service revenues in 1996 compared to 7% in 1995 and 1994. The percentage
increase in 1996 is primarily due to the increase in roaming fraud.
Maintenance, utility and cell site expenses totaled $42.0 million in 1996
compared to $35.5 million in 1995 and $25.3 million in 1994, primarily
reflecting an increase in the number of cell sites in U.S. Cellular's systems to
1,328 in 1996 from 1,116 in 1995 and 790 in 1994. Monthly maintenance, utility
and cell site expenses totaled $2,866, $3,107 and $3,216 per average cell site
in 1996, 1995 and 1994, respectively.
Marketing and selling expenses increased $47.6 million, or 47%, in 1996 and
$33.3 million, or 48%, in 1995. Marketing and selling expenses primarily consist
of salaries, commissions and expenses of field sales and retail personnel and
offices; agent expenses; promotional expenses; local advertising and public
relations expenses. The 1996 increase was primarily due to a 44% rise in the
number of gross customer activations (excluding acquisitions and divestitures),
from 392,000 in 1995 to 563,000 in 1996. The 1995 increase was primarily due to
a 69% rise in the number of gross customer activations (excluding acquisitions
and divestitures), from 232,000 in 1994 to 392,000 in 1995. Cost per gross
customer addition, including losses on equipment sales, totaled $367 in
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<PAGE>
1996, $361 in 1995 and $408 in 1994. Net acquisitions increased marketing and
selling expenses $5.7 million, or 6%, in 1996 and $9.0 million, or 13%, in 1995.
Cost of equipment sold increased $19.1 million, or 35%, in 1996 and $15.5
million, or 39%, in 1995. The increases reflect the growth in unit sales related
to the rise in gross customer activations made through U.S. Cellular's direct
and retail distribution channels, offset somewhat by falling manufacturer prices
per unit. The average cost to U.S. Cellular of a telephone unit sold, including
accessories and installation, was $165 in 1996 compared to $186 in 1995 and $258
in 1994. Net acquisitions increased cost of goods sold $2.7 million, or 5%, in
1996 and $6.3 million, or 16%, in 1995.
General and administrative expenses increased $37.8 million, or 29%, in 1996
and $38.2 million, or 41%, in 1995. These expenses include the costs of
operating U.S. Cellular's local business offices and its corporate expenses.
These increases include the effects of an increase in expenses required to serve
the growing customer base and an expansion of both local administrative office
and corporate staff, necessitated by growth in U.S. Cellular's business. U.S.
Cellular is using an ongoing clustering strategy to combine local operations
wherever feasible in order to gain operational efficiencies and reduce its
administrative expenses. The increase also includes the effect of a higher
amount of bad debt, primarily related to U.S. Cellular's increased rate of
customer growth, and the increased cost of retaining current customers, which
includes providing user equipment and service incentives to customers to help
reduce U.S. Cellular's churn rate. Net acquisitions increased direct
field-related general and administrative expenses $2.0 million, or 2%, in 1996
and $11.1 million, or 12%, in 1995.
Operating cash flow increased $64.0 million, or 48%, to $196.2 million in
1996 and increased $49.4 million, or 60%, to $132.2 million in 1995. The
improvements in 1996 and 1995 were primarily due to substantial growth in
customers and service revenues and the effects of improved operational
efficiencies on operating expenses. Net acquisitions decreased operating cash
flow $505,000, or less than 1%, in 1996 and increased operating cash flow $10.3
million, or 12% in 1995.
Depreciation expense increased $17.3 million, or 30%, in 1996 and $17.8
million, or 45%, in 1995. These increases reflect rising average fixed asset
balances, which increased 34% in 1996 and 48% in 1995. Increased fixed asset
balances primarily result from the increase in cell sites built to improve
coverage and capacity in U.S. Cellular's markets. Net acquisitions increased
depreciation expense $104,000, or less than 1%, in 1996 and $4.6 million, or
12%, in 1995.
Amortization of intangibles increased $2.1 million, or 6%, in 1996 and $6.2
million, or 24%, in 1995. These increases are primarily due to increases in
deferred information system development costs, which are amortized over the
useful life of the related systems. Net acquisitions decreased amortization of
intangibles $472,000, or 2%, in 1996 compared to an increase of $2.2 million, or
9%, in 1995.
OPERATING INCOME BEFORE MINORITY SHARE
Operating income before minority share totaled $87.4 million in 1996, $42.8
million in 1995 and $17.4 million in 1994. The operating income margin (as a
percent of service revenues) improved to 13% in 1996 compared to 9% in 1995 and
5% in 1994. The 1996 and 1995 operating income improvements reflect increased
revenues resulting from growth in the number of customers served by U.S.
Cellular's systems and the effect of improved operational efficiencies on
operating expenses. Net acquisitions decreased operating income before minority
share $137,000 in 1996 and increased operating income before minority share $3.5
million in 1995.
U.S. Cellular expects service revenues to continue to grow significantly
during 1997 as it adds customers to its existing systems and realizes a full
year of revenues from customers added in 1996. However, management anticipates
that average monthly revenue per customer will continue to decrease as local
retail and inbound roaming revenue per minute of use declines and as the growth
rate of U.S. Cellular's customer base exceeds the growth rate of inbound roaming
revenue, diluting the roaming contribution per customer. Additionally, U.S.
Cellular expects expenses to increase significantly during 1997 as it incurs
costs for cell sites added in 1996 and 1997 and incurs costs associated with
customer growth.
Management believes there exists a seasonality 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, which may cause operating
income to vary from quarter to quarter. Additionally, competitors licensed to
provide personal communications services ("PCS") have initiated service in
certain of U.S. Cellular's markets in recent months. U.S. Cellular anticipates
that PCS operators will initiate service in several other of U.S. Cellular's
markets in 1997 and 1998. U.S. Cellular's management is monitoring these
II-19
<PAGE>
and other providers' strategies to determine what effect this additional
competition will have on U.S. Cellular's future strategies and results.
INVESTMENT AND OTHER INCOME
Investment and other income totaled $191.1 million in 1996, $124.7 million
in 1995 and $31.0 million in 1994. Investment income was $51.5 million in 1996
compared to $39.8 million in 1995 and $26.5 million in 1994. Investment income
primarily represents U.S. Cellular's share of net income from the markets
managed by others that are accounted for by the equity method.
Gain on sale of cellular interests totaled $132.7 million in 1996, $83.5
million in 1995 and $3.3 million in 1994. The 1996 amount primarily reflects
gains totaling $88.5 million recorded on the sales of U.S. Cellular's majority
interests in eight markets; gains totaling $2.6 million recorded on the sales of
U.S. Cellular's investment interests in two markets; a gain totaling $11.3
million recorded on cash received in an exchange of markets with another
cellular operator; and gains totaling $30.3 million recorded on cash received
from the settlement of two separate legal matters.
The 1995 amount primarily reflects gains totaling $64.6 million recorded on
the sales of U.S. Cellular's majority interests in six markets; gains totaling
$11.1 million recorded on the sales of U.S. Cellular's investment interests in
six markets; a gain totaling $5.3 million resulting from cash proceeds received
in an exchange of markets with another cellular operator; and a gain totaling
$2.5 million recorded on the sale of certain marketable equity securities.
The 1994 amount reflects gains recorded on an exchange in which five of U.S.
Cellular's investment interests were traded to another cellular operator for
minority interests in seven markets in which U.S. Cellular owns controlling
interests.
INTEREST AND INCOME TAXES
Total interest expense decreased $4.2 million, or 15%, in 1996, primarily
due to the repayment of debt under the Revolving Credit Agreement with TDS after
the issuance of Liquid Yield Option Notes ("LYONs") in June 1995. LYONs carry a
lower effective interest rate than the borrowings under the Revolving Credit
Agreement with TDS. Total interest expense increased $5.4 million, or 25%, in
1995, on a 26% increase in the average amount of debt outstanding. Interest
expense in 1996 is primarily related to LYONs ($14.4 million) and borrowings
under a vendor financing agreement ($8.0 million). Interest expense in 1995 is
primarily related to borrowings under the Revolving Credit Agreement with TDS
($10.4 million), borrowings under a vendor financing agreement ($9.2 million)
and LYONs ($7.4 million). Interest expense in 1994 is primarily related to
borrowings under the Revolving Credit Agreement with TDS ($17.8 million) and
borrowings under a vendor financing agreement ($3.9 million).
The average amount of debt outstanding under the Revolving Credit Agreement
was $100.0 million in 1995 and $204.7 million in 1994. The average interest rate
on such debt was 10.4% in 1995 and 8.6% in 1994. No borrowings have been
outstanding under the Revolving Credit Agreement since June 1995. In June 1995,
U.S. Cellular issued $228.3 million of LYONs, using most of the net proceeds to
repay all borrowings under the Revolving Credit Agreement with TDS. The LYONs
are zero coupon convertible debentures which accrete interest at 6% annually,
but do not require current cash payments of interest. The average amount of debt
under the vendor financing agreements was $112.9 million in 1996, $112.1 million
in 1995 and $58.1 million in 1994. The average interest rate on such debt was
7.8% in 1996, 8.3% in 1995 and 7.1% in 1994.
Income tax expense was $111.6 million in 1996, $32.5 million in 1995 and
$4.9 million in 1994. In 1996 and 1995, approximately $65.3 million and $27.7
million of income tax expense, respectively, related to the gains on sales of
cellular and other investments. The effective tax rates were 46.2%, 24.6% and
23.1% in 1996, 1995 and 1994, respectively. In 1996, state income taxes and
gains on sales increased the effective rate above the statutory rate. In 1995
and 1994, the effect of the valuation allowance on the deferred tax asset
decreased the effective rate below the statutory rate, partially offset by state
income taxes and amortization of license costs which increased the effective
rate.
U.S. Cellular is included in a consolidated federal income tax return with
other members of the TDS consolidated group. TDS and U.S. Cellular are parties
to a Tax Allocation Agreement under which U.S. Cellular is able to carry forward
its losses and credits and use them to offset any current or future income tax
liabilities to TDS. The amount of federal net operating loss carryforward
available to offset future taxable income aggregated approximately $6 million at
December 31, 1996, and expires between 2003 and 2011. The amount of state net
operating
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<PAGE>
loss carryforward available to offset future taxable income aggregated
approximately $203 million at December 31, 1996, and expires between 1997 and
2011. Both the federal and state loss carryforwards have been significantly
reduced by the gains on the sales of cellular and other investments during 1996
and 1995.
NET INCOME
Net income totaled $129.9 million in 1996, $99.7 million in 1995 and $16.4
million in 1994. The improvements in 1996 and 1995 resulted from gains on the
sales of cellular and other investments, improved overall operating results and
increased investment income, partially offset by increased income tax expense.
In 1996 and 1995, net income included significant gains on sales of cellular and
other investments. See "Results of Operations" for a summary of the after-tax
effect of these gains on net income.
INFLATION
Management believes that inflation affects U.S. Cellular's business to no
greater extent than the general economy.
FINANCIAL RESOURCES AND LIQUIDITY
U.S. Cellular operates a capital- and marketing-intensive business. In
recent years, U.S. Cellular has generated operating cash flows and received cash
proceeds from divestitures to fund most of its construction and operating
expenses. U.S. Cellular anticipates further substantial increases in cellular
units in service, revenues and cell sites as it continues its growth strategy.
As U.S. Cellular's customer and revenue base grows, the percentage increases in
operating cash flow and operating income may be reduced.
Cash flows from operating activities provided $137.5 million in 1996, $115.9
million in 1995 and $84.3 million in 1994. Operating cash flow (operating income
before minority share plus depreciation and amortization expense) provided cash
totaling $196.2 million in 1996, $132.2 million in 1995 and $82.8 million in
1994. Cash flows from other operating activities (investment and other income,
interest expense, changes in working capital and changes in other assets and
liabilities) required cash investments totaling $58.7 million in 1996 and $16.3
million in 1995 and provided cash totaling $1.5 million in 1994.
Cash flows from financing activities required cash totaling $11.2 million in
1996 and provided $19.3 million in 1995 and $95.6 million in 1994. Cash flows
from financing activities include cash flows from the sale of LYONs, borrowings
under the Revolving Credit Agreement with TDS and vendor financing transactions.
In 1996, U.S. Cellular primarily used available cash to repay amounts owed under
the vendor financing agreements totaling $21.5 million. In 1995, the sale of
LYONs provided cash totaling $221.5 million and borrowings under one of the
vendor financing agreements provided cash totaling $59.5 million. This cash was
used to repay amounts owed under the Revolving Credit Agreement with TDS
totaling $251.2 million and amounts owed under the vendor financing agreements
totaling $13.4 million. Borrowings under the Revolving Credit Agreement with TDS
totaling $75.4 million and borrowings under one of the vendor financing
agreements totaling $18.0 million provided a majority of U.S. Cellular's
external financing requirements in 1994.
Cash flows from investing activities required cash investments totaling
$150.3 million in 1996, $102.6 million in 1995 and $180.4 million in 1994. Such
cash requirements primarily consisted of cash additions to property, plant, and
equipment, and cash requirements for acquisitions, deferred system development
costs and investments in cellular markets. In 1996 and 1995, U.S. Cellular
received cash proceeds totaling $213.0 million and $151.1 million, respectively,
relating to the sales of cellular and other investments. In 1996, U.S. Cellular
required cash totaling $28.8 million for deferred system development costs,
primarily related to the development of its customer billing and information
system. Cash expenditures for property, plant and equipment totaled $219.4
million in 1996, $208.7 million in 1995 and $158.2 million in 1994, representing
the construction of 242, 292 and 225 cell sites, respectively, plus other plant
additions.
Anticipated capital requirements for 1997 primarily reflect U.S. Cellular's
construction and system expansion program. U.S. Cellular's construction and
system expansion budget for 1997 is approximately $300 million, primarily for
new cell sites to expand and enhance U.S. Cellular's coverage and capacity in
its service areas and for the enhancement of U.S. Cellular's office systems.
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<PAGE>
ACQUISITIONS AND DIVESTURES
U.S. Cellular is continuing to assess its cellular holdings in order to
maximize the benefits derived from clustering its markets. As the number of
opportunities for outright acquisitions has decreased in recent years, and as
U.S. Cellular's clusters have grown, U.S. Cellular's focus has shifted toward
exchanges and divestitures of managed and investment interests. Recently, U.S.
Cellular has completed certain exchanges of controlling interests in its less
strategic markets for controlling interests in markets which better complement
its clusters. U.S. Cellular has also completed outright sales of other less
strategic markets. The proceeds from these sales have been used to further U.S.
Cellular's growth. U.S. Cellular is currently negotiating acquisitions,
exchanges and divestitures of cellular interests to further capitalize on the
benefits of its clustering strategy.
In 1996, U.S. Cellular purchased controlling interests in two markets and
several minority interests, representing 1.0 million pops, and received a
controlling interest in another market through an exchange with another cellular
operator. The total consideration paid in these transactions, primarily in the
form of cash and U.S. Cellular Common Shares issued to TDS to reimburse TDS for
the value of TDS Common Shares issued to third parties, totaled $158.9 million.
Included in these acquisitions are minority interests representing 598,000 pops
U.S. Cellular acquired from TDS for $102.8 million in cash, pursuant to an
agreement entered into in June 1996.
Pursuant to the above agreement with TDS, U.S. Cellular will acquire
additional interests, representing an additional 104,000 pops, for $17.2 million
in cash. Additionally, at December 31, 1996, U.S. Cellular had an agreement
pending with a third party to acquire a majority interest in one market,
representing 213,000 pops, for $31.5 million in cash. The pending acquisition
agreements discussed above are expected to be completed during 1997.
In 1996, U.S. Cellular sold controlling interests in eight markets and one
market partition, plus minority interests in two other markets, representing 1.2
million pops, and divested a controlling interest in another market through an
exchange with another cellular operator. U.S. Cellular received cash
consideration totaling $187.8 million from these sales and from the exchange.
U.S. Cellular also settled two separate legal matters during 1996, receiving
$30.3 million in cash from those transactions. In total, sales, exchanges and
litigation settlements provided U.S. Cellular with cash totaling $218.1 million
in 1996.
In 1995, U.S. Cellular purchased controlling interests in eleven markets and
several minority interests, representing 1.7 million pops. The total
consideration paid for these purchases, primarily in the form of cash and U.S.
Cellular Common Shares issued or issuable to TDS to reimburse TDS for the value
of TDS Common Shares issued and issuable and cash paid to third parties, totaled
$151.0 million. U.S. Cellular also acquired controlling interests in twelve
markets, representing 2.0 million pops, as a result of six separate exchange
transactions completed during 1995.
In 1995, U.S. Cellular sold controlling interests in six markets and
minority interests in six markets, representing 1.1 million pops. U.S. Cellular
received consideration of cash and receivables totaling $128.2 million from
these sales. U.S. Cellular also divested controlling interests in ten markets
plus three market partitions, representing 2.1 million pops, as a result of the
exchange transactions completed during 1995.
In 1994, U.S. Cellular purchased controlling interests in nine markets and
several minority interests, representing 1.3 million pops. The total
consideration paid for these purchases, primarily in the form of cash and U.S.
Cellular Common Shares issued to TDS to reimburse TDS for the value of TDS
Common Shares issued and issuable and cash paid to third parties, totaled $140.3
million.
In 1994, U.S. Cellular exchanged its minority interests in five markets with
another cellular operator for minority interests in seven markets in which U.S.
Cellular already owned a majority interest.
In October 1997, U.S. Cellular completed the exchange with BellSouth it had
announced earlier in 1997. Pursuant to the exchange, U.S. Cellular received
majority interests in 12 markets adjacent to its Iowa and Wisconsin/Illinois
clusters. In exchange, U.S. Cellular divested its majority interests in 10
markets and minority interests in nine markets and paid a net amount of $87
million in cash ($103 million paid in October less $16 million received in
September). Certain aspects of this transaction are taxable; the amount of these
taxes will be determined by year-end and will be paid in the first quarter of
1998. No book gain or loss will be recorded on the transaction. U.S. Cellular
received majority interests representing approximately 4.0 million pops in the
transaction, and divested majority interests representing 2.0 million pops and
minority interests representing approximately 1.1 million pops.
In December, 1997 U.S. Cellular announced that AirTouch Communications, Inc.
[NYSE:ATI] will acquire interests owned by U.S. Cellular and its parent
organization, TDS, in cellular systems serving Seattle and Olympia,
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Washington; Tucson, Arizona; Duluth, Minnesota; and rural areas in Arizona,
Colorado and Idaho. ATI will issue approximately 5,000,000 shares of its common
stock and approximately $50 million in cash to U.S. Cellular and TDS in exchange
for these interests, which represent approximately 900,000 pops (the population
of a market multiplied by a company's ownership interest in a cellular licensee
in that market). The interests being sold to ATI by TDS were subject to an
existing purchase agreement between U.S. Cellular and TDS. TDS will retain the
ATI common stock it receives from this sale, approximately 1,000,000 shares, and
pay U.S. Cellular approximately $20 million to terminate those purchase rights.
In exchange for the interests it will sell to ATI, U.S. Cellular will receive
the remaining 4,000,000 shares of ATI common stock and approximately $50 million
in cash.
LIQUIDITY
U.S. Cellular anticipates that the aggregate resources required for 1997
will include approximately: (i) $300 million for capital spending, (ii) $49
million for acquisitions and (iii) $23 million of scheduled debt repayments.
U.S. Cellular had $14 million of cash and cash equivalents at December 31, 1996
and anticipates generating an increasing amount of cash flows from operating
activities during 1997. U.S. Cellular also had $100 million available under the
Revolving Credit Agreement with TDS.
Management believes that U.S. Cellular's operating cash flows and sources of
external financing provide substantial financial flexibility. U.S. Cellular has
a line of credit with TDS to help meet its short-term financing needs. U.S.
Cellular also has access to public and private capital markets to help meet its
long-term financing needs, although there are currently no material agreements
or commitments pending to issue additional debt or equity securities. U.S.
Cellular anticipates issuing debt and equity securities of U.S. Cellular or its
subsidiaries only when capital requirements (including acquisitions), financial
market conditions and other factors warrant.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION AND OTHER SECTIONS OF THIS PROXY STATEMENT/PROSPECTUS
CONTAIN "FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES
AND PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL FACTS, INCLUDING STATEMENTS
ABOUT TDS'S BELIEFS AND EXPECTATIONS, ARE FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS CONTAIN POTENTIAL RISKS AND UNCERTAINTIES, AND THEREFORE ACTUAL
RESULTS MAY DIFFER MATERIALLY. TDS UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY
ANY FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE,
BUT ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION
IN OUR MARKETS; NEW TELECOMMUNICATIONS TECHNOLOGY ADVANCES; CHANGES IN THE
TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING AND FUTURE LITIGATION;
AVAILABILITY OF FUTURE FINANCING; AND UNANTICIPATED CHANGES IN GROWTH IN
CELLULAR CUSTOMERS, PENETRATION RATES, CHURN RATES AND THE MIX OF PRODUCTS AND
SERVICES OFFERED IN OUR MARKETS. READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT
OF THESE IMPORTANT FACTORS.
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THE UNITED STATES CELLULAR GROUP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING REVENUES
Service.............................................................................. $ 690,434 $ 476,634 $ 318,649
Equipment sales...................................................................... 17,386 15,761 13,755
----------- ----------- -----------
Total Operating Revenues....................................................... 707,820 492,395 332,404
----------- ----------- -----------
OPERATING EXPENSES
System operations 117,368 70,442 46,869
Marketing and selling................................................................ 150,000 102,361 69,072
Cost of equipment sold............................................................... 74,023 54,948 39,431
General and administrative........................................................... 170,224 132,431 94,193
Depreciation......................................................................... 74,631 57,302 39,520
Amortization of intangibles.......................................................... 34,208 32,156 25,934
----------- ----------- -----------
Total Operating Expenses....................................................... 620,454 449,640 315,019
----------- ----------- -----------
OPERATING INCOME BEFORE MINORITY SHARE................................................. 87,366 42,755 17,385
Minority Share of Operating Income..................................................... (13,743) (7,902) (5,152)
----------- ----------- -----------
OPERATING INCOME....................................................................... 73,623 34,853 12,233
----------- ----------- -----------
INVESTMENT AND OTHER INCOME
Investment income.................................................................... 51,518 39,833 26,540
Amortization of licenses related to investments...................................... (1,391) (1,089) (913)
Interest income...................................................................... 10,093 5,008 3,380
Other (expense), net................................................................. (1,881) (2,578) (1,368)
Gain on sale of cellular and other investments....................................... 132,718 83,494 3,321
----------- ----------- -----------
Total Investment and Other Income.............................................. 191,057 124,668 30,960
----------- ----------- -----------
INCOME BEFORE INTEREST AND INCOME TAXES................................................ 264,680 159,521 43,193
----------- ----------- -----------
INTEREST EXPENSE
Interest expense--affiliate.......................................................... -- 10,406 17,812
Interest expense--other.............................................................. 23,111 16,881 4,071
----------- ----------- -----------
Total Interest Expense......................................................... 23,111 27,287 21,883
----------- ----------- -----------
INCOME BEFORE INCOME TAXES............................................................. 241,569 132,234 21,310
Income tax expense..................................................................... 111,640 32,492 4,917
----------- ----------- -----------
NET INCOME............................................................................. $ 129,929 $ 99,742 $ 16,393
Net Income to Minority Shareholders of U.S. Cellular................................... (25,179) (19,046) (2,740)
----------- ----------- -----------
Net Income to TDS...................................................................... $ 104,750 $ 80,696 $ 13,653
----------- ----------- -----------
----------- ----------- -----------
Pro forma (Unaudited): (See Note 1)
Net Income Attributable to the TDS Group through Retained Interest..................... $ 26,187 $ 20,174 $ 3,413
Net Income Attributable to the United States Cellular Group Common Shares.............. $ 78,563 $ 60,522 $ 10,240
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
II-24
<PAGE>
THE UNITED STATES CELLULAR GROUP
BALANCE SHEETS--ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents
General funds................................................................................. $ 802 $ 8,462
Affiliated cash equivalents................................................................... 13,575 29,942
------------- -------------
14,377 38,404
Accounts receivable
Customers, less allowance of $4,199 and $3,820, respectively.................................. 58,034 42,934
Roaming....................................................................................... 29,742 26,316
Affiliates.................................................................................... 607 2,166
Other......................................................................................... 7,568 5,761
Inventory....................................................................................... 11,893 9,198
Prepaid and other current assets................................................................ 6,398 5,007
------------- -------------
128,619 129,786
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction............................................................. 846,005 674,450
Less accumulated depreciation................................................................. 195,251 144,423
------------- -------------
650,754 530,027
------------- -------------
INVESTMENTS
Licenses, net of accumulated amortization of $110,727 and $88,403, respectively............... 1,044,141 1,035,846
Cellular entities............................................................................. 186,791 134,421
Notes and interest receivable................................................................. 14,943 16,376
------------- -------------
1,245,875 1,186,643
------------- -------------
DEFERRED CHARGES
System development costs, net of accumulated amortization of $11,089 and $4,951,
respectively................................................................................ 44,319 21,704
Other, net of accumulated amortization of $5,276 and $9,289, respectively..................... 16,332 11,984
------------- -------------
60,651 33,688
------------- -------------
TOTAL ASSETS............................................................................ $ 2,085,899 $ 1,880,144
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
II-25
<PAGE>
THE UNITED STATES CELLULAR GROUP
BALANCE SHEETS--LIABILITIES AND GROUP EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and redeemable preferred stock.............................. $ 23,065 $ 30,939
Notes payable................................................................................. 1,375 1,375
Accounts payable
Affiliates.................................................................................. 2,729 11,636
Other....................................................................................... 66,638 53,155
Accrued taxes................................................................................. 18,781 29,644
Customer deposits and deferred revenues....................................................... 16,410 11,332
Other current liabilities..................................................................... 17,456 17,028
------------- -------------
146,454 155,109
------------- -------------
LONG-TERM DEPT
6% zero coupon convertible debentures......................................................... 250,107 235,750
Vendor financing, excluding current portion................................................... 80,589 98,656
------------- -------------
330,696 334,406
------------- -------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability............................................................. 78,833 14,331
Other......................................................................................... 2,444 1,541
------------- -------------
81,277 15,872
------------- -------------
MINORITY INTEREST............................................................................... 51,270 45,303
------------- -------------
UNITED STATES CELLULAR GROUP EQUITY............................................................. 1,476,202 1,329,454
------------- -------------
TOTAL LIABILITIES AND GROUP EQUITY...................................................... $ 2,085,899 $ 1,880,144
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
II-26
<PAGE>
THE UNITED STATES CELLULAR GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................ $ 129,929 $ 99,742 $ 16,393
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization................................................. 108,839 89,458 65,454
Investment income............................................................. (51,518) (39,833) (26,540)
Gain on sale of cellular and other investments................................ (132,718) (83,494) (3,321)
Minority share of operating income............................................ 13,743 7,902 5,152
Other noncash expense......................................................... 19,260 30,597 19,019
Change in accounts receivable................................................. (16,706) (27,878) (12,538)
Change in accounts payable.................................................... 12,709 (1,819) 13,882
Change in accrued taxes....................................................... (10,185) 27,127 1,575
Change in deferred taxes...................................................... 63,137 8,660 1,611
Change in other assets and liabilities........................................ 1,019 5,472 3,621
------------ ------------ ------------
137,509 115,934 84,308
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Vendor financing borrowings....................................................... 3,922 59,460 18,611
Change in convertible debentures.................................................. -- 221,466 --
Repayment of vendor financing..................................................... (21,519) (13,353) (12,091)
Change in Revolving Credit Agreement.............................................. -- (251,230) 75,414
Common Shares issued.............................................................. 10,483 1,563 1,135
Capital (distributions) contributions (to)/from minority partners................. (4,099) 1,411 12,504
------------ ------------ ------------
(11,213) 19,317 95,573
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment........................................ (219,370) (208,713) (158,208)
System development costs.......................................................... (28,753) (5,628) (10,111)
Investments in and advances to nonconsolidated entities........................... (22,256) (18,807) (21,553)
Distributions from nonconsolidated entities....................................... 23,464 8,679 16,395
Proceeds from sales of cellular and other investments............................. 212,979 151,137 --
Acquisitions, excluding cash acquired............................................. (116,387) (29,315) (6,878)
------------ ------------ ------------
(150,323) (102,647) (180,355)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................ (24,027) 32,604 (474)
CASH AND CASH EQUIVALENTS--
Beginning of period............................................................... 38,404 5,800 6,274
------------ ------------ ------------
End of period..................................................................... $ 14,377 $ 38,404 $ 5,800
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
II-27
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS
The United States Cellular Group ("Cellular Group") consists solely of United
States Cellular Corporation, an 80.6%-owned subsidiary of Telephone and Data
Systems, Inc. ("TDS") which operates and invests in cellular telephone companies
and properties. The Cellular Group may in the future also include such other
assets and liabilities of TDS as the Board of Directors of TDS may determine to
attribute to the Cellular Group and such other businesses, assets and
liabilities as TDS or any of its subsidiaries may in the future acquire for the
Cellular Group, as determined by the Board of Directors of TDS.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
U.S. Cellular owns, manages and invests in cellular systems throughout the
United States and is the nation's eighth largest cellular telephone company in
terms of population equivalents ("pops"). U.S. Cellular owns interests in 204
cellular markets, representing approximately 25.1 million pops as of December
31, 1996. U.S. Cellular's 131 majority-owned and managed markets, primarily
mid-sized and rural markets, cover 26 states and served 1,073,000 customers as
of December 31, 1996.
BASIS OF PRESENTATION
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal (the "Tracking Stock Proposal") which, if approved by
shareholders and implemented by the Board, would authorize the Board to issue
three new classes of common stock designated as United States Cellular Group
Common Shares (the "Cellular Group Shares"), TDS Telecommunications Group Common
Shares (the "Telecom Group Shares") and Aerial Communications Group Common
Shares (the "Aerial Group Shares"), and change the state of incorporation of
Telephone and Data Systems, Inc. from Iowa to Delaware. While each of the new
classes of common stock would constitute common stock of Telephone and Data
Systems, Inc., each is intended to reflect the separate performance of Telephone
and Data Systems, Inc.'s cellular telephone, landline telephone and personal
communications services businesses ("Tracking Stocks"). The Cellular Group
Shares, when issued, are intended to reflect the separate performance of the
United States Cellular Group (the "Cellular Group"), which includes Telephone
and Data Systems, Inc.'s interest in United States Cellular Corporation, an
81%-owned subsidiary of Telephone and Data Systems, Inc. which operates and
invests in cellular telephone companies and properties. The Telecom Group
Shares, when issued, are intended to reflect the separate performance of the TDS
Telecommunications Group (the "Telecom Group"), which primarily includes
Telephone and Data Systems, Inc.'s interest in TDS Telecommunications
Corporation, a wholly-owned subsidiary of Telephone and Data Systems, Inc. which
operates landline telephone companies. The Aerial Group Shares, when issued, are
intended to reflect the separate performance of the Aerial Communications Group
(the "Aerial Group"), which includes Telephone and Data Systems, Inc.'s interest
in Aerial Communications, Inc., an 83%-owned subsidiary of Telephone and Data
Systems, Inc. which is developing broadband personal communications services.
The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the residual group
(the "TDS Group"), which includes retained interests ("Retained Interests") in
each of United States Cellular Group, the TDS Telecommunications Group, and the
Aerial Communications Group to the extent of the Retained Interests in the
respective groups, and all other businesses of TDS. The TDS Group includes
Telephone and Data Systems, Inc. and all of its subsidiaries and their
respective properties and assets other than (except with respect to the Retained
Interests): United States Cellular and its subsidiaries (which are included in
the United States Cellular Group), TDS Telecom and its subsidiaries (which are
included in the TDS Telecommunications Group), and Aerial and its subsidiaries
(which are included in the Aerial Communications Group) and any other assets or
liabilities or subsidiaries of Telephone and Data Systems, Inc. attributed to
the United States Cellular Group, the TDS Telecommunications Group or the Aerial
Communications Group. The TDS Group reflects primarily the TDS Group's Retained
Interest in the United States Cellular Group, the TDS Telecom Group and the
Aerial Group, the Corporate operations (including corporate management,
intercompany financing, cash management and intercompany income tax allocation
activities) and the operations of American Paging, Inc., an 82%-owned
subsidiary.
II-28
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Following approval by shareholders of the Tracking Stock Proposal, Telephone
and Data Systems, Inc. currently intends to a) offer and sell Telecom Group
Shares in a public offering for cash, subject to prevailing market and other
conditions (the "Telecom Public Offering"), and to allocate the net proceeds
thereof to the Telecom Group, b) issue Cellular Group Shares in exchange for all
of the Common Shares of United States Cellular Corporation which are not owned
by Telephone and Data Systems, Inc., subject to approval by the board of
directors and the shareholders of United States Cellular Corporation (the "U.S.
Cellular Merger"), c) issue Aerial Group Shares in exchange for all of the
Common Shares of Aerial Communications, Inc. which are not owned by Telephone
and Data Systems, Inc., subject to approval by the board of directors and the
shareholders of Aerial Communications, Inc. (the "Aerial Merger"), and d)
distribute one Cellular Group Share, two-thirds of a Telecom Group Share and
two-thirds of an Aerial Group Share in the form of a stock dividend with respect
to each outstanding Series A Common Share and Common Share of Telephone and Data
Systems, Inc. (the "Distribution"). It is currently expected that the
Distribution would take place in June 1998 or later, after the completion of the
Telecom Public Offering, the U.S. Cellular Merger and the Aerial Merger,
although the Board reserves the right to effect all or any part of the
Distribution at any time, or not to make the Distribution, regardless of whether
or not such other transactions have taken place.
The shares of Tracking Stock which would be issued in the Distribution would
represent an approximately 75% interest of the common equity value of TDS in
each Tracking Group (the "Outstanding Interest"). When considering the shares of
Tracking Stock which would also be issued in the Telecom Public Offering, the U.
S. Cellular Merger and the Aerial Merger, as well as the Distribution, the
Outstanding Interest would initially represent in the aggregate an approximately
80% interest in each Tracking Group. Upon completion of all of the Transactions
as contemplated, approximately 20% of the common shareholders' value of
Telephone and Data Systems, Inc. in each Tracking Group would initially be
retained as Retained Interest in the TDS Group, along with all other interests
held by Telephone and Data Systems, Inc.
Following the Distribution, subject to the legal restrictions on the payment
of dividends, the Board currently intends to establish an annual dividend on the
Telecom Group Shares in an amount equal to $.48 per share. The Board also
currently intends to establish an annual dividend on the Common Shares and
Series A Common Shares in an amount equal to $.10 per share. (Based on the
expected distribution ratio of two-thirds of a Telecom Group Share for each
existing Common Share and Series A Common Share, the dividend on Telecom Group
shares would equate to a per share dividend of $.32 per existing Common Share
and Series A Common Share. The total of the dividend on Common Shares and Series
A Common Shares of $.10 and the equivalent dividend on Telecom Group Shares of
$.32 equals the existing current annual dividend on the existing Common Shares
and Series A Common Shares of $.42). With regard to the Cellular Group and the
Aerial Group Shares, the Board currently intends to retain future earnings, if
any, for the development of the businesses of the Cellular Group and Aerial
Group, respectively, and does not anticipate paying dividends on the Cellular
Group or the Aerial Group Shares in the foreseeable future. Future dividends on
the shares of common stock will be payable when, as and if declared by the Board
out of the lessor of (1) all funds of Telephone and Data Systems, Inc. legally
available therefor and (2) the available dividend amount with respect to the
relevant Group.
Funds of the Company legally available for the payment of dividends
("Surplus") (approximately $2,031 million as of December 31, 1996, based on the
financial statements) is an amount approximately equal to the Total Common and
Preferred Equity of the Company less the par or stated value of all shares of
common and preferred stock outstanding (204,155,000 shares as of December 31,
1996 after the Distribution). With respect to any Tracking Group, the Available
Dividend Amount (approximately $1,107 million for the Cellular Group, $258
million for the Telecom Group and $328 million for the Aerial Group as of
December 31, 1996, based on the financial statements) is an amount approximately
equal to the Outstanding Interest Fraction of such Tracking Group (approximately
75% after the Distribution) times the respective Tracking Group Equity less the
par value of the respective outstanding Tracking Group shares. With respect to
the TDS Group, the Available Dividend Amount (approximately $610 million as of
December 31, 1996) is an amount approximately equal to the greater of a) an
amount (approximately $339 million) which is approximately equal to the Surplus
of the Company less the sum of all Available Dividend Amounts of all Tracking
Groups or b) an amount (approximately $610 million) which is
II-29
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
approximately equal to the TDS Group Equity and Preferred Stock less the par or
stated value of all Common and Series A Common Shares and Preferred Stock
outstanding.
The financial statements of the Groups comprise all of the accounts included
in the corresponding consolidated financial statements of Telephone and Data
Systems, Inc. The separate Cellular Group, Telecom Group, Aerial Group, and TDS
Group financial statements give effect to the management and accounting policies
that would be applicable upon implementation of the Tracking Stock Proposal.
Subject to the completion of the U.S. Cellular Merger and the Aerial Merger,
Telephone and Data Systems, Inc. intends to terminate certain intercompany
agreements between Telephone and Data Systems, Inc. and U.S. Cellular and
Aerial, respectively. Thereafter, all of the relationships between Telephone and
Data Systems, Inc. and such subsidiaries would be determined solely by methods
that management of Telephone and Data Systems, Inc. believes to be reasonable.
Many of such policies would continue the arrangements which presently exist
between Telephone and Data Systems, Inc. and U.S. Cellular or Aerial pursuant to
the intercompany agreements, but Telephone and Data Systems, Inc. would have no
contractual obligation to continue such policies after the intercompany
agreements have been terminated. The separate Group financial statements have
been prepared on a basis that management believes to be reasonable and
appropriate and include (1) the historical financial position, results of
operations and cash flows of the businesses that comprise each of the Groups,
(2) any assets and liabilities (including contingent liabilities) which have
been attributed to any Group from any other Group, and (3) with respect to the
TDS Group, the Retained Interest in each of the Tracking Groups. The effects of
the issuance of the Tracking Stocks have not been reflected in these historical
financial statements.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, Telephone and Data
Systems, Inc. will prepare and file with the Securities and Exchange Commission,
consolidated financial statements of Telephone and Data Systems, Inc., and
financial statements of the Cellular Group, the Telecom Group, and the Aerial
Group for so long as the respective Tracking Stock is outstanding, and the TDS
Group for as long as any Tracking Stock is outstanding. Although the financial
statements of the Cellular Group, the Telecom Group, the Aerial Group, and the
TDS Group will separately report the assets, liabilities (including contingent
liabilities) and shareholders' equity of Telephone and Data Systems, Inc.
attributed to the Cellular Group, the Telecom Group, the Aerial Group, and the
TDS Group, such attribution will not affect the legal title to such assets or
responsibility for such liabilities. Holders of Cellular Group, Telecom Group,
and Aerial Group Common Shares will be, and holders of Telephone and Data
Systems, Inc. Common Shares and Series A Common Shares are, shareholders of
Telephone and Data Systems, Inc. Telephone and Data Systems, Inc. and its
subsidiaries would each continue to be responsible for their respective
liabilities.
Financial effects arising from the Cellular Group, Telecom Group, Aerial
Group or TDS Group that affect the consolidated results of operations or
financial condition of Telephone and Data Systems, Inc. could affect the results
of operations or financial condition of the Cellular Group, Telecom Group,
Aerial Group or TDS Group, or could affect the market price of any or all
classes of Common Stock. In addition, any net losses of Telephone and Data
Systems, Inc., or the Cellular Group, the Telecom Group, the Aerial Group or the
TDS Group, and dividends or distributions on, or repurchases of, any class of
Common Stock will reduce the assets of Telephone and Data Systems, Inc. legally
available for payment of dividends on any class of Common Stock. Accordingly,
Telephone and Data Systems, Inc.'s consolidated financial statements should be
read in conjunction with the Cellular Group, the Telecom Group, the Aerial Group
and the TDS Group financial information.
The management and accounting policies applicable to the preparation of the
financial statements of the TDS Group could be modified or rescinded by the
Board, in its sole discretion and without the approval of shareholders, although
there is no present intention to do so. The Board could also adopt additional
policies depending upon the circumstances. Any determination by the Board to
modify or rescind such policies, or to adopt additional policies, including any
such decision that could have disparate effects upon the holders of different
series of common stock, would be made by the Board in good faith and in the
honest belief that such decision is in the best interests of Telephone and Data
Systems, Inc. In addition, generally accepted accounting principles require that
changes in accounting policy must be preferable (in accordance with such
principles) to the policy previously in place.
II-30
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES APPLIED IN FINANCIAL STATEMENTS
The financial statements include the accounts of U.S. Cellular, its
majority-owned subsidiaries and partnerships in which U.S. Cellular has a
controlling majority partnership interest. All material intercompany accounts
and transactions between companies within the Cellular Group have been
eliminated. Certain amounts reported in prior years have been reclassified to
conform to current period presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates, but management
believes they will not be material.
REVENUES
Revenues from operations primarily consist of charges to customers for
monthly access, cellular airtime and data usage, roaming charges, long-distance
charges and vertical services. Revenues are recognized as services are rendered.
Unbilled revenues, resulting from cellular service provided from the billing
cycle date to the end of each month and from other cellular carriers' customers
using U.S. Cellular's cellular systems for the last half of each month, are
estimated and recorded. Equipment sales are recognized upon delivery to the
customer and reflect charges to customers for cellular telephone user equipment
purchased.
ADVERTISING COSTS
U.S. Cellular expenses advertising costs as incurred. Advertising costs
totaled $24.4 million, $14.1 million and $11.1 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
PENSION PLAN
Telephone and Data Systems, Inc. Wireless Companies' Pension Plan (the
"Pension Plan"), a qualified noncontributory defined contribution pension plan,
was adopted effective January 1, 1994. It provides pension benefits for the
employees of U.S. Cellular or its subsidiaries. Under this plan, pension
benefits and costs are calculated separately for each participant and are funded
currently. Pension costs were $1.5 million in 1996, $1.2 million in 1995 and
$1.0 million in 1994.
PRO FORMA NET INCOME AND EARNINGS PER SHARE
Pro forma net income attributable to the Cellular Group and to the TDS Group
through Retained Interest assumes that the Cellular Merger has not taken place
and therefore 75% of net income is attributable to the Cellular Group Shares and
25% of net income is attributable to the Retained Interest for the TDS Group. A
portion of the Net Income is allocated to the minority public shareholders of
U.S. Cellular prior to attributing the Net Income to the Cellular Group and the
TDS Group through Retained Interest.
Earnings per Share was omitted from the historical statements of earnings
since the Cellular Group Shares were not a part of the equity structure of TDS
and the Articles of Incorporation did not allow for the issuance of the Cellular
Group Shares for the periods presented.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the plant
assets. The provision for depreciation as a percentage of average depreciable
property, plant and equipment was 10.4% in 1996, 10.0% in 1995 and 10.5% in
1994.
II-31
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, plant and equipment in service and under construction consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating plant and equipment............................................................. $ 641,600 $ 505,242
Land...................................................................................... 46,198 38,161
Office furniture, equipment and vehicles.................................................. 71,674 54,904
Buildings and leasehold improvements...................................................... 86,533 76,143
----------- -----------
$ 846,005 $ 674,450
----------- -----------
----------- -----------
</TABLE>
See Note 12--Lease Commitments for a discussion of property leased by U.S.
Cellular.
NOTES AND INTEREST RECEIVABLE
Notes and interest receivable primarily consist of loans to other partners
for capital calls paid on their behalf. The interest charged on these loans is
at varying annual rates. U.S. Cellular also has an outstanding loan to the
operators of another cellular company in which U.S. Cellular has no equity. The
interest charged on this loan is at an annual rate of prime plus 1 1/2%. The
carrying amount reported in the balance sheet for notes and interest receivable
approximates their fair value.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. The carrying
amount reported in the balance sheet for cash and cash equivalents approximates
its fair value.
ACCOUNTS RECEIVABLE
Accounts receivable consists of amounts owed by customers for both service
provided and equipment sales, by other cellular carriers whose customers have
used U.S. Cellular's cellular systems, by affiliated entities and by other
partners for capital contributions and distributions.
INVENTORY
Inventory is stated at the lower of cost or market with cost determined on a
specific identification basis.
DEFERRED CHARGES
Deferred system development costs primarily represent costs incurred for the
development of new information systems. Capitalized costs of information systems
development are amortized over a five-year period, starting when each new system
is placed in service. Certain of the capitalized costs are for systems which are
still being developed and are not yet in service; these costs are not being
amortized.
Other deferred charges primarily represent legal and other charges incurred
relating to the preparation of vendor financing agreements and the 6% zero
coupon convertible debentures, and also deferred market start-up costs. The
deferred charges related to vendor financing are amortized over the related
financing period, the charges related to the convertible debentures are
amortized over the twenty-year financing period and deferred market start-up
costs are amortized over five years beginning with the commencement of
operations in each market. During 1996 and 1995, U.S. Cellular retired $5.5
million and $1.1 million, respectively, of deferred start-up costs which had
been fully amortized.
II-32
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL CASH FLOW DISCLOSURES
U.S. Cellular acquired certain cellular licenses and other cellular
interests during 1996, 1995 and 1994. In conjunction with these acquisitions,
the following assets were acquired, liabilities assumed and Common Shares
issued:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Property, plant and equipment, net..................................................... $ 7,069 $ 29,622 $ 13,638
Cellular licenses...................................................................... 90,341 138,600 139,332
Increase (Decrease) in equity-method investments in cellular interests................. 13,971 (5,921) (12,706)
Accounts receivable.................................................................... 1,332 1,760 1,910
Long-term debt......................................................................... -- -- (212)
Revolving Credit Agreement-TDS......................................................... -- (15,493) (309)
Accounts payable....................................................................... (1,081) (5,051) (1,375)
Other assets and liabilities, excluding cash acquired.................................. 1,493 (998) (1,518)
U.S. Cellular Common Shares issued and issuable........................................ 3,262 (113,204) (131,882)
----------- ----------- -----------
Decrease in cash due to acquisitions................................................... $ 116,387 $ 29,315 $ 6,878
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Following are supplemental cash flow disclosures regarding interest and
income taxes paid and certain noncash transactions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest paid.............................................................................. $ 7,001 $ 4,112 $ 4,021
Income taxes paid.......................................................................... 64,402 3,035 1,968
Noncash interest expense................................................................... 16,110 23,175 17,862
Accrued interest converted into debt under the Revolving Credit Agreement.................. -- 14,432 17,579
Additions to Property, Plant and Equipment financed through Accounts Payable-Other......... (4,679) 1,929 (9,761)
Common Shares issued by U.S. Cellular for redemption of U.S. Cellular Preferred Stock and
TDS Preferred Shares...................................................................... $ 18,450 $ 22,236 $ 1,496
--------- --------- ---------
</TABLE>
2. ACQUISITIONS AND DIVESTITURES
U.S. Cellular has acquired cellular interests for cash, promissory notes,
U.S. Cellular and TDS Common Shares, and shares of TDS Preferred Stock. U.S.
Cellular has also divested cellular interests for cash and notes receivable.
INFORMATION WITH RESPECT TO ACQUISITIONS AND DIVESTITURES
COMPLETED ACQUISITIONS. During 1996, U.S. Cellular completed the
acquisition of controlling interests in two markets and several minority
interests representing approximately 1.0 million population equivalents for a
total consideration of $158.9 million as shown in the following table:
<TABLE>
<CAPTION>
CONSIDERATION
-------------
(MILLIONS)
<S> <C>
1.3 million Common Shares to TDS (1)............................................................ $ 42.4
1,000 Common Shares issued to third parties..................................................... .1
Cash............................................................................................ 116.4
-------------
Total....................................................................................... $ 158.9
-------------
-------------
</TABLE>
- ---------
(1) Issued to reimburse TDS for TDS securities and cash paid to third parties in
connection with the acquisitions.
II-33
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
TRANSFER OF MINORITY INTERESTS TO U.S. CELLULAR FROM TDS. Included in the
interests U.S. Cellular acquired in 1996 were investment interests in 13
markets, representing 598,000 population equivalents, acquired in September 1996
for $102.8 million in cash. These interests were acquired pursuant to an
agreement entered into in June 1996 between U.S. Cellular and TDS. Due to the
intercompany nature of the transaction, these transfers were recorded at TDS's
book value of the interests. Also pursuant to the agreement, U.S. Cellular
expects to acquire investment interests in two additional markets, representing
104,000 population equivalents, for $17.2 million in cash. The pending
acquisitions are awaiting regulatory approvals.
During 1995, U.S. Cellular completed the acquisition of controlling
interests in eleven markets and several minority interests representing
approximately 1.7 million population equivalents for a total consideration of
$151.0 million as shown in the following table:
<TABLE>
<CAPTION>
CONSIDERATION
-------------
(MILLIONS)
<S> <C>
2.7 million U.S. Cellular Common Shares to TDS (1).............................................. $ 85.9
422,000 U.S. Cellular Common Shares issued to third parties..................................... 12.8
Increase in Revolving Credit Agreement (1)...................................................... 14.6
456,000 U.S. Cellular Common Shares issuable in 1996............................................ 14.5
Cash............................................................................................ 23.2
-------------
Total....................................................................................... $ 151.0
-------------
-------------
</TABLE>
- ---------
(1) To reimburse TDS for TDS securities and cash paid to third parties in
connection with the acquisitions.
Assuming that the 1996 and 1995 acquisitions discussed above, which were
accounted for as purchases, had taken place on January 1, 1995, unaudited pro
forma results of operations would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Service Revenues.......................................................................... $ 691,038 $ 492,127
Equipment Sales........................................................................... 17,393 16,930
Interest Expense (including cost to finance acquisitions)................................. 23,111 27,446
Net Income................................................................................ 133,062 94,197
----------- -----------
</TABLE>
During 1996, U.S. Cellular completed the divestiture of controlling
interests in eight markets and investment interests in two markets. See Note
11--Gain on Sale of Cellular and Other Investments for a discussion of these
divestitures.
PENDING ACQUISITIONS AND DIVESTITURES. At December 31, 1996, U.S. Cellular
had entered into an agreement with a third party to acquire a controlling
interest in one market for $31.5 million in cash. This transaction was completed
during 1997. Additionally, in February, 1997, U.S. Cellular entered into an
agreement with another cellular operator for an exchange of markets. See Note
16--Subsequent Events for a discussion of this exchange transaction.
II-34
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT IN LICENSES
Investment in licenses consists of the costs incurred in acquiring Federal
Communications Commission ("FCC") licenses or interests in entities which have
filed for or have been awarded FCC licenses to provide cellular service. These
costs include amounts paid to license applicants and owners of interests in
cellular entities awarded licenses; amounts paid for legal, engineering and
consulting services; amounts incurred by U.S. Cellular and TDS in acquiring
these interests; and goodwill. These costs are being amortized over 40 years,
upon commencement of operations, or at the date of acquisition when U.S.
Cellular acquires an interest in an operating system. Costs applicable to
unsuccessful license applications and acquisitions are charged to expense.
Included in cellular license costs is approximately $322 million and $363
million at December 31, 1996 and 1995, respectively, of goodwill which resulted
from various acquisitions structured to be tax-free.
4. REVOLVING CREDIT AGREEMENT
U.S. Cellular has the right to borrow funds on an unsecured basis from TDS
and Telecommunications Technologies Fund, Inc. ("TTF"), a wholly-owned
subsidiary of TDS, pursuant to a Revolving Credit Agreement. U.S. Cellular
repaid approximately $206.5 million of debt under the Revolving Credit Agreement
with the proceeds of its 1995 offering of 6% Zero Coupon Convertible Debentures.
See Note 6 - 6% Zero Coupon Convertible Debentures for a discussion of these
debentures. As of December 31, 1996, no borrowings were outstanding under the
Revolving Credit Agreement.
The terms of the Revolving Credit Agreement provide for borrowings with
interest, at the prime rate plus .75% (for a rate of 9.0% at December 31, 1996),
due quarterly. The facility was amended effective June 29, 1995, to provide for
borrowings up to a maximum of $100 million. No principal under the Revolving
Credit Agreement is due until January 2, 1998, on which date the Revolving
Credit Agreement terminates and all unpaid principal and accrued interest
thereon are due and payable.
5. VENDOR FINANCING
U.S. Cellular has two arrangements for the financing of cellular system
equipment and construction costs with an equipment vendor.
During 1994, U.S. Cellular consolidated the terms of its borrowings under
previously negotiated long-term financing agreements into one agreement (the
"1994 Agreement"). As provided for in the 1994 Agreement, U.S. Cellular
consolidated borrowings under certain other previously negotiated agreements,
those which were arranged through the individual entities which U.S. Cellular
manages, during 1995. All borrowings are collateralized by a secured interest in
the tangible assets (excluding customer accounts receivable) and certain
intangible assets of certain of U.S. Cellular's operating subsidiaries,
excluding any interest in such operating subsidiaries' FCC licenses. Terms of
the borrowings are for a total of seven years at an interest rate of 1.40% over
the 90-day Commercial Paper Rate of high-grade, unsecured notes (for a rate of
7.03%). Borrowings totaling $101.1 million were outstanding under the 1994
Agreement at December 31, 1996 and there was no remaining availability at that
date for future borrowings.
U.S. Cellular has another agreement which was assumed pursuant to a 1993
acquisition and which is arranged through the individual entity acquired. Terms
of the borrowings under this agreement are similar to those of the 1994
Agreement. Borrowings totaling $2.6 million were outstanding under this
agreement as of December 31, 1996 and there was no remaining availability at
that date for future borrowings.
The carrying value of U.S. Cellular's current and long-term vendor
financing, $103.7 million and $120.0 million, is approximately equal to its
estimated fair value at December 31, 1996 and 1995, respectively.
II-35
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. VENDOR FINANCING (CONTINUED)
Vendor financing is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Vendor financing arrangement (including deferred interest) due through 2003..... $ 101,119 $ 116,448
Other long-term notes issued in connection with acquisitions, due through
1998........................................................................... 2,535 3,550
----------- -----------
103,654 119,998
Less current portion............................................................ 23,065 21,342
----------- -----------
$ 80,589 $ 98,656
----------- -----------
----------- -----------
</TABLE>
Vendor financing principal payment requirements are $23.1 million, $24.3
million, $22.2 million, $16.9 million and $14.0 million for the years 1997
through 2001, respectively.
6. 6% ZERO COUPON CONVERTIBLE DEBENTURES
During 1995, U.S. Cellular sold $745 million principal amount at maturity of
zero coupon 6% yield to maturity convertible debt with proceeds to U.S. Cellular
of $221.5 million. This 20-year fixed rate debt, in the form of Liquid Yield
Option Notes ("LYONs") is subordinated to all senior indebtedness of U.S.
Cellular. At December 31, 1996, U.S. Cellular's senior indebtedness totaled
$113.7 million. Each LYON is convertible at the option of the holder at any time
at a conversion rate of 9.475 Common Shares per LYON. Upon conversion, U.S.
Cellular may elect to deliver its Common Shares or cash equal to the market
value of the Common Shares. Beginning June 15, 2000, the LYONs may be redeemed
at any time for cash at the option of U.S. Cellular at the issue price plus
accrued original issue discount through the date of redemption. U.S. Cellular
will purchase LYONs, at the option of the holder, as of June 15, 2000, at the
issue price plus accrued original issue discount through that date. U.S.
Cellular will have the option of purchasing such LYONs with cash, U.S. Cellular
Common Shares or TDS common equity securities, or any combination thereof. No
LYONs have been converted as of December 31, 1996.
The carrying value at December 31, 1996 of U.S. Cellular's 6% Zero Coupon
Convertible Debentures, $250.1 million, is greater than its fair value,
estimated to be $248.4 million. The carrying value at December 31, 1995 of U.S.
Cellular's 6% Zero Coupon Convertible Debentures, $235.7 million, is less than
its fair value, estimated to be $265.5 million. The fair values were estimated
using discounted cash flow analysis. The decrease in estimated fair value in
1996 was due to a change in the incremental borrowing rate.
7. UNITED STATES CELLULAR GROUP EQUITY
The changes in the United States Cellular Group equity for the periods
presented is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.............................. $ 1,329,454 $ 1,093,967 $ 940,128
Net Income.................................................. 129,929 99,742 16,393
Issuance of Common Shares................................... 16,825 137,116 135,613
Other....................................................... (6) (1,371) 1,833
------------- ------------- -------------
Balance at end of period.................................... $ 1,476,202 $ 1,329,454 $ 1,093,967
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
U.S. Cellular has 53,117,313 Common Shares and 33,005,877 Series A Common
Shares issued and outstanding as of December 31, 1996. Cellular Group Shares
will be exchanged for all of the Common Shares of U.S. Cellular which are not
owned by TDS, subject to approval by the board of directors and the shareholders
of U.S. Cellular. See Basis of Presentation in Footnote 1.
II-36
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. UNITED STATES CELLULAR GROUP EQUITY (CONTINUED)
U.S. CELLULAR COMMON SHARES ISSUABLE
Certain of the cellular acquisition agreements completed in previous years
required U.S. Cellular to deliver U.S. Cellular Common Shares in the future.
U.S. Cellular issued 928,009 Common Shares to TDS and third parties in 1996
pursuant to these agreements.
EMPLOYEE BENEFIT PLANS
The following table summarizes U.S. Cellular Common Shares issued for the
employee benefit plans described below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Tax Deferred Savings Plan...................................................................... 23,302 26,357 25,934
Employee stock options and stock appreciation rights........................................... 16,380 10,713 8,365
Employee Stock Purchase Plan................................................................... 22,366 25,000 20,244
--------- --------- ---------
62,048 62,070 54,543
--------- --------- ---------
--------- --------- ---------
</TABLE>
TAX-DEFERRED SAVINGS PLAN. U.S. Cellular has reserved 176,411 Common Shares
for issuance under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing
plan pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code.
Participating employees have the option of investing their contributions in U.S.
Cellular Common Shares, TDS Common Shares, American Paging, Inc. (an 82.3%-owned
subsidiary of TDS) Common Shares, Aerial Communications, Inc. (an 82.8%-owned
subsidiary of TDS) Common Shares or five other non-affiliated funds.
STOCK-BASED COMPENSATION PLANS
U.S. Cellular accounts for stock options, stock appreciation rights and
employee stock purchase plans under Accounting Principles Board ("APB") Opinion
No. 25. No compensation costs have been recognized for the stock option and
employee stock purchase plans. Compensation expense for SARs, measured by the
difference between the SAR prices and the year-end market price of the Common
Shares, aggregated $407,000 in 1996, $168,000 in 1995 and $71,000 in 1994. Had
compensation costs for all plans been determined consistent with Financial
Accounting Standards Board Statement of Accounting Standards ("SFAS") No. 123,
U.S. Cellular's net income would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Income: As Reported $ 129,929 $ 99,742
Pro Forma 129,166 98,960
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. A
II-37
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. UNITED STATES CELLULAR GROUP EQUITY (CONTINUED)
summary of the status of U.S. Cellular's stock option plans at December 31,
1996, 1995 and 1994 and changes during the years then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE
OF SHARES OPTION PRICES FAIR VALUES
--------- ------------- -----------
<S> <C> <C> <C>
Stock Options:
Outstanding
January 1, 1994 (33,300 exercisable)........................... 56,659 $ 16.07
Granted........................................................ 178,398 30.65
Exercised...................................................... (8,365) 15.67
Cancelled...................................................... (2,433) $ 20.63
Outstanding
December 31, 1994 (80,164 exercisable)......................... 224,259 $ 27.63
Granted........................................................ 106,406 27.76 $ 14.02
Exercised...................................................... (10,713) $ 15.67
Outstanding
December 31, 1995 (177,675 exercisable)........................ 319,952 $ 28.07
Granted........................................................ 103,326 25.12 $ 16.59
Exercised...................................................... (16,380) 16.98
Cancelled...................................................... (15,851) $ 30.05
Outstanding
December 31, 1996 (271,866 exercisable)........................ 391,047 $ 29.47
</TABLE>
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN. U.S. Cellular has reserved
967,192 Common Shares and 55,000 Series A Common Shares for options granted to
key employees. U.S. Cellular has established two Stock Option plans as of
February 1, 1991 and November 9, 1994 that provide for the grant of stock
options and stock appreciation rights to officers and employees. The options
under the 1991 plan are exercisable from the date of vesting through November 1,
1997, or thirty days following the date of the employee's termination of
employment, if earlier. Under the 1991 Stock Option Plan at December 31, 1996,
66,889 stock options were outstanding at a price of $15.67 per share. The
options under the 1994 plan are exercisable from the date of vesting through
November 9, 2004, or thirty days following the date of the employee's
termination of employment, if earlier. Under the 1994 Stock Option Plan at
December 31, 1996, 215,071 stock options were outstanding at a weighted average
price of $32.10 per share. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1996 and 1995,
respectively: risk-free interest rates of 5.9% and 6.9%; expected dividend
yields of zero for both years; expected lives of 4.0 years and 5.2 years and
expected volatility of 22.7% and 25.3%.
Stock Appreciation Rights ("SARs") (as amended on February 1, 1991) allow
the grantee to receive an amount in U.S. Cellular Common Shares or cash, or a
combination thereof, equivalent to the difference between the exercise price and
the fair market value of the Common Shares on the exercise date. At December 31,
1996, 42,000 Common Share SARs and 36,000 Series A Common Share SARs were
outstanding at $15 per share. These rights expire from 1998 to 2003 or the date
of the person's termination of employment, if earlier. During 1996 and 1994, 300
and 1,200 Common Share SARs were exercised, respectively. No SARs were exercised
in 1995. There were no SARs granted in 1996 or 1995.
EMPLOYEE STOCK PURCHASE PLAN. U.S. Cellular sold 22,366 and 25,000 U.S.
Cellular Common Shares to its employees at $26.94 per share in 1996 and 1995,
respectively, in connection with the 1994 Employee Stock Purchase Plan and has
42,634 Common Shares reserved under the plan. During 1996, the 1997 Employee
Stock Purchase Plan ("1997 ESPP") was approved which became effective January 1,
1997. U.S. Cellular reserved 130,000 Common Shares for sale to employees of U.
S. Cellular and its subsidiaries under the 1997 ESPP. The fair value of the
employees' purchase rights is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants rights in 1996: risk-free interest rates of
II-38
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. UNITED STATES CELLULAR GROUP EQUITY (CONTINUED)
5.8% and 5.4%; expected dividend yield of zero for both years; expected lives of
2.3 years and 1.2 years; and expected volatility of 15.4% and 15.7%.
1996 SENIOR EXECUTIVE STOCK BONUS AND RESTRICTED STOCK AWARD PLAN. U.S.
Cellular has reserved 10,300 U.S. Cellular Common Shares for issuance under the
1996 Senior Executive Stock Bonus and Restricted Stock Award Plan. Eligible
senior executives may qualify for stock awards under this plan when U.S.
Cellular's customer base reaches certain levels. No shares had been issued under
this plan as of December 31, 1996.
COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS. U.S. Cellular has reserved
10,000 shares for issuance under the Compensation Plan for Non-Employee
Directors. Effective November 1, 1996, members of U.S. Cellular's Board of
Directors who are not employed by U.S. Cellular or another TDS affiliate may
elect to receive a number of U.S. Cellular Common Shares equal to the current
fair market value of up to 50% of their directors' fee and up to 33% of each
committee meeting fee. No shares had been issued under this plan as of December
31, 1996.
SERIES A COMMON SHARES
U.S. Cellular Series A Common Shares are convertible on a share-for-share
basis into U.S. Cellular Common Shares and each share is entitled to ten votes
per share, compared to one vote for each Common Share. As of December 31, 1996,
all of U.S. Cellular's outstanding Series A Common Shares were held by TDS.
8. REDEEMABLE PREFERRED STOCK
Redeemable Preferred Stock of U.S. Cellular, authorized 5,000,000 shares,
has a stated liquidation value of $100 per share and is not entitled to any
dividends. The Redeemable Preferred Stock is issuable in series by the Board of
Directors of U.S. Cellular, who establish the terms of the issue. At December
31, 1995, all shares of Redeemable Preferred Stock were held by TDS as
reimbursement for TDS Preferred Shares issued in connection with acquisitions.
The fair value of Redeemable Preferred Stock at December 31, 1995 was estimated
to be approximately $17.6 million using the net present value of the U.S.
Cellular Common Shares to be issued upon conversion, valued at quoted market
price. At December 31, 1996 all of the Redeemable Preferred Stock of U.S.
Cellular had been redeemed. At December 31, 1995, 95,972 redeemable preferred
shares were outstanding, valued at $9.6 million.
During 1996, 51,107 Series C and 44,865 Series D Redeemable Preferred Shares
were redeemed for a total of 621,904 U.S. Cellular Common Shares. During 1995,
8,282 Series B and 84,030 Series E Redeemable Preferred Shares of U.S. Cellular
were redeemed for a total of 471,224 U.S. Cellular Common Shares.
9. INCOME TAXES
U.S. Cellular is included in a consolidated federal income tax return with
other members of the TDS consolidated group.
TDS and U.S. Cellular entered into a Tax Allocation Agreement (the
"Agreement") effective July 1, 1987. The Agreement provides that U.S. Cellular
and its subsidiaries be included in a consolidated federal income tax return and
in state income or franchise tax returns in certain situations with the TDS
affiliated group. U.S. Cellular and its subsidiaries calculate their losses and
credits as if they comprised a separate affiliated group. Under the Agreement,
U.S. Cellular is able to carry forward its losses and credits and use them to
offset any future income tax liabilities to TDS.
II-39
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Income tax provisions charged to net income are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes
Current.............................................................. $ 35,613 $ 14,882 $ 1,054
Deferred............................................................. 54,509 8,468 26
State income taxes
Current.............................................................. 12,890 8,306 2,252
Deferred............................................................. 8,628 836 1,585
----------- --------- ---------
Total income tax expense............................................... $ 111,640 $ 32,492 $ 4,917
----------- --------- ---------
----------- --------- ---------
</TABLE>
The statutory federal income tax rate is reconciled to U.S. Cellular's
effective income tax rate below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate...................................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit............................. 6.9 4.6 11.1
Amortization of license costs.......................................... 1.1 2.2 11.9
Effects of corporations not included in consolidated federal income tax
return................................................................ .8 1.1 3.7
Effects of valuation allowance on deferred tax asset................... (2.4) (18.3) (38.6)
Gains on sales......................................................... 4.8 -- --
----------- --------- ---------
Effective income tax rate.............................................. 46.2% 24.6% 23.1%
----------- --------- ---------
----------- --------- ---------
</TABLE>
The increase in the 1996 effective rate reflects additional income tax
expense due to tax gains in excess of book gains associated with the sale of
certain cellular interests.
Deferred income taxes are provided for the temporary differences between the
amount of U.S. Cellular's assets and liabilities for financial reporting
purposes and their tax basis.
U.S. Cellular had current deferred tax assets totaling $2.4 million at
December 31, 1996, and $1.0 million at December 31, 1995, resulting primarily
from the allowance for customer receivables.
II-40
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The temporary differences that gave rise to the noncurrent deferred tax
assets and liabilities as of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred Tax Asset
Net operating loss carryforward................................................ $ 14,121 $ 37,718
Stock appreciation rights...................................................... 299 67
Alternative minimum tax credit carryforward.................................... 24,545 12,464
Other.......................................................................... -- 188
----------- ---------
38,965 50,437
Less valuation allowance......................................................... 13,150 20,110
----------- ---------
Total Deferred Tax Asset......................................................... 25,815 30,327
----------- ---------
Deferred Tax Liability
Property, plant and equipment.................................................. 23,402 17,654
Equity investments............................................................. 41,482 998
Partnership investments........................................................ 15,005 11,010
Licenses....................................................................... 24,759 14,996
----------- ---------
Total Deferred Tax Liability..................................................... 104,648 44,658
----------- ---------
Net Deferred Tax Liability....................................................... $ 78,833 $ 14,331
----------- ---------
----------- ---------
</TABLE>
The amount of federal net operating loss carryforward available to offset
future taxable income aggregated approximately $5.6 million at December 31, 1996
and expires between 2003 and 2011. The amount of state net operating loss
carryforward available to offset future taxable income aggregated approximately
$203 million at December 31, 1996 and expires between 1997 and 2011. At December
31, 1996, U.S. Cellular had $24.5 million of federal alternative minimum tax
credit carryforward available to offset regular income tax payable in future
years.
A valuation allowance has been provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. During 1996, the
valuation allowance decreased $7.0 million primarily due to U.S. Cellular's 1996
net taxable income.
10. RELATED PARTIES
U.S. Cellular is billed for all services it receives from TDS, consisting
primarily of information processing and general management services. Such
billings are based on expenses specifically identified to U.S. Cellular and on
allocations of common expenses. Such allocations are based on the relationship
of U.S. Cellular's assets, employees, investment in plant and expenses to the
total assets, employees, investment in plant and expenses of TDS. Management
believes the method used to allocate common expenses is reasonable. Billings to
U.S. Cellular from TDS amounted to $28.1 million in 1996, $26.1 million in 1995
and $22.1 million in 1994. Management believes that all expenses and costs
applicable to U.S. Cellular are reflected in the accompanying financial
statements on a basis which is representative of what they would have been if
U.S. Cellular operated on a stand-alone basis.
All markets managed by U.S. Cellular are billed for services they receive
from U.S. Cellular. Such billings are based on expenses specifically identified
to each market and on allocations of common expenses. Such allocations are
primarily based on the relationships of each market's assets and revenues to the
total assets and revenues of all the markets managed by U.S. Cellular.
Management believes that all expenses and costs applicable to each market are
representative of what they would have been if each managed market operated on a
stand-alone basis.
Interest income primarily includes interest on loans to managed
unconsolidated markets used to fund these markets' ongoing construction and
operating expenses. Interest income from these markets amounted to $1.9 million
in 1996 and 1994, and $1.8 million in 1995.
II-41
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTIES (CONTINUED)
U.S. Cellular has a Cash Management Agreement with TDS under which U.S.
Cellular may from time to time deposit its excess cash with TDS for investment
under TDS's cash management program. Deposits made under the agreement are
available to U.S. Cellular on demand and bear interest each month at the 30-day
Commercial Paper Rate as reported in The Wall Street Journal, plus 1/4%, or such
higher rate as TDS may at its discretion offer on such deposits. Interest income
was $4.8 million and $701,000 in 1996 and 1995, respectively.
See Note 2--Acquisitions and Divestitures, Transfer of Minority Interests to
U.S. Cellular from TDS for a discussion of a transfer of investment interests
between U.S. Cellular and TDS.
11. GAIN ON SALE OF CELLULAR AND OTHER INVESTMENTS
The gains in 1996 primarily reflect gains recorded on the sales of U.S.
Cellular's majority interests in eight markets and a minority interest in two
markets, on cash received in an exchange of markets with another cellular
operator and on cash received from the settlement of two separate legal matters.
The gains recorded in 1995 reflect the sales and exchanges of minority- and
majority-owned cellular interests and the sale of certain marketable equity
securities as follows: (a) U.S. Cellular sold a majority interest in six markets
for $115.3 million in cash. A pretax gain of $64.6 million was recognized on the
sales; (b) U.S. Cellular sold its minority interests in six markets for $14.0
million in cash and notes receivable. A pretax gain of $11.1 million was
recognized on the sales; (c) U.S. Cellular received cash proceeds totaling $5.5
million in an exchange of cellular markets, recognizing a pretax gain of $5.3
million; and (d) U.S. Cellular sold all of its marketable equity securities for
$20.7 million in cash. A pretax gain of $2.5 million was recognized on the sale,
representing the excess of the fair market value over the cost basis of the
securities.
The gains recorded in 1994 reflect the exchange of U.S. Cellular's
cost-basis investment interests in five markets in exchange for additional
interests in seven markets controlled by U.S. Cellular. The exchange of the
investment interests in the five markets has been recorded at their fair market
value of approximately $4.3 million. A gain of $3.3 million, representing the
excess of the fair market value of the market interests exchanged over the book
value of such interests, was included in income for 1994.
12. LEASE COMMITMENTS
U.S. Cellular and certain of its majority-owned partnerships and
subsidiaries lease certain office and cell site locations under operating
leases. Future minimum rental payments required under operating leases that have
noncancelable lease terms in excess of one year as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
MINIMUM
FUTURE RENTALS
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
1997................................................................ $ 9,917
1998................................................................ 7,922
1999................................................................ 6,280
2000................................................................ 4,857
2001................................................................ 3,836
Thereafter.......................................................... 23,223
--------
$ 56,035
--------
--------
</TABLE>
Rent expense totaled $12.4 million in 1996, $9.8 million in 1995 and $6.4
million in 1994.
II-42
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
The partnerships and corporations in which U.S. Cellular is a partner or
shareholder are in various stages of development. U.S. Cellular expects to spend
approximately $300 million during 1997 primarily for new cell sites to expand
and enhance U.S. Cellular's coverage in its service areas and for the
enhancement of U.S. Cellular's office systems. Under the terms of certain
partnership and shareholder agreements, U.S. Cellular may be committed to
funding other partners' or shareholders' portions of construction and other
costs, if sufficient financing is not available to the individual entities. U.S.
Cellular does not expect such individual financing shortfalls to be material.
From time to time U.S. Cellular may acquire attractive markets to maximize
its clustering strategy. See Note 2 - Acquisitions and Divestitures for a
discussion of pending acquisitions and divestitures.
14. INVESTMENTS IN CELLULAR ENTITIES
Investments in cellular entities consist of amounts invested in cellular
entities in which U.S. Cellular holds a minority interest. These investments are
accounted for using either the equity or cost method, as shown in the following
table:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1996 1995
-------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Equity method investments:
Capital contributions, loans and advances.......................................... $ 93,209 $ 65,402
Cumulative share of income......................................................... 172,974 121,456
Cumulative share of distributions.................................................. (88,862) (63,017)
-------------------- --------------------
177,321 123,841
Cost method investments:
Capital contributions, net of partnership distributions............................ 9,470 10,580
-------------------- --------------------
Total investment in nonconsolidated entities......................................... $ 186,791 $ 134,421
-------------------- --------------------
-------------------- --------------------
</TABLE>
As of December 31, 1996, U.S. Cellular followed the equity method of
accounting for minority interests in markets managed by U.S. Cellular and for
certain markets managed by others. This method recognizes, on a current basis,
U.S. Cellular's proportionate share of the incomes and losses accruing to it
under the terms of the respective partnership and shareholder agreements.
As of December 31, 1996, U.S. Cellular follows the cost method of accounting
for its investments in certain markets managed by others. It is not practicable
to estimate the fair value of U.S. Cellular's investments accounted for using
the cost method due to the lack of quoted market prices and the inability to
estimate fair values without incurring excessive costs. The $9.5 million and
$10.6 million carrying amounts at December 31, 1996, and 1995, respectively,
represent primarily the original amounts invested, which management believes are
not impaired.
II-43
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. INVESTMENTS IN CELLULAR ENTITIES (CONTINUED)
The following summarizes the unaudited balance sheets and results of
operations of the cellular system partnerships in which U.S. Cellular's
investments are accounted for by the equity method:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995
-------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets
Current............................................................................... $ 249,077 $ 206,548
Due from affiliates................................................................... 6,165 24,459
Property and other.................................................................... 1,000,537 835,320
-------------- --------------------
$ 1,255,779 $ 1,066,327
-------------- --------------------
-------------- --------------------
Liabilities and Partners' capital
Current liabilities................................................................... $ 226,606 $ 204,512
Due to affiliates..................................................................... 20,614 29,687
Deferred credits...................................................................... 791 727
Long-term debt........................................................................ 16,144 15,072
Partners' capital..................................................................... 991,624 816,329
-------------- --------------------
$ 1,255,779 $ 1,066,327
-------------- --------------------
-------------- --------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
-------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Results of Operations
Revenues........................................................................ $ 1,269,835 $ 1,078,413 $ 846,377
Costs and expenses.............................................................. 859,026 730,873 613,235
Other income.................................................................... 832 1,418 1,654
-------------- -------------- ------------
Net income...................................................................... $ 411,641 $ 348,958 $ 234,796
-------------- -------------- ------------
-------------- -------------- ------------
</TABLE>
U.S. Cellular owns a 5.5% interest in the Los Angeles SMSA Limited
Partnership (the "Partnership"). In November 1993, a class action complaint was
filed on behalf of cellular customers in Orange County Superior Court naming,
among others, the Partnership. These complaints alleged certain facts, including
a similarity in the pricing structures of the two defendant cellular carriers,
which plaintiffs contended evidenced circumstantial evidence that the
Partnership and Los Angeles Cellular Telephone Company conspired to fix the
prices of retail and wholesale cellular radio services in the Los Angeles
market. The complaint seeks damages for the class "in a sum in excess of $100
million." The case was settled in July 1997 before reaching trial. The
Partnership agreed to give subscribers $90 million worth of free service and
discounted merchandise to settle the complaint.
15. LEGAL PROCEEDINGS
U.S. Cellular is involved in a number of legal proceedings before the FCC
and various state and federal courts. Management does not believe that any of
such proceedings should have a material adverse impact on the financial position
or results of operations of U.S. Cellular.
16. SUBSEQUENT EVENTS
SALE OF NOTES. U.S. Cellular filed a shelf Registration Statement on Form
S-3 in July 1997 for the sale of up to $400 million of unsecured debt. U.S.
Cellular issued $250 million of 7.25% Notes due August 15, 2007 (the "Notes")
under the shelf registration in August 1997. U.S. Cellular used a portion of the
net proceeds from the sale of the Notes of approximately $247.0 million to repay
$70.4 million of variable-rate borrowings under the Revolving Credit Agreement
with U.S. Cellular's parent organization, TDS as well as $90.1 million principal
amount of variable-rate borrowings under a vendor financing agreement. The
remaining net proceeds were used for general corporate purposes.
II-44
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS (CONTINUED)
LINE OF CREDIT. In August of 1997 U.S. Cellular established a $500 million
revolving credit facility with a group of banks. This seven-year facility
replaces U.S. Cellular's Revolving Credit Agreement with TDS.
EXCHANGE OF MARKETS WITH ANOTHER CELLULAR OPERATOR. In October 1997, U.S.
Cellular completed the exchange with BellSouth it had announced earlier in 1997.
Pursuant to the exchange, U.S. Cellular received majority interests in 12
markets adjacent to its Iowa and Wisconsin/Illinois clusters. In exchange, U.S.
Cellular divested its majority interests in 10 markets and minority interests in
nine markets and paid a net amount of $87 million in cash ($103 million paid in
October less $16 million received in September). Certain aspects of this
transaction are taxable; the amount of these taxes will be determined by
year-end and will be paid in the first quarter of 1998. No book gain or loss
will be recorded on the transaction. U.S. Cellular received majority interests
representing approximately 4.0 million pops in the transaction, and divested
majority interests representing 2.0 million pops and minority interests
representing approximately 1.1 million pops.
SALE OF MINORITY INTERESTS. In December, 1997 U.S. Cellular announced that
AirTouch Communications, Inc. [NYSE:ATI] will acquire interests owned by U.S.
Cellular and its parent organization, TDS, in cellular systems serving Seattle
and Olympia, Washington; Tucson, Arizona; Duluth, Minnesota; and rural areas in
Arizona, Colorado and Idaho. ATI will issue approximately 5,000,000 shares of
its common stock and approximately $50 million in cash to U.S. Cellular and TDS
in exchange for these interests, which represent approximately 900,000 pops (the
population of a market multiplied by a company's ownership interest in a
cellular licensee in that market). The interests being sold to ATI by TDS were
subject to an existing purchase agreement between U.S. Cellular and TDS. TDS
will retain the ATI common stock it receives from this sale, approximately
1,000,000 shares, and pay U.S. Cellular approximately $20 million to terminate
those purchase rights. In exchange for the interests it will sell to ATI, U.S.
Cellular will receive the remaining 4,000,000 shares of ATI common stock and
approximately $50 million in cash.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1996
Revenues $ 147,966 $ 174,720 $ 187,594 $ 197,540
Operating Income Before Minority Share.......................... 11,822 30,021 33,094 12,429
Gain on Sale of Cellular or Other Investments................... 38,691 86,305 7,797 (75)
Net Income...................................................... 29,387 63,055 26,140 11,347
Net Income--Operations........................................ 8,547 19,694 23,899 10,364
Net Income--Gains............................................. $ 20,840 $ 43,361 $ 2,241 $ 983
1995
Revenues........................................................ $ 99,748 $ 117,124 $ 138,567 $ 136,956
Operating Income Before Minority Share.......................... 8,064 10,852 17,967 5,872
Gain on Sale of Cellular or Other Investments................... 18,517 16,842 42,301 5,834
Net Income...................................................... 23,598 24,089 32,263 19,792
Net Income--Operations........................................ 6,386 8,853 15,531 13,147
Net Income--Gains............................................. $ 17,212 $ 15,236 $ 16,732 $ 6,645
</TABLE>
Net Income for 1996 and 1995 included significant gains from the sales of
cellular and other investments. The table above summarizes the effect of the
gains on Net Income.
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.
II-45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Telephone and Data Systems, Inc.:
We have audited, the accompanying balance sheets of the United States
Cellular Group (representing a business unit of Telephone and Data Systems,
Inc.) as of December 31, 1996 and 1995, and the related statements of operations
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the management of
Telephone and Data Systems, Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the United States Cellular
Group as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
December 15, 1997
II-46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The United States Cellular Group ("Cellular Group") consists solely of
United States Cellular Corporation, an 81%-owned subsidiary of Telephone and
Data Systems, Inc. ("TDS") which operates and invests in cellular telephone
companies and properties. The Cellular Group may in the future also include such
other assets and liabilities of TDS as the Board of Directors of TDS may
determine to attribute to the Cellular Group and such other businesses, assets
and liabilities as TDS or any of its subsidiaries may in the future acquire for
the Cellular Group, as determined by the Board of Directors of TDS.
RESULTS OF OPERATIONS
NINE MONTHS ENDED 9/30/97 COMPARED TO NINE MONTHS ENDED 9/30/96
United States Cellular Corporation ("U.S. Cellular") owns, operates and
invests in cellular markets throughout the United States. U.S. Cellular owned
either majority or minority cellular interests in 202 markets at September 30,
1997, representing 25,083,000 population equivalents ("pops"). U.S. Cellular
included the operations of 132 majority-owned and managed cellular markets,
representing 20.5 million pops, in consolidated operations ("consolidated
markets") as of September 30, 1997. Noncontrolling interests in 60 markets,
representing 4.6 million pops, were accounted for using the equity method and
were included in investment income at that date. All other interests,
representing less than 100,000 pops in the aggregate, were accounted for using
the cost method. Following is a table of summarized operating data for U.S.
Cellular's consolidated operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED OR AT
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Total market population (in thousands)(1).......................................................... 21,844 21,483
Customers.......................................................................................... 1,357,000 940,000
Market penetration................................................................................. 6.21% 4.38%
Markets in operation............................................................................... 132 130
Cell sites in service.............................................................................. 1,556 1,270
Average monthly revenue per customer $ 56.58 $ 64.96(2)
Churn rate per month............................................................................... 1.9% 1.9%
Marketing cost per net customer addition........................................................... $ 561 $ 531(2)
</TABLE>
- ---------
(1) Calculated using the respective Donnelley Marketing Service estimates for
each year.
(2) Recomputed to show the effect of change in current year presentation of
certain revenues and expenses.
U.S. Cellular's operating income for the first nine months of 1997, which
includes 100% of the revenues and expenses of its consolidated markets plus its
corporate office operations, primarily reflects improvement in U.S. Cellular's
overall operations compared to the first nine months of 1996. This improvement
resulted from growth in its customer base and revenues coupled with increasing
economies of scale. Operating revenues, driven by increases in customers served,
rose $140.8 million, or 29%. Operating expenses rose $105.2 million, or 25%.
Operating cash flow (operating income before minority share plus depreciation
and amortization expense) increased $51.0 million, or 33%.
Beginning on January 1, 1997, U.S. Cellular changed its income statement
presentation of certain credits given to customers on their monthly bills.
Customer incentive programs which result in either new or current customers
receiving free or reduced-price airtime or access are now reported as a
reduction of local retail revenue. Prior to January 1, 1997, U.S. Cellular
reported the foregone revenues resulting from these incentive programs as
marketing and selling expense (for new customers) and general and administrative
expense (for current customers). Amounts in the currently affected revenue and
expense categories have been reclassified for previous years, including the 1996
information provided throughout this Form 10-Q. Operating income and net income
are not affected by this change.
II-47
<PAGE>
Investment and other income decreased $102.4 million, or 59%, to $72.6
million, due primarily to the decrease of $119.3 million in gains on the sales
of cellular interests. Interest expense increased $2.8 million, or 16%, in 1997.
Income tax expense decreased $39.0 million to $66.1 million, as improved
operating results were more than offset by decreased gains on the sales of
cellular interests.
Net income totaled $86.4 million in 1997, a decrease of $32.2 million, or
27%, from 1996. In both years, net income included gains on sales of cellular
interests. A summary of the after-tax effects of these gains on net income is
shown below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net income before after-tax effects of gains......................................................... $ 79,263 $ 52,140
Add: After-tax effects of gains...................................................................... 7,119 66,442
Net income as reported............................................................................... $ 86,382 $ 118,582
</TABLE>
OPERATING REVENUES
OPERATING REVENUES totaled $634.1 million in 1997, up $140.8 million, or
29%, over 1996. As explained previously, operating revenues for 1996 have been
reclassified to conform to current period presentation of customer incentive
program credits.
SERVICE REVENUES primarily consist of: (I) charges for access, airtime and
value-added services provided to U.S. Cellular's local retail customers who use
the local systems operated by U.S. Cellular ("local retail"); (ii) charges to
customers of other systems who use U.S. Cellular's cellular systems when roaming
("inbound roaming"); and (iii) charges for long-distance calls made on U.S.
Cellular's systems. Service revenues totaled $618.2 million in 1997, up $137.7
million, or 29%, over 1996. The increase was primarily due to the growing number
of local retail customers and the growth in inbound roaming revenue. The
reclassification of customer credits reduced service revenues by $38.2 million,
or 6%, in 1997 and $16.9 million, or 3%, in 1996.
Average monthly service revenue per customer declined 13% to $56.58 in 1997
from $64.96 in 1996. The 13% decrease in average monthly service revenue per
customer resulted from a decrease in average revenue per minute of use from both
local retail customers and inbound roamers. Also contributing was slower growth
in inbound roaming minutes of use than in U.S. Cellular's customer base. The
reclassification of customer credits reduced average monthly service revenue per
customer by $3.50, or 6%, in 1997 and $2.29, or 3%, in 1996.
Although average monthly local minutes of use per retail customer decreased
less than 1% to 105 in 1997 from 106 in 1996, U.S. Cellular's increasing use of
incentive programs that encourage weekend and off-peak usage, in order to
stimulate overall usage, resulted in a larger decrease in average local retail
revenue per minute of use during the year. Also contributing to the decline in
average local retail revenue per minute of use are increased amounts of credits
given to new and current customers as incentives to become or remain U.S.
Cellular's customers.
U.S. Cellular believes that its customer base is growing faster than that of
the industry as a whole, which has a dilutive effect on inbound roaming revenue
per customer. Inbound roaming minutes of use have been growing at a slower rate
than U.S. Cellular's customer base (28% compared to 44%). Also, U.S. Cellular's
average inbound roaming revenue per minute of use decreased during 1997, in line
with the ongoing trend toward reduced per minute prices for roaming negotiated
between U.S. Cellular and other cellular operators.
LOCAL RETAIL REVENUE increased $107.6 million, or 36%, in 1997. Growth in
U.S. Cellular's customer base was the primary reason for the increase in local
revenue. The number of customers increased 44% to 1,357,000 at September 30,
1997 from 940,000 at September 30, 1996. U.S. Cellular added 284,000 net new
customers in the first nine months of 1997 compared to 232,000 in 1996. While
the percentage increase in customer additions is expected to be lower in the
future, management anticipates that U.S. Cellular will continue to increase its
customer base over the next few years. The reclassification of customer credits
reduced local retail revenue by $38.2 million, or 9%, in 1997 and $16.9 million,
or 5%, in 1996.
Average monthly local retail revenue per customer declined to $37.30 in 1997
from $40.54 in 1996. Monthly local retail minutes of use per customer decreased
less than 1% to 105 in 1997. While average minutes of use per customer remained
relatively the same, average revenue per minute of use decreased as a result of
the incentive programs stated previously. Average local retail revenue per
minute totaled $.36 in 1997 compared to $.38 in 1996.
II-48
<PAGE>
The decrease in average monthly local retail revenue per customer is part of an
industry-wide trend. It reflects U.S. Cellular's and the industry's continued
penetration of the consumer market, which tends to include fewer peak business
hour-usage customers and the effects of increased competition in the industry.
The reclassification of customer credits reduced average monthly local retail
revenue per customer by $3.50, or 9%, in 1997 and $2.29, or 5%, in 1996.
INBOUND ROAMING REVENUE increased $23.9 million, or 17%, in 1997. This
increase was attributable to the 28% increase in the number of minutes used by
customers from other wireless systems when roaming in U.S. Cellular's service
areas. Also contributing were the increased number of cell sites within U.S.
Cellular's service areas. These effects were offset somewhat by the decrease in
average revenue per minute due to the downward trend in negotiated rates.
Average inbound roaming revenue per minute totaled $.86 in 1997 and $.93 in
1996. Monthly inbound roaming revenue per Company customer averaged $14.97 in
1997 and $18.88 in 1996. This decrease is related to both the decrease in
roaming revenue per minute and the faster increase in U.S. Cellular's customer
base as compared to the growth in inbound roaming minutes of use.
LONG-DISTANCE REVENUE increased $6.5 million, or 17%, in 1997 as the volume
of long-distance calls billed by U.S. Cellular increased. Monthly long-distance
revenue per customer averaged $4.19 in 1997 and $5.31 in 1996. The decrease in
monthly long-distance revenue per customer is primarily due to the dilution of
the portion of long-distance revenue that comes from inbound roaming customers.
In a manner similar to inbound roaming revenue, this revenue is not growing as
fast as U.S. Cellular's customer base.
EQUIPMENT SALES REVENUES increased $3.1 million, or 24%, in 1997. Equipment
sales reflect the sale of 393,000 and 288,000 cellular telephone units in 1997
and 1996, respectively, plus installation and accessories revenue. The average
revenue per unit was $40 in 1997 compared to $44 in 1996. The average revenue
per unit decline partially reflects U.S. Cellular's decision to reduce sales
prices on cellular telephones to stimulate growth in the number of customers, to
maintain its market position and to meet competitive prices as well as to pass
through reduced manufacturers' prices to customers. Also, U.S. Cellular uses
promotions which are based on increased equipment discounting. The success of
these promotions has led to both an increase in units sold and a decrease in
average equipment sales revenue per unit.
OPERATING EXPENSES
OPERATING EXPENSES totaled $523.6 million in 1997, up $105.2 million, or
25%, over 1996. As explained previously, operating expenses for 1996 have been
reclassified to conform to current period presentation of customer incentive
program credits. The reclassification of customer credits reduced operating
expenses by $38.2 million, or 7%, in 1997 and $16.9 million, or 4%, in 1996.
SYSTEM OPERATIONS EXPENSES increased $29.8 million, or 37%, in 1997 as a
result of increases in customer usage expenses and costs associated with serving
U.S. Cellular's increased number of customers, which include the costs of
roaming fraud, and the growing number of cell sites within U.S. Cellular's
systems. In total, system operations costs are expected to continue to increase
as the number of customers using and the number of cell sites within U.S.
Cellular's systems grows.
Customer usage expenses represent charges from other telecommunications
service providers for U.S. Cellular's customers' use of their facilities as well
as for U.S. Cellular's inbound roaming traffic on these facilities. Also
included are costs related to local interconnection to the landline network,
toll charges and expenses incurred by U.S. Cellular when its customers use
systems other than their local systems ("outbound roaming"). These expenses are
offset somewhat by amounts U.S. Cellular bills to its customers for outbound
roaming. Customer usage expenses increased $22.1 million, or 46%, in 1997. The
increase in 1997 is primarily due to the increase in net outbound roaming
expense, which has resulted from U.S. Cellular offering its customers
increasingly larger service footprints in which their calls are billed at local
rates. In certain cases these service areas include other operators' service
areas. U.S. Cellular pays roaming rates to the other carriers for calls its
customers make in these areas, while charging those customers a local rate which
is usually lower than the roaming rate. Also contributing to the increase in
1997 were costs related to the increase in minutes used on U.S. Cellular's
systems, partially offset by the reduction in costs related to fraudulent use of
U.S. Cellular's customers' cellular telephone numbers. U.S. Cellular continues
to implement procedures in its markets to combat this fraud, which is primarily
related to roaming usage. Customer usage expenses represented 11% of service
revenues in 1997 and 10% in 1996. The percentage increase in 1997 is primarily
due to the increase in net outbound roaming expense.
Maintenance, utility and cell site expenses increased $7.7 million, or 24%,
in 1997, primarily reflecting a 23% increase in the number of cell sites in U.S.
Cellular's systems to 1,556 in 1997 from 1,270 in 1996.
II-49
<PAGE>
MARKETING AND SELLING EXPENSES increased $33.3 million, or 38%, in 1997.
Marketing and selling expenses primarily consist of salaries, commissions and
expenses of field sales and retail personnel and offices; agent expenses; local
advertising and public relations expenses. The increase was primarily due to a
32% rise in the number of gross customer activations (excluding acquisitions and
divestitures), to 494,000 in 1997 from 373,000 in 1996. Cost per gross customer
activation, including losses on equipment sales, decreased to $322 in 1997 from
$331 in 1996. The reclassification of customer credits reduced cost per gross
addition by $62, or 16%, in 1997 and $37, or 10%, in 1996; in total, the
reclassification reduced marketing and selling expenses by $30.3 million, or
20%, in 1997 and $13.9 million, or 14%, in 1996.
COST OF EQUIPMENT SOLD increased $5.8 million, or 12%, in 1997. The increase
reflects the growth in unit sales related to the rise in gross customer
activations made through U.S. Cellular's direct and retail distribution
channels, offset somewhat by falling manufacturer prices per unit. The average
cost to U.S. Cellular of a telephone unit sold, including accessories and
installation, was $141 in 1997 compared to $172 in 1996.
GENERAL AND ADMINISTRATIVE EXPENSES increased $20.9 million, or 17%, in
1997. These expenses include the costs of operating U.S. Cellular's local
business offices and its corporate expenses. The increase includes the effects
of increases in expenses required to serve the growing customer base in existing
markets and an expansion of both local administrative office and corporate
staff, necessitated by growth in U.S. Cellular's business. U.S. Cellular is
using an ongoing clustering strategy to combine local operations wherever
feasible in order to gain operational efficiencies and reduce its administrative
expenses. The reclassification of customer credits reduced general and
administrative expenses by $7.9 million, or 5%, in 1997 and $3.1 million, or 2%,
in 1996.
Operating cash flow increased $51.0 million, or 33%, to $205.2 million in
1997. The improvement was primarily due to substantial growth in customers and
service revenues and the effects of improved operational efficiencies on cash
operating expenses. Operating cash flow margins were 33.2% in 1997 and 32.1% in
1996.
DEPRECIATION EXPENSE increased $15.0 million, or 28%, in 1997. The increase
reflects rising average fixed asset balances, which increased 29% in 1997.
Increased fixed asset balances primarily result from the increase in cell sites
built to improve coverage and capacity in U.S. Cellular's markets.
OPERATING INCOME BEFORE MINORITY SHARE
OPERATING INCOME BEFORE MINORITY share totaled $110.5 million in 1997, an
increase of $35.6 million, or 47%, over 1996. The operating income margin (as a
percent of service revenues) was 17.9% in 1997 and 15.6% in 1996. The
improvement in operating income and operating income margin reflects increased
revenues resulting from growth in the number of customers served by U.S.
Cellular's systems and the effect of improved operational efficiencies on total
operating expenses.
U.S. Cellular expects service revenues to continue to grow during the
remainder of 1997 and in 1998; however, management anticipates that average
monthly revenue per customer will continue to decrease as local retail and
inbound roaming revenue per minute of use decline. Additionally, U.S. Cellular
expects expenses to increase during the remainder of 1997 and in 1998 as it
incurs costs associated with both customer growth and cell sites added.
Management believes there exists a seasonality 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, which may cause operating
income to vary from quarter to quarter. Additionally, competitors licensed to
provide personal communications services ("PCS") have initiated service in
certain of U.S. Cellular's markets over the past fifteen months. PCS operators
are expected to complete initial deployment of PCS across all of U.S. Cellular's
markets by the end of 1998. U.S. Cellular's management is monitoring these and
other wireless communications providers' strategies to determine what effect
this additional competition will have on U.S. Cellular's future strategies and
results. While the effects of additional wireless competition have slowed
customer growth in certain of U.S. Cellular's markets, the overall effect on
U.S. Cellular's operations to date has not been material.
INVESTMENT AND OTHER INCOME
INVESTMENT AND OTHER INCOME totaled $72.6 million in 1997, a decrease of
$102.4 million, or 59%, from 1996. GAIN ON SALE OF CELLULAR INTERESTS totaled
$13.4 million in 1997, reflecting gains recorded on the sales of U.S. Cellular's
majority interest in one market partition and minority interests in two other
markets. Gain on sale of cellular interests totaled $132.8 million in 1996,
reflecting gains recorded on the sales of U.S. Cellular's majority
II-50
<PAGE>
interests in eight markets and minority interests in two other markets, on cash
received in an exchange of markets with another cellular operator and on cash
received from the settlement of two separate legal matters.
INVESTMENT INCOME was $60.5 million in 1997 compared to $36.4 million in
1996, a 66% increase. Investment income primarily represents U.S. Cellular's
share of net income from the markets managed by others that are accounted for by
the equity method. Although investment income increased significantly in the
nine months of 1997, future investment income is expected to be negatively
impacted as a result of the completion of the exchange transaction with
BellSouth Corporation ("BellSouth"). See "Financial Resources and
Liquidity--Acquisitions and Divestitures" for further discussion of this
transaction.
INTEREST AND INCOME TAXES
Total INTEREST EXPENSE increased $2.8 million, or 16%, in 1997. Interest
expense in 1997 is primarily related to Liquid Yield Option Notes ("LYONs")
($11.4 million); borrowings under vendor financing agreements ($4.5 million);
borrowings under the Revolving Credit Agreement with TDS ($1.9 million); and
U.S. Cellular's 7.25% notes (the "Notes") issued during the third quarter of
1997 ($1.8 million). Interest expense in 1996 is primarily related to LYONs
($10.7 million) and borrowings under vendor financing agreements ($6.1 million).
In August 1997, U.S. Cellular sold $250 million principal amount of 7.25%
Notes under a shelf registration statement, priced to yield 7.33% to maturity.
The Notes are unsecured and become due on August 15, 2007. Interest on the Notes
is payable semi-annually on February 15 and August 15 of each year, commencing
February 15, 1998. The Notes will be redeemable, in whole or in part, at the
option of U.S. Cellular at any time on or after August 15, 2004.
The LYONs are zero coupon convertible debentures which accrete interest at
6% annually, but do not require current cash payments of interest. All accreted
interest is added to the outstanding principal balance on June 15 and December
15 of each year. All borrowings under the vendor financing agreements were
repaid in August 1997 with a portion of the proceeds from the Notes offering.
Borrowings under the Revolving Credit Agreement with TDS were outstanding from
April 1997 through August 1997, at which time all outstanding amounts were
repaid with a portion of the proceeds from the Notes offering.
INCOME TAX EXPENSE was $66.1 million in 1997 and $105.2 million in 1996. In
1997, $6.3 million of income tax expense related to the gains on sales of
cellular interests compared to $66.4 million in 1996. The effective tax rates
were 43% in 1997 and 47% in 1996. The decrease in 1997's effective tax rate is
primarily due to the decrease in gains on sales of cellular interests from 1996;
taxes on these gains are generally higher than taxes on income from operations.
In both 1997 and 1996, state income taxes and gains on sales of cellular
interests increased the effective rate above the statutory federal income tax
rate.
U.S. Cellular is included in a consolidated federal income tax return with
other members of the TDS consolidated group. For financial reporting purposes,
U.S. Cellular computes federal income taxes as if it were filing a separate
return as its own affiliated group and was not included in the TDS group. TDS
and U.S. Cellular are parties to a Tax Allocation Agreement under which U.S.
Cellular is able to carry forward any losses and credits and use them to offset
any current or future income tax liabilities to TDS.
NET INCOME
NET INCOME totaled $86.4 million in 1997 compared to $118.6 million in 1996.
Net income in both years included gains on the sales of cellular interests.
FINANCIAL RESOURCES AND LIQUIDITY
U.S. Cellular operates a capital and marketing-intensive business. In recent
years, U.S. Cellular has generated operating cash flow and received cash
proceeds from divestitures to fund most of its construction costs and
substantially all of its operating expenses. U.S. Cellular anticipates further
substantial increases in cellular units in service, revenues and cell sites as
it continues its growth strategy. Operating cash flow may fluctuate from quarter
to quarter depending on the seasonality of each of these growth factors.
Cash flows from operating activities provided $183.6 million in 1997 and
$126.3 million in 1996. Operating cash flow provided $205.2 million in 1997 and
$154.2 million in 1996. Cash flows from other operating activities (investment
and other income, interest expense, changes in working capital and changes in
other assets and liabilities) required cash investments totaling $21.6 million
in 1997 and $27.9 million in 1996.
II-51
<PAGE>
Cash flows from financing activities provided $140.8 million in 1997 and
required $6.3 million in 1996. In August 1997, the Notes offering provided
$247.0 million of cash. A portion of the proceeds from the Notes offering was
used to repay all outstanding borrowings under the Revolving Credit Agreement
with TDS and under vendor financing agreements, aggregating $160.5 million.
Repayments of borrowings under the vendor financing agreements earlier in 1997
totaled $13.7 million. In 1996, issuances of U.S. Cellular Common Shares,
primarily to TDS, provided $9.8 million while repayments of debt under the
vendor financing agreements required $15.8 million.
Cash flows from investing activities required $218.3 million in 1997 and
$93.1 million in 1996. U.S. Cellular received net cash proceeds totaling $32.9
million in 1997 and $193.6 million in 1996 related to the sales and exchanges of
cellular interests. Cash distributions from cellular entities in which U.S.
Cellular has an interest provided $40.0 million in 1997 and $14.9 million in
1996. Cash required for property, plant and equipment and system development
expenditures totaled $248.0 million in 1997, financed primarily with internally
generated cash and the proceeds of the Notes offering, and $172.9 million in
1996, financed primarily with internally generated funds and proceeds from the
sales of cellular interests. These expenditures primarily represent the
construction of 234 and 184 cell sites, respectively, plus other plant additions
and costs related to the development of U.S. Cellular's office systems.
Acquisitions required $39.2 million in 1997 and $112.1 million in 1996.
Anticipated capital requirements for 1997 primarily reflect U.S. Cellular's
construction and system expansion program. U.S. Cellular's construction and
system expansion budget for 1997 is approximately $300 million, primarily for
new cell sites to expand and enhance U.S. Cellular's coverage in its service
areas and for the enhancement of U.S. Cellular's office systems.
ACQUISITIONS AND DIVESTITURES
U.S. Cellular assesses its cellular holdings on an ongoing basis in order to
maximize the benefits derived from clustering its markets. As U.S. Cellular's
clusters have grown, U.S. Cellular's focus has shifted toward exchanges and
divestitures of managed and investment interests. Over the past few years, U.S.
Cellular has completed exchanges of controlling interests in its less strategic
markets for controlling interests in markets which better complement its
clusters. U.S. Cellular has also completed outright sales of other less
strategic markets. The proceeds from these sales have been used to further U.S.
Cellular's growth.
In the first nine months of 1997, U.S. Cellular purchased a majority
interest in one market and several minority interests, representing 327,000
pops. The total consideration paid in these transactions was $48.7 million in
cash.
In the first nine months of 1996, U.S. Cellular purchased a majority
interest in one market and several minority interests, representing 971,000
pops, and received a majority interest in another market through an exchange
with another cellular operator. The total consideration paid for these
purchases, primarily in the form of U.S. Cellular Common Shares issued to TDS to
reimburse TDS for the value of TDS Common Shares issued to third parties, was
$153.9 million.
In the first nine months of 1997, U.S. Cellular sold a majority interest in
one market partition and minority interests in two other markets, representing
183,000 pops. U.S. Cellular received consideration consisting of cash and
receivables totaling $34.5 million from these sales. The two minority interests
involved interests U.S. Cellular had previously acquired from TDS pursuant to an
agreement between the two companies signed in June 1996. In the aggregate, U.S.
Cellular recorded a substantial book gain on the divestitures of the interests
acquired from TDS.
In the first nine months of 1996, U.S. Cellular sold majority interests in
eight markets and one market partition, plus minority interests in two other
markets, representing 1.1 million pops, and divested a controlling interest in
another market through an exchange with another cellular operator. U.S. Cellular
received consideration, consisting of cash and receivables, totaling $187.8
million both from these sales and from the exchange. U.S. Cellular also settled
two separate legal matters during the first nine months of 1996, receiving $30.3
million from those transactions. In total, sales, exchanges and litigation
settlements provided U.S. Cellular with cash and receivables totaling $218.1
million in the first nine months of 1996.
At September 30, 1997, U.S. Cellular had entered into an agreement to
acquire a majority interest in one market, representing 202,000 pops, for
consideration totaling $32.5 million. This transaction was completed in the
fourth quarter. The consideration paid to the sellers was approximately 759,000
TDS Common Shares; U.S. Cellular reimbursed TDS for the value of these shares by
issuing approximately 996,000 shares to TDS. U.S. Cellular also has an agreement
pending to divest a majority interest in the wireline licensee in one market,
representing 174,000 pops, for $20.0 million in cash. Pursuant to a waiver
received from the Federal Communications Commission, U.S. Cellular owned both
wireline and nonwireline licensees in this market as of the completion of the
transaction with
II-52
<PAGE>
BellSouth, described below, and will continue to do so until the divestiture of
the wireline license is completed. This divestiture is expected to be completed
by year-end.
In October 1997, U.S. Cellular completed the exchange with BellSouth it had
announced earlier in 1997. Pursuant to the exchange, U.S. Cellular received
majority interests in 12 markets adjacent to its Iowa and Wisconsin/Illinois
clusters. In exchange, U.S. Cellular divested its majority interests in 10
markets and minority interests in nine markets and paid a net amount of $87
million in cash ($103 million paid in October less $16 million received in
September). Certain aspects of this transaction are taxable; the amount of these
taxes will be determined by year-end and will be paid in the first quarter of
1998. No book gain or loss will be recorded on the transaction which is being
treated as a like-kind exchange. U.S. Cellular received majority interests
representing approximately 4.0 million pops in the transaction, and divested
majority interests representing 2.0 million pops and minority interests
representing approximately 1.1 million pops.
U.S. Cellular expects that this transaction will have a net positive effect
on its operating cash flow after the transition of operations is complete, which
is expected to occur in the next 12 to 18 months. As it includes the divestiture
of significant investment interests in exchange for majority interests, the
transaction may also significantly reduce investment income in the future.
In December, 1997 U.S. Cellular announced that AirTouch Communications, Inc.
(NYSE:ATI) will acquire interests owned by U.S. Cellular and its parent
organization, TDS, in cellular systems serving Seattle and Olympia, Washington;
Tucson, Arizona; Duluth, Minnesota; and rural areas in Arizona, Colorado and
Idaho. ATI will issue approximately 5,000,000 of its shares of its common stock
and approximately $50 million in cash to U.S. Cellular and TDS in exchange for
these interests, which represent approximately 900,000 pops (the population of a
market multiplied by a company's ownership interest in a cellular licensee in
that market). The interests being sold to ATI by TDS were subject to an existing
purchase agreement between U.S. Cellular and TDS. TDS will retain the ATI common
stock it receives from this sale, approximately 1,000,000 shares, and pay U.S.
Cellular approximately $20 million to terminate those purchase rights. In
exchange for the interests it will sell to ATI, U.S. Cellular will receive the
remaining 4,000,000 shares of ATI common stock and approximately $50 million in
cash.
LIQUIDITY
U.S. Cellular anticipates that the aggregate resources required for the
remainder of 1997 will include approximately $52 million for capital spending
and approximately $103 million was required to complete the transaction with
BellSouth. U.S. Cellular is generating substantial cash from its operations and
anticipates financing its capital spending for the remainder of 1997 primarily
with internally generated cash and its financing facilities. U.S. Cellular had
$121 million of cash and cash equivalents at September 30, 1997 and expects to
receive approximately $20 million from pending divestitures during the remainder
of 1997.
Additionally, in August 1997 U.S. Cellular established a $500 million
revolving credit facility with a group of banks. This seven-year facility
replaces U.S. Cellular's Revolving Credit Agreement with TDS. No borrowings have
been made under the new credit facility to date.
U.S. Cellular filed a shelf registration statement in July 1997 covering
$400 million of debt securities, and in August 1997 sold $250 million of Notes
under such shelf registration statement. The remaining $150 million is available
for future borrowings.
Management believes that U.S. Cellular's operating cash flows and sources of
external financing, including the revolving credit facility and shelf
registration mentioned previously, provide substantial financial flexibility for
U.S. Cellular to meet both its short and long-term needs. U.S. Cellular also
currently has access to public and private capital markets to help meet its
long-term financing needs. U.S. Cellular anticipates issuing debt and equity
securities only when capital requirements (including acquisitions), financial
market conditions and other factors warrant.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION AND OTHER SECTIONS OF THIS PROXY STATEMENT/PROSPECTUS
CONTAIN "FORWARD-LOOKING" STATEMENTS AS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES
AND PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL FACTS, INCLUDING STATEMENTS
ABOUT TDS'S BELIEFS AND EXPECTATIONS, ARE FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS CONTAIN POTENTIAL RISKS AND UNCERTAINTIES; THEREFORE, ACTUAL RESULTS
MAY DIFFER MATERIALLY. TDS
II-53
<PAGE>
UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE,
BUT ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION
IN MARKETS IN WHICH U.S. CELLULAR OPERATES; ADVANCES IN TELECOMMUNICATIONS
TECHNOLOGY; CHANGES IN THE TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING
AND FUTURE LITIGATION; AVAILABILITY OF FUTURE FINANCING; START-UP OF PCS
OPERATIONS; AND UNANTICIPATED CHANGES IN GROWTH IN CELLULAR CUSTOMERS,
PENETRATION RATES, CHURN RATES AND THE MIX OF PRODUCTS AND SERVICES OFFERED IN
U.S. CELLULAR'S MARKETS. READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF
THESE IMPORTANT FACTORS.
II-54
<PAGE>
THE UNITED STATES CELLULAR GROUP
STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING REVENUES
Service....................................................................................... $ 618,209 $ 480,541
Equipment sales............................................................................... 15,913 12,790
------------- -------------
Total Operating Revenues.................................................................... 634,122 493,331
------------- -------------
OPERATING EXPENSES
System operations............................................................................. 109,545 79,728
Marketing and selling......................................................................... 119,728 86,455
Cost of equipment sold........................................................................ 55,473 49,631
General and administrative.................................................................... 144,224 123,364
Depreciation.................................................................................. 68,735 53,691
Amortization of intangibles................................................................... 25,906 25,525
------------- -------------
Total Operating Expenses.................................................................... 523,611 418,394
------------- -------------
OPERATING INCOME BEFORE MINORITY SHARE.......................................................... 110,511 74,937
Minority Share of Operating Income.............................................................. (10,271) (8,616)
------------- -------------
OPERATING INCOME................................................................................ 100,240 66,321
------------- -------------
INVESTMENT AND OTHER INCOME
Investment income............................................................................. 60,537 36,401
Amortization of licenses related to investments............................................... (1,603) (854)
Interest income............................................................................... 3,212 7,644
Other income (expense), net................................................................... (3,032) (1,069)
Gain on sale of cellular and other investments................................................ 13,445 132,793
------------- -------------
Total Investment and Other Income........................................................... 72,559 174,915
------------- -------------
INCOME BEFORE INTEREST AND INCOME TAXES......................................................... 172,799 241,236
------------- -------------
Interest expense--affiliate................................................................... 1,948 --
Interest expense--other....................................................................... 18,347 17,496
------------- -------------
Total Interest Expense...................................................................... 20,295 17,496
------------- -------------
INCOME BEFORE INCOME TAXES...................................................................... 152,504 223,740
Income tax expense.............................................................................. 66,122 105,158
------------- -------------
NET INCOME...................................................................................... $ 86,382 $ 118,582
Net Income to Minority Shareholders of U.S. Cellular............................................ (16,478) (22,914)
------------- -------------
Net Income to TDS............................................................................... $ 69,904 $ 95,668
------------- -------------
------------- -------------
Pro forma: (See Note 4)
Net Income Attributable to TDS Group through Retained Interest.................................. $ 17,476 $ 23,917
Net Income Attributable to United States Cellular Group Common Shares........................... $ 52,428 $ 71,751
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
II-55
<PAGE>
THE UNITED STATES CELLULAR GROUP
STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................................................................... $ 86,382 $ 118,582
Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization............................................................... 94,641 79,216
Investment income........................................................................... (60,537) (36,401)
Gain on sale of cellular and other investments.............................................. (13,445) (132,793)
Minority share of operating income.......................................................... 10,271 8,616
Other noncash expense....................................................................... 18,123 15,371
Change in accounts receivable............................................................... (21,510) (17,080)
Change in accounts payable.................................................................. 16,008 (9,365)
Change in accrued interest.................................................................. 1,971 113
Change in accrued taxes..................................................................... 25,384 47,206
Change in deferred taxes.................................................................... 21,053 42,604
Change in unearned revenue.................................................................. 3,646 3,577
Change in other assets and liabilities...................................................... 1,649 6,668
------------ ------------
183,636 126,314
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in 7.25% notes........................................................................... 246,985 --
Vendor financing borrowings..................................................................... -- 3,922
Repayment of vendor financing................................................................... (103,802) (15,752)
Borrowings from Revolving Credit Agreement--TDS................................................. 70,444 --
Repayment of Revolving Credit Agreement--TDS.................................................... (70,444) --
Common Shares issued............................................................................ 1,971 9,784
Capital (distributions) to minority partners.................................................... (4,310) (4,302)
------------ ------------
140,844 (6,348)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment...................................................... (219,311) (156,387)
System development costs........................................................................ (28,646) (16,528)
Investments in and advances to investment entities.............................................. (497) (16,709)
Distributions from investment entities.......................................................... 40,029 14,922
Proceeds from sale of cellular and other investments............................................ 32,866 193,625
Acquisitions, excluding cash acquired........................................................... (39,169) (112,071)
Other investments............................................................................... (1,896) --
Change in temporary cash and marketable non-equity securities................................... (1,675) --
------------ ------------
(218,299) (93,148)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................................................... 106,181 26,818
CASH AND CASH EQUIVALENTS--
Beginning of period............................................................................. 14,377 38,404
------------ ------------
End of period................................................................................... $ 120,558 $ 65,222
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
II-56
<PAGE>
THE UNITED STATES CELLULAR GROUP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, 1997 DECEMBER 31, 1996
-------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents
General funds.................................................................. $ 15,464 $ 802
Affiliated cash equivalents.................................................... 105,094 13,575
----------- -------------------
120,558 14,377
Temporary cash investments....................................................... 336 --
Accounts receivable
Customers, net of allowance.................................................... 71,305 58,034
Roaming........................................................................ 37,469 29,742
Affiliates..................................................................... 126 607
Other.......................................................................... 8,624 7,568
Inventory........................................................................ 8,648 11,893
Prepaid and other current assets................................................. 9,587 6,398
----------- -------------------
256,653 128,619
----------- -------------------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction................................................ 1,044,988 846,005
Less accumulated depreciation.................................................... 252,709 195,251
----------- -------------------
792,279 650,754
----------- -------------------
INVESTMENTS
Licenses, net of accumulated amortization........................................ 1,052,490 1,044,141
Cellular entities................................................................ 208,772 186,791
Notes and interest receivable.................................................... 13,828 14,943
Marketable non-equity securities................................................. 1,339 --
----------- -------------------
1,276,429 1,245,875
----------- -------------------
DEFERRED CHARGES
System development costs, net of accumulated amortization........................ 67,694 44,319
Other, net of accumulated amortization........................................... 19,150 16,332
----------- -------------------
86,844 60,651
----------- -------------------
Total Assets............................................................... $ 2,412,205 $ 2,085,899
----------- -------------------
----------- -------------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
II-57
<PAGE>
THE UNITED STATES CELLULAR GROUP
BALANCE SHEETS
LIABILITIES AND GROUP EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, 1997 DECEMBER 31, 1996
-------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt................................................ $ -- $ 23,065
Notes payable.................................................................... 1,375 1,375
Accounts payable.................................................................
Affiliates..................................................................... 2,466 2,729
Other.......................................................................... 83,379 66,638
Accrued taxes.................................................................. 44,384 18,781
Accrued interest............................................................... 2,175 204
Customer deposits and deferred revenues........................................ 20,057 16,410
Other current liabilities........................................................ 15,282 17,252
-------------------- -------------------
169,118 146,454
-------------------- -------------------
LONG-TERM DEBT.....................................................................
6% zero coupon convertible debentures............................................ 261,465 250,107
7.25% notes...................................................................... 250,000 --
Vendor financing, excluding current portion...................................... -- 80,589
-------------------- -------------------
511,465 330,696
-------------------- -------------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability................................................ 99,765 78,833
Other............................................................................ 5,534 2,444
-------------------- -------------------
105,299 81,277
-------------------- -------------------
MINORITY INTEREST.................................................................. 55,177 51,270
-------------------- -------------------
UNITED STATES CELLULAR GROUP EQUITY................................................ 1,571,146 1,476,202
-------------------- -------------------
Total Liabilities and Group Equity............................................. $ 2,412,205 $ 2,085,899
-------------------- -------------------
-------------------- -------------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
II-58
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS
The United States Cellular Group ("Cellular Group") consists solely of United
States Cellular Corporation, an 80.9%-owned subsidiary of TDS which operates and
invests in cellular telephone companies and properties. The Cellular Group may
in the future also include such other assets and liabilities of TDS as the Board
of Directors of TDS may determine to attribute to the Cellular Group and such
other businesses, assets and liabilities as TDS or any of its subsidiaries may
in the future acquire for the Cellular Group, as determined by the Board of
Directors of TDS.
1. The interim, unaudited financial statements included herein have been
prepared by U.S. Cellular, 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 U.S.
Cellular believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these unaudited financial
statements be read in conjunction with the audited financial statements and
the notes thereto included elsewhere in this Proxy/Prospectus.
The accompanying unaudited financial statements contain the following: all
adjustments (consisting of only normal recurring items) necessary to present
fairly the financial position as of September 30, 1997 and December 31,
1996; the results of operations and cash flows for the nine months ended
September 30, 1997 and 1996. The results of operations for the nine months
ended September 30, 1997 and 1996, are not necessarily indicative of the
results to be expected for the full year.
2. Basis of Presentation
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal (the "Tracking Stock Proposal") which, if approved by
shareholders and implemented by the Board, would authorize the Board to
issue three new classes of common stock designated as United States Cellular
Group Common Shares (the "Cellular Group Shares"), TDS Telecommunications
Group Common Shares (the "Telecom Group Shares") and Aerial Communications
Group Common Shares (the "Aerial Group Shares"), and change the state of
incorporation of Telephone and Data Systems, Inc. from Iowa to Delaware.
While each of the new classes of common stock would constitute common stock
of Telephone and Data Systems, Inc., each is intended to reflect the
separate performance of Telephone and Data Systems, Inc.'s cellular
telephone, landline telephone and personal communications services
businesses ("Tracking Stocks"). The Cellular Group Shares, when issued, are
intended to reflect the separate performance of the United States Cellular
Group (the "Cellular Group"), which includes Telephone and Data Systems,
Inc.'s interest in United States Cellular Corporation, an 81%-owned
subsidiary of Telephone and Data Systems, Inc. which operates and invests in
cellular telephone companies and properties. The Telecom Group Shares, when
issued, are intended to reflect the separate performance of the TDS
Telecommunications Group (the "Telecom Group"), which primarily includes
Telephone and Data Systems, Inc.'s interest in TDS Telecommunications
Corporation, a wholly-owned subsidiary of Telephone and Data Systems, Inc.
which operates landline telephone companies. The Aerial Group Shares, when
issued, are intended to reflect the separate performance of the Aerial
Communications Group (the "Aerial Group"), which includes Telephone and Data
Systems, Inc.'s interest in Aerial Communications, Inc., an 83%-owned
subsidiary of Telephone and Data Systems, Inc. which is developing broadband
personal communications services.
The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the United States
Cellular Group, the TDS Telecommunications Group, and the Aerial
Communications Group to the extent of the Retained Interests in the
respective groups, and to reflect the performance of the TDS Group. The TDS
Group includes Telephone and Data Systems, Inc. and all of its subsidiaries
and their respective properties and assets other than (except with respect
to the Retained Interests): United States Cellular and its subsidiaries
(which are included in the United States Cellular Group), TDS Telecom and
its subsidiaries (which are included in the TDS Telecommunications Group),
and Aerial and its subsidiaries (which are included in the Aerial
Communications Group) and any other assets or liabilities or subsidiaries of
Telephone and Data Systems, Inc. attributed to the United States Cellular
Group, the TDS Telecommunications Group or the Aerial Communications Group.
The TDS Group reflects primarily the TDS Group's Retained Interest in the
United States Cellular Group, the TDS Telecom Group and the Aerial Group,
II-59
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the Corporate operations (including corporate management, intercompany
financing, cash management and intercompany income tax allocation
activities) and the operations of American Paging, Inc., an 82%-owned
subsidiary.
Following approval by shareholders of the Tracking Stock Proposal, Telephone
and Data Systems, Inc. currently intends to a) offer and sell Telecom Group
Shares in a public offering for cash, subject to prevailing market and other
conditions (the "Telecom Public Offering"), and to allocate the net proceeds
thereof to the Telecom Group, b) issue Cellular Group Shares in exchange for
all of the Common Shares of United States Cellular Corporation which are not
owned by Telephone and Data Systems, Inc., subject to approval by the board
of directors and the shareholders of United States Cellular Corporation (the
"U.S. Cellular Merger"), c) issue Aerial Group Shares in exchange for all of
the Common Shares of Aerial Communications, Inc. which are not owned by
Telephone and Data Systems, Inc., subject to approval by the board of
directors and the shareholders of Aerial Communications, Inc. (the "Aerial
Merger"), and d) distribute one Cellular Group Share, two-thirds of a
Telecom Group Share and two-thirds of an Aerial Group Share in the form of a
stock dividend with respect to each outstanding Series A Common Share and
Common Share of Telephone and Data Systems, Inc. (the "Distribution"). It is
currently expected that the Distribution would take place in June 1998 or
later, after the completion of the Telecom Public Offering, the U.S.
Cellular Merger and the Aerial Merger, although the Board reserves the right
to effect all or any part of the Distribution at any time, or not to make
the Distribution, regardless of whether or not such other transactions have
taken place.
The shares of Tracking Stock which would be issued in the Distribution would
represent an approximately 75% interest of the common equity value of TDS in
each Tracking Group (the "Outstanding Interest"). When considering the
shares of Tracking Stock which would also be issued in the Telecom Public
Offering, the U. S. Cellular Merger and the Aerial Merger, as well as the
Distribution, the Outstanding Interest would initially represent in the
aggregate an approximately 80% interest in each Tracking Group. Upon
completion of all of the Transactions as contemplated, approximately 20% of
the common shareholders' value of each Tracking Group would initially be
retained (the "Retained Interest") in a residual group (the "TDS Group"),
along with all other interests held by Telephone and Data Systems, Inc.
Following the Distribution, subject to the legal restrictions on the payment
of dividends, the Board currently intends to establish an annual dividend on
the Telecom Group Shares in an amount equal to $.48 per share. The Board
also currently intends to establish an annual dividend on the Common Shares
and Series A Common Shares in an amount equal to $.10 per share. (Based on
the expected distribution ratio of two-thirds of a Telecom Group Share for
each existing Common Share and Series A Common Share, the dividend on
Telecom Group shares would equate to a per share dividend of $.32 per
existing Common Share and Series A Common Share. The total of the dividend
on Common Shares and Series A Common Shares of $.10 and the equivalent
dividend on Telecom Group Shares of $.32 equals the existing current annual
dividend on the existing Common Shares and Series A Common Shares of $.42).
With regard to the Cellular Group and the Aerial Group Shares, the Board
currently intends to retain future earnings, if any, for the development of
the businesses of the Cellular Group and Aerial Group, respectively, and
does not anticipate paying dividends on the Cellular Group or the Aerial
Group Shares in the foreseeable future. Future dividends on the shares of
common stock will be payable when, as and if declared by the Board out of
the lessor of (1) all funds of Telephone and Data Systems, Inc. legally
available therefor and (2) the available dividend amount with respect to the
relevant Group.
Funds of the Company legally available for the payment of dividends
("Surplus") (approximately $1,966 million as of September 30, 1997, based on
the financial statements) is an amount approximately equal to the Total
Common and Preferred Equity of the Company less the par or stated value of
all shares of common and preferred stock outstanding (204,725,000 shares as
of September 30, 1997 after the Distribution). With respect to any Tracking
Group, the Available Dividend Amount (approximately $1,178 million for the
Cellular Group, $280 million for the Telecom Group and $213 million for the
Aerial Group as of September 30, 1997, based on the financial statements) is
an amount approximately equal to the Outstanding Interest Fraction of such
Tracking Group (approximately 75% after the Distribution) times the
respective Tracking Group Equity less the par value of the respective
outstanding Tracking Group shares. With respect to the TDS Group, the
Available Dividend Amount (approximately $557 million as of September 30,
1997) is an amount approximately equal to the greater of a) an amount
(approximately $295 million) which is approximately equal to the Surplus of
the
II-60
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company less the sum of all Available Dividend Amounts of all Tracking
Groups or b) an amount (approximately $557 million) which is approximately
equal to the TDS Group Equity and Preferred Stock less the par or stated
value of all Common and Series A Common Shares and Preferred Stock
outstanding.
The financial statements of the Groups comprise all of the accounts included
in the corresponding consolidated financial statements of Telephone and Data
Systems, Inc. The separate Cellular Group, Telecom Group, Aerial Group, and
TDS Group financial statements give effect to the management and accounting
policies that would be applicable upon implementation of the Tracking Stock
Proposal. Subject to the completion of the U.S. Cellular Merger and the
Aerial Merger, Telephone and Data Systems, Inc. intends to terminate certain
intercompany agreements between Telephone and Data Systems, Inc. and U.S.
Cellular and Aerial, respectively. Thereafter, all of the relationships
between Telephone and Data Systems, Inc. and such subsidiaries would be
determined solely by methods that management of Telephone and Data Systems,
Inc. believes to be reasonable. Many of such policies would continue the
arrangements which presently exist between Telephone and Data Systems, Inc.
and U.S. Cellular or Aerial pursuant to the intercompany agreements, but
Telephone and Data Systems, Inc. would have no contractual obligation to
continue such policies after the intercompany agreements have been
terminated. The separate Group financial statements have been prepared on a
basis that management believes to be reasonable and appropriate and include
(1) the historical financial position, results of operations and cash flows
of the businesses that comprise each of the Groups, (2) any assets and
liabilities (including contingent liabilities) which have been attributed to
any Group from any other Group, and (3) with respect to the TDS Group, the
Retained Interest in each of the Tracking Groups. The effects of the
issuance of the Tracking Stocks have not been reflected in these historical
financial statements.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, Telephone and
Data Systems, Inc. will prepare and file with the Securities and Exchange
Commission, consolidated financial statements of Telephone and Data Systems,
Inc., and financial statements of the Cellular Group, the Telecom Group, and
the Aerial Group for so long as the respective Tracking Stock is
outstanding, and the TDS Group for as long as any Tracking Stock is
outstanding. Although the financial statements of the Cellular Group, the
Telecom Group, the Aerial Group, and the TDS Group will separately report
the assets, liabilities (including contingent liabilities) and shareholders'
equity of Telephone and Data Systems, Inc. attributed to the Cellular Group,
the Telecom Group, the Aerial Group, and the TDS Group, such attribution
will not affect the legal title to such assets or responsibility for such
liabilities. Holders of Cellular Group, Telecom Group, and Aerial Group
Common Shares will be, and holders of Telephone and Data Systems, Inc.
Common Shares and Series A Common Shares are, shareholders of Telephone and
Data Systems, Inc. Telephone and Data Systems, Inc. and its subsidiaries
would each continue to be responsible for their respective liabilities.
Financial effects arising from the Cellular Group, Telecom Group, Aerial
Group or TDS Group that affect the consolidated results of operations or
financial condition of Telephone and Data Systems, Inc. could affect the
results of operations or financial condition of the Cellular Group, Telecom
Group, Aerial Group or TDS Group, or could affect the market price of any or
all classes of Common Stock. In addition, any net losses of Telephone and
Data Systems, Inc., or the Cellular Group, the Telecom Group, the Aerial
Group or the TDS Group, and dividends or distributions on, or repurchases
of, any class of Common Stock will reduce the assets of Telephone and Data
Systems, Inc. legally available for payment of dividends on any class of
Common Stock. Accordingly, Telephone and Data Systems, Inc.'s consolidated
financial statements should be read in conjunction with the Cellular Group,
the Telecom Group, the Aerial Group and the TDS Group financial information.
The management and accounting policies applicable to the preparation of the
financial statements of the TDS Group could be modified or rescinded by the
Board, in its sole discretion and without the approval of shareholders,
although there is no present intention to do so. The Board could also adopt
additional policies depending upon the circumstances. Any determination by
the Board to modify or rescind such policies, or to adopt additional
policies, including any such decision that could have disparate effects upon
the holders of
II-61
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
different series of common stock, would be made by the Board in good faith
and in the honest belief that such decision is in the best interests of
Telephone and Data Systems, Inc. In addition, generally accepted accounting
principles require that changes in accounting policy must be preferable (in
accordance with such principles) to the policy previously in place.
Common Shares will be, and holders of Telephone and Data Systems, Inc.
Common Shares and Series A Common Shares are, shareholders of Telephone and
Data Systems, Inc., which continues to be responsible for all of its
liabilities.
Financial effects arising from the Cellular Group, Telecom Group, Aerial
Group or TDS Group that affect the consolidated results of operations or
financial condition of Telephone and Data Systems, Inc. could affect the
results of operations or financial condition of the Cellular Group, Telecom
Group, Aerial Group or TDS Group, or could affect the market price of any or
all classes of Common Stock. In addition, any net losses of Telephone and
Data Systems, Inc., or the Cellular Group, the Telecom Group, the Aerial
Group or the TDS Group, and dividends or distributions on, or repurchases
of, any class of Common Stock will reduce the assets of Telephone and Data
Systems, Inc. legally available for payment of dividends on any class of
Common Stock. Accordingly, Telephone and Data Systems, Inc.'s consolidated
financial statements should be read in conjunction with the Cellular Group,
the Telecom Group, the Aerial Group and the TDS Group financial information.
The management and accounting policies applicable to the preparation of the
financial statements of the TDS Group could be modified or rescinded by the
Board, in its sole discretion and without the approval of shareholders,
although there is no present intention to do so. The Board could also adopt
additional policies depending upon the circumstances. Any determination by
the Board to modify or rescind such policies, or to adopt additional
policies, including any such decision that could have disparate effects upon
the holders of different series of common stock, would be made by the Board
in good faith and in the honest belief that such decision is in the best
interests of Telephone and Data Systems, Inc. In addition, generally
accepted accounting principles require that changes in accounting policy
must be preferable (in accordance with such principles) to the policy
previously in place.
3. Certain amounts reported in prior periods have been reclassified to conform
to the current period presentation which nets certain customer promotional
and retention expenses against service revenues.
4. Pro Forma Net Income and Earnings Per Share
Pro forma net income attributable to the Cellular Group and to the TDS Group
through Retained Interest assumes that the Cellular Merger has not taken
place and therefore 75% of net income is attributable to the Cellular Group
Shares and 25% of net income is attributable to the Retained Interest for
the TDS Group. A portion of the net income is allocated to the minority
public shareholders of U.S. Cellular prior to attributing the net income to
the Cellular Group and the TDS Group through Retained Interest.
Earnings per Share was omitted from the historical statements of earnings
since the Cellular Group Shares were not a part of the equity structure of
TDS and the Articles of Incorporation did not allow for the issuance of the
Cellular Group Shares for the periods presented.
5. Assuming that acquisitions accounted for as purchases during the period
January 1, 1996, to September 30, 1997, had taken place on January 1, 1996,
pro forma results of operations would have been as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Service Revenues................................................................ $ 618,209 $ 481,145
Equipment Sales................................................................. 15,913 12,797
Interest Expense (including cost to finance acquisitions)....................... 21,346 20,132
Net Income...................................................................... 85,632 119,741
</TABLE>
II-62
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Supplemental Cash Flow Information U.S. Cellular acquired certain cellular
licenses and interests during the first nine months of 1997 and 1996. In
conjunction with these acquisitions, the following assets were acquired,
liabilities assumed and U.S. Cellular Common Shares issued.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Property, plant and equipment.................................................... $ -- $ 7,069
Cellular licenses................................................................ 37,258 88,006
Increase in equity-method investment in cellular interests....................... -- 13,971
Accounts receivable.............................................................. -- 1,332
Accounts payable................................................................. -- (1,106)
Other assets and liabilities, excluding cash acquired............................ 1,911 (463)
U.S. Cellular Common Shares issued and issuable.................................. -- 3,262
--------- -----------
Decrease in cash due to acquisitions............................................. $ 39,169 $ 112,071
--------- -----------
--------- -----------
</TABLE>
The following summarizes certain noncash transactions and interest and
income taxes paid.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Interest paid...................................................................... $ 6,431 $ 5,142
Income taxes paid.................................................................. 24,840 21,409
Non-cash interest expense.......................................................... 11,506 11,952
Common Shares issued by U.S. Cellular for conversion of U.S. Cellular Preferred
Stock and TDS Preferred Shares $ -- $ 18,450
</TABLE>
7. Debt Securities
U.S. Cellular filed a shelf Registration Statement on Form S-3 in July 1997
for the sale of up to $400 million of unsecured debt. U.S. Cellular issued
$250 million of 7.25% Notes due August 15, 2007 (the "Notes") under the
shelf registration in August 1997. U.S. Cellular used a portion of the net
proceeds from the sale of the Notes of approximately $247.0 million to repay
$70.4 million of variable-rate borrowings under the Revolving Credit
Agreement with TDS as well as $90.1 million principal amount of
variable-rate borrowings under a vendor financing agreement. The remaining
net proceeds were used for general corporate purposes.
8. Contingencies
U.S. Cellular owns a 5.5% interest in the Los Angeles SMSA Limited
Partnership (the "Partnership"). In November 1993, a class action complaint
was filed on behalf of cellular customers in Orange County Superior Court
naming, among others, the Partnership. These complaints alleged certain
facts, including a similarity in the pricing structures of the two defendant
cellular carriers, which plaintiffs contended evidenced circumstantial
evidence that the Partnership and Los Angeles Cellular Telephone Company
conspired to fix the prices of retail and wholesale cellular radio services
in the Los Angeles market. The case was settled in July 1997 before reaching
trial. The Partnership agreed to give subscribers $90 million worth of free
service and discounted merchandise to settle the complaint.
9. Subsequent Events
In October 1997, U.S. Cellular completed the exchange with BellSouth it had
announced earlier in 1997. Pursuant to the exchange, U.S. Cellular received
majority interests in 12 markets adjacent to its Iowa and Wisconsin/Illinois
clusters. In exchange, U.S. Cellular divested its majority interests in 10
markets and minority interests in nine markets and paid a net amount of $87
million in cash ($103 million paid in October less $16 million received in
September). Certain aspects of this transaction are taxable; the amount of
these taxes will be determined by year-end and will be paid in the first
quarter of 1998. No book gain or loss will be recorded on the
II-63
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
transaction. U.S. Cellular received majority interests representing
approximately 4.0 million pops in the transaction, and divested majority
interests representing 2.0 million pops and minority interests representing
approximately 1.1 million pops.
In December, 1997 U.S. Cellular announced that AirTouch Communications, Inc.
[NYSE:ATI] will acquire interests owned by U.S. Cellular and its parent
organization, TDS, in cellular systems serving Seattle and Olympia,
Washington; Tucson, Arizona; Duluth, Minnesota; and rural areas in Arizona,
Colorado and Idaho. ATI will issue approximately 5,000,000 shares of its
common stock and approximately $50 million in cash to U.S. Cellular and TDS
in exchange for these interests, which represent approximately 900,000 pops
(the population of a market multiplied by a company's ownership interest in
a cellular licensee in that market). The interests being sold to ATI by TDS
were subject to an existing purchase agreement between U.S. Cellular and
TDS. TDS will retain the ATI common stock it receives from this sale,
approximately 1,000,000 shares, and pay U.S. Cellular approximately $20
million to terminate those purchase rights. In exchange for the interests it
will sell to ATI, U.S. Cellular will receive the remaining 4,000,000 shares
of ATI common stock and approximately $50 million in cash.
RECENT DEVELOPMENTS
RECENT FINANCIAL RESULTS
United States Cellular Group operating revenues for the three and
twelve-month periods ended December 31, 1997 increased 30% and 29% to $242.8
million and $877.0 million, respectively, compared to the same periods in 1996.
These increases were primarily related to the 59% growth in customer units in
the past twelve months, which at year-end totaled 1.7 million.
Operating expenses for the three and twelve-month periods ended December 31,
1997 increased 28% and 26%, to $223.8 million and $747.4 million, respectively
compared to the same periods in 1996. The increases relate primarily to costs to
attract new and retain current customers, as well as costs associated with
servicing the increased customer base, including increased customer usage.
Operating income for the three and twelve-month periods ended December 31,
1997 increased 53% and 48%, to $19.0 million and $129.5 million, respectively,
compared to the same periods in 1996.
Earnings Before Interest and Taxes (EBIT) increased $28.6 million to $52.0
million for the three months ended December 31, 1997, which included Gains on
Sales of Cellular Interests of $16.9 million in 1997 compared to virtually no
gain in 1996. For the twelve months ended, EBIT decreased $39.8 million to
$224.8 million. Gains on Sales of Cellular Interests totaled $30.3 million in
the twelve month period ended December 31, 1997 compared to $132.7 million in
1996.
Net Income for the three months ended December 31, 1997 totaled $25.2
million compared to $11.3 million in 1996. Net income totaled $111.5 million for
the twelve months ended December 31, 1997 compared to $129.9 million in 1996.
PROPOSED CORPORATE RESTRUCTURING
On December 29, 1997, Airmont Plaza Associates, which claims to be a holder
of common shares of U.S. Cellular, filed a putative class action complaint on
behalf of the minority shareholders of U.S. Cellular in the Court of Chancery of
the State of Delaware in New Castle County. The complaint names as defendants
TDS, U.S. Cellular and the directors of U.S. Cellular. The complaint alleges a
breach of fiduciary duties by the defendants in connection with the proposed
U.S. Cellular Merger and seeks to have the U.S. Cellular Merger enjoined or, if
it is consummated, to have it rescinded and to recover unspecified damages, fees
and expenses. On January 5, 1998, Richard Greenfield, who claims to be a holder
of common shares of Aerial, filed a putative class action complaint on behalf of
the minority shareholders of Aerial in the Court of Chancery of the State of
Delaware in New Castle County. The complaint names as defendants TDS, Aerial and
the directors of TDS and Aerial. The complaint alleges a breach of fiduciary
duties by the defendants in connection with the proposed Aerial Merger and seeks
to have the Aerial Merger enjoined or, if it is consummated, to have it
rescinded and to recover unspecified damages, fees and expenses. TDS intends to
vigorously defend against these lawsuits.
II-64
<PAGE>
ANNEX III
DESCRIPTION OF THE TDS TELECOMMUNICATIONS GROUP
The TDS Telecommunications Group ("Telecom Group") primarily consists of TDS
Telecommunications Corporation and its subsidiaries ("TDS Telecom"), a wholly
owned subsidiary of Telephone and Data Systems, Inc. ("TDS") which operates
landline telephone companies. The Telecom Group also includes the attribution of
certain TDS debt. The Telecom Group may in the future also include such other
assets and liabilities of TDS as the Board of Directors of TDS may determine to
attribute to the Telecom Group and such other businesses, assets and liabilities
as TDS or any of its subsidiaries may in the future acquire for the Telecom
Group, as determined by the Board of Directors of TDS.
The Telecom Group's telephone operations are conducted through TDS Telecom
and 105 telephone subsidiaries. These telephone companies, ranging in size from
less than 500 to more than 50,000 access lines, serve 506,600 access lines at
September 30, 1997, in 28 states.
The Telecom Group provides modern, high-quality local and long-distance
telephone service. Local service is provided by the Telecom Group's operating
telephone subsidiaries. Long-distance or toll service is provided through
connections with long-distance carriers, primarily AT&T and the Bell Operating
Companies ("BOCs").
Future growth in telephone operations is expected to be derived from
providing service to new or presently unserved establishments, from business
expansion in the areas served by the Telecom Group and others, from upgrading
existing customers to higher grades of service, from increased usage of the
network through both local and long-distance calling, from providing additional
services made possible by advances in technology and from the acquisition of
additional telephone companies.
The following table summarizes certain information regarding the Telecom
Group's telephone operations.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED OR AT YEAR ENDED OR AT DECEMBER 31,
SEPTEMBER 30, -------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- ---------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Telephone Operations
Access lines*...................................... 506,600 484,500 425,900 392,500 356,200 321,700
% Residential...................................... 78.7 79.9 80.6 81.3 82.0 83.1
% Business (nonresidential)........................ 21.3 20.1 19.4 18.7 18.0 16.9
Total revenues..................................... $ 338,700 $ 402,629 $ 354,841 $ 306,341 $ 268,122 $ 238,095
% Local service.................................... 26.8 27.4 26.8 26.8 26.9 27.4
% Network access and long-distance................. 56.5 58.5 61.6 60.0 59.3 57.9
Depreciation and amortization expense.............. $ 74,241 $ 88,967 $ 77,354 $ 68,878 $ 59,562 $ 51,946
Operating income................................... 76,708 103,358 98,240 91,606 78,585 72,218
Construction expenditures.......................... 96,717 144,440 104,372 115,483 80,818 65,652
Total identifiable assets.......................... $ 1,192,035 $1,181,084 $1,058,241 $ 984,563 $ 829,489 $ 723,855
</TABLE>
- ------------
* An "access line" is a single or multi-party circuit between the customer's
establishment and the central switching office.
TELEPHONE ACQUISITIONS
TDS and the Telecom Group continually review attractive opportunities to
acquire operating telephone companies. Since January 1, 1992, TDS has acquired
22 telephone companies serving a total of 90,400 access lines for an aggregate
consideration totaling $297.1 million, all of which were attributed to the
Telecom Group. Historically, TDS has attributed the acquired telephone companies
to the Telecom Group which increased the equity interest of TDS attributable to
the Telecom Group. The consideration, paid by TDS, consisted of $59.5 million in
cash and notes, 155,000 TDS Preferred Shares and 5.2 million TDS Common Shares.
Telephone holding companies and others actively compete for the acquisition
of telephone companies and such acquisitions are subject to the consent or
approval of regulatory agencies in most states and, in some cases, to federal
waivers that may affect the form of regulation or amount of interstate cost
recovery of acquired telephone exchanges. While management believes that it will
be successful in making additional acquisitions, there can be no assurance that
TDS or the Telecom Group will be able to negotiate additional acquisitions on
terms acceptable to it or that regulatory approvals, where required, will be
received.
III-1
<PAGE>
It is TDS Telecom's policy to preserve, in so far as possible, the local
management of each telephone company it acquires. TDS Telecom provides the
telephone subsidiaries with centralized purchasing and general management and
other services, at cost plus a reasonable rate of return on invested capital.
These services afford the subsidiaries expertise in the following areas:
finance, accounting and treasury services; marketing; customer service; traffic;
engineering and construction; customer billing; rate administration; credit and
collection; and the development of administrative and procedural practices.
CONSTRUCTION AND DEVELOPMENT PROGRAM
In accordance with the Telecom Group's strategy of providing its customers
with first-to-market telecommunications solutions and then maintaining a high
quality of on-going service, the Telecom Group has continued through 1997 its
program of enhancing and expanding its service providing network. By building
its network to take full advantage of advanced telecommunications technologies
such as Signaling System 7 (SS7), fiber optic fed Digital Serving Areas (DSAs),
Integrated Services Digital Network (ISDN), and Advanced Calling Services (ACS),
the Telecom Group intends to meet competition by providing its customers with
high-quality telecommunications services. In 1997, the Telecom Group brought
105,900 more customers the capabilities of SS7, 130,500 more customers the
functionality of ACS, deployed 310 route miles of fiber optic cable, deployed
210 DSAs, and enabled 67,900 more customers to subscribe to the advanced
performance of ISDN. By the end of 1997 the cumulative statistics, as presented
in the following table, show that the Telecom Group will have enabled a large
majority of its customers to subscribe to these advanced telecommunications
capabilities:
<TABLE>
<S> <C> <C>
# EQUIPPED % EQUIPPED
LINES LINES
1997 1997
SIGNALING SYSTEM 7 483,157 88%
ADVANCED CALLING SERVICES 483,157 88%
INTEGRATED SERVICES DIGITAL NETWORK 383,043 57%
</TABLE>
As the Telecom Group upgrades and expands its service providing network to
provide advanced and reliable telecommunications services, the Telecom Group is
also standardizing its network for the most efficient and effective mode of
operation. At the heart of the Telecom Group's efforts to standardize network
elements is the initiative to reduce costs and improve service reliability by
centralizing the monitoring and management of the Telecom Group's service
providing network. Strategic alliances with Lucent Technologies and Siemens
Stromberg-Carlson to modernize and standardize TDS Telecom's switching platform
with the Lucent 5ESS-2000 and Siemens EWSD switches will assist TDS Telecom in
implementing its 24 hour-a-day/7 day-per-week Network Management Center. In
return, the Network Management Center will continuously monitor the Telecom
Group's service providing network in an effort to proactively identify and
correct network faults prior to the customer being alerted to any interruption
or degradation of service. During 1997 an additional 2 host and 8 remote Lucent
switches and 9 host and 32 remote Siemens switches were deployed representing
33,501 and 46,227 lines respectively. By the end of 1998 the Network Management
Center will be proactively monitoring 100% of the Telecom Group's service
providing network.
While continually working to improve its core operations of its Local
Exchange Carrier (LEC) business, the Telecom Group is also seeking to recognize
the opportunities that are presenting themselves in adjacent areas of the
telecommunications industry. In 1997 the Telecom Group has continued to expand
its investments into its competitive businesses : TDS DATACOM, the structured
wiring entity, TDSNET its Internet service provider, and TDS METROCOM its
Competitive Local Exchange Company (CLEC). In 1997, TDS DATACOM operated in 15
markets. TDSNET expanded its operation in 1997 by adding an additional 15
operating markets to bring its total markets to 90. TDS METROCOM began building
its facilities in 1997 and is expected to be operational in the Madison, WI.
market in 1998. The Telecom Group seeks to recognize supplemental revenue
opportunities that the newer business operations of TDS DATACOM, TDSNET, and TDS
METROCOM present to the Telecom Group as it faces an increasingly competitive
telecommunications industry. Although the Telecom Group currently operates these
businesses, there can be no assurance that the TDS Board will permit the Telecom
Group to expand these businesses.
The Telecom Group's total 1997 capital budget is $130.0 million compared to
actual capital expenditures of $144.4 million in 1996 and $104.4 million in
1995. Financing for the 1997 capital additions will be primarily provided by
internally generated funds and supplemented by federal long-term financing.
III-2
<PAGE>
FEDERAL FINANCING
The Telecom Group's primary sources of long-term financing for additions to
telephone plant and equipment have been the Rural Utilities Service ("RUS"), the
Rural Telephone Bank ("RTB") and the Federal Financing Bank ("FFB"), agencies of
the United States of America. The RUS has made primarily 35-year loans to
telephone companies since 1949, at interest rates of 2% and 5%, for the purpose
of improving telephone service in rural areas. Currently, the RUS is authorized
to issue hardship loans at a 5% interest rate and other loans at an interest
rate approximating the government's rate for instruments of comparable maturity.
The RTB, established in 1971, makes loans at interest rates based on its average
cost of money (6.54% for its fiscal year ended September 30, 1997), and in some
cases makes loans concurrently with RUS loans. In addition, the RUS guarantees
loans made to telephone companies by the FFB at the federal cost of money (6.55%
for a 35-year note at September 30, 1997).
Substantially all of the Telecom Group's telephone plant is pledged or is
subject to mortgages securing obligations of the operating telephone companies
to the RUS, RTB and FFB. The amount of dividends on common stock that may be
paid by the operating telephone companies is limited by certain financial
requirements set forth in the mortgages.
Effective October 6, 1997, the RUS has revised its regulations on the amount
of allowable distributions a borrower can make in any calendar year. For those
companies with greater than 40% net worth to total assets, the amount of
distribution is now unlimited. The majority of the Telecom Group's telephone
subsidiaries exceed this percentage. However, actual determination of allowable
distributions under the new procedures cannot be made pending State regulatory
approval, if required.
At September 30, 1997, the Telecom Group's operating telephone companies had
unadvanced loan commitments under the RUS, RTB and FFB loan programs aggregating
approximately $118.7 million, at a weighted average annual interest rate of
6.04%, to finance specific construction activities in 1997 and future years.
These loan commitments are generally issued for five-year periods and may be
extended under certain circumstances. The Telecom Group's operating telephone
companies intend to make further applications for additional loans from the RUS,
RTB and FFB as their needs arise. There is no assurance that these applications
will be accepted or what the terms or interest rates of any future loan
commitments will be.
ACCESS REVENUES
The Telecom Group's operating telephone subsidiaries receive access revenue
as compensation for carrying interstate and intrastate long-distance traffic on
its network. The interstate and intrastate access rates charged include the cost
of providing service plus a fair rate of return. Access revenues account for
approximately 55% of the revenue generated by the Telecom Group's local exchange
carrier ("LEC") subsidiaries.
The Telecom Group filed an interstate access rate tariff for one of its
operating subsidiaries in 1997. The Telecom Group concurs in the National
Exchange Carrier Association ("NECA") interstate common line and traffic
sensitive tariffs for the remainder of its LEC subsidiaries. These operating
companies participate in the access revenue pools administered by NECA, which
collect and distribute revenue from interstate access services. The FCC created
NECA and it operates subject to FCC rules and oversight.
The FCC regulates interstate toll rates and other matters relating to
interstate telephone service. On May 16, 1997, the FCC released its Order on
access reform. The Order applies primarily to price cap LECs. However, non-price
cap companies, such as the Telecom Group, were also affected in a few areas by
this Order. The FCC is expected to release an order for non-price cap companies
in early 1998. Depending on the outcome of the order for non-price cap
companies, the source and nature of the operating companies' recovery of costs
from the interstate jurisdiction will be affected.
The Telecommunications Act of 1996 (the "1996 Act") provides for reciprocal
compensation for parties to any interconnection arrangement. The FCC issued a
1996 order governing the compensation arrangements between LECs and wireless
providers. LECs must charge wireless carriers cost-based rates and must now pay
access charges to wireless carriers to terminate calls from LEC customers. Since
this order raises interconnection costs, the operating companies may adjust
their charges to recover such increased costs.
On October 7, 1997, the FCC released a Notice of Proposed Rulemaking
("NPRM") on jurisdictional separations reform. In the NPRM, the FCC reviews the
current procedures for separating LECs' service costs between the state and
federal jurisdictions. Many of the proposals in the NPRM seek to limit costs
assigned to the interstate jurisdiction and seek to assign greater costs to the
intrastate jurisdiction. To the extent that the costs are not made
III-3
<PAGE>
up in the new federal and state universal service mechanisms, the Telecom Group
may seek rate increases to offset any reductions in interstate revenues.
Where applicable and subject to state regulatory approval, the Telecom
Group's LEC subsidiaries utilize intrastate access tariffs and participate in
intrastate revenue pools. However, many intrastate toll revenue pooling
arrangements, a source of substantial revenues to TDS Telecom's LECs, have been
replaced with access-charge-based arrangements. In these cases, access charges
are typically set to generate revenue flows similar to those realized in the
pooling process. The impact of the 1996 Act has accelerated the pace of
regulatory re-evaluation at both the state and federal level. To the extent that
state-ordered access charge revisions reduce revenues, the Telecom Group may
seek adjustments in other rates. Given the many regulatory issues still
unresolved, the Telecom Group cannot predict the cumulative nature or extent of
impacts from regulatory reform.
FEDERAL SUPPORT REVENUES
To promote universal service, the FCC developed a number of federal support
mechanisms to keep telephone rates affordable for both high-cost, rural areas
and low-income customers. Many of the Telecom Group's LEC subsidiaries provide
telephone service in rural areas and all of them offer service to low-income
customers.
The 1996 Act codified universal service; set forth clear principles for
ensuring affordable access to modern telephone service nationwide; established
discounts for schools, libraries and rural health care facilities; and
established a federal-state joint board to make recommendations to the FCC
regarding implementation of the universal service provisions of the 1996 Act. On
May 8, 1997, the FCC released its Order on universal service, adopting many of
the joint board's recommendations. The FCC adopted the use of forward-looking
proxy cost models to determine costs rather than relying on actual costs.
However, rural LECs will continue to receive support based on their actual costs
for a three year period, beginning January 1, 1998. After December 31, 2000,
rural LECs will transition to the use of proxy cost models over an additional
three year period. To date, no proxy cost models have proven to provide
sufficient and predictable support for rural LECS.
The FCC's Order also mandated that all telecommunications providers
contribute to the universal service fund beginning January 1, 1998. However, the
Order allows companies to recover these contributions through their interstate
access rates.
The final rules to implement the universal service provisions of the 1996
Act will involve development of new support mechanisms and changes in the
eligibility criteria. In addition, some of TDS Telecom's LEC subsidiaries
operate in states where support and rate structures are either being
re-evaluated or have already been changed. Full recovery of universal service
costs in the future through interstate and intrastate mechanisms is uncertain.
If interstate or intrastate support decrease, TDS Telecom's LEC subsidiaries may
pursue local service rate increases to recover the difference.
In the past, telephone company acquisition and investment decisions assumed
the ability to recover the cost and a reasonable rate of return through local
service, access and support revenues. Significant changes in the universal
service funding system will affect the TDS and the Telecom Group's acquisition
strategy. The Telecom Group can no longer assume it will recover its acquisition
and investment costs and a reasonable rate of return given the changes in
universal service, access reform, and separations reform. The Telecom Group is
pursuing a strategy of network modernization to maintain a strong competitive
position. The speed of such network modernization may depend on favorable
support and access policies on the federal and state levels.
REGULATION
The Telecom Group's LEC subsidiaries are regulated by state regulatory
agencies and the Telecom Group seeks to maintain positive relationships with
these regulators. Rate setting, including local rates, intrastate toll rates and
intrastate access charges, is subject to state commission approval. The Telecom
Group will continue to pursue necessary changes in rate structures to ensure
affordable rates and reasonable earnings.
State regulators can approve service areas, service standards, accounting
and related matters. In some states, construction plans, borrowing, depreciation
rates, affiliated charge transactions and certain other financial transactions
are also subject to regulatory approval. States have traditionally regulated
entry into local markets by designating a single carrier to be the universal
service provider. However, the 1996 Act has almost completely pre-empted state
authority over market entry. Each state retains the power to impose
competitively neutral requirements that are consistent with the 1996 Act's
universal service provision and necessary for universal services,
III-4
<PAGE>
public safety, and welfare, continued service quality and consumer rights. While
a state may not impose requirements that effectively function as barriers to
entry, it retains limited authority to regulate certain competitive practices in
rural telephone company service areas.
The 1996 Act establishes a general duty for all telecommunications carriers,
including wireless providers, to interconnect with other carriers. Congress
prescribed a more specific list of interconnection requirements for all LECs
including resale, number portability, dialing parity, access to rights-of-way
and reciprocal compensation. The FCC has adopted or is considering rules and
policies implementing the provisions of the 1996 Act.
Unless exempted, or granted suspension or modification, incumbent LECs have
additional obligations: (a) to negotiate in good faith terms of interconnection;
(b) to comply with more detailed interconnection terms, including
non-discrimination and unbundling their network and service components so
competitors may provide only those elements they choose to provide; (c) to offer
their retail services at wholesale rates to facilitate resale by their
competitors; and (d) to allow other carriers to place equipment necessary for
interconnection or access on their premises.
Many of the FCC determinations made to implement the 1996 law and to
facilitate competition in local service and other telephone services involve
investment and upgrades to the Telecom Group LECs' networks. These investments
and upgrades include requirements to implement local number portability so
subscribers may change to competitors' services without changing their telephone
numbers, network signaling information that must be provided to certain other
carriers and payphone providers, and other changes that require additional
investments and expenses. The Telecom Group is seeking to comply with these
requirements, and is pursuing policies that provide a fair opportunity to
recover its costs, but in some cases is asking for waivers or delayed
implementation deadlines. A new law also requires LECs to provide certain
communications for law enforcement purposes. The full cost and the adequacy of
the government compensation are not yet known, but the LEC industry is pursuing
regulatory policies that cover any shortfall in available government
compensation.
As defined in the 1996 Act, the Telecom Group's LEC subsidiaries qualify as
rural telephone companies. Therefore, they enjoy an exemption from the incumbent
LEC requirements until they receive a bonafide request for interconnection and
the state commission lifts the exemption. The FCC has also adopted extensive
rules for state commissions to follow in mediating and arbitrating
interconnection negotiations between incumbent LECs and carriers requesting
interconnection, services or network elements. The 1996 Act establishes
deadlines, standards for state commission approval of interconnection agreements
and recourse to the FCC if a state commission fails to act. A federal appellate
decision striking down FCC pricing regulations for interconnection and several
rules that limited the Telecom Group telephone companies' ability to obtain
regulatory relief from stricter interconnection requirements for incumbent
telephone companies has been taken to the U.S. Supreme Court in petitions for
certiorari. TDS cannot predict the outcome of this or the numerous other court
and FCC proceedings stemming from the 1996 Act.
The Telecom Group seeks to maintain and enhance existing revenue streams
despite heightened earnings review activity by state regulators and the advent
of local exchange competition sparked by the 1996 Act. The Telecom Group is
preparing for competition even though its operating subsidiaries remain governed
by state regulators. For example, the Telecom Group is seeking the necessary
pricing flexibility to adjust its rate structures to a more competitive model.
The Telecom Group is also participating in state regulatory and legislative
processes to ensure that any telecommunications reform measures treat rural
areas fairly and continue to provide sufficient contributions to high cost rural
service areas to keep the Telecom Group LEC's rates affordable. The ongoing
changes in public policy and introduction of competition might affect the
earnings of the operating subsidiaries and the Telecom Group is not able to
predict the impact.
While the majority of the Telecom Group's LEC subsidiaries continue to
operate in a rate-of-return environment, a number of state commissions are
negotiating, or have agreed to alternative regulation plans with LECs. Price
regulation, the most common form of alternative regulation, focuses on the price
of telecommunication services. The Telecom Group's LEC subsidiaries in Alabama,
Arkansas and Michigan are currently operating in a price-regulated environment,
whereby the commissions in those states are no longer reviewing earnings. For
several years, the RBOCs and some of the nation's larger LECs have operated
under an FCC "price cap" plan, where earnings can only be increased through
productivity improvements. When LECs achieve a rate of return above an allowed
return, taking into account required productivity gains, they must share the
excess gains with their customers.
For 1997, the Telecom Group's telephone subsidiaries have neither elected
price caps nor an alternative FCC plan, which was designed for smaller LECs.
Instead, the operating subsidiaries will continue to abide by traditional
III-5
<PAGE>
rate-of-return regulation for interstate purposes. Since approximately one-third
of the Telecom Group's telephone subsidiaries serve high-cost areas, important
averaging mechanisms associated with the NECA pooling process would be lost if
the Telecom Group elected either of the alternatives to traditional
rate-of-return regulation. However, the FCC periodically considers whether to
initiate a proceeding to lower the allowed rate-of-return for rate-of-return
LECs. The FCC also plans to reform the rules that govern how LECs, on their own
or through the National Exchange Carrier Association, charge interstate
companies for local distribution of their long distance calls. Some of the
reforms already adopted for price cap regulated LECs, if expanded to cover the
Telecom Group LECs, could reduce the interstate costs recovered.
NECA is requesting access charge changes from the FCC which would use a
"banded" rate structure to help pool members with lower costs charge more
competitive rates. The FCC has not acted on this matter yet.
Access to affordable long-distance service in rural areas was achieved
because the FCC ordered AT&T to provide nationwide average rates. As a result of
increasing competition, the FCC lifted all regulations relating to AT&T's
interstate services in 1996. However, the 1996 Act preserves interstate toll
rate averaging and endorses a nationwide policy that interstate and intrastate
long-distance rates of all long-distance carriers should not be higher in rural
areas than in urban areas they serve. The statute is intended to ensure
affordable long distance services even in the Telecom Group's most remote
exchanges.
COMPETITION
The 1996 Act will help introduce a new wave of competition in the
telecommunications industry. The 1996 Act embraced competition in
telecommunications as a national policy and also started the process of
deregulation. The 1996 Act applies expanded interconnection and other
requirements to local exchange telephone companies for the purpose of
stimulating competition. The Act establishes a framework for local service
competition and it establishes different standards for different types of
telecommunications carriers. The Act defines rural telephone companies ("RTC")
and provides them with an exemption from certain incumbent LEC obligations. All
the Telecom Group LECs meet the RTC definition and fall under the exemption.
This may delay certain forms of competition occurring in the Telecom Group LEC
service areas while additional regulatory issues are resolved. However, some
Telecom Group LECs already face requests, filed by potential competitors,
seeking to terminate their exemptions.
The Telecom Group believes there will eventually be open entry into nearly
every aspect of the telephone industry, including local service, interstate and
intrastate toll, switched and special access services and customer premises
equipment. Accordingly, TDS Telecom expects competition in the telephone
business to be dynamic and intense as a result of the entrance of new
competitors and the development of new technologies, products and services. To
face this increasing competition, the Telecom Group's strategy is to position
itself to provide high-quality customer relationships and to provide complete
solutions to customers' telecommunication needs.
To position the Telecom Group as a customer-intimate organization with
high-quality customer relationships, the Telecom Group is dedicating resources
to establishing a Virtual Business Office ("VBO"). The VBO is an environment
that is technically equipped to enable multiple local business offices to
perform customer contact functions as if they were a "virtual" office in the
eyes of the customer. VBO is the Telecom Group's solution to connect offices
together to better use resources and preserve local presence. Through extended
availability that coincides with customers' schedules and expectations, VBO will
help provide greater market coverage and customer service on the customer's
terms. It will also enable the business office teams to deliver high-quality
service to the customer through more efficient call answering capabilities,
provide continued focused local service to walk-in customers, and leverage voice
and customer service application technology.
The Telecom Group is providing its operating telephone companies with the
most advanced central office switching equipment possible in order to offer
customers up-to-date technology such as Advanced Calling Services, high-speed
data access, ISDN and Internet access and services. The Telecom Group plans to
provide its customers bundled service offerings and become a single source for
their telecommunications needs. Developing these services also provides an
opportunity to provide a greater range of service in both the basic telephony
and the more competitive marketplaces. In 1997, the Telecom Group significantly
grew its competitive market offerings with products and services like LAN and
data structured wiring, Internet access and web hosting and resale of Direct
Broadcast Satellite. The Telecom Group also decided to enter the Madison,
Wisconsin market as a facility based competitive local exchange carrier through
its subsidiary, TDS METROCOM. TDS METROCOM has begun construction of a switched
SONET fiber optic network in the Madison area. TDS METROCOM is expected to begin
providing advanced voice and data services to the Madison marketplace in 1998.
The Telecom Group will continue to seek additional attractive opportunities in
competitive markets during 1998.
III-6
<PAGE>
EMPLOYEES
As of September 30, 1997, the Telecom Group had a total of 2,153 employees.
There are 155 employees at the Telecom Group who are represented by labor
unions. The Telecom Group considers its relations with its employees to be good.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
This business description, contains "forward-looking" statements, as defined
in the Private Securities Litigation Reform Act of 1995, that are based on
current expectations, estimates and projections. Statements that are not
historical facts, including statements about TDS's beliefs and expectations are
forward-looking statements. These statements contain potential risks and
uncertainties and therefore, actual results may differ materially. TDS
undertakes no obligation to update publicly any forward-looking statements
whether as a result of new information, future events or otherwise.
Important factors that may affect these projections or expectations include,
but are not limited to: changes in the overall economy; changes in competition
in markets in which Telecom Group operates; advances in telecommunications
technology; changes in the telecommunications regulatory environment; pending
and future litigation; availability of future financing and the mix of products
and services offered in the Telecom Group's markets. Readers should evaluate any
statements in light of these important factors.
III-7
<PAGE>
EXPLANATORY NOTE REGARDING FINANCIAL INFORMATION
Effective upon completion of the Transactions, Telephone and Data Systems,
Inc. will have outstanding five classes of Common Stock: United States Cellular
Group Common Shares, which are intended to reflect the performance of the United
States Cellular Group; TDS Telecommunications Group Common Shares, which are
intended to reflect the performance of TDS Telecommunications Group; Aerial
Communications Group Common Shares, which are intended to reflect the
performance of the Aerial Communications Group; and Common Shares and Series A
Common Shares which are intended to reflect the performance of a residual group
(the "TDS Group") (which will also reflect the performance of the United States
Cellular Group, the TDS Telecommunications Group, and Aerial Communications
Group to the extent of the Retained Interest.)
Although the financial statements of the TDS Telecommunications Group will
separately report the assets, liabilities (including contingent liabilities) and
shareholders' equity of Telephone and Data Systems, Inc. attributed to the TDS
Telecommunications Group such attribution will not affect the legal title to
such assets or responsibility for such liabilities. Holders of TDS
Telecommunications Group Common Shares will be, and holders of Telephone and
Data Systems, Inc. Common Shares and Series A Common Shares are, shareholders of
Telephone and Data Systems, Inc. Telephone and Data Systems, Inc. and its
subsidiaries would each continue to be responsible for their respective
liabilities. Financial results arising from the business of Telephone and Data
Systems, Inc. (including its Retained Interest in the TDS Telecommunications
Group) or from the business of the TDS Telecommunications Group could affect the
market price of all classes of Common Stock. In addition, any net losses of any
of the Telephone and Data Systems, Inc. Groups, including the TDS
Telecommunications Group, and dividends or distributions on, or repurchases of,
any class of Common Stock will reduce the assets of Telephone and Data Systems,
Inc. legally available for payment of dividends on all classes of Common Stock.
Accordingly, Telephone and Data Systems, Inc.'s consolidated financial
statements should be read in conjunction with the TDS Telecommunications Group's
financial information.
III-8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
The TDS Telecommunications Group ("Telecom Group") primarily consists of TDS
Telecommunications Corporation and its subsidiaries ("TDS Telecom"), a wholly
owned subsidiary of Telephone and Data Systems, Inc. ("TDS") which operates
landline telephone companies. The Telecom Group also includes the attribution of
certain TDS debt. The Telecom Group may in the future also include such other
assets and liabilities of TDS as the Board of Directors of TDS may determine to
attribute to the Telecom Group and such other businesses, assets and liabilities
as TDS or any of its subsidiaries may in the future acquire for the Telecom
Group, as determined by the Board of Directors of TDS.
RESULTS OF OPERATIONS
The Telecom Group operates 105 telephone companies serving 484,500 access
lines in 28 states at the end of 1996. Approximately 58% of the Telecom Group's
revenue is derived from operations in seven states. (Tennessee, Wisconsin,
Alabama, Georgia, Minnesota, Maine, Indiana--based on 1996 revenues)
The Telecom Group's telephone subsidiaries are suppliers of telephone
services to subscribers within the telephone company's prescribed service areas.
Its income is derived from subscriber fees charged to its customers and from
access charges imposed pursuant to contracts with long-distance
("interexchange") telephone carriers. Both the fees charged to the Telecom
Group's customers for its services and the access charges to interexchange
carriers are based upon rates established by the various public service
commissions for intrastate services and the Federal Communications Commission
("FCC") for interstate services. Generally, these fees are a function of a
prescribed return on the telephone subsidiaries' investment in plant and
equipment and the cost of services provided to their subscribers.
Local network service revenues are derived from providing local telephone
exchange service within telephone subsidiaries franchise area. Network access
service revenues result from providing interexchange carriers with access to the
Telecom Group's network to facilitate completing long-distance communications
("toll calls"). Such revenues are based upon the allocation of operating
expenses and telephone plant investment to interstate and intrastate
jurisdictions under cost separation procedures established by the FCC. Revenues
are designed to cover expenses and provide a rate of return on plant investment.
Charges to interexchange carriers for interstate network usage are based on
tariffs filed with the FCC by the National Exchange Carriers Association
("NECA"), a service organization formed after the AT&T divestiture for the
purpose of administering collection and distribution of revenues between its
member local exchange carriers and the interexchange carriers. Charges to
interexchange carriers for intrastate network usage are based on tariffs
established by state regulatory agencies. The interstate portion of these
revenues is initially received based on estimates of expenses, plant investment
and rates of return for the settlement period (usually a calendar year). The
intrastate portion of these revenues is received based on approved tariffs and
is influenced by changes in traffic levels as measured by minutes of use.
Other service revenues consist primarily of revenues of a long-distance
provider and a cellular interest acquired in 1996 by a telephone subsidiary as
well as the Telecom Group's new business ventures which include an Internet
access provider and a structured wiring business. Although the Telecom Group
currently operates such other businesses, there can be no assurance that the TDS
Board of Directors will permit the Telecom Group to expand such businesses.
The audited financial statements for the years ended December 31, 1996,
1995, and 1994 are stated to comply with the financial reporting requirements
mandated by generally accepted accounting principles reflecting practices
appropriate to the telephone industry.
The Telecom Group is subject to the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain
Types of Regulation." The Telecom Group periodically reviews the criteria for
applying these provisions to determine whether continuing application of SFAS
No. 71 is appropriate. The Telecom Group believes that such criteria are still
being met and therefore has no current plans to change its method of accounting.
In analyzing the effects of discontinuing the application of SFAS No. 71,
management has determined that the useful lives of plant assets used for
regulatory and financial purposes are consistent with generally accepted
accounting principles and therefore any adjustments to accumulated depreciation
would be immaterial, as would be the write-off of regulatory assets and
liabilities.
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<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
TOTAL INTERNAL
--------------------- ACQUISITION ---------------------
1996 1995 CHANGE % CHG EFFECTS CHANGE % CHG
----------- ----------- --------- ---------- ----------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER ACCESS LINE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues
Telephone Revenues
Local Service............................ $ 110,501 $ 95,184 $ 15,317 16.1% $ 6,041 $ 9,276 9.7%
Network Access and Long-Distance......... 213,113 195,575 17,538 9.0% 9,869 7,669 3.9%
Miscellaneous............................ 48,299 41,528 6,771 16.3% 2,898 3,873 9.3%
----------- ----------- --------- ---------- ----------- --------- ----------
Total Telephone Revenues............... 371,913 332,287 39,626 11.9% 18,808 20,818 6.3%
Other Service Offerings.................... 31,774 23,764 8,010 33.7% 7,147 863 3.6%
Intercompany Revenues...................... (1,058) (1,210) 152 12.6% -- 152 12.6%
----------- ----------- --------- ---------- ----------- --------- ----------
Total Operating Revenues............... 402,629 354,841 47,788 13.5% 25,955 21,833 6.2%
----------- ----------- --------- ---------- ----------- --------- ----------
Operating Expenses
Network Operations......................... 67,521 54,964 12,557 22.8% 4,101 8,456 15.4%
Depreciation and Amortization.............. 85,575 74,758 10,817 14.5% 3,995 6,822 9.1%
Customer Operations........................ 53,764 46,818 6,946 14.8% 2,714 4,232 9.0%
Corporate Operations....................... 62,276 58,998 3,278 5.6% 3,789 (511) (0.9%)
----------- ----------- --------- ---------- ----------- --------- ----------
Total Telephone Expenses............... 269,136 235,538 33,598 14.3% 14,599 18,999 8.1%
Other Service Offerings.................... 31,193 22,273 8,920 40.0% 6,493 2,427 10.9%
Intercompany Expenses...................... (1,058) (1,210) 152 12.6% -- 152 12.6%
----------- ----------- --------- ---------- ----------- --------- ----------
Total Operating Expenses............... 299,271 256,601 42,670 16.6% 21,092 21,578 8.4%
----------- ----------- --------- ---------- ----------- --------- ----------
Operating Income............................. 103,358 98,240 5,118 5.2% 4,863 255 0.3%
Other Income, Net............................ 19,594 20,794 (1,200) (5.8%) 2,307 (3,507) (16.9%)
----------- ----------- --------- ---------- ----------- --------- ----------
Income Before Interest and Income Taxes...... 122,952 119,034 3,918 3.3% 7,170 (3,252) (2.7%)
Interest Expense............................. 61,573 60,648 925 1.5% 1,718 (793) (1.3%)
Income Tax Expense........................... 25,685 24,231 1,454 6.0% 1,699 (245) (1.0%)
----------- ----------- --------- ---------- ----------- --------- ----------
Net Income................................... $ 35,694 $ 34,155 $ 1,539 4.5% $ 3,753 $ (2,214) (9.1%)
----------- ----------- --------- ---------- ----------- --------- ----------
----------- ----------- --------- ---------- ----------- --------- ----------
Access Lines................................. 484,500 425,900
Revenue per Access Line...................... $ 67.12 $ 66.87
Operating Margin............................. 25.7% 27.7%
Operating Cash Flow.......................... $ 192,325 $ 175,594
Effective Income Tax Rate.................... 41.8% 41.5%
</TABLE>
Operating Revenues increased $47.8 million, or 13.5%, in 1996 as a result of
the effects of acquisitions ($26.0 million), recovery of increased costs of
providing long-distance services ($8.1 million), internal access line growth
($5.2 million), increased network usage ($4.5 million) and increased sales of
custom calling and advanced features ($2.9 million). The number of telephone
access lines increased 13.8% (7.8% from acquisitions and 6.0% from internal
growth) from 425,900 at December 31, 1995 to 484,500 at the end of 1996. Average
monthly revenue per access line was $67.12 in 1996 and $66.87 in 1995.
LOCAL SERVICE revenues increased $15.3 million, or 16.1%, in 1996. The
effects of acquisitions increased local service revenues $6.0 million. Internal
access line growth of 6.0% increased local service revenues $5.2 million. Custom
calling and advanced feature sales and other miscellaneous revenues increased
$2.9 million. Revenue generated for Extended Area Service ("EAS") plans
implemented in Vermont and Ohio increased local service revenues $1.0 million,
but reduced network access and long-distance revenues by a similar amount.
NETWORK ACCESS AND LONG-DISTANCE revenues increased $17.5 million, or 9.0%, in
1996. The effects of acquisitions increased revenues $9.9 million. Increased
expense and investment levels to provide access service increased revenues $8.1
million in 1996 through state and national revenue pools, and increased usage of
the network generated $4.5 million of additional revenues. Revenue adjustments
due to updated cost separation and pool rate of return
III-10
<PAGE>
information were $3.0 million less in 1996 than in 1995. The impact of EAS plans
implemented in Vermont and Ohio reduced access revenue $1.0 million in 1996 as
compared to 1995. MISCELLANEOUS revenues increased $6.8 million, or 16.3%, in
1996. The effects of acquisitions increased revenues $2.9 million. Higher sales
and leases of customer premise equipment increased revenues $2.2 million in
1996. OTHER SERVICE revenues increased $8.0 million, or 33.7%, in 1996. The
effects of the acquisition of a controlling interest of a cellular market by a
majority-owned telephone subsidiary in 1996 increased revenues $7.1 million.
Operating Expenses increased $42.7 million, or 16.6%, in 1996 as a result of
the effects of acquisitions ($21.1 million), depreciation on increased
investment in plant and equipment ($5.8 million), development of a centralized
network management center ($3.4 million), development of groups to explore new
service offerings ($3.2 million) as well as growth in internal operations.
NETWORK OPERATIONS expense increased $12.6 million, or 22.8%, with
acquisitions increasing expenses $4.1 million. The development of a centralized
network management center to provide more effective network monitoring and
maintenance caused an increase in expenses of $3.4 million in 1996. DEPRECIATION
AND AMORTIZATION increased $10.8 million, or 14.5%, with acquisitions increasing
expenses $4.0 million. Increased investment in plant and equipment resulted in
an increase in expenses of $5.8 million in 1996. Additional depreciation charges
of $1.0 million were taken in 1996 at a telephone company in Tennessee. The
composite depreciation rate was 7.2% in 1996 and 7.1% in 1995. CUSTOMER
OPERATIONS expense increased $6.9 million, or 14.8%, with acquisitions
increasing expenses $2.7 million. The development of groups to explore new
service offerings caused expenses to increase by $3.2 million in 1996. CORPORATE
OPERATIONS expense increased $3.3 million, or 5.6%, with acquisitions increasing
expenses $3.8 million. The remaining increases were primarily due to growth in
internal operations. OTHER SERVICE expense increased $8.9 million, with
acquisitions increasing expenses $6.5 million. The remaining increase was due to
growth of the Telecom Group's internet service business.
Operating Income increased $5.1 million, or 5.2%, in 1996, with acquisitions
increasing operating income $4.9 million. The operating margin declined to 25.7%
in 1996 from 27.7% in 1995 due primarily to increased costs associated with the
development of the centralized network management centers and groups to explore
new service offerings as well as earnings pressures from regulatory agencies and
long-distance providers. The operating margins for the other services group is
considerably lower than that of the typical telephone company resulting in a
reduction in overall margins.
Other Income, Net decreased $1.2 million, or 5.8%. CELLULAR EQUITY INCOME
increased $2.7 million reflecting increased earnings from minority interests in
cellular partnerships. However, cellular equity income is expected to decrease
in 1997 due to the transfer of the majority of the cellular interests to TDS
during 1996. GAIN ON SALES OF INVESTMENTS decreased $4.1 million from 1995. In
1995, the Telecom Group sold a cellular interest, a telephone company and
various marketable equity securities resulting in a gain of $4.1 million.
Interest Expense increased $925,000, or 1.5%, in 1996 due primarily to the
added interest expense from acquired companies.
Income Tax Expense increased $1.5 million, or 6.0%, in 1996. The effective
income tax rate was 41.8% in 1996 compared to 41.5% in 1995.
Net Income increased $1.5 million, or 4.5%, in 1996. The effect of
acquisitions increased net income $3.8 million in 1996.
III-11
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
TOTAL INTERNAL
--------------------- ACQUISITION ---------------------
1995 1994 CHANGE % CHG EFFECTS CHANGE % CHG
----------- ----------- --------- ---------- ----------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER ACCESS LINE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues
Telephone Revenues
Local Service............................ $ 95,184 $ 82,145 $ 13,039 15.9% $ 4,582 $ 8,457 10.3%
Network Access and Long-Distance......... 195,575 174,178 21,397 12.3% 11,039 10,358 5.9%
Miscellaneous............................ 41,528 40,399 1,129 2.8% 1,209 (80) (0.2%)
----------- ----------- --------- ---------- ----------- --------- ----------
Total Telephone Revenues............... 332,287 296,722 35,565 12.0% 16,830 18,735 6.3%
Other Service Offerings...................... 23,764 10,499 13,265 126.3% 13,823 (558) (5.3%)
Intercompany Revenues........................ (1,210) (880) (330) 37.5% (579) 249 28.3%
----------- ----------- --------- ---------- ----------- --------- ----------
Total Operating Revenues............... 354,841 306,341 48,500 15.8% 30,074 18,426 6.0%
----------- ----------- --------- ---------- ----------- --------- ----------
Operating Expenses
Network Operations......................... 54,964 45,412 9,552 21.0% 3,251 6,301 13.9%
Depreciation and Amortization.............. 74,758 67,956 6,802 10.0% 4,315 2,487 3.7%
Customer Operations........................ 46,818 42,617 4,201 9.9% 2,524 1,677 3.9%
Corporate Operations....................... 58,998 49,706 9,292 18.7% 4,219 5,073 10.2%
----------- ----------- --------- ---------- ----------- --------- ----------
Total Telephone Expenses............... 235,538 205,691 29,847 14.5% 14,309 15,538 7.6%
Other Service Offerings.................... 22,273 9,924 12,349 124.4% 12,523 (174) (1.8%)
Intercompany Expenses...................... (1,210) (880) (330) 37.5% (579) 249 28.3%
----------- ----------- --------- ---------- ----------- --------- ----------
Total Operating Expenses............... 256,601 214,735 41,866 19.5% 26,253 15,613 7.3%
----------- ----------- --------- ---------- ----------- --------- ----------
Operating Income............................. 98,240 91,606 6,634 7.2% 3,821 2,813 3.1%
Other Income, Net............................ 20,794 15,254 5,540 36.3% 2,277 3,263 21.4%
----------- ----------- --------- ---------- ----------- --------- ----------
Income Before Interest and Income Taxes...... 119,034 106,860 12,174 11.4% 6,098 6,076 5.7%
Interest Expense............................. 60,648 50,677 9,971 19.7% 1,548 8,423 16.6%
Income Tax Expense........................... 24,231 22,806 1,425 6.2% 2,033 (608) (2.7%)
----------- ----------- --------- ---------- ----------- --------- ----------
Net Income Before Cumulative Effect of
Accounting Change.......................... 34,155 33,377 778 2.3% 2,517 (1,739) (5.2%)
Cumulative Effect of Accounting Change....... -- (723) 723 100% -- 723 100%
----------- ----------- --------- ---------- ----------- --------- ----------
Net Income................................... $ 34,155 $ 32,654 $ 1,501 4.6% $ 2,517 $ (1,016) (3.1%)
----------- ----------- --------- ---------- ----------- --------- ----------
----------- ----------- --------- ---------- ----------- --------- ----------
Access Lines................................. 425,900 392,500
Revenue per Access Line...................... $ 66.87 $ 66.66
Operating Margin............................. 27.7% 29.9%
Operating Cash Flow.......................... $ 175,594 $ 160,484
Effective Income Tax Rate.................... 41.5% 40.6%
</TABLE>
Operating Revenue increased $48.5 million, or 15.8%, in 1995 as a result of
the effects of acquisitions ($30.1 million), increased network usage ($5.8
million), recovery of increased costs of providing long-distance services ($4.5
million), internal access line growth ($4.1 million) and increased sales of
custom calling and other advanced features ($2.0 million). The number of
telephone access lines increased 8.5% (5.1% from internal growth and 3.4% from
acquisitions) from 392,500 at December 31, 1994 to 425,900 at the end of 1995.
Average monthly revenue per access line was $66.87 in 1995 and $66.66 in 1994.
LOCAL SERVICE revenue increased $13.0 million, or 15.9%, in 1995. The
effects of acquisitions increased local service revenues $4.6 million. Internal
access line growth of 5.1% increased local service revenue $3.5 million. Custom
calling and advanced feature sales and other miscellaneous revenue increased
$2.0 million. Revenue generated for Extended Community Calling ("ECC")
previously recorded as network access revenues and changes in settlement plans
increased local service revenues approximately $3.4 million. NETWORK ACCESS AND
III-12
<PAGE>
LONG-DISTANCE revenue increased $21.4 million, or 12.3%, in 1995. The effects of
acquisitions increased revenues $11.0 million. Increased usage of the network
generated $5.8 million additional revenue, and recovery of increased expense and
investment levels to provide access service increased revenue $4.5 million in
1995. Settlements received from toll pools relating to prior years' activity
increased these revenues by $1.7 million in 1995, while a $3.4 million decrease
in these revenues resulted from the reclassification of ECC revenues to local
service revenues. The remainder of the revenue increase in 1995 was primarily
due to increased minutes of use, increases in access lines served and changes in
rates of return. MISCELLANEOUS revenue increased $1.1 million, or 2.8%, in 1995.
The effects of acquisitions increased revenues $1.2 million. OTHER SERVICE
revenue increased $13.3 million due to the acquisition of a long-distance
provider in August of 1994.
Operating Expenses increased $41.9 million, or 19.5%, in 1995 as a result of
the effects of acquisitions ($26.3 million), increased investment in plant and
equipment ($5.6 million), increased maintenance activities ($2.0 million) as
well as growth in internal operations.
NETWORK OPERATIONS expense increased $9.6 million, or 21.0%, with
acquisitions increasing expenses $3.3 million. The increase includes a $2.0
million charge for additional maintenance activity such as updating network maps
and building renovations. DEPRECIATION AND AMORTIZATION increased $6.8 million,
or 10.0%, with acquisitions increasing expense $4.3 million. Increased
investment in plant and equipment resulted in an increase of $5.6 million while
lump sum depreciation adjustments reduced the expense by $3.1 million. The
composite depreciation rate was 7.1% in 1995 compared to 7.5% in 1994. CUSTOMER
OPERATIONS expense increased $4.2 million, or 9.9%, with acquisitions increasing
expenses $2.5 million. CORPORATE OPERATIONS expense increased $9.3 million, or
18.7%, with acquisitions increasing expenses $4.2 million. The remaining
increases were primarily due to growth in internal operations. OTHER SERVICE
expense increased $12.3 million due to the acquisition of a long-distance
provider in August of 1994.
Operating Income increased $6.6 million, or 7.2%, in 1995, with acquisitions
increasing operating income $3.8 million. The operating margin dropped from
29.9% in 1994 to 27.7% in 1995. The reduction in operating margin was caused by
earnings pressures from regulatory agencies and long-distance providers and
increased operating expenses. The operating margins for the other services group
is considerably lower than that of the typical telephone company resulting in a
reduction in overall margins.
Other Income, Net increased $5.5 million, or 36.3%. Interest and dividend
income increased $3.6 million, or 32.3%, with acquisitions increasing interest
income $500,000. Cellular equity income increased $1.9 million reflecting
increased earnings from minority interests in cellular partnerships. In 1995,
the Telecom Group sold a cellular interest, a telephone company, and some
marketable equity securities resulting in a gain of $4.1 million. In 1994 the
Telecom Group sold a minority interest in a telephone company resulting in a
gain of $4.1 million.
Interest Expense increased $10.0 million, or 19.7%, in 1995 due primarily to
the added interest expense ($3.3 million) from the issuance of $39.2 million of
medium-term notes, from acquired companies ($1.5 million) and from higher
interest rates on short-term debt.
Income Tax Expense increased $1.4 million, or 6.2%, due primarily to the
increase in pretax income. The effective income tax rate was 41.5% in 1995
compared to 40.6% in 1994.
The Telecom Group adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," effective January 1, 1994. 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 implementation on years prior to 1994 reduced 1994 net
income by $723,000.
Net Income increased $1.5 million, or 4.6%, in 1995. The effect of
acquisitions increased net income $2.5 million in 1995.
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, the Telecommunications Act of 1996 was signed into law.
The new law is deregulatory and pro-competition but also contains special
pro-rural provisions which continue such principles as universal service and
toll rate averaging. All Telecom Group companies fit the definition of a rural
telephone company. The new law will provide the Telecom Group with protection
from unfair competition, while also providing opportunities to grow its
business. The FCC will be initiating and managing various rulemaking proceedings
to establish the necessary rules to implement the law. State Commissions will
also be involved in the implementation of the law and FCC rules and will monitor
the actions and progress of carriers in their respective states. The Telecom
Group will be
III-13
<PAGE>
actively participating in this process with the goal that the pro-rural
provisions of the law are translated into effective rules.
INFLATION
Management believes that inflation affects the Telecom Group's business to
no greater extent than the general economy.
FINANCIAL RESOURCES AND LIQUIDITY
The Telecom Group operates a capital intensive business. The Telecom Group
has financed and plans to continue to finance its construction program primarily
using internally generated cash supplemented by long-term financing from federal
government programs and short-term financing from the TDS Group. Financing from
federal government programs provided 24%, 24% and 27% of telecommunications
plant and equipment additions in 1996, 1995 and 1994, respectively. Internally
generated cash financed 76%, 76% and 73% of telecommunications plant and
equipment additions in 1996, 1995 and 1994, respectively.
CASH FLOWS FROM OPERATING ACTIVITIES increased 25.1% ($28.8 million) to
$143.5 million in 1996, but decreased 12.0% ($15.7 million) to $114.6 million in
1995. Operating cash flow (operating income plus depreciation and amortization)
totaled $192.3 million in 1996, $175.6 million in 1995 and $160.5 million in
1994. 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 $48.9 million in 1996, $61.0 million in 1995 and $30.2
million in 1994.
CASH FLOWS FROM FINANCING ACTIVITIES required $15.9 million in 1996, $3.7
million in 1995 and $16.6 million in 1994 reflecting the payment of cash
dividends to TDS, and borrowing and repayment of short- and long-term debt.
CASH FLOWS FROM INVESTING ACTIVITIES required $141.8 million in 1996, $58.4
million in 1995 and $112.1 million in 1994. The Telecom Group makes substantial
investments each year to construct, operate and maintain modern high-quality
communications networks and facilities that meet its customers expectations as a
basis for creating long-term value for shareowners. In recent years, rapid
changes in technology and new opportunities have required substantial
investments in revenue enhancing and cost reducing upgrades of the Telecom
Group's networks. Cash expenditures for telecommunications property and plant
additions totaled $144.4 million in 1996, $104.4 million in 1995 and $115.5
million in 1994 The following table summarizes the Telecom Group's investments
in telecommunications plant during the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Central Office Equipment........................................... $ 47,208 $ 38,697 $ 46,618
Outside Plant...................................................... 53,130 55,569 52,629
Other.............................................................. 44,102 10,106 16,236
----------- ----------- -----------
$ 144,440 $ 104,372 $ 115,483
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Telecom Group's capital additions include expenditures for outside plant
facilities and upgrades of recently acquired companies for new customer growth
and switch modernization. The Telecom Group installed 35 digital switches in
1996, 39 in 1995, and 32 in 1994 and made substantial improvements in outside
plant facilities during each year.
Capital expenditures during 1997 are expected to total approximately $130
million, including about $56 million for new digital switches and other
switching facilities, and $56 million for improvements to outside plant
facilities. It is expected that internally generated funds will be primarily
used to finance these improvements, supplemented by long-term financing from
federal government programs.
ACQUISITIONS The Telecom Group seeks to acquire telephone companies which
add value to the Telecom Group. The Telecom Group has acquired five telephone
companies in 1996 and 1995 and three telephone companies in 1994. A majority
owned telephone subsidiary also purchased a controlling interest in a cellular
entity in 1996. Aggregate consideration paid was $88.1 million for the
acquisitions in 1996, consisting of approximately 1.5 million TDS Common Shares
and $17.4 million in cash. The 1995 consideration consisted of approximately 1.0
million TDS Common Shares and $250,000 in cash. The 1994 consideration consisted
of approximately
III-14
<PAGE>
1.4 million TDS Common Shares, 125,000 TDS Preferred Shares and $7.4 million in
cash. The result of the issuance of such consideration by TDS was an increase in
TDS's common equity interest in the Telecom Group.
LIQUIDITY
The Telecom Group is generating substantial internal funds. Operating cash
flow (operating income plus depreciation and amortization) increased 9.5% to
$192.3 million in 1996 from $175.6 million in 1995 and 9.4% from $160.5 million
in 1994. Property, plant, and equipment additions were 75.1% of operating cash
flows in 1996, 59.4% in 1995 and 72.0% in 1994.
The Telecom Group has cash and cash equivalents, temporary cash investments,
construction funds and marketable securities totaling $241.9 million at December
31, 1996. These investments are primarily the result of telephone operations'
internally generated cash. While certain regulated telephone subsidiaries' debt
agreements place limits on the transfer of funds to the parent, these
restrictions are not expected to affect the Telecom Group's ability to meet its
cash obligations.
The Telecom Group plans to continue financing its telephone construction
program primarily using internally generated cash supplemented by long-term
financing from federal government programs and short-term financing from TDS.
The Telecom Group's telephone subsidiaries had $129.8 million in unadvanced loan
funds from federal government programs at December 31, 1996, to finance the
telephone construction program. These loan commitments have a weighted average
annual interest rate of 6.15%.
Management believes the Telecom Group has sufficient internal and external
resources to finance the anticipated requirements of its business development
and construction programs.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAIN "FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, THAT ARE BASED ON CURRENT
EXPECTATIONS, ESTIMATES AND PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL
FACTS, INCLUDING STATEMENTS ABOUT TDS'S BELIEFS AND EXPECTATIONS ARE
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS CONTAIN POTENTIAL RISKS AND
UNCERTAINTIES AND, THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY. TDS
UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE, BUT
ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION IN
MARKETS IN WHICH THE TELECOM GROUP OPERATES; ADVANCES IN TELECOMMUNICATIONS
TECHNOLOGY; CHANGES IN THE TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING
AND FUTURE LITIGATION; AVAILABILITY OF FUTURE FINANCING; AND UNANTICIPATED
CHANGES IN THE MIX OF PRODUCTS AND SERVICES OFFERED IN THE TELECOM GROUP'S
MARKETS. READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF THESE IMPORTANT
FACTORS.
III-15
<PAGE>
THE TDS TELECOMMMUNICATIONS GROUP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING REVENUES
Telephone Revenues
Local Service...................................................................... $ 110,501 $ 95,184 $ 82,145
Network Access and Long Distance................................................... 213,113 195,575 174,178
Miscellaneous...................................................................... 48,299 41,528 40,399
----------- ----------- -----------
Total Telephone Revenues......................................................... 371,913 332,287 296,722
Other Service Offerings.............................................................. 31,774 23,764 10,499
Intercompany Revenues................................................................ (1,058) (1,210) (880)
----------- ----------- -----------
Total Operating Revenues......................................................... 402,629 354,841 306,341
----------- ----------- -----------
OPERATING EXPENSES
Network Operations................................................................... 67,521 54,964 45,412
Depreciation and Amortization........................................................ 85,575 74,758 67,956
Customer Operations.................................................................. 53,764 46,818 42,617
Corporate Operations................................................................. 62,276 58,998 49,706
----------- ----------- -----------
Total Telephone Expenses........................................................... 269,136 235,538 205,691
Other Service Offerings.............................................................. 31,193 22,273 9,924
Intercompany Expenses................................................................ (1,058) (1,210) (880)
----------- ----------- -----------
Total Operating Expenses........................................................... 299,271 256,601 214,735
----------- ----------- -----------
OPERATING INCOME....................................................................... 103,358 98,240 91,606
----------- ----------- -----------
OTHER INCOME AND (EXPENSES)
Interest and Dividend Income......................................................... 5,942 6,895 4,558
Interest and Dividend Income--Affiliated............................................. 8,945 7,950 6,664
Cellular Investment Income, net of License Cost Amortization......................... 5,751 3,082 1,157
AFUDC................................................................................ 825 682 1,660
Gain on Sale of Investments.......................................................... -- 4,094 4,136
Other (Expenses), Net................................................................ (1,869) (1,909) (2,921)
----------- ----------- -----------
19,594 20,794 15,254
----------- ----------- -----------
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES........................................ 122,952 119,034 106,860
----------- ----------- -----------
Interest Expense..................................................................... 39,318 37,765 32,470
Interest Expense--Affiliate.......................................................... 22,255 22,883 18,207
----------- ----------- -----------
61,573 60,648 50,677
----------- ----------- -----------
INCOME BEFORE INCOME TAXES............................................................. 61,379 58,386 56,183
Income Tax Expense..................................................................... 25,685 24,231 22,806
----------- ----------- -----------
NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE............................... 35,694 34,155 33,377
Cumulative Effect of Accounting Change................................................. -- -- (723)
----------- ----------- -----------
NET INCOME............................................................................. $ 35,694 $ 34,155 $ 32,654
----------- ----------- -----------
----------- ----------- -----------
Proforma (Unaudited): See Note 1
Net Income Attributable to TDS Group through Retained Interest......................... $ 8,923 $ 8,529 $ 8,163
Net Income Attributable to TDS
Telecommunications Group Common Shares............................................... $ 26,771 $ 25,616 $ 24,491
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
III-16
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income........................................................................ $ 35,694 $ 34,155 $ 32,654
Add (Deduct) adjustments to reconcile net income to net cash provided by operating
activities
Cumulative Effect of Accounting Change.......................................... -- -- 723
Depreciation and Amortization................................................... 88,967 77,354 68,878
Deferred Income Taxes, Net...................................................... (9,157) (10,724) (4,349)
Cellular Investment Income...................................................... (6,907) (4,039) (1,909)
Amortization of License Costs................................................... 1,156 936 764
Gain on Sale of Investments..................................................... -- (4,094) (4,136)
Other Non-cash Expense.......................................................... 35,067 35,461 30,077
Change in Accounts Receivable................................................... (3,925) (7,663) (8,220)
Change in Accounts Payable...................................................... (4,013) (4,943) 14,972
Change in Accrued Federal Income Taxes.......................................... 2,135 5,625 (932)
Change in Other Accrued Taxes................................................... 135 2,873 42
Change in Other Assets and Liabilities.......................................... 4,300 (10,307) 1,746
------------ ------------ ------------
143,452 114,634 130,310
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-Term Debt Borrowing.......................................................... 34,036 25,363 31,716
Repayment of Long-Term Debt....................................................... (26,178) (17,769) (32,920)
Change in Notes Payable........................................................... (8,186) 5,804 451
Dividends Paid.................................................................... (15,611) (17,077) (15,808)
------------ ------------ ------------
(15,939) (3,679) (16,561)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Telecommunications Plant............................................. (144,440) (104,372) (115,483)
Proceeds from Investment Sales.................................................... 5,942 10,091 6,000
Acquisitions, excluding cash acquired............................................. 32 2,351 3,499
Change in Temporary Cash Investments and Marketable Securities.................... (2,879) 29,126 (929)
Investment in Cellular Partnerships............................................... 1,557 453 (2,930)
Change in Investments............................................................. (2,051) 3,905 (2,232)
------------ ------------ ------------
(141,839) (58,446) (112,075)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................ (14,326) 52,509 1,674
CASH AND CASH EQUIVALENTS
Beginning of Period............................................................. 197,861 145,352 143,678
------------ ------------ ------------
End of Period................................................................... $ 183,535 $ 197,861 $ 145,352
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
III-17
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents
General Funds............................................................................... $ 33,519 $ 39,447
Affiliated Cash Equivalents................................................................. 150,016 158,414
------------- -------------
183,535 197,861
Temporary Cash Investments.................................................................... 39,383 22,839
Construction Funds............................................................................ 1,405 1,588
Accounts Receivable
Customers................................................................................... 25,821 21,629
Connecting Companies........................................................................ 37,363 28,003
Affiliated.................................................................................. 2,004 7,742
Other....................................................................................... 6,260 5,017
Notes Receivable--Affiliated.................................................................. 3,660 3,884
Other Current Assets.......................................................................... 12,305 14,724
------------- -------------
311,736 303,287
------------- -------------
INVESTMENTS
Costs in Excess of Underlying Book Values of Subsidiaries, net of accumulated amortization of
$29,560 and $24,724, respectively........................................................... 182,281 160,093
Cellular Investments.......................................................................... 57,241 72,545
Marketable Securities......................................................................... 17,626 19,378
Other Investments............................................................................. 12,703 17,776
------------- -------------
269,851 269,792
------------- -------------
TELECOMMUNICATIONS PLANT
In Service and Under Construction............................................................. 1,293,779 1,104,575
Less Accumulated Depreciation................................................................. 524,418 445,236
------------- -------------
769,361 659,339
------------- -------------
OTHER ASSETS AND DEFERRED CHARGES............................................................... 1,981 6,536
------------- -------------
TOTAL ASSETS.................................................................................... $ 1,352,929 $ 1,238,954
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
III-18
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
BALANCE SHEETS
LIABILITIES AND GROUP EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current Portion of Long-Term Debt............................................................. $ 13,554 $ 12,431
Notes Payable--Affiliated..................................................................... 27,542 28,002
Accounts Payable
Connecting Companies........................................................................ 17,852 13,225
Affiliated.................................................................................. 4,305 11,925
Other....................................................................................... 23,904 27,882
Advance Bills and Customer Deposits........................................................... 5,423 5,454
Accrued Federal Income Taxes due TDS.......................................................... 9,849 7,948
Other Accrued Taxes........................................................................... 8,426 8,011
Other......................................................................................... 10,038 9,408
------------- -------------
120,893 124,286
------------- -------------
DEFERRED LIABILITIES AND CREDITS
Net Deferred Income Tax Liability............................................................. 57,217 52,314
Postretirement Benefits Obligation Other Than Pensions........................................ 10,804 10,802
Other......................................................................................... 14,064 13,748
------------- -------------
82,085 76,864
------------- -------------
LONG-TERM DEBT, excluding current portion....................................................... 547,290 523,948
LONG-TERM DEBT--Affiliated...................................................................... 237,035 231,360
------------- -------------
784,325 755,308
------------- -------------
MINORITY INTEREST IN SUBSIDIARIES............................................................... 21,810 17,109
------------- -------------
TDS TELECOMMUNICATIONS GROUP EQUITY............................................................. 343,816 265,387
------------- -------------
TOTAL LIABILITIES AND GROUP EQUITY.............................................................. $ 1,352,929 $ 1,238,954
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
III-19
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS
The TDS Telecommunications Group ("Telecom Group") primarily consists of TDS
Telecommunications Corporation and its subsidiaries ("TDS Telecom"), a wholly
owned subsidiary of Telephone and Data Systems, Inc. ("TDS") which operates
landline telephone companies. The Telecom Group also includes the attribution of
certain TDS debt. The Telecom Group may in the future also include such other
assets and liabilities of TDS as the Board of Directors of TDS may determine to
attribute to the Telecom Group and such other businesses, assets and liabilities
as TDS or any of its subsidiaries may in the future acquire for the Telecom
Group, as determined by the Board of Directors of TDS.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of the Telecom Group conform to generally accepted
accounting principles. The accounting records of the telephone subsidiaries are
maintained in accordance with the uniform systems of accounts prescribed by the
regulatory bodies under whose jurisdiction the subsidiaries operate.
BASIS OF PRESENTATION
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal (the "Tracking Stock Proposal") which, if approved by
shareholders and implemented by the Board, would authorize the Board to issue
three new classes of common stock designated as United States Cellular Group
Common Shares (the "Cellular Group Shares"), TDS Telecommunications Group Common
Shares (the "Telecom Group Shares") and Aerial Communications Group Common
Shares (the "Aerial Group Shares"), and change the state of incorporation of
Telephone and Data Systems, Inc. from Iowa to Delaware. While each of the new
classes of common stock would constitute common stock of Telephone and Data
Systems, Inc., each is intended to reflect the separate performance of Telephone
and Data Systems, Inc.'s cellular telephone, landline telephone and personal
communications services businesses ("Tracking Stocks"). The Cellular Group
Shares, when issued, are intended to reflect the separate performance of the
United States Cellular Group (the "Cellular Group"), which includes Telephone
and Data Systems, Inc.'s interest in United States Cellular Corporation, an
81%-owned subsidiary of Telephone and Data Systems, Inc. which operates and
invests in cellular telephone companies and properties. The Telecom Group
Shares, when issued, are intended to reflect the separate performance of the TDS
Telecommunications Group (the "Telecom Group"), which primarily includes
Telephone and Data Systems, Inc.'s interest in TDS Telecommunications
Corporation, a wholly-owned subsidiary of Telephone and Data Systems, Inc. which
operates landline telephone companies. The Aerial Group Shares, when issued, are
intended to reflect the separate performance of the Aerial Communications Group
(the "Aerial Group"), which includes Telephone and Data Systems, Inc.'s interest
in Aerial Communications, Inc., an 83%-owned subsidiary of Telephone and Data
Systems, Inc. which is developing broadband personal communications services.
The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the residual group
(the "TDS Group"), which includes retained interests ("Retained Interests") in
each of United States Cellular Group, the TDS Telecommunications Group, and the
Aerial Communications Group to the extent of the Retained Interests in the
respective groups, and all other businesses of TDS. The TDS Group includes
Telephone and Data Systems, Inc. and all of its subsidiaries and their
respective properties and assets other than (except with respect to the Retained
Interests): United States Cellular and its subsidiaries (which are included in
the United States Cellular Group), TDS Telecom and its subsidiaries (which are
included in the TDS Telecommunications Group), and Aerial and its subsidiaries
(which are included in the Aerial Communications Group) and any other assets or
liabilities or subsidiaries of Telephone and Data Systems, Inc. attributed to
the United States Cellular Group, the TDS Telecommunications Group or the Aerial
Communications Group. The TDS Group reflects primarily the TDS Retained Interest
in the Cellular Group, the Telecom Group and the Aerial Group, the Corporate
operations (including corporate management, intercompany financing, cash
management and intercompany income tax allocation activities) and the operations
of American Paging, Inc., an 82%-owned subsidiary.
Following approval by shareholders of the Tracking Stock Proposal, Telephone
and Data Systems, Inc. currently intends to a) offer and sell Telecom Group
Shares in a public offering for cash, subject to prevailing market and other
conditions (the "Telecom Public Offering"), and to allocate the net proceeds
thereof to the Telecom Group, b) issue Cellular Group Shares in exchange for all
of the Common Shares of United States Cellular
III-20
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Corporation which are not owned by Telephone and Data Systems, Inc., subject to
approval by the board of directors and the shareholders of United States
Cellular Corporation (the "U. S. Cellular Merger"), c) issue Aerial Group Shares
in exchange for all of the Common Shares of Aerial Communications, Inc. which
are not owned by Telephone and Data Systems, Inc., subject to approval by the
board of directors and the shareholders of Aerial Communications, Inc. (the
"Aerial Merger"), and d) distribute one Cellular Group Share, two-thirds of a
Telecom Group Share and two-thirds of an Aerial Group Share in the form of a
stock dividend with respect to each outstanding Series A Common Share and Common
Share of Telephone and Data Systems, Inc. (the "Distribution"). It is currently
expected that the Distribution would take place in June 1998 or later, after the
completion of the Telecom Public Offering, the U. S. Cellular Merger and the
Aerial Merger, although the Board reserves the right to effect all or any part
of the Distribution at any time, or not to make the Distribution, regardless of
whether or not such other transactions have taken place.
The shares of Tracking Stock which would be issued in the Distribution would
represent an approximate 75% interest of the common equity value of TDS in each
Tracking Group (the "Outstanding Interest"). When considering the shares of
Tracking Stock which would also be issued in the Telecom Public Offering, the U.
S. Cellular Merger and the Aerial Merger, as well as the Distribution, the
Outstanding Interest would initially represent in the aggregate an approximately
80% interest in each Tracking Group. Upon completion of all of the Transactions
as contemplated, approximately 20% of the common shareholders' value of
Telephone and Data Systems, Inc. in each Tracking Group would initially be
retained as Retained Interests in the TDS Group, along with all other interests
held by Telephone and Data Systems, Inc.
Following the Distribution, subject to the legal restrictions on the payment
of dividends, the Board currently intends to establish an annual dividend on the
Telecom Group Shares in an amount equal to $.48 per share. The Board also
currently intends to establish an annual dividend on the Common Shares and
Series A Common Shares in an amount equal to $.10 per share. (Based on the
expected distribution ratio of two-thirds of a Telecom Group Share for each
existing Common Share and Series A Common Share, the dividend on Telecom Group
shares would equate to a per share dividend of $.32 per existing Common Share
and Series A Common Share. The total of the dividend on Common Shares and Series
A Common Shares of $.10 and the equivalent dividend on Telecom Group Shares of
$.32 equals the existing current annual dividend on the existing Common Shares
and Series A Common Shares of $.42). With regard to the Cellular Group and the
Aerial Group Shares, the Board currently intends to retain future earnings, if
any, for the development of the businesses of the Cellular Group and Aerial
Group, respectively, and does not anticipate paying dividends on the Cellular
Group or the Aerial Group Shares in the foreseeable future. Future dividends on
the shares of common stock will be payable when, as and if declared by the Board
out of the lessor of (1) all funds of Telephone and Data Systems, Inc. legally
available therefor and (2) the available dividend amount with respect to the
relevant Group.
Funds of the Company legally available for the payment of dividends
("Surplus") (approximately $2,031 million as of December 31, 1996, based on the
financial statements) is an amount approximately equal to the Total Common and
Preferred Equity of the Company less the par or stated value of all shares of
common and preferred stock outstanding (204,155,000 shares as of December 31,
1996 after the Distribution). With respect to any Tracking Group, the Available
Dividend Amount (approximately $1,107 million for the Cellular Group, $258
million for the Telecom Group and $328 million for the Aerial Group as of
December 31, 1996, based on the financial statements) is an amount approximately
equal to the Outstanding Interest Fraction of such Tracking Group (approximately
75% after the Distribution) times the respective Tracking Group Equity less the
par value of the respective outstanding Tracking Group shares. With respect to
the TDS Group, the Available Dividend Amount (approximately $610 million as of
December 31, 1996) is an amount approximately equal to the greater of a) an
amount (approximately $339 million) which is approximately equal to the Surplus
of the Company less the sum of all Available Dividend Amounts of all Tracking
Groups or b) an amount (approximately $610 million) which is approximately equal
to the TDS Group Equity and Preferred Stock less the par or stated value of all
Common and Series A Common Shares and Preferred Stock outstanding.
The financial statements of the Groups comprise all of the accounts included
in the corresponding consolidated financial statements of Telephone and Data
Systems, Inc. The separate Cellular Group, Telecom Group,
III-21
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Aerial Group, and TDS Group financial statements give effect to the management
and accounting policies that would be applicable upon implementation of the
Tracking Stock Proposal. Subject to the completion of the U. S. Cellular Merger
and the Aerial Merger, Telephone and Data Systems, Inc. intends to terminate
certain intercompany agreements between Telephone and Data Systems, Inc. and U.
S. Cellular and Aerial, respectively. Thereafter, all of the relationships
between Telephone and Data Systems, Inc. and such subsidiaries would be
determined solely by methods that management of Telephone and Data Systems, Inc.
believes to be reasonable. Many of such policies would continue the arrangements
which presently exist between Telephone and Data Systems, Inc. and U. S.
Cellular or Aerial pursuant to the intercompany agreements, but Telephone and
Data Systems, Inc. would have no contractual obligation to continue such
policies after the intercompany agreements have been terminated. The separate
Group financial statements have been prepared on a basis that management
believes to be reasonable and appropriate and include (1) the historical
financial position, results of operations and cash flows of the businesses that
comprise each of the Groups, (2) any assets and liabilities (including
contingent liabilities) which have been attributed to any Group from any other
Group, and (3) with respect to the TDS Group, the Retained Interest in each of
the Tracking Groups. The effects of the issuance of the Tracking Stocks have not
been reflected in these historical financial statements.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, Telephone and Data
Systems, Inc. will prepare and file with the Securities and Exchange Commission,
consolidated financial statements of Telephone and Data Systems, Inc., and
financial statements of the Cellular Group, the Telecom Group, and the Aerial
Group for so long as the respective Tracking Stock is outstanding, and the TDS
Group for as long as any Tracking Stock is outstanding. Although the financial
statements of the Cellular Group, the Telecom Group, the Aerial Group, and the
TDS Group will separately report the assets, liabilities (including contingent
liabilities) and shareholders' equity of Telephone and Data Systems, Inc.
attributed to the Cellular Group, the Telecom Group, the Aerial Group, and the
TDS Group, such attribution will not affect the legal title to such assets or
responsibility for such liabilities. Holders of Cellular Group, Telecom Group,
and Aerial Group Common Shares will be, and holders of Telephone and Data
Systems, Inc. Common Shares and Series A Common Shares are, shareholders of
Telephone and Data Systems, Inc. Telephone and Data Systems, Inc. and its
subsidiaries would each continue to be responsible for their respective
liabilities.
Financial effects arising from the Cellular Group, Telecom Group, Aerial
Group or TDS Group that affect the consolidated results of operations or
financial condition of Telephone and Data Systems, Inc. could affect the results
of operations or financial condition of the Cellular Group, Telecom Group,
Aerial Group or TDS Group, or could affect the market price of any or all
classes of Common Stock. In addition, any net losses of Telephone and Data
Systems, Inc., or the Cellular Group, the Telecom Group, the Aerial Group or the
TDS Group, and dividends or distributions on, or repurchases of, any class of
Common Stock will reduce the assets of Telephone and Data Systems, Inc. legally
available for payment of dividends on any class of Common Stock. Accordingly,
Telephone and Data Systems, Inc.'s consolidated financial statements should be
read in conjunction with the Cellular Group, the Telecom Group, the Aerial Group
and the TDS Group financial information.
The management and accounting policies applicable to the preparation of the
financial statements of the TDS Group could be modified or rescinded by the
Board, in its sole discretion and without the approval of shareholders, although
there is no present intention to do so. The Board could also adopt additional
policies depending upon the circumstances. Any determination by the Board to
modify or rescind such policies, or to adopt additional policies, including any
such decision that could have disparate effects upon the holders of different
series of common stock, would be made by the Board in good faith and in the
honest belief that such decision is in the best interests of Telephone and Data
Systems, Inc. In addition, generally accepted accounting principles require that
changes in accounting policy must be preferable (in accordance with such
principles) to the policy previously in place.
(A) NATURE OF OPERATIONS
The Telecom Group operates 105 telephone companies serving 484,500 access
lines in 28 states. The Telecom Group also operates a long-distance company, an
Internet access provider and a structured wiring
III-22
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
business. The Telecom Group expands its operations through internal access line
growth, acquisitions, new services and entry into new territories.
(B) PRINCIPLES APPLIED IN THE FINANCIAL STATEMENTS
The financial statements include the accounts of TDS Telecom and its
majority owned subsidiaries since acquisition and certain other telephone
companies, assets and liabilities attributed to the Telecom Group, as determined
by the Board of Directors of TDS. All material transactions between companies
within the Telecom Group have been eliminated.
The Telecom Group includes as investments in subsidiaries the value of the
consideration given and all direct and incremental costs relating to
acquisitions accounted for as purchases. All costs relating to unsuccessful
negotiations for acquisitions are expensed.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) REVENUE RECOGNITION
The Telecom Group's revenues are recognized when earned. Network access and
long-distance services are furnished jointly with other companies, primarily
AT&T and the Bell Operating Companies. Compensation for interstate access
services is based on tariffed access charges to interstate long-distance
carriers as filed by the National Exchange Carrier Association with the Federal
Communications Commission on behalf of the Telecom Group. Compensation for
intrastate toll and access services is based on tariffed access charges, cost
separation studies, nationwide average schedules or special settlement
arrangements with intrastate long-distance carriers. Network access and
long-distance revenues based on cost separation studies represent estimates
pending completion and acceptance of final cost studies. Management believes
that recorded amounts represent reasonable estimates of the final amounts.
(D) PRO FORMA NET INCOME AND EARNINGS PER SHARE
Pro forma net income attributable to the Telecom Group and to the TDS Group
through the Retained Interest assumes that the Telecom Public Offering has not
taken place and therefore 75% of Net Income is attributable to the Telecom Group
Shares and 25% of Net Income is attributable to the Retained Interest for the
TDS Group.
Earnings per share was omitted from the historical statements of earnings
since the Telecom Group Shares were not part of the equity structure of TDS and
the Articles of Incorporation did not allow for the issuance of the Telecom
Group Shares for the periods presented.
(E) INCOME TAXES
For federal income tax purposes, the Telecom Group is included in the TDS
consolidated tax return. For financial reporting purposes, the Telecom Group
computes its federal income tax as if it were not a member of the TDS
consolidated group but filed a separate return.
The provision for income taxes consists of an amount for taxes currently
payable and a provision for tax consequences deferred to future periods.
Deferred income taxes are provided for certain temporary differences principally
due to use of accelerated depreciation for income tax purposes. Investment tax
credits resulting from investments in telecommunications plant and equipment
prior to January 1, 1986, have been deferred and are being amortized to income
over the service lives of the related property.
III-23
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) SUPPLEMENTAL CASH FLOW DISCLOSURES
TDS has historically purchased controlling interests in telephone companies
in exchange for stock, cash and deferred cash payments. TDS has then attributed
the telephone subsidiary to the Telecom Group, which increased TDS's equity
interest attributable to the Telecom Group.
TDS acquired five telephone companies in 1996, five telephone companies in
1995, and three telephone companies in 1994. In conjunction with these
acquisitions, the following assets were acquired, liabilities assumed and equity
was attributed to the Telecom Group. Also, in September, 1996 the Telecom Group
transferred interests in 13 cellular markets held by various telephone
subsidiaries to TDS.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Telecommunications plant, net........................................................... $ 48,764 $ 20,804 $ 33,262
Costs in excess of underlying book values of subsidiaries............................... 25,603 25,263 40,604
Cellular investment..................................................................... (20,071) 7,952 21,728
Long-term debt.......................................................................... (22,978) (5,943) (22,040)
Deferred credits........................................................................ (6,239) (995) (6,226)
Other assets and liabilities, excluding cash and cash equivalents....................... 7,963 (3,079) 8,188
TDS Telecommunications Group Equity..................................................... (33,074) (46,353) (79,015)
---------- ---------- ----------
(Increase) in cash and cash equivalents due to acquisition.............................. $ (32) $ (2,351) $ (3,499)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table summarizes interest and income taxes paid.
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest paid........................................................................... $ 22,870 $ 20,562 $ 16,907
Income taxes paid....................................................................... 43,004 33,099 31,258
</TABLE>
The TDS long-term debt was attributed to the Telecom Group by the Board of
Directors of TDS. The long-term debt and the related interest expense of $21.8
million, $21.6 million and $17.7 million for the years of 1996, 1995, 1994,
respectively were recorded as non-cash transactions through the TDS
Telecommunications Group Equity.
(G) CASH AND CASH EQUIVALENTS, TEMPORARY CASH INVESTMENTS AND MARKETABLE
SECURITIES
Cash and cash equivalents consists of cash and those short-term,
highly-liquid investments with original maturities of three months or less.
Those investments with original maturities of more than three months to 12
months are classified as temporary cash investments. Temporary cash investments
are stated at cost, which approximates market. Those investments with original
maturities of more than 12 months are classified as marketable securities.
Marketable non-equity securities are stated at amortized cost and held to
maturity. Marketable equity securities are stated at fair value. The market
value of all marketable securities was $17.6 million and $19.4 million at
December 31, 1996 and 1995, respectively.
Affiliated cash equivalents consist of cash invested with TDS. The
investments earn interest at a rate equal to the average monthly rate paid on
cash invested in the general cash management program (5.52% at December 31,
1996).
(H) ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts owed by customers for service, by
long-distance providers, by affiliated entities, and other miscellaneous
receivables.
III-24
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) NOTES RECEIVABLE--AFFILIATED
Rural Development Acquisition Corporation ("RDAC"), a wholly owned
subsidiary of TDS Telecom, has loaned $3.7 million and $3.9 million to certain
rural cable and service companies (subsidiaries of TDS) at December 31, 1996 and
1995, respectively, bearing interest at the prime rate plus 1/2 percent (8.75%
at December 31, 1996). RDAC's intent is to further the interests of rural
telecommunications companies by investing in telecommunications projects and
acquisitions located in rural areas.
(J) MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost or market.
(K) INVESTMENTS
Costs in excess of the underlying book value of acquired telephone companies
relating to acquisitions initiated before November 1, 1970, aggregating $6.5
million, are not being amortized. Costs relating to acquisitions since November
1, 1970, aggregating $205.4 million at December 31, 1996, are being amortized on
a straight-line basis over a 40-year period. Amortization amounted to $4.9
million, $4.4 million and $3.3 million in 1996, 1995 and 1994, respectively.
Included in excess cost is approximately $120.6 million, which resulted from
various acquisitions structured to be tax-free.
Cellular investments includes amounts invested in cellular entities and
costs incurred in acquiring cellular interests.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cellular Partnerships.................................................................................. $ 13,317 $ 23,770
Cellular License Costs, net of amortization............................................................ 43,924 48,775
--------- ---------
$ 57,241 $ 72,545
--------- ---------
--------- ---------
</TABLE>
The Telecom Group follows the equity method of accounting, which recognizes
the Telecom Group's proportionate share of the income and losses accruing to it
under the terms of its partnership or shareholder agreements, for its more
significant investments ($5.8 million and $3.1 million at December 31, 1996 and
1995, respectively). Income and losses from these entities are reflected in the
income statements on a pretax basis. At December 31, 1996, the cumulative share
of income from minority cellular investments accounted for under the equity
method was approximately $6.0 million, $5.1 million of which was undistributed.
The cost method of accounting is followed for those insignificant minority
interests ($898,000 and $1.3 million at December 31, 1996 and 1995,
respectively).
Cellular license costs consist of costs incurred in acquiring minority
interests in cellular entities which have been awarded FCC licenses to provide
cellular service. These costs include amounts incurred by TDS in acquiring these
interests. These costs are capitalized and amortized through charges to expense
over 40 years. Amortization amounted to $1.2 million, $936,000 and $764,000 in
1996, 1995, and 1994, respectively. Accumulated amortization of cellular license
costs was $1.6 million and $2.7 million at December 31, 1996 and 1995,
respectively.
(L) TELECOMMUNICATIONS PLANT
Telecommunications plant in service and under construction is stated at the
original cost of construction including the capitalized costs of certain taxes,
payroll-related expenses, and an allowance for funds used during construction
("AFUDC"). AFUDC, a noncash item of nonoperating income, totaled $825,000,
$682,000, and $1.7 million in 1996, 1995 and 1994, respectively. The composite
weighted average rates were 7.3%, 9.3% and 10.4% in 1996, 1995 and 1994,
respectively. The amount of such allowance has varied principally as a result of
changes in the level of construction work in progress and in the cost of
capital.
III-25
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Renewals and betterments of units of property are added to
telecommunications plant in service. The original cost of depreciable property
retired is removed from plant in service and, together with removal cost less
any salvage realized, is charged to accumulated depreciation. Repairs and
renewals of minor items of property are charged to plant operations expense. No
gain or loss is recognized in connection with ordinary retirements of
depreciable property.
Depreciation is provided for financial reporting purposes using the
straight-line method. Composite depreciation rates, as applied to the average
cost of depreciable property was 7.2%, 7.1% and 7.5% for 1996, 1995 and 1994,
respectively.
(M) REGULATORY ACCOUNTING
The Telecom Group's telephone operations follow accounting for regulated
enterprises prescribed by Statement of Financial Accounting Standard ("SFAS")
No. 71, "Accounting for the Effects of Certain Types of Regulation." The Telecom
Group periodically reviews the criteria for applying these provisions to
determine whether continuing application of SFAS No. 71 is appropriate. The
Telecom Group believes that such criteria are still being met and therefore has
no current plans to change its method of accounting.
In analyzing the effect of discontinuing the application of SFAS No.71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles and therefore any adjustments to
telecommunications plant would be immaterial, as would be the write-off of
regulatory assets and liabilities.
(2) INCOME TAXES
Tax provisions charged to expense for the years ended December 31, 1996,
1995, and 1994 are summarized below. Taxes charged to other accounts are not
significant.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision:
Current.................................................................................. $ 21,037 $ 21,768 $ 15,376
Deferred................................................................................. (134) (2,120) 4,812
State income tax provision:
Current.................................................................................. 6,494 7,029 4,814
Deferred................................................................................. (47) (673) 36
Amortization of deferred investment tax credits............................................ (1,665) (1,773) (2,232)
--------- --------- ---------
Income tax expense..................................................................... 25,685 24,231 22,806
Taxes charged to cumulative effect of accounting change:
Current.................................................................................. -- -- (137)
Deferred................................................................................. -- -- (253)
--------- --------- ---------
Total income tax expense............................................................... $ 25,685 $ 24,231 $ 22,416
--------- --------- ---------
--------- --------- ---------
</TABLE>
III-26
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) INCOME TAXES (CONTINUED)
Income tax expense above divided by income before income taxes results in
effective income tax rates of 41.8% and 41.5%, and 40.6% in 1996, 1995, and
1994, respectively. The statutory federal income tax rate is reconciled to the
Telecom Group's effective income tax rate below:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate............................................................. 35.0% 35.0% 35.0%
State income taxes, net of federal benefit.................................................... 5.1 5.4 4.5
Amortization of intangibles................................................................... 2.1 1.8 1.2
Amortization of deferred investment tax credits............................................... (2.1) (2.3) (3.2)
Effects of corporations not in Federal Consolidated Return.................................... 1.9 2.5 2.6
Divided exclusion............................................................................. -- -- (1.1)
Other......................................................................................... (.2) (.9) 1.6
--- --- ---
Effective income tax rate..................................................................... 41.8% 41.5% 40.6%
--- --- ---
--- --- ---
</TABLE>
The effective tax rate for the year ended December 31, 1994 including the
cumulative effect of accounting change is 40.7%.
Deferred income taxes are provided for the temporary differences between the
amount of the Telecom Group's assets and liabilities for financial reporting
purposes and their tax bases. The Telecom Group's current net deferred tax
assets totaled $191,000 and $179,000 as of December 31, 1996 and 1995,
respectively.
The temporary differences that gave rise to the noncurrent deferred tax
assets and liabilities as of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred Tax Asset:
Postretirement benefits.............................................................................. $ 3,558 $ 3,196
Acquisition cost amortization........................................................................ 4,885 3,941
Regulatory........................................................................................... 2,064 2,239
Other................................................................................................ -- 760
--------- ---------
Deferred Tax Asset..................................................................................... 10,507 10,136
--------- ---------
Deferred Tax Liability:
Property, plant and equipment........................................................................ 66,821 62,450
Other................................................................................................ 903 --
--------- ---------
Total Deferred Tax Liability....................................................................... 67,724 62,450
--------- ---------
Net Deferred Income Tax Liability.................................................................... $ 57,217 $ 52,314
--------- ---------
--------- ---------
</TABLE>
The Telecom Group has recorded deferred income tax liabilities related to
temporary differences not deferred under rate-making policy. As of December 31,
1996 a corresponding net regulatory liability of $200,000 has been established
to reflect future rate treatment for the temporary differences. This amount is
being amortized over the lives of the related temporary differences.
(3) GAINS ON SALES OF INVESTMENTS
The Telecom Group sold a telephone company, a cellular interest, and various
marketable equity securities in 1995 for aggregate consideration of $10.1
million, resulting in a pre-tax gain of $4.1 million. The Telecom Group sold a
minority telephone company investment in 1994 for aggregate consideration of
$11.9 million, resulting in a pre-tax gain of $4.1 million.
III-27
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) TELECOMMUNICATIONS PLANT
The following table summarizes the telecommunications plant in service and
under construction at December 31, 1996 and 1995 used in operations.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and Buildings.............................................................................. $ 67,181 $ 69,629
Central Office Equipment........................................................................ 372,008 323,317
Cable and Wire.................................................................................. 639,537 547,502
Furniture and Office Equipment.................................................................. 77,046 72,070
Vehicles and Other Equipment.................................................................... 39,928 32,959
Plant Under Construction........................................................................ 59,213 42,948
Non-regulated investments....................................................................... 38,866 16,150
------------- -------------
$ 1,293,779 $ 1,104,575
------------- -------------
------------- -------------
</TABLE>
(5) NOTES PAYABLE--AFFILIATED
The Telecom Group has notes payable to a wholly owned subsidiary of TDS and
to TDS (included in the TDS Group) totaling $27.5 million at December 31, 1996
and $28.0 million at December 31, 1995.
Interest on notes payable is accrued at the current prime rate plus 1/2
percent (8.75% at December 31, 1996). The carrying amounts of notes payable
approximate fair values due to the short-term nature of these instruments.
III-28
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) LONG-TERM DEBT
Long-term debt as of December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
RUS, RTB, and FFB Mortgage
Notes, due through 2031
0% to 2%........................................................................................ $ 24,859 $ 26,350
4% to 6%........................................................................................ 178,499 172,231
6.04% to 9%..................................................................................... 103,800 84,464
9.5% to 11%..................................................................................... 1,213 1,233
----------- -----------
308,371 284,278
Other long-term notes,
0% to 12.6%, due through 2009................................................................... 10,601 9,225
----------- -----------
Telecom Group debt.................................................................................. 318,972 293,503
Less current portion................................................................................ 13,322 12,013
----------- -----------
Total Telecom Group long-term debt.................................................................. $ 305,650 $ 281,490
----------- -----------
Telephone and Data Systems, Inc. (Parent)
Medium-term notes, 8% to 10%, due through 2025.................................................. $ 239,200 $ 239,200
Purchase contracts and other Long-term notes 8% to 9.6%, due through 2003....................... 2,672 3,676
----------- -----------
241,872 242,876
Less current portion............................................................................ 232 418
----------- -----------
Total parent debt................................................................................... 241,640 242,458
----------- -----------
Total long-term debt................................................................................ $ 547,290 $ 523,948
Long-term debt--affiliated.......................................................................... 237,035 231,360
----------- -----------
$ 784,325 $ 755,308
----------- -----------
----------- -----------
</TABLE>
Long-term debt includes the debt of the parent company, TDS, which was
attributed to the Telecom Group by the Board of Directors of TDS.
TDS has also attributed certain other long-term debt (Long-term
debt--affiliated) to the Telecom Group from the TDS Group. Such debt is being
treated as an unsecured interest bearing instrument at an interest rate equal to
1/2% above the prime rate until the principal amount becomes due. Interest at a
rate equal to 2 1/2% above such prime rate would accrue on any overdue principal
or overdue installment of interest. No principal will be payable until maturity,
January 4, 1999. TDS has also attributed the tax benefit relating to the
interest expense of all attributed debt to the Telecom Group.
The mortgage notes issued under certain loan agreements with the Rural
Utilities Service ("RUS"), Rural Telephone Bank ("RTB"), and Federal Financing
Bank ("FFB"), agencies of the United States of America, are to be repaid in
equal monthly or quarterly installments covering principal and interest
beginning six months to three years after dates of issue and expiring through
2031. The agreements with the RUS, RTB and FFB provide for additional borrowings
of up to $129.4 million. Substantially all telephone plant is pledged under RUS
and RTB mortgage notes and various other obligations of the subsidiaries.
The annual requirements for principal payments on long-term debt are
approximately $13.6 million, $14.5 million, $14.6 million, $14.8 million, and
$13.9 million for the years 1997 through 2001, respectively.
The estimated fair value of the Telecom Group's non-affiliated long-term
debt was $515.8 million and $545.0 million at December 31, 1996 and 1995,
respectively. The fair value was estimated using discounted cash flow analysis
based on the Telecom Group's current incremental borrowing rates for similar
types of borrowing arrangements.
III-29
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) TDS TELECOMMUNICATIONS GROUP EQUITY
The changes in the TDS Telecommunications Group equity for the periods
presented is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at the beginning of period..................................................... $ 265,387 $ 228,800 $ 107,298
Net income............................................................................. 35,694 34,155 32,654
Dividends to TDS....................................................................... (71,719) (16,828) (15,808)
Equity contributions................................................................... 114,454 19,260 104,656
----------- ----------- -----------
Balance at the end of period........................................................... $ 343,816 $ 265,387 $ 228,800
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(8) PENSION PLAN
(A) PENSION PLAN
The Telecom Group participates in a qualified noncontributory defined
contribution pension plan sponsored by TDS which provides pension benefits for
most of the employees of the Telecom Group. Under this plan pension benefits and
costs are calculated separately for each participant and are funded currently.
TDS also sponsors an unfunded non-qualified deferred compensation plan to
supplement pension plan benefits to offset the reduction of benefits caused by
the limitation on annual employee compensation under the Internal Revenue Code.
Employees of certain of the telephone subsidiaries not covered by the pension
plan are covered under other pension plans or receive direct pension payment.
Total pension costs of the Telecom Group were $2.8 million, $2.7 million,
and $3.1 million in 1996, 1995, and 1994, respectively.
(B) OTHER POSTRETIREMENT BENEFITS
TDS sponsors two defined benefit postretirement plans that cover most of the
employees of the Telecom Group. One plan provides medical benefits and the other
plan provides life insurance benefits. Both plans are contributory, with retiree
contributions adjusted annually.
The medical plan anticipates future cost sharing changes that are consistent
with TDS's intent to increase retiree contributions by the health care cost
trend rate. An amount not to exceed 25% of the total contribution to the pension
plan will be contributed to fund the medical plan annually. An additional
contribution equal to a reasonable amortization of the part service cost may be
made without regard to the 25% limitation described above. TDS will limit
overall contributions to the aggregate accruals recorded by its subsidiaries.
III-30
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) PENSION PLAN (CONTINUED)
The following table sets forth the plans' funded status reconciled with the
amount show in the Telecom Group's consolidated balance sheet at December 31,
1996.
<TABLE>
<CAPTION>
LIFE
INSURANCE HEALTH
PLAN CARE PLAN TOTAL
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................................................... $ 1,571 $ 2,920 $ 4,491
Fully eligible active plan participants................................................ 495 2,079 2,574
Other active plan participants......................................................... 879 8,589 9,468
----------- ---------- ----------
2,945 13,588 16,533
Plan assets at fair value................................................................ (1,235) (7,403) (8,638)
----------- ---------- ----------
Accumulated postretirement benefit obligation in excess of plan assets................... 1,710 6,185 7,895
Unrecognized prior service cost.......................................................... (68) (649) (717)
Unrecognized net gain from past experience different from that assumed and from changes
in assumptions.......................................................................... 698 2,928 3,626
----------- ---------- ----------
Accrued postretirement benefit cost at December 31, 1996................................. $ 2,340 $ 8,464 $ 10,804
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
Net postretirement cost for 1996, 1995, and 1994 includes the following
components:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service Cost................................................................................... $ 695 $ 429 $ 599
Interest cost on accumulated postretirement benefit obligation................................. 1,049 911 947
Actual return on plan assets................................................................... (648) (549) --
Net amortization and deferral.................................................................. 104 231 (79)
--------- --------- ---------
Net postretirement cost........................................................................ $ 1,200 $ 1,022 $ 1,467
--------- --------- ---------
--------- --------- ---------
</TABLE>
For measurement purposes, a 10.2% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996; the rate was assumed
to decrease over seven years to 6.1% and to remain at 6.1% thereafter. The
assumed rates of compensation increases and return on plan assets were 5% and
8%, respectively. The health care cost trend rate assumption has a significant
effect on the amounts reported. Increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1996, by $2.2 million and
the aggregate of the service and interest cost components of postretirement
expense for the year then ended by $339,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7%.
ACCOUNTING FOR POSTEMPLOYMENT BENEFITS
The Telecom Group adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," effective January 1, 1994. 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 implementation on years prior to 1994 reduced 1994 net
income by $723,000 (net of income tax benefits of $390,000).
III-31
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) PRO FORMA ACQUISITION EFFECTS
During 1996 and 1995, TDS purchased and subsequently attributed to the
Telecom Group five telephone companies, respectively. Assuming that these
transfers had taken place on January 1, 1995, unaudited proforma results of
operations from continuing operations would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating revenues.................................................................................. $ 416,434 $ 393,499
Net income before cumulative effect of an accounting change......................................... $ 48,043 $ 51,340
</TABLE>
(10) COMMITMENTS AND CONTINGENCIES
CONSTRUCTION
The primary purpose of the Telecom Group's construction and expansion
program is to provide for normal growth, to upgrade telephone service, to expand
into new communications areas and to take advantage of service-enhancing and
cost-reducing technological developments. Telephone construction expenditures
are estimated to be approximately $130 million during 1997.
LEASE COMMITMENTS
The Telecom Group has leases for office space and data processing equipment,
most of which are classified as operating leases. For the years 1996, 1995,
1994, rent expense for term leases was $1.8 million, $1.6 million and $1.4
million, respectively, and rent expense under cancelable and short-term leases
was $1.7 million, $1.8 million and $1.6 million, respectively. At December 31,
1996, the aggregate minimum rental commitments under noncancelable operating
leases were as follows:
<TABLE>
<CAPTION>
MINIMUM FUTURE RENTAL
PAYMENTS
---------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
1997................................................................................ $ 1,618
1998................................................................................ 1,633
1999................................................................................ 1,621
2000................................................................................ 1,598
2001................................................................................ 1,582
Thereafter.......................................................................... 10
</TABLE>
LEGAL PROCEEDINGS
The Telecom Group is involved in legal proceedings before various states and
federal courts from time-to-time. Management does not believe that any of such
proceedings should have a material adverse impact on the financial position or
results of operations of the Telecom Group.
(11) RELATED PARTY TRANSACTIONS
TDS provided the Telecom Group with centralized management, accounting,
commercial, engineering, and data processing services aggregating $21.3 million,
$28.4 million, and $28.0 million during 1996, 1995, and 1994, respectively.
Services provided by TDS or any other Group to another Group are billed based on
expenses specifically identified to the Telecom Group and on allocation of
common expenses. Such allocations are based on the relationship of the Telecom
Group's assets, employees, investment in plant and expenses to the total assets,
employees, investment in plant and expenses of TDS. Management believes the
method used to allocate common expenses is reasonable. Management believes that
all expenses and costs applicable to the Telecom Group are reflected in the
accompanying financial statements on a basis which is representative of what
they would have been if the Telecom Group operated on a stand-alone basis.
III-32
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) RELATED PARTY TRANSACTIONS (CONTINUED)
The Telecom Group transferred interests in 13 cellular markets held by
various telephone subsidiaries to TDS in September 1996. Such cellular
interests, with a book value of $47.2 million, were transferred by TDS Telecom
to TDS via a dividend.
Long-term debt includes the debt of the parent company, TDS, which was
attributed to the Telecom Group by the Board of Directors of TDS.
TDS has also attributed certain other long-term debt (Long-term
debt--affiliated) to the Telecom Group from the TDS Group. Such debt is being
treated as an unsecured interest bearing instrument at an interest rate equal to
1/2% above the prime rate until the principal amount becomes due. Interest at a
rate equal to 2 1/2% above such prime rate would accrue on any overdue principal
or overdue installment of interest. No principal will be payable until maturity,
January 4, 1999. TDS has also attributed the tax benefit relating to the
interest expense of all attributed debt to the Telecom Group.
III-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Telephone and Data Systems, Inc.:
We have audited, the accompanying balance sheets of the TDS
Telecommunications Group (representing a business unit of Telephone and Data
Systems, Inc.) as of December 31, 1996 and 1995, and the related statements of
income and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the management of
Telephone and Data Systems, Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the TDS Telecommunications
Group as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
December 15, 1997
III-34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The TDS Telecommunications Group ("Telecom Group") primarily consists of TDS
Telecommunications Corporation and its subsidiaries ("TDS Telecom"), a wholly
owned subsidiary of Telephone and Data Systems, Inc. ("TDS") which operates
landline telephone companies. The Telecom Group also includes the attribution of
certain TDS debt. The Telecom Group may in the future also include such other
assets and liabilities of TDS as the Board of Directors of TDS may determine to
attribute to the Telecom Group and such other businesses, assets and liabilities
as TDS or any of its subsidiaries may in the future acquire for the Telecom
Group, as determined by the Board of Directors of TDS.
RESULTS OF OPERATIONS
The Telecom Group operates 105 telephone companies serving 506,600 access
lines in 28 states at September 30, 1997. The Telecom Group's telephone
subsidiaries are suppliers of telephone services to subscribers within the
telephone company's prescribed service areas. Its income is derived from
subscriber fees charged to its customers and from access charges imposed
pursuant to contracts with long-distance ("interexchange") telephone carriers.
Both the fees charged to the Telecom Group's customers for its services and the
access charges to interexchange carriers are based upon rates established by the
various public service commissions for intrastate services and the Federal
Communications Commission ("FCC") for interstate services. Generally, these fees
are a function of a prescribed return on the telephone subsidiaries' investment
in plant and equipment and the cost of services provided to their subscribers.
Local network service revenues are derived from providing local telephone
exchange service within telephone subsidiaries franchise area. Network access
service revenues result from providing interexchange carriers with access to TDS
Telecom's network to facilitate completing long-distance communications ("toll
calls"). Such revenues are based upon the allocation of operating expenses and
telephone plant investment to interstate and intrastate jurisdictions under cost
separation procedures established by the FCC. Revenues are designed to cover
expenses and provide a rate of return on plant investment. Charges to
interexchange carriers for interstate network usage are based on tariffs filed
with the FCC by the National Exchange Carriers Association ("NECA"), a service
organization formed after the AT&T divestiture for the purpose of administering
collection and distribution of revenues between its member local exchange
carriers and the interexchange carriers. Charges to interexchange carriers for
intrastate network usage are based on tariffs established by state regulatory
agencies. The interstate portion of these revenues is initially received based
on estimates of expenses, plant investment and rates of return for the
settlement period (usually a calendar year). The intrastate portion of these
revenues is received based on approved tariffs and is influenced by changes in
traffic levels as measured by minutes of use.
Other service revenues consist primarily of revenues of a long-distance
provider and a cellular interest acquired in 1996 by a telephone subsidiary as
well as the Telecom Group's new business ventures which include an Internet
access provider and a structured wiring business. Although the Telecom Group
currently operates such other businesses, there can be no assurance that the TDS
Board of Directors will permit the Telecom Group to expand such businesses.
III-35
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
TOTAL INTERNAL
--------------------- ACQUISITION ---------------------
1997 1996 CHANGE % CHG EFFECTS CHANGE % CHG
----------- ----------- --------- ---------- ----------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER ACCESS LINE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues
Telephone Revenues
Local Service...................... $ 91,383 $ 81,148 $ 10,235 12.6% $ 2,666 $ 7,569 9.3%
Network Access and Long-Distance... 174,821 155,272 19,549 12.6% 4,452 15,097 9.7%
Miscellaneous...................... 37,091 34,902 2,189 6.3% 1,009 1,180 3.4%
----------- ----------- --------- ---------- ----------- --------- ----------
Total Telephone Revenues......... 303,295 271,322 31,973 11.8% 8,127 23,846 8.8%
Other Service Offerings............ 36,654 18,351 18,303 99.7% 11,170 7,133 38.9%
Intercompany Revenues.............. (1,249) (837) (412) 49.2% -- (412) 49.2%
----------- ----------- --------- ---------- ----------- --------- ----------
Total Operating Revenues......... 338,700 288,836 49,864 17.3% 19,297 30,567 10.6%
----------- ----------- --------- ---------- ----------- --------- ----------
Operating Expenses
Network Operations................... 56,541 51,671 4,870 9.4% 1,489 3,381 6.5%
Depreciation and Amortization........ 71,043 61,907 9,136 14.8% 2,007 7,129 11.5%
Customer Operations.................. 48,080 39,960 8,120 20.3% 1,427 6,693 16.7%
Corporate Operations................. 49,330 44,733 4,597 10.3% 1,312 3,285 7.3%
----------- ----------- --------- ---------- ----------- --------- ----------
Total Telephone Expenses......... 224,994 198,271 26,723 13.5% 6,235 20,488 10.3%
Other Service Offerings.............. 38,247 17,691 20,556 116.2% 10,270 10,286 58.1%
Intercompany Expenses................ (1,249) (837) (412) 49.2% -- (412) 49.2%
----------- ----------- --------- ---------- ----------- --------- ----------
Total Operating Expenses......... 261,992 215,125 46,867 21.8% 16,505 30,362 14.1%
----------- ----------- --------- ---------- ----------- --------- ----------
Operating Income....................... 76,708 73,711 2,997 4.1% 2,792 205 0.3%
Other Income, Net...................... 11,066 14,427 (3,361) (23.3%) (191) (3,170) (22.0%)
----------- ----------- --------- ---------- ----------- --------- ----------
Income Before Interest and Income
Taxes................................ 87,774 88,138 (364) (0.4%) 2,601 (2,965) (3.4%)
Interest Expense....................... 47,216 45,700 1,516 3.3% 710 806 1.8%
Income Tax Expense..................... 17,431 17,633 (202) (1.1%) 539 (741) (4.2%)
----------- ----------- --------- ---------- ----------- --------- ----------
Net Income............................. $ 23,127 $ 24,805 $ (1,678) (6.8%) $ 1,352 $ (3,030) (12.2%)
----------- ----------- --------- ---------- ----------- --------- ----------
----------- ----------- --------- ---------- ----------- --------- ----------
Access Lines........................... 506,600 479,700
Revenue per Access Line................ $ 67.90 $ 66.16
Operating Margin....................... 22.6% 25.5%
Operating Cash Flow.................... $ 150,949 $ 137,652
Effective Income Tax Rate.............. 43.0% 41.6%
</TABLE>
Operating Revenues increased $49.9 million, or 17.3%, in the first nine
months of 1997 as a result of the effects of acquisitions ($19.3 million),
increases in other services ($7.1 million), recovery of increased costs of
providing long-distance services ($9.7 million), internal access line growth
($4.4 million), increased network usage ($4.1 million) and increases in the
sales of custom calling and advanced features ($2.4 million). The number of
telephone access lines increased 5.6% from 479,700 at September 30, 1996 to
506,600 at September 30, 1997. Average monthly revenue per access line was
$67.90 in the first nine months of 1997 and $66.16 in the same period of 1996.
LOCAL SERVICE revenues increased $10.2 million, or 12.6%, in the first nine
months of 1997. The effects of acquisitions increased local service revenues
$2.7 million. Internal access line growth of 5.6% increased local service
revenues $4.4 million. Custom calling and advanced feature sales and other
miscellaneous revenues increased $2.4 million. NETWORK ACCESS and LONG-DISTANCE
revenues increased $19.5 million, or 12.6%, in the first nine months of 1997.
The effects of acquisitions increased revenues $4.5 million. Increased expense
and investment levels to provide access service increased revenues $9.7 million
in 1997, and increased usage of the network generated $4.1 million of additional
revenues. Favorable revenue adjustments due to updated cost separation and pool
rate of return information increased revenues by $1.2 million in 1997.
MISCELLANEOUS revenues increased $2.2 million, or 6.3%, in the first nine months
of 1997. The effects of acquisitions increased miscellaneous revenues $1.0
million. OTHER SERVICE revenues increased $18.3 million, or 99.7%, in the first
nine months of 1997. The effects
III-36
<PAGE>
of the acquisition of a controlling interest of a cellular market by a
majority-owned telephone subsidiary in 1996 increased revenues $11.2 million.
TDSNet, the Telecom Group's Internet access provider, and TDS Datacom, Telecom
Group's structured wiring business, accounted for a $5.3 million increase in
revenues in the first nine months of 1997 compared to 1996.
Operating Expenses increased $46.9 million, or 21.8%, in the first nine
months of 1997 as a result of the effects of acquisitions ($16.5 million),
increases in other services ($10.3 million), increased investment in plant and
equipment ($7.1 million) as well as growth in internal operations.
NETWORK OPERATIONS expense increased $4.9 million, or 9.4%, with
acquisitions increasing expenses $1.5 million. DEPRECIATION and AMORTIZATION
increased $9.1 million, or 14.8%, with acquisitions increasing expenses $2.0
million. Increased investment in plant and equipment increased expenses by $7.1
million in 1997. CUSTOMER OPERATIONS expense increased $8.1 million, or 20.3%,
with acquisitions increasing expenses $1.4 million. Cost of equipment sold
increased $2.2 million due to increased sales activity. The remaining increase
in customer operations was primarily due to increased marketing and selling
efforts. CORPORATE OPERATIONS expense increased $4.6 million, or 10.3%, with
acquisitions increasing expenses $1.3 million. The remaining increases were
primarily due to growth in internal operations. OTHER SERVICE expense increased
$20.6 million, with acquisitions increasing expenses $10.3 million. Continued
expansion of new service offerings increased expenses by $6.9 million.
Operating Income increased $3.0 million, or 4.1%, in the first nine months
of 1997, with acquisitions increasing operating income $2.8 million. The
operating margin declined to 22.6% in the first nine months of 1997 from 25.5%
in 1996 due primarily to increased costs associated with developing new service
offerings as well as earnings pressures from regulatory agencies and
long-distance providers. The operating margins for the other services group is
considerably lower than that of the typical telephone company resulting in a
reduction in overall margins.
Other Income, Net decreased $3.4 million, or 23.3%, in the first nine months
of 1997. CELLULAR EQUITY INCOME decreased $2.0 million reflecting the transfer
of the majority of the cellular interests held by the Telecom Group to TDS
during 1996. INTEREST AND DIVIDEND INCOME decreased $500,000, or 4.4%, in the
first nine months of 1997 due to a decrease in cash balances.
Interest Expense increased $1.5 million, or 3.3%, in the first nine months
of 1997 primarily due to the added interest expense from acquired companies.
Income Tax Expense decreased $202,000, or 1.1%, in the first nine months of
1997. The effective income tax rate was 43.0% in 1997 compared to 41.6% in 1996.
Net Income decreased $1.7 million, or 6.8%, in the first nine months of
1997. The decrease is due primarily to the reduction in Other Income offset
somewhat by the effect of acquisitions.
FINANCIAL RESOURCES AND LIQUIDITY
The Telecom Group operates a capital intensive business. The Telecom Group
has financed and plans to continue to finance its construction program primarily
using internally generated cash supplemented by long-term financing from federal
government programs and short-term financing from the TDS Group.
CASH FLOWS FROM OPERATING ACTIVITIES decreased 1.2% ($1.2 million) to $94.1
million in the first nine months of 1997, from $95.3 million in 1996. Operating
cash flow (operating income plus depreciation and amortization) totaled $150.9
million in the first nine months of 1997 and $137.7 million in the first nine
months of 1996. 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 $56.8 million in 1997 and $42.4 million
in 1996.
CASH FLOWS FROM FINANCING ACTIVITIES requires $5.8 million in the first nine
months of 1997 and $15.4 million in the first nine months of 1996 reflecting the
borrowing and repayment of short- and long-term debt.
CASH FLOWS FROM INVESTING ACTIVITIES required $92.0 million in the first
nine months of 1997 and $68.6 million in the first nine months of 1996. The
Telecom Group makes substantial investments each year to construct, operate and
maintain modern high-quality communications networks and facilities in an effort
to meet or exceed its customers expectations as a basis for creating long-term
value for shareowners. In recent years, rapid changes in technology and new
opportunities have required substantial investments in revenue enhancing and
cost reducing upgrades of the Telecom Group's networks. Cash expenditures for
telecommunications property and plant additions totaled $96.7 million in the
first nine months of 1997 and $91.1 million in the first nine months of 1996.
The Telecom Group's capital additions include expenditures for outside plant
facilities and upgrades of recently acquired companies for new customer growth
and switch modernization.
III-37
<PAGE>
Capital expenditures during 1997 are expected to total approximately $130
million, including about $56 million for new digital switches and other
switching facilities, and $56 million for improvements to outside plant
facilities. It is expected that internally generated funds will be primarily
used to finance these improvements, supplemented by long-term financing from
federal government programs.
LIQUIDITY
The Telecom Group is generating substantial internal funds. Operating cash
flow (operating income plus depreciation and amortization) increased 12.6% to
$205.6 million for the twelve months ended September 30, 1997 from $182.6
million for the twelve months ended September 30, 1996.
The Telecom Group has cash and cash equivalents, temporary cash investments,
construction funds and marketable securities totaling $239.7 million at
September 30, 1997. These investments are primarily the result of telephone
operations' internally generated cash. While certain regulated telephone
subsidiaries' debt agreements place limits on the transfer of funds to the
parent, these restrictions are not expected to affect the Telecom Group's
ability to meet its cash obligations.
The Telecom Group plans to continue financing its telephone construction
program primarily using internally generated cash supplemented by long-term
financing from federal government programs and short term financing from the TDS
Group. The Telecom Group's telephone subsidiaries had $111.5 million in
unadvanced loan funds from federal government programs at September 30, 1997, to
finance the telephone construction program.
Management believes the Telecom Group has sufficient internal and external
resources to finance the anticipated requirements of its business development
and construction programs.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTAIN "FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, THAT ARE BASED ON CURRENT
EXPECTATIONS, ESTIMATES AND PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL
FACTS, INCLUDING STATEMENTS ABOUT TDS'S BELIEFS AND EXPECTATIONS ARE
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS CONTAIN POTENTIAL RISKS AND
UNCERTAINTIES AND, THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY. TDS
UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE, BUT
ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION IN
MARKETS IN WHICH THE TELECOM GROUP OPERATES; ADVANCES IN TELECOMMUNICATIONS
TECHNOLOGY; CHANGES IN THE TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING
AND FUTURE LITIGATION; AVAILABILITY OF FUTURE FINANCING; AND UNANTICIPATED
CHANGES IN THE MIX OF PRODUCTS AND SERVICES OFFERED IN THE TELECOM GROUP'S
MARKETS. READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF THESE IMPORTANT
FACTORS.
III-38
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING REVENUES
Telephone Revenues
Local Service................................................................................... $ 91,383 $ 81,148
Network Access and Long-Distance................................................................ 174,821 155,272
Miscellaneous................................................................................... 37,091 34,902
----------- -----------
Total Telephone Revenues...................................................................... 303,295 271,322
Other Service Offerings........................................................................... 36,654 18,351
Intercompany Revenues............................................................................. (1,249) (837)
----------- -----------
Total Operating Revenues...................................................................... 338,700 288,836
----------- -----------
OPERATING EXPENSES
Network Operations................................................................................ 56,541 51,671
Depreciation and Amortization..................................................................... 71,043 61,907
Customer Operations............................................................................... 48,080 39,960
Corporate Operations.............................................................................. 49,330 44,733
----------- -----------
Total Telephone Expenses...................................................................... 224,994 198,271
Other Service Offerings........................................................................... 38,247 17,691
Intercompany Expenses............................................................................. (1,249) (837)
----------- -----------
Total Operating Expenses...................................................................... 261,992 215,125
----------- -----------
OPERATING INCOME.................................................................................... 76,708 73,711
----------- -----------
OTHER INCOME AND (EXPENSES)
Interest and Dividend Income...................................................................... 4,113 3,933
Interest and Dividend Income Affiliated........................................................... 6,846 6,515
Cellular Investment Income, net of License Cost Amortization...................................... 1,776 3,743
AFUDC............................................................................................. 404 655
Other (Expenses), Net............................................................................. (2,073) (419)
----------- -----------
11,066 14,427
----------- -----------
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES..................................................... 87,774 88,138
----------- -----------
Interest Expense.................................................................................... 29,584 29,113
Interest Expense--Affiliate......................................................................... 17,632 16,587
----------- -----------
47,216 45,700
----------- -----------
INCOME BEFORE INCOME TAXES.......................................................................... 40,558 42,438
Income Tax Expense.................................................................................. 17,431 17,633
----------- -----------
NET INCOME.......................................................................................... $ 23,127 $ 24,805
----------- -----------
----------- -----------
Pro forma (Unaudited): See Note 4
Net Income Attributable to TDS Group through Retained Interest...................................... $ 5,782 $ 6,201
Net Income Attributable to TDS Telecommunications Group Common Shares............................... $ 17,345 $ 18,604
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
III-39
<PAGE>
THE TDS TELECOMMMUNICATIONS GROUP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income........................................................................................ $ 23,127 $ 24,805
Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities
Depreciation and Amortization................................................................... 74,241 63,031
Deferred Income Taxes, Net...................................................................... (9,464) (8,580)
Cellular Investment Income...................................................................... (2,292) (4,582)
Amortization of License Costs................................................................... 1,156 1,156
Other Non-cash Expense.......................................................................... 25,968 24,987
Change in Accounts Receivable................................................................... (8,472) (1,167)
Change in Accounts Payable...................................................................... (2,310) (5,392)
Change in Accrued Federal Income Taxes.......................................................... (7,789) (2,327)
Change in Other Accrued Taxes................................................................... 1,546 182
Change in Other Assets and Liabilities.......................................................... (1,566) 3,210
----------- -----------
94,145 95,323
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-Term Debt Borrowing.......................................................................... 13,131 19,268
Repayment of Long-Term Debt....................................................................... (20,173) (13,984)
Change in Notes Payable........................................................................... 1,246 (12,661)
Dividends Paid.................................................................................... -- (8,065)
----------- -----------
(5,796) (15,442)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Telecommunications Plant............................................................. (96,717) (91,131)
Proceeds from Investment Sales.................................................................... -- 18,574
Acquisitions, excluding cash acquired............................................................. -- (7,743)
Change in Temporary Cash Investments and Marketable Securities.................................... (1,289) 12,001
Investment in Cellular Partnerships............................................................... 1,853 143
Change in Investments............................................................................. 4,183 (441)
----------- -----------
(91,970) (68,597)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,621) 11,284
Cash and Cash Equivalents
Beginning of Period............................................................................. 183,535 197,861
----------- -----------
End of Period................................................................................... $ 179,914 $ 209,145
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
III-40
<PAGE>
THE TDS TELECOMMUNCIATIONS GROUP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
-------------- -------------
1997 1996
-------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents
General Funds.............................................................................. $ 25,650 $ 33,519
Affiliated Cash Equivalents................................................................ 154,264 150,016
-------------- -------------
179,914 183,535
Temporary Cash Investments................................................................... 25,035 39,383
Construction Funds........................................................................... 5,189 1,405
Accounts Receivable
Customers.................................................................................. 32,998 25,821
Connecting Companies....................................................................... 42,145 37,363
Affiliated................................................................................. 1,113 2,004
Other...................................................................................... 4,391 6,260
Notes Receivable--Affiliated................................................................. 3,770 3,660
Other Current Assets......................................................................... 14,010 12,305
-------------- -------------
308,565 311,736
-------------- -------------
INVESTMENTS
Costs in Excess of Underlying Book Values of Subsidiaries, net of accumulated amortization of
$20,162 and $29,560, respectively.......................................................... 178,942 182,281
Cellular Investments......................................................................... 39,999 57,241
Marketable Securities........................................................................ 29,521 17,626
Other Investments............................................................................ 12,373 12,703
-------------- -------------
260,835 269,851
-------------- -------------
TELECOMMUNICATIONS PLANT
In Service and Under Construction............................................................ 1,368,238 1,293,779
Less Accumulated Depreciation................................................................ 580,263 524,418
-------------- -------------
787,975 769,361
-------------- -------------
OTHER ASSETS AND DEFERRED...................................................................... 3,806 1,981
-------------- -------------
TOTAL ASSETS................................................................................... $ 1,361,181 $ 1,352,929
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
III-41
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
BALANCE SHEETS
LIABILITIES AND GROUP EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
-------------- -------------
1997 1996
-------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current Portion of Long-Term Debt............................................................ $ 13,494 $ 13,554
Notes Payable--Affiliated.................................................................... 28,788 27,542
Accounts Payable
Connecting Companies....................................................................... 15,299 17,852
Affiliated................................................................................. 2,642 4,305
Other...................................................................................... 20,172 23,904
Advance Bills and Customer Deposits........................................................ 5,106 5,423
Accrued Federal Income Taxes due TDS....................................................... 2,059 9,849
Other Accrued Taxes........................................................................ 9,972 8,426
Other...................................................................................... 9,954 10,038
-------------- -------------
107,486 120,893
-------------- -------------
DEFERRED CREDITS
Net Deferred Income Tax Liability............................................................ 54,761 57,217
Post-retirement Benefits Obligation Other Than Pensions...................................... 11,700 10,804
Other........................................................................................ 12,864 14,064
-------------- -------------
79,325 82,085
-------------- -------------
LONG-TERM DEBT, excluding current portion...................................................... 547,339 547,290
LONG-TERM DEBT--Affiliated..................................................................... 230,274 237,035
-------------- -------------
777,613 784,325
-------------- -------------
MINORITY INTEREST IN SUBSIDIARIES.............................................................. 22,862 21,810
-------------- -------------
TDS TELECOMMUNICATIONS GROUP EQUITY............................................................ 373,895 343,816
-------------- -------------
TOTAL LIABILITIES AND GROUP EQUITY............................................................. $ 1,361,181 $ 1,352,929
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
III-42
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The TDS Telecommunications Group ("Telecom Group") primarily consists of TDS
Telecommunications Corporation and its subsidiaries ("TDS Telecom"), a wholly
owned subsidiary of TDS which operates landline telephone companies. The Telecom
Group also includes the attribution of certain TDS debt. The Telecom Group may
in the future also include such other assets and liabilities of TDS as the Board
of Directors of TDS may determine to attribute to the Telecom Group and such
other businesses, assets and liabilities as TDS or any of its subsidiaries may
in the future acquire for the Telecom Group, as determined by the Board of
Directors of TDS.
1. The interim, unaudited financial statements included herein have been
prepared by TDS, 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 TDS believes that the disclosures are
adequate to make the information presented not misleading. It is suggested
that these interim, unaudited financial statements be read in conjunction
with the audited financial statements and the notes thereto included
elsewhere in this Proxy Statement/Prospectus.
The accompanying unaudited financial statements contain all adjustments
(consisting of only normal recurring items) necessary to present fairly the
financial position as of September 30, 1997 and December 31, 1996, and the
results of operations and cash flows for the nine months ended September 30,
1997 and 1996. The results of operations for the nine months ended September
30, 1997 and 1996, are not necessarily indicative of the results to be
expected for the full year.
2. BASIS OF PRESENTATION
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal (the "Tracking Stock Proposal") which, if approved by
shareholders and implemented by the Board, would authorize the Board to
issue three new classes of common stock designated as United States Cellular
Group Common Shares (the "Cellular Group Shares"), TDS Telecommunications
Group Common Shares (the "Telecom Group Shares") and Aerial Communications
Group Common Shares (the "Aerial Group Shares"), and change the state of
incorporation of Telephone and Data Systems, Inc. from Iowa to Delaware.
While each of the new classes of common stock would constitute common stock
of Telephone and Data Systems, Inc., each is intended to reflect the
separate performance of Telephone and Data Systems, Inc.'s cellular
telephone, landline telephone and personal communications services
businesses ("Tracking Stocks"). The Cellular Group Shares, when issued, are
intended to reflect the separate performance of the United States Cellular
Group (the "Cellular Group"), which includes Telephone and Data Systems,
Inc.'s interest in United States Cellular Corporation, an 81%-owned
subsidiary of Telephone and Data Systems, Inc. which operates and invests in
cellular telephone companies and properties. The Telecom Group Shares, when
issued, are intended to reflect the separate performance of the TDS
Telecommunications Group (the "Telecom Group"), which primarily includes
Telephone and Data Systems, Inc.'s interest in TDS Telecommunications
Corporation, a wholly-owned subsidiary of Telephone and Data Systems, Inc.
which operates landline telephone companies. The Aerial Group Shares, when
issued, are intended to reflect the separate performance of the Aerial
Communications Group (the "Aerial Group"), which includes Telephone and Data
Systems, Inc.'s interest in Aerial Communications, Inc., an 83%-owned
subsidiary of Telephone and Data Systems, Inc. which is developing broadband
personal communications services.
The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the residual
group (the "TDS Group"), which includes retained interests ("Retained
Interests") in each of United States Cellular Group, the TDS
Telecommunications Group, and the Aerial Communications Group to the extent
of the Retained Interests in the respective groups, and all other businesses
of TDS. The TDS Group includes Telephone and Data Systems, Inc. and all of
its subsidiaries and their respective properties and assets other than
(except with respect to the Retained Interests): United States Cellular and
its subsidiaries (which are included in the United States Cellular Group),
TDS Telecom and its subsidiaries (which are included in the TDS
Telecommunications Group), and Aerial and its subsidiaries (which are
included in the Aerial Communications Group) and any other assets or
liabilities or subsidiaries of Telephone and Data Systems, Inc. attributed
to the United States Cellular Group, the TDS Telecommunications Group or the
Aerial Communications Group. The TDS Group reflects primarily the TDS
Retained Interest in the Cellular Group, the Telecom Group and the Aerial
Group, the Corporate operations (including corporate
III-43
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
management, intercompany financing, cash management and intercompany income
tax allocation activities) and the operations of American Paging, Inc., an
82%-owned subsidiary.
Following approval by shareholders of the Tracking Stock Proposal, Telephone
and Data Systems, Inc. currently intends to a) offer and sell Telecom Group
Shares in a public offering for cash, subject to prevailing market and other
conditions (the "Telecom Public Offering"), and to allocate the net proceeds
thereof to the Telecom Group, b) issue Cellular Group Shares in exchange for
all of the Common Shares of United States Cellular Corporation which are not
owned by Telephone and Data Systems, Inc., subject to approval by the board
of directors and the shareholders of United States Cellular Corporation (the
"U. S. Cellular Merger"), c) issue Aerial Group Shares in exchange for all
of the Common Shares of Aerial Communications, Inc. which are not owned by
Telephone and Data Systems, Inc., subject to approval by the board of
directors and the shareholders of Aerial Communications, Inc. (the "Aerial
Merger"), and d) distribute one Cellular Group Share, two-thirds of a
Telecom Group Share and two-thirds of an Aerial Group Share in the form of a
stock dividend with respect to each outstanding Series A Common Share and
Common Share of Telephone and Data Systems, Inc. (the "Distribution"). It is
currently expected that the Distribution would take place in June 1998 or
later, after the completion of the Telecom Public Offering, the U. S.
Cellular Merger and the Aerial Merger, although the Board reserves the right
to effect all or any part of the Distribution at any time, or not to make
the Distribution, regardless of whether or not such other transactions have
taken place.
The shares of Tracking Stock which would be issued in the Distribution would
represent an approximate 75% interest of the common equity value of TDS in
each Tracking Group (the "Outstanding Interest"). When considering the
shares of Tracking Stock which would also be issued in the Telecom Public
Offering, the U. S. Cellular Merger and the Aerial Merger, as well as the
Distribution, the Outstanding Interest would initially represent in the
aggregate an approximately 80% interest in each Tracking Group. Upon
completion of all of the Transactions as contemplated, approximately 20% of
the common shareholders' value of Telephone and Data Systems, Inc. In each
Tracking Group would initially be retained as Retained Interests in the TDS
Group, along with all other interests held by Telephone and Data Systems,
Inc.
Following the Distribution, subject to the legal restrictions on the payment
of dividends, the Board currently intends to establish an annual dividend on
the Telecom Group Shares in an amount equal to $.48 per share. The Board
also currently intends to establish an annual dividend on the Common Shares
and Series A Common Shares in an amount equal to $.10 per share. (Based on
the expected distribution ratio of two-thirds of a Telecom Group Share for
each existing Common Share and Series A Common Share, the dividend on
Telecom Group shares would equate to a per share dividend of $.32 per
existing Common Share and Series A Common Share. The total of the dividend
on Common Shares and Series A Common Shares of $.10 and the equivalent
dividend on Telecom Group Shares of $.32 equals the existing current annual
dividend on the existing Common Shares and Series A Common Shares of $.42).
With regard to the Cellular Group and the Aerial Group Shares, the Board
currently intends to retain future earnings, if any, for the development of
the businesses of the Cellular Group and Aerial Group, respectively, and
does not anticipate paying dividends on the Cellular Group or the Aerial
Group Shares in the foreseeable future. Future dividends on the shares of
common stock will be payable when, as and if declared by the Board out of
the lessor of (1) all funds of Telephone and Data Systems, Inc. legally
available therefor and (2) the available dividend amount with respect to the
relevant Group.
Funds of the Company legally available for the payment of dividends
("Surplus") (approximately $1,966 million as of September 30, 1997, based on
the financial statements) is an amount approximately equal to the Total
Common and Preferred Equity of the Company less the par or stated value of
all shares of common and preferred stock outstanding (204,725,000 shares as
of September 30, 1997 after the Distribution). With respect to any Tracking
Group, the Available Dividend Amount (approximately $1,178 million for the
Cellular Group, $280 million for the Telecom Group and $213 million for the
Aerial Group as of September 30, 1997, based on the financial statements) is
an amount approximately equal to the Outstanding Interest Fraction of such
Tracking Group (approximately 75% after the Distribution) times the
respective Tracking Group Equity less the par value of the respective
outstanding Tracking Group shares. With respect to the TDS Group, the
Available Dividend Amount (approximately $557 million as of September 30,
1997) is an amount approximately equal to the greater of a) an amount
(approximately $295 million) which is approximately equal to the Surplus of
the
III-44
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company less the sum of all Available Dividend Amounts of all Tracking
Groups or b) an amount (approximately $557 million) which is approximately
equal to the TDS Group Equity and Preferred Stock less the par or stated
value of all Common and Series A Common Shares and Preferred Stock
outstanding.
The financial statements of the Groups comprise all of the accounts included
in the corresponding consolidated financial statements of Telephone and Data
Systems, Inc. The separate Cellular Group, Telecom Group, Aerial Group, and
TDS Group financial statements give effect to the management and accounting
policies that would be applicable upon implementation of the Tracking Stock
Proposal. Subject to the completion of the U. S. Cellular Merger and the
Aerial Merger, Telephone and Data Systems, Inc. intends to terminate certain
intercompany agreements between Telephone and Data Systems, Inc. and U. S.
Cellular and Aerial, respectively. Thereafter, all of the relationships
between Telephone and Data Systems, Inc. and such subsidiaries would be
determined solely by methods that management of Telephone and Data Systems,
Inc. believes to be reasonable. Many of such policies would continue the
arrangements which presently exist between Telephone and Data Systems, Inc.
and U. S. Cellular or Aerial pursuant to the intercompany agreements, but
Telephone and Data Systems, Inc. would have no contractual obligation to
continue such policies after the intercompany agreements have been
terminated. The separate Group financial statements have been prepared on a
basis that management believes to be reasonable and appropriate and include
(1) the historical financial position, results of operations and cash flows
of the businesses that comprise each of the Groups, (2) any assets and
liabilities (including contingent liabilities) which have been attributed to
any Group from any other Group, and (3) with respect to the TDS Group, the
Retained Interest in each of the Tracking Groups. The effects of the
issuance of the Tracking Stocks have not been reflected in these historical
financial statements.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, Telephone and
Data Systems, Inc. will prepare and file with the Securities and Exchange
Commission, consolidated financial statements of Telephone and Data Systems,
Inc., and financial statements of the Cellular Group, the Telecom Group, and
the Aerial Group for so long as the respective Tracking Stock is
outstanding, and the TDS Group for as long as any Tracking Stock is
outstanding. Although the financial statements of the Cellular Group, the
Telecom Group, the Aerial Group, and the TDS Group will separately report
the assets, liabilities (including contingent liabilities) and shareholders'
equity of Telephone and Data Systems, Inc. attributed to the Cellular Group,
the Telecom Group, the Aerial Group, and the TDS Group, such attribution
will not affect the legal title to such assets or responsibility for such
liabilities. Holders of Cellular Group, Telecom Group, and Aerial Group
Common Shares will be, and holders of Telephone and Data Systems, Inc.
Common Shares and Series A Common Shares are, shareholders of Telephone and
Data Systems, Inc. Telephone and Data Systems, Inc. and its subsidiaries
would each continue to be responsible for their respective liabilities.
Financial effects arising from the Cellular Group, Telecom Group, Aerial
Group or TDS Group that affect the consolidated results of operations or
financial condition of Telephone and Data Systems, Inc. could affect the
results of operations or financial condition of the Cellular Group, Telecom
Group, Aerial Group or TDS Group, or could affect the market price of any or
all classes of Common Stock. In addition, any net losses of Telephone and
Data Systems, Inc., or the Cellular Group, the Telecom Group, the Aerial
Group or the TDS Group, and dividends or distributions on, or repurchases
of, any class of Common Stock will reduce the assets of Telephone and Data
Systems, Inc. legally available for payment of dividends on any class of
Common Stock. Accordingly, Telephone and Data Systems, Inc.'s consolidated
financial statements should be read in conjunction with the Cellular Group,
the Telecom Group, the Aerial Group and the TDS Group financial information.
The management and accounting policies applicable to the preparation of the
financial statements of the TDS Group could be modified or rescinded by the
Board, in its sole discretion and without the approval of shareholders,
although there is no present intention to do so. The Board could also adopt
additional policies depending upon the circumstances. Any determination by
the Board to modify or rescind such policies, or to adopt additional
policies, including any such decision that could have disparate effects upon
the holders of different series of common stock, would be made by the Board
in good faith and in the honest belief that such decision is in the best
interests of Telephone and Data Systems, Inc. In addition, generally
accepted accounting principles require that changes in accounting policy
must be preferable (in accordance with such principles) to the policy
previously in place.
III-45
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Certain amounts reported in prior periods have been reclassified to conform
to the current period presentation.
4. Pro Forma Net Income and Earnings per Share
Pro forma net income attributable to the Telecom Group and to the TDS Group
through the Retained Interest assumes that the Telecom Public Offering has
not taken place and therefore 75% of Net Income is attributable to the
Telecom Group Shares and 25% of Net Income is attributable to the Retained
Interest for the TDS Group.
Earnings per share was omitted from the historical statements of earnings
since the Telecom Group Shares were not part of the equity structure of TDS
and the Articles of Incorporation did not allow for the issuance of the
Telecom Group Shares for the periods presented.
5. Supplemental Cash Flow Information
Cash and cash equivalents include cash and those short-term, highly liquid
investments with original maturities of three months or less. Those
investments with original maturities of more than three months to twelve
months are classified as temporary investments. Temporary investments are
stated at cost, which approximates market. Those investments with original
maturities of more than 12 months are classified as marketable securities
and are stated at amortized cost.
The Telecom Group acquired no telephone companies in 1997 and five in 1996.
In conjunction with these acquisitions, the following assets were acquired
and liabilities assumed and Common Shares issued.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Property, plant and equipment....................................................... $ 48,623
Cellular licenses................................................................... (4,552)
Increase in equity method investment in cellular interests.......................... (4,726)
Franchise costs..................................................................... 8,569
Long-term debt...................................................................... (22,979)
Deferred credits.................................................................... (7,363)
Other assets and liabilities, excluding cash and cash equivalents................... 10,488
Minority interest................................................................... (2,552)
TDS Common Shares issued and issuable............................................... (17,765)
--------
Decrease in cash due to acquisitions............................................ $ 7,743
--------
--------
</TABLE>
The following table summarizes interest and income taxes paid, and other
noncash transactions.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Interest Paid...................................................................... $ 17,606 $ 16,460
Income Taxes Paid.................................................................. $ 36,860 $ 36,461
</TABLE>
6. Long-term debt includes the debt of the parent company, TDS, which was
attributed to the Telecom Group by the Board of Directors of TDS.
TDS has also attributed certain other long-term debt (Long-term
debt--affiliated) to the Telecom Group from the TDS Group. Such debt is being
treated as an unsecured interest bearing instrument at an interest rate equal to
1/2% above the prime rate until the principal amount becomes due. Interest at a
rate equal to 2 1/2% above such prime rate would accrue on any overdue principal
or overdue installment of interest. No principal will be payable until maturity,
January 4, 1999. TDS has also attributed the tax benefit relating to the
interest expense of all attributed debt to the Telecom Group.
III-46
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECENT DEVELOPMENTS
RECENT FINANCIAL RESULTS
TDS Telecommunications Group operating revenues for the three and
twelve-month periods ended December 31, 1997 increased 9% and 12% to $116.7
million and $444.2 million, respectively, compared to the same periods in 1996.
These increases were primarily related to increases in network access & long
distance revenues as well as increased revenues generated from new business
ventures.
Operating expenses increased 21% and 18% to $93.9 million and $345.6
million, respectively, for the three and twelve-month periods ended December 31,
1997 as compared to the same periods in 1996. The increases relate primarily to
costs associated with maintaining and upgrading systems as well as development
of new business ventures.
Operating income for the same three and twelve-month periods ended December
31, 1997 decreased 21% and 4% to $22.8 million and $98.6 million, respectively
as compared to the same periods in 1996. The reduction in operating income is
due primarily to losses incurred in start-up ventures, such as the internet,
structured wiring and CLEC operations, as well as higher operating expenses and
downward pressures on certain revenue streams in the landline telephone
business. In addition, the three month period in 1996 included non recurring,
one-time expense reductions which increased operating income in 1996.
Earnings Before Interest and Taxes (EBIT) totaled $28.4 million, decreasing
$6.4 million for the three months ended December 31, 1997. For the twelve months
ended December 31, 1997, EBIT totaled $116.1 million, a decrease of $6.8
million, or 6%.
Net Income for the three months ended December 31, 1997 totaled $12.9
million compared to $19.8 million in 1996. Net income totaled $53.7 million for
the twelve months ended December 31, 1997 compared to $62.4 million in 1996.
PROPOSED CORPORATE RESTRUCTURING
On December 29, 1997, Airmont Plaza Associates, which claims to be a holder
of common shares of U.S. Cellular, filed a putative class action complaint on
behalf of the minority shareholders of U.S. Cellular in the Court of Chancery of
the State of Delaware in New Castle County. The complaint names as defendants
TDS, U.S. Cellular and the directors of U.S. Cellular. The complaint alleges a
breach of fiduciary duties by the defendants in connection with the proposed
U.S. Cellular Merger and seeks to have the U.S. Cellular Merger enjoined or, if
it is consummated, to have it rescinded and to recover unspecified damages, fees
and expenses. On January 5, 1998, Richard Greenfield, who claims to be a holder
of common shares of Aerial, filed a putative class action complaint on behalf of
the minority shareholders of Aerial in the Court of Chancery of the State of
Delaware in New Castle County. The complaint names as defendants TDS, Aerial and
the directors of TDS and Aerial. The complaint alleges a breach of fiduciary
duties by the defendants in connection with the proposed Aerial Merger and seeks
to have the Aerial Merger enjoined or, if it is consummated, to have it
rescinded and to recover unspecified damages, fees and expenses. TDS intends to
vigorously defend against these lawsuits.
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ANNEX IV
DESCRIPTION OF THE AERIAL COMMUNICATIONS GROUP
The Aerial Communications Group ("Aerial Group") consists solely of Aerial
Communications, Inc. and its subsidiaries ("Aerial"), an 82.8%-owned subsidiary
of TDS which is developing broadband personal communications services. The
Aerial Group may in the future also include such other assets and liabilities of
TDS as the Board of Directors of TDS may determine to attribute to the Aerial
Group and such other businesses, assets and liabilities as TDS or any of its
subsidiaries may in the future acquire for the Aerial Group, as determined by
the Board of Directors of TDS.
Aerial Communications, Inc. (NASDAQ symbol "AERL"), together with its
subsidiaries is a provider of Personal Communications Services ("PCS") in the
Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and
Columbus Major Trading Areas ("MTAs") (collectively, the "PCS Markets"). The PCS
Markets include approximately 27.6 million population equivalents ("POPs").
Aerial has constructed networks for its PCS Markets using Global System for
Mobile Communication ("GSM") technology. Aerial has commenced service in all its
markets. By year end 1997, Aerial expects its system coverage to total
approximately 80% of the six MTAs' total population.
PCS is the term used to describe the wireless telecommunications services
that are offered by those companies that acquired licenses for radio spectrum
(frequency range 1850-1990 MHZ) in the Federal Communications Commission ("FCC")
auctions and are the newest entrants in the wireless telecommunications market.
PCS competes directly with existing cellular telephone, paging and specialized
mobile radio services. Aerial believes that PCS providers will be the first in
most markets to offer mass market all-digital mobile networks. In addition, PCS
providers may be among the first to be able to offer mass market wireless local
loop applications, in competition with switched and direct access local
telecommunications services.
Aerial's strategic goal is to take full advantage of the potential of
wireless telecommunications. Aerial sees an opportunity for significant growth
in the wireless telecommunications market through the shift of existing wireless
usage patterns from applications focused on business use, special occasions and
emergencies to much broader applications for everyday use. Aerial is structured
to meet the increasingly competitive challenges of the wireless
telecommunications marketplace, and has a marketing-oriented approach focused on
serving its customers and their needs. Since 1983, the demand for wireless
telecommunications services has grown dramatically as cellular, paging and other
emerging wireless personal communications services have become widely available
and increasingly affordable. Since its introduction in 1983, the number of
domestic cellular telephone subscribers, both analog and digital, has grown from
approximately 91,600 in 1984 to an estimated 49 million at June 30, 1997, which
represents U.S. market penetration of approximately 19%.
During 1996 and early 1997, Aerial contracted for network equipment, billing
systems, support software and the equipment and services necessary to launch
service. Additionally during this period, Aerial completed the design for its
PCS networks, acquired and built out the switching centers serving each market,
leased and built out a National Operations Center, leased or purchased the cell
sites required to launch and commenced zoning and building the sites. The
Columbus MTA launched service on March 27, 1997. Aerial's five remaining MTAs
launched service during the second quarter of 1997. Across all six markets,
Aerial launched with approximately 600 cell sites in service. Aerial launched
service in its Orlando market in early November of 1997. Aerial anticipates
having more than 1,000 cell sites in service by the end of 1997. The coverage of
Aerial's PCS networks includes the major metropolitan areas within the PCS
Markets, as well as portions of the major highway corridors extending out from
those areas. All of the senior management positions and other key management
positions have been staffed. Key operating and marketing staff have been put in
place in each of the PCS Markets.
In November 1996, Aerial entered into a Member Control Agreement
("Agreement") forming a joint venture with Rural Cellular Corporation ("RCC") to
build out certain rural areas covering approximately 530,000 POPs in the
Minneapolis MTA. In 1997 RCC exercised its option in the Agreement to add an
additional 156,000 POPs to the joint venture. Aerial has contributed 20 MHZ of
its Minneapolis MTA license covering certain territories as defined in the
Agreement in return for a 49% equity interest in the joint venture. RCC will be
responsible for building out the network and for the ongoing operations. It is
anticipated that the joint venture will purchase services such as network
switching and customer billing from Aerial. The network will use GSM technology.
Aerial expects to benefit from the joint venture by extending the GSM footprint
without the capital investment required to build out the network.
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TECHNOLOGY
With GSM technology, Aerial offers easy-to-use, interactive menu-driven
phones, and advanced features such as caller identification and a smart card, as
well as more complex features such as text messaging, which allows the GSM
handset to function as a two-way messaging device. In the future, Aerial intends
to increasingly emphasize services which are expected to increase the size and
scope of the wireless market such as wireless data and information services as
well as wireless local loop services. Aerial anticipates that PCS will
ultimately offer a competitive alternative to wireline telephone service as PCS
networks are constructed and PCS operators form strategic alliances.
GSM is not compatible with other PCS or cellular technologies. However,
compatibility can be achieved through the use of handsets that support multiple
technologies. Aerial expects that compatibility between GSM and the existing
analog cellular systems will be achieved with the use of dual-mode handsets.
Dual-mode handsets are expected to be available in 1998. Because analog cellular
service is available nationwide, Aerial expects that PCS customers will be able
to roam into service areas served by analog cellular providers.
To date, seventeen other North American PCS licensees have implemented or
announced their intention to utilize the GSM protocol in the construction of
their networks. GSM committed providers in the U.S. have licenses to cover
approximately 260 million POPs (representing approximately 98% of the population
of the United States) and approximately 25 million POPs in Canada, although
their can be no assurance that all the licensees will build-out their licensed
territory. GSM systems are currently in commercial operation in over 700 North
American cities with more than one million customers. Aerial anticipates that
its customers will be able to roam substantially throughout the United States,
either on other GSM-based PCS networks or by using dual-mode handsets that can
also be used on existing cellular networks.
Aerial is a member of the North American GSM Alliance LLC ("GSM Alliance"),
an all-digital wireless PCS network of U.S. and Canadian carriers. The GSM
Alliance was established to create a national network and develop seamless
wireless communications for customers, whether at home, away or abroad. The GSM
Alliance's collaborative efforts focus on serving the wireless customer
efficiently by addressing the areas of roaming, customer care, national
distribution, and data communications. Aerial is also a part of the GSM North
America consortium, which is the North American interest group for the GSM MoU
Association. Formed in 1995, GSM North America brings together service providers
and equipment manufacturers to identify and resolve issues related to making GSM
the premier PCS digital technology.
WIRELESS TELECOMMUNICATIONS INDUSTRY
OVERVIEW. Wireless service is currently available using analog or digital
technology. Most wireless services currently transmit voice and data signals
over analog-based networks by varying the amplitude or frequency of one
continuous electronic signal transmitted over a single radio channel. Analog
technology currently has several limitations, including inconsistent service
quality, lack of privacy, limited capacity and less reliability in transferring
data without errors. Aerial has chosen GSM, which utilizes a digital technology,
for use in the PCS Markets. Digital systems convert voice or data signals into a
stream of digits that is compressed before transmission, enabling a single radio
channel to carry multiple simultaneous signal transmissions. This additional
capacity, along with improvements in digital protocols, allows digital-based
wireless technologies to offer new and enhanced services, such as greater call
privacy and more robust data transmission features, such as "mobile office"
applications (including facsimile, electronic mail and wireless connections to
computer/data networks, including the Internet).
While digital technology serves generally to reduce transmission
interference relative to analog technology, coding methods in the 8 Kb vocoder
cellular digital handsets which have been deployed by several digital wireless
operators using TDMA technology cause a perceptible decline in voice quality.
This gap in voice quality has proven to be a significant barrier to cellular
operators attempting to switch their customers from analog to digital service.
Manufacturers have developed enhanced 13 Kb vocoder digital handsets for both
PCS and digital cellular networks using GSM or CDMA technology and an 8Kb
vocoder using TDMA technology. These new handsets are expected to offer digital
voice transmission comparable to wireline quality.
PCS spectrum differs from existing cellular and specialized mobile radio
("SMR") spectrum in three basic ways: frequency, spectrum and geographic
division. PCS networks will operate in a higher-frequency range (1850-1990 MHZ)
compared to the cellular and SMR frequency (800-900 MHZ). PCS is comprised of 30
or 10 MHZ spectrum versus 25 MHZ spectrum for cellular networks. As a result of
the improved capacity of the infrastructure and large allocation of spectrum in
the A, B and C PCS frequency Blocks, PCS will have more capacity for new
wireless services such as data and video transmission. Finally, the geographic
areas for PCS licenses are divided
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differently than for cellular licenses. PCS is segmented among 51 MTAs and 493
Basic Trading Areas ("BTAs") as opposed to cellular's 306 Metropolitan
Statistical Areas ("MSAs") and 428 Rural Service Areas ("RSAs"). An MTA license
generally covers a much larger geographic area than a BTA, MSA or RSA license.
OPERATION OF WIRELESS NETWORKS. Wireless service areas are divided into
smaller geographic areas called "cells", each of which contains an antenna and a
base transceiver station ("BTS") consisting of a low-power transmitter, a
receiver and signaling equipment. The cells are typically configured on a grid
in a honeycomb-like pattern, although terrain factors (including natural and
man-made obstructions) and signal coverage patterns may result in irregularly
shaped cells and overlaps or gaps in coverage. The BTS in each cell is connected
by microwave, fiber optic cable or telephone wires to a switching office
("mobile switching center" or "MSC"). The MSC controls the operation of the
wireless telephone network for its entire service area, performing inter-BTS
hand-offs, managing call delivery to handsets, allocating calls among the cells
within the network and connecting calls to local landline telephone systems or
to long-distance telephone carriers. Wireless service providers have
interconnection agreements with various local exchange carriers and
interexchange carriers, thereby integrating the wireless telephone network with
landline telecommunications systems. Because two-way wireless networks are fully
interconnected with landline telephone networks and long-distance networks,
customers can receive and originate both local and long-distance calls from
their wireless telephones.
The signal strength of a transmission between a handset and a BTS antenna
declines as the handset moves away from the BTS antenna. The MSC and the BTSs
monitor the signal strength of calls in process. When the signal strength of a
call declines to a predetermined level, the call may be "handed off" to another
BTS that can establish a stronger signal with the handset. If a handset leaves
the service area of the wireless service provider, the call is disconnected
unless an appropriate technical interface is established to hand off the call to
an adjacent service provider's system.
Operators of wireless networks frequently agree to provide service to
customers from other compatible networks who are temporarily located or
traveling through the operator's service area. Such customers are called
"roamers." Agreements among network operators allocate revenues received from
roamers. With automatic roaming, wireless customers are preregistered in certain
networks outside their home service area and receive service automatically while
they are roaming. Other roaming features permit calls to a customer to follow
the customer into different networks, so that the customer will continue to
receive calls in a different network just as if the customer were within his or
her service area.
Wireless customers generally are charged separately for monthly access,
airtime, long-distance calls and custom-calling features (although
custom-calling features may be included in monthly access charges in certain
pricing plans). Wireless network operators pay fees to local exchange and
long-distance telephone companies for access to their networks and toll charges
based on standard or negotiated rates. When wireless operators provide service
to roamers from other networks, they generally charge roamer air-time usage
rates, which usually are higher than standard air-time usage rates for their own
customers, and additionally may charge daily access fees. Special, discounted
rate roaming arrangements, often between neighboring operators who wish to
stimulate usage in their respective territories, provide for reduced roaming
fees and no daily access fees.
PRODUCTS AND SERVICES
Aerial offers coverage in those areas of the PCS Markets where most of the
population lives and works. Subsequent construction of its PCS networks will
provide urban and suburban coverage which is competitive with that of current
cellular operators. Aerial provides roaming capabilities, through agreements
with other GSM and cellular operators.
Aerial's two primary sources of revenues are similar to those available to
other cellular system providers. Service revenue primarily consists of charges
for access, airtime and value-added services provided to Aerial's retail
customers who use the network operated by Aerial, and charges for long-distance
calls made on Aerial's systems. Equipment sales revenue consists of the sale of
handsets and related accessories to retailers, independent agents and end user
customers. At September 30, 1997, Aerial had nearly 65,000 customers. Service
revenues and equipment sales revenues totaled $12.9 million and $12.9 million,
respectively, for the nine months ended September 30, 1997.
AERIAL PROVIDES THE FOLLOWING SERVICES AND FEATURES:
THE SMART CARD. GSM technology employs a Smart Card which contains a
microchip containing detailed information about a customer's service profile.
The Smart Card allows Aerial to initiate services or change a
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customer's service package from a remote location. The Smart Card also allows
customers to roam onto other participating GSM-based networks by using their
cards in handsets compatible with the local network.
FEATURE-RICH HANDSETS. As part of its basic service package, Aerial
provides easy-to-use, interactive menu-driven phones that enable customers to
utilize the features available in a GSM network. These handsets primarily use
words and easy-to-use menus rather than numeric codes to operate handset
functions such as call-forwarding, call-waiting and text messaging.
SHORT TEXT MESSAGING. GSM technology allows for the capability to send and
receive short text messages, similar to two-way radio paging services. This
service allows Aerial to offer a quicker and less expensive form of wireless
communication when a full conversation is not necessary.
ENHANCED SECURITY. Aerial's service provides greater security from
eavesdropping and cloning than existing wireless service. Greater conversation
security is provided by the encryption code of the digital GSM signal. Greater
fraud protection is provided because GSM handsets require the use of a Smart
Card with a sophisticated authentication scheme, the replication of which is
virtually impossible.
As the market for wireless telecommunications services continues to develop,
Aerial expects to offer advanced wireless applications such as mobile data
services, wireless private branch exchange applications, wireless local loop
services and other individually customized wireless products and services.
MARKETING AND DISTRIBUTION
Aerial's marketing objective is to create demand for its PCS service by
clearly differentiating its service offerings. Aerial believes the strength of
its marketing efforts will be a key contributor to its success. Aerial has
developed overall marketing strategies as well as certain, specific local
marketing strategies for each PCS Market.
Aerial's mass marketing efforts emphasize the value of Aerial's
high-quality, innovative services and are supported by heavily promoting the
Aerial brand name. This is supported by a substantial advertising program.
Aerial offers its services and products through traditional cellular sales
channels as well as through new, lower cost channels. Aerial utilizes
traditional sales channels which include mass merchandisers and retail outlets,
company retail stores, sales agents and a direct sales force. National
distributors include Best Buy, Circuit City, Office Depot, Office Max and Radio
Shack in certain markets. Aerial currently also distributes its services and
products through over 50 company retail locations (mall stores, strip mall
stores and kiosks). Based in part upon the remote activation feature of the GSM
Smart Card, Aerial also intends to develop distribution innovations such as
simplified retail sales processes and lower-cost channels which include inbound
telesales, affinity marketing programs, neighborhood sales and on-line sales.
SOURCES OF EQUIPMENT
Aerial does not manufacture any of the GSM network equipment, handsets or
accessories ("equipment") used or anticipated to be used in its operations. The
equipment Aerial uses or anticipates to use is available from multiple sources,
and Aerial anticipates such equipment will continue to be available to Aerial in
the foreseeable future, consistent with normal manufacturing and delivery lead
times. As GSM uses an open system architecture, and due to the fact that GSM has
well-developed features, software systems and equipment that are available "off
the shelf", Aerial is able to design its GSM networks and systems without being
dependent upon any single manufacturing source. Nokia Telecommunications Inc.
has been Aerial's sole supplier of digital radio channel and switching
infrastructure equipment during the initial build-out of its PCS networks.
Aerial's current handset vendors are Nokia Mobile Phones, Inc., Ericsson Inc.,
and Mitsubishi Wireless Communications, Inc.
AERIAL'S PCS MARKETS
The PCS Markets cover large areas which, in general, have attractive
demographic characteristics including growing populations, high population
densities, favorable commuting patterns, high median household incomes and
favorable business climates. Aerial believes the geographic diversity of the PCS
Markets mitigates adverse consequences which may result from an economic
slowdown in one particular region.
COMPETITION
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of digital upgrades to
existing analog cellular networks, evolving industry standards, ongoing
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improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements, and changes in end-user
requirements and preferences. Accordingly, Aerial expects competition in the
wireless telecommunications business to be dynamic and intense as a result of
the entrance of new competitors and the development of new technologies,
products and services.
Aerial will compete directly with up to five other PCS providers in each of
its PCS Markets. The other successful bidders in the FCC's broadband Block A and
Block B PCS auction in each of the six PCS Markets were PCS PrimeCo (Houston and
Tampa-St. Petersburg-Orlando), Sprint Spectrum (Minneapolis, Pittsburgh and
Kansas City) and AT&T Wireless Services, Inc. (Columbus). Aerial also expects
that existing cellular providers in the PCS Markets, most of which have an
infrastructure in place and have been operational for a number of years, will
upgrade their networks to provide comparable services in competition with
Aerial. Principal cellular providers in the PCS Markets are AT&T Wireless
Services, Inc., BellSouth Mobility, Inc., GTE Mobile Communications Corporation,
AirTouch Communications, Inc., Southwestern Bell, Bell Atlantic-NYNEX Mobile and
Ameritech Cellular. Additionally, Aerial competes with SMR provider Nextel
Communications, Inc. in each of its six PCS Markets.
Aerial also expects to compete with other communications technologies that
now exist, such as paging, enhanced specialized mobile radio ("ESMR") and global
satellite networks, and expects to compete with cellular and PCS resellers. In
the future, cellular service and PCS will also compete more directly with
traditional landline telephone service providers and with cable operators who
expand into the offering of traditional communications services over their cable
systems. In addition, Aerial may face competition from technologies that may be
introduced in the future.
All of such competition is expected to be intense. There can be no assurance
that Aerial will be able to compete successfully in this environment or that new
technologies and products that are more commercially effective than Aerial's
technologies and products will not be developed. In addition, many of Aerial's
competitors have substantially greater financial, technical, marketing, sales
and distribution resources than those of Aerial and have significantly greater
experience than Aerial in testing new or improved telecommunications products
and services and obtaining regulatory approvals. Some competitors are expected
to market other services, such as cable television access, with their wireless
telecommunications service offerings. Several of Aerial's competitors are
operating, or planning to operate, through joint ventures and affiliation
arrangements, wireless telecommunications networks that cover most of the United
States.
Handsets used for GSM-based PCS networks are not automatically compatible
with cellular systems, and vice versa. Aerial expects dual-mode handsets to be
available in 1998, which will permit its customers to roam by using the existing
cellular wireless network in other markets. Until then, this lack of
interoperability may impede Aerial's ability to attract current cellular
customers or potential new wireless communication customers that desire the
ability to access service providers in several markets.
Aerial anticipates that market prices for two-way wireless services
generally will decline in the future based on increased competition. Aerial will
compete to attract and retain customers principally on the basis of services and
enhancements, its customer service, the size and location of its service areas
and pricing. Aerial's ability to compete successfully will also depend, in part,
on its ability to anticipate and respond to various competitive factors
affecting the industry, including new services that may be introduced, changes
in consumer preferences, demographic trends, economic conditions and discount
pricing strategies by competitors, which could adversely affect Aerial's
operating margins.
REGULATION
REGULATORY ENVIRONMENT. The FCC regulates the licensing, construction,
operation and acquisition of wireless telecommunications systems in the U.S.
pursuant to the Communications Act, and the rules, regulations and policies
promulgated by the FCC thereunder. Under the Communications Act, the FCC is
authorized to allocate, grant and deny licenses for PCS frequencies, establish
regulations governing the interconnection of PCS networks with wireline and
other wireless carriers, grant or deny license renewals and applications for
transfer of control or assignment of PCS licenses, and impose forfeitures for
violations of FCC regulations.
In addition, the 1996 Act, which amended the Communications Act, mandates
significant changes in existing telecommunications rules and policies to promote
competition, ensure the availability of telecommunications services to all parts
of the nation and to streamline regulation of the telecommunications industry to
remove regulatory burdens, as competition develops and makes regulation less
necessary. The FCC promulgated and
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continues to promulgate regulations governing construction and operation of
wireless providers, licensing (including renewal of licenses) and technical
standards for the provision of PCS services under the Communications Act, and is
implementing the legislative objectives of the 1996 Act, as discussed below.
PCS LICENSING. The FCC established PCS service areas in the United States
and its possessions and territories based upon Rand McNally's market definition
of 51 MTAs comprised of 493 smaller BTAs. Each MTA consists of at least two
BTAs.
The FCC has allocated 120 MHZ of radio spectrum in the 2 GHz band for
licensed broadband PCS services. The FCC divided the 120 MHZ of spectrum into
six individual blocks, each of which is allocated to serve either MTAs or BTAs.
The spectrum allocation includes two 30 MHZ blocks ("A" and "B" Blocks) licensed
for each of the 51 MTAs, one 30 MHZ block ("C" Block) licensed for each of the
493 BTAs, and three 10 MHZ blocks ("D," "E" and "F" Blocks) licensed for each of
the 493 BTAs. A PCS license has been awarded for each MTA and BTA in every
block, for a total of more than 2,000 licenses. This means that in any PCS
service area as many as six licensees could be operating separate PCS networks.
Under the FCC's rules, a broadband PCS licensee may own combinations of licenses
with total aggregate spectrum coverage of up to 45 MHZ in a single geographic
area. The FCC adopted comprehensive rules that outlined the bidding process,
described the bidding application and payment process, established penalties for
certain bid withdrawals, default or disqualification and established regulatory
safeguards.
On November 9, 1995, in Cincinnati Bell Telephone Co. v. FCC (Case No. 94-
3701/4113), the United States Court of Appeals for the Sixth Circuit granted two
petitions for review of an FCC order that had barred certain common ownership of
cellular and PCS interests in the same market, and remanded the case to the FCC
for further proceedings. Neither of the two petitioners had been barred by cross
interests from applying for any of the authorizations the FCC later granted to
Aerial. Aerial is watching the FCC proceedings closely.
The grants of licenses to Aerial are conditioned upon timely compliance with
the FCC's build-out requirements, I.E., coverage of one-third of the population
of a PCS market within five years of initial license grant and coverage of
two-thirds of that population within ten years.
The FCC also imposes a requirement that all licensees register and obtain
FCC registration numbers for all of their antenna towers which require prior FAA
clearance. Aerial is currently engaged in this registration process. All new
towers must be registered at the time of construction.
The FCC licenses granted to Aerial are issued for a ten-year period expiring
June 23, 2005 and may be renewed. In the event challengers file competing
applications in response to any of Aerial's renewal filings, the FCC has rules
and policies providing that the application of the licensee seeking renewal will
be granted and the application of the challenger will not be considered in the
event that the broadband PCS licensee involved has (I) provided "substantial"
performance, which is defined as "sound, favorable and substantially above a
level of mediocre service just minimally justifying renewal" and (ii)
substantially complied with FCC rules, policies and the Communications Act.
Although Aerial is unaware of any circumstances which would prevent the approval
of any future renewal applications, there can be no assurance that Aerial's
licenses will be renewed by the FCC in the future. Moreover, although revocation
and involuntary modification of licenses are extraordinary regulatory measures,
the FCC has the authority to restrict the operation of licensed facilities or
revoke or modify licenses.
The FCC has proceedings in process which could open up other frequency bands
for wireless telecommunications and PCS-like services. There can be no assurance
that such proceedings will not result in additional wireless competition.
In addition, there are citizenship requirements, assignment requirements and
other federal regulations and requirements which may affect the business of
Aerial.
RECENT EVENTS. There are certain regulatory proceedings currently pending
before the FCC which are of particular importance to the broadband PCS industry.
In one proceeding, the FCC has imposed new "enhanced 911" regulations in
broadband PCS systems to determine the precise location of the person making the
emergency call. The new rules require broadband PCS providers to work with local
public safety officials to process 911 calls, including those made from mobile
telephones not registered with the broadband PCS provider, and to meet phased
deadlines for implementing these capabilities.
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The FCC has adopted a limited expansion of the obligation of cellular
carriers to serve the subscribers of broadband PCS providers, among others, even
though the subscribers involved have no pre-existing service relationship with
that carrier. Under these new policies, broadband PCS providers may offer their
subscribers handsets which are capable of operating over broadband PCS and
cellular networks so that when their subscribers are out of range of broadband
PCS networks, they will be able to obtain non-automatic access to cellular
networks. The FCC expects that implementation of these roaming capabilities will
promote competition between broadband PCS and cellular service providers.
The FCC has adopted requirements which will make it possible for subscribers
to retain, at the same location, their existing telephone numbers when they
switch from one service provider to another. This numbering portability will
include switching between LEC and other wireline providers, between wireless
service providers and between LEC/wireline and wireless providers. LECs have
implementation deadlines by the end of 1998. Broadband PCS, cellular and certain
other wireless providers have phased implementation deadlines in 1998 and 1999.
Beginning in October 1997, broadband PCS systems, which previously were
"categorically excluded" from having to evaluate their facilities to ensure
their compliance with federal "radio frequency" (RF) radiation requirements,
were made subject to those requirements. After October 1997, all new broadband
PCS facilities must be in compliance when they are brought into service.
The FCC is also proceeding to implement the 1996 Act. The 1996 Act provides
that implementing its legislative objectives will be the task of the FCC, the
state public utilities commissions and a Federal-state Joint Board. Much of this
implementation is proceeding in numerous, concurrent proceedings with aggressive
deadlines. Aerial cannot predict the full extent and nature of developments of
the 1996 Act, which will depend, in part, upon interrelationships among state
and federal regulators.
The primary purpose and effect of the new law is to open all
telecommunications markets to competition-- including local telephone service.
The 1996 Act makes most direct or indirect state and local barriers to
competition unlawful. It directs the FCC to preempt all inconsistent state and
local laws and regulations, after notice and comment proceedings. It also
enables electric and other utilities to engage in telecommunications service
through qualifying subsidiaries.
Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the 1996 Act's universal service provision
and necessary for universal services, public safety and welfare, continued
service quality and consumer rights. While a state may not impose requirements
that effectively function as barriers to entry, it retains limited authority to
regulate certain competitive practices of state and local regulators.
Since enactment, the FCC has adopted orders implementing the local
competition provisions of the 1996 Act. The FCC found that broadband PCS and
certain other wireless providers are entitled to reciprocal compensation, may
not be charged for LEC-originated traffic or for code opening/per-number fees,
and may obtain LEC interconnection subject to the terms of the 1996 Act. Appeals
were taken to the United States Court of Appeals for the Eighth Circuit from
these FCC orders by numerous parties alleging that the FCC has exceeded its
statutory mandate, among other matters. On July 18, 1997, the Eighth Circuit
vacated the FCC's rules prescribing interim rates for reciprocal compensation
because it has held that the 1996 Act requires that rate issues are to be
decided by the states. It upheld the authority of the FCC to order LECs to
interconnect with broadband PCS and other wireless providers and to issue rules
relating to certain terms of interconnection between LECs and such providers.
The 1996 Act establishes principles and a process for implementing a
modified "universal service" policy. This policy seeks nationwide, affordable
service and access to advanced telecommunications and information services. It
calls for reasonably comparable urban and rural rates and services. The 1996 Act
also requires universal service to schools, libraries and rural health
facilities at discounted rates. In a series of Orders adopted in May, July and
August, 1997, the FCC established universal service support mechanisms which
require telecommunications providers, including all wireless carriers, to
contribute. Aerial has made the required Universal Service Worksheet filings and
expects to make the required periodic payments starting in the first quarter of
1998.
STATE AND LOCAL REGULATION. The scope of state regulatory authority covers
such matters as the terms and conditions of interconnection between LECs and
wireless carriers with respect to intrastate services, customer billing
information and practices, billing disputes, other consumer protection matters,
facilities construction issues and transfers of control, among other matters. In
these areas, particularly the terms and conditions of interconnection between
LECs and wireless providers, the FCC and state regulatory authorities share
regulatory responsibilities with respect to interstate and intrastate issues,
respectively.
IV-7
<PAGE>
The FCC has pending numerous petitions for pre-emption of state and local
regulations which allege such regulations prohibit or impair the provision of
interstate or intrastate telecommunications services. It has also requested
public comment on a petition requesting pre-emption of moratoria imposed by
state and local governments on siting of telecommunications facilities, the
imposition of state taxes on the gross receipts of CMRS providers and other
proposed state taxes based on the asset value of CMRS licenses awarded by the
FCC. The FCC has been actively involved in educating state and local regulatory
and zoning authorities as to the prohibitions in the 1996 Act against the
creation of unreasonable and discriminatory zoning, taxation or other barriers
to new wireless providers.
The FCC is required to forbear from applying any statutory or regulatory
provision that is not necessary to keep telecommunications rates and terms
reasonable or to protect consumers. A state may not apply a statutory or
regulatory provision that the FCC decides to forbear from applying. In addition,
the FCC must review its telecommunications regulations every two years and
change any that are no longer necessary.
Aerial and its subsidiaries have been and intend to remain active
participants in proceedings before the FCC and before state and local regulatory
and zoning authorities. Proceedings with respect to the foregoing policy issues
before the FCC and state regulatory authorities could have significant impacts
on the competitive market structure among wireless providers and the
relationships between wireless providers and other carriers. Aerial is unable to
predict the scope, pace, or financial impact of policy changes which could be
adopted in these proceedings.
SEASONALITY
Generally, Aerial's operating results are not significantly affected by
seasonal factors.
EMPLOYEES
As of September 30, 1997, Aerial had a total of 1,177 employees. None of
Aerial's employees is represented by a labor union. Aerial considers its
relations with its employees to be good.
IV-8
<PAGE>
EXPLANATORY NOTE REGARDING FINANCIAL INFORMATION
Effective upon completion of the Transactions, Telephone and Data Systems,
Inc. ("TDS") will have outstanding five classes of Common Stock: United States
Cellular Group Common Shares, which are intended to reflect the performance of
the United States Cellular Group; TDS Telecommunications Group Common Shares,
which are intended to reflect the performance of the TDS Telecommunications
Group; Aerial Communications Group Common Shares, which are intended to reflect
the performance of the Aerial Communications Group; and Common Shares and Series
A Common Shares which are intended to reflect the performance of Telephone and
Data Systems (which will also reflect the performance of the United States
Cellular Group, the TDS Telecommunications Group, and the Aerial Communications
Group to the extent of the Retained Interest in those groups.)
Although the financial statements of the Aerial Communications Group will
separately report the assets, liabilities (including contingent liabilities) and
shareholders' equity of Telephone and Data Systems, Inc. attributed to the
Aerial Communications Group such attribution will not affect the legal title to
such assets or responsibility for such liabilities. Holders of Aerial
Communications Group Common Shares will be, and holders of Telephone and Data
Systems, Inc. Common Shares and Series A Common Shares are, shareholders of
Telephone and Data Systems, Inc., Telephone and Data Sytems, Inc. and its
subsidiaries would each continue to be responsible for their respective
liabilities. Financial results arising from the business of Telephone and Data
Systems, Inc. (including its Retained Interest in the Aerial Communications
Group) or from the business of the Aerial Communications Group could affect the
market price of all classes of Common Stock. In addition, any net losses of any
of the Telephone and Data Systems, Inc. Groups, including the Aerial
Communications Group, and dividends or distributions on, or repurchases of, any
class of Common Stock will reduce the assets of Telephone and Data Systems, Inc.
legally available for payment of dividends on all classes of Common Stock.
Accordingly, Telephone and Data Systems, Inc.'s consolidated financial
statements should be read in conjunction with the Aerial Communications Group's
financial information.
IV-9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
The Aerial Communications Group ("Aerial Group") consists solely of Aerial
Communications, Inc. and its subsidiaries (the "Company" or "Aerial"), an
82.8%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS") which is
developing broadband personal communications services. The Aerial Group may in
the future also include such other assets and liabilities of TDS as the Board of
Directors of TDS may determine to attribute to the Aerial Group and such other
businesses, assets and liabilities as TDS or any of its subsidiaries may in the
future acquire for the Aerial Group, as determined by the Board of Directors of
TDS.
OVERVIEW
Aerial was formed to acquire Personal Communications Services ("PCS")
licenses from the Federal Communications Commission ("FCC"), construct PCS
networks in its Major Trading Areas ("MTAs") and offer wireless PCS
communications services in these areas.
Aerial acquired eight licenses in the FCC broadband Block A and Block B PCS
auction which concluded in March 1995 (the "FCC auction"). Since its acquisition
of PCS licenses, Aerial has been devoting its efforts to recruiting an
experienced management team, developing and executing a business plan, raising
capital and designing and constructing a PCS network in each of its MTAs
(Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and
Columbus). Aerial has sold its licenses covering the Guam and Alaska MTAs and
recorded a total gain on such sales in 1996 of $2.6 million, net of commissions
and legal fees.
Aerial's focus in 1996 has been the development of its PCS business. This
focus continued until the launch of commercial service in all its markets in
1997. As of December 31, 1996, Aerial had cleared 150 microwave paths and had
commitments to clear 39 paths. Management believes that sufficient paths have
been cleared to allow service launch in all six markets. Management contemplates
clearing additional paths as it expands its network in 1997. Over 600 cell sites
have been secured as zoning and installation work continues. A number of
municipalities have adopted cell site zoning moratoria slowing the task of
network build-out. Aerial has taken steps to mitigate the impact of all such
moratoria affecting its build-out. Moratoria have been particularly challenging
for all wireless providers in the Orlando/Orange County, Florida area.
Aerial is currently capitalizing, as work in process, expenditures for the
design, construction and testing of Aerial's PCS networks as well as the cost to
relocate dedicated private microwave links currently operating in Aerial's
spectrum. Costs associated with developing information systems are also
capitalized. Aerial capitalized interest in 1996 solely on its PCS network
expenditures financed under the Nokia Credit Agreement, the Series A Zero Coupon
Notes and the TDS Revolving Credit Agreement (See "Liquidity and Capital
Resources"). Aerial capitalized interest in 1995 on the acquisition cost of the
licenses, prior to TDS's $289.2 million equity contribution which covered such
costs.
The following discussion of the consolidated financial condition and results
of operations of Aerial for the three years ended December 31, 1996, should be
read in conjunction with the Consolidated Financial Statements, the related
notes thereto, and the other financial information included herein.
RESULTS OF OPERATIONS
Aerial's results of operations for 1996 compared to 1995 and 1994 primarily
reflect increased activities undertaken to prepare Aerial's MTAs for initiation
of commercial PCS services. These activities accelerated in March 1995 after
Aerial's purchase of the eight broadband PCS licenses in the FCC auction and
significantly increased Aerial's net loss to $37.9 million in 1996 from $6.5
million in 1995 and $1.3 million in 1994. Aerial had no operating revenues in
1996 as commercial service is not anticipated to commence in its first market
until March 1997, and expects its net losses to increase during 1997 as Aerial
continues its business development activities.
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
DEVELOPMENT COSTS-AFFILIATE are management services performed for the Aerial
Group by the TDS Group or other groups and incurred in the development of
Aerial's business. Development costs-affiliate stayed constant at $1.2 million
from 1995 to 1996. Development costs-affiliate were $0.9 million in 1994 which
reflected management services costs incurred primarily in preparation for the
FCC auction.
IV-10
<PAGE>
DEVELOPMENT COSTS-OTHER increased to $15.1 million during 1996 from $3.0
million in 1995 and $.9 million in 1994. The $12.3 million increase between 1996
and 1995 is primarily due to increased consulting fees incurred in the
development of Aerial's business and marketing plans and legal expenses incurred
in the continuing effort to prepare Aerial's MTAs for commercial PCS services.
Development costs-other in 1995 primarily reflect legal expenses related to the
FCC auction and the establishment of Aerial's subsidiaries. Development
costs-other in 1994 primarily reflect legal expenses incurred in preparation for
the FCC auction. Additionally, 1994 costs include a charge to expense for the
book value of equipment related to an unsuccessful business development
activity.
GENERAL AND ADMINISTRATIVE EXPENSES increased to $27.7 million during 1996
from $3.6 million in 1995, primarily as a result of the growth of Aerial's
management and operating teams and the resulting increases in salaries, employee
benefits and overhead expenses. General and administrative expenses in 1994 were
not significant.
INTEREST INCOME-AFFILIATE was $4.5 million in 1996 as a result of interest
income earned on the proceeds from Aerial's initial public offering ("IPO"). The
proceeds were invested in the TDS cash management program pending use in PCS
network development and construction.
INTEREST INCOME-OTHER increased to $1.2 million in 1996 from $49,000 in 1995
primarily due to $1.1 million in interest income earned in 1996 on the excess
proceeds from Aerial's sale of Series A Zero Coupon Notes (See Note 5-Long-Term
Debt) pending use in PCS network development and construction. Interest
income-other was not significant in 1994.
INVESTMENT LOSSES were $0.3 million in 1996 and represent Aerial's share of
the 1996 losses of the Wireless Alliance, LLC, a joint venture associated with
Aerial's Minneapolis MTA and designed to extend the PCS footprint to areas that
were not in Aerial's initial build-out.
GAIN ON SALE OF PCS LICENSES represents the pretax gain of $0.2 million
recognized on the sale of the Guam license in May 1996 and the pretax gain of
$2.4 million recognized on the sale of the Alaska license in December 1996.
INTEREST EXPENSE-AFFILIATE increased to $2.0 million in 1996 from $1.1
million in 1995 and $50,000 in 1994. Interest expense-affiliate represents
interest on amounts borrowed under the Revolving Credit Agreement with TDS and
fees paid to TDS for serving as guarantor on the Series A Zero Coupon Notes,
less interest capitalized.
INTEREST EXPENSE-OTHER was $0.8 million in 1996 and relates primarily to the
Series A Zero Coupon Notes issued in November 1996, less interest capitalized.
Interest capitalization in 1996, totaling $1.2 million, is based solely upon
construction expenditures incurred related to the PCS network and financed under
the Nokia Credit Agreement, the Series A Zero Coupon Notes and the TDS Revolving
Credit Agreement (See "Liquidity and Capital Resources"). Interest
capitalization in 1995, totaling $16.6 million, represents interest capitalized
on the acquisition cost of licenses, prior to TDS's $289.2 million equity
contribution which covered such costs.
Income tax benefit decreased to $0.9 million in 1996 from $2.1 million in
1995 primarily due to an increase in the estimated valuation allowance
associated with deferred tax assets. Aerial recognized income tax benefits of
$2.1 million in 1995 and $0.7 million in 1994 due primarily to an increase in
pretax loss. See "Income Taxes" below for a discussion of Aerial's tax
allocation agreement with TDS.
INCOME TAXES
For federal income tax purposes, Aerial is included in the TDS consolidated
tax return. For financial reporting purposes, Aerial computes its federal income
taxes as if it were not a member of the TDS consolidated group but filed a
separate return.
For 1995 and prior years, TDS reimbursed Aerial for the federal income tax
benefit of any net operating loss of Aerial which reduced the provision for
income taxes reflected in TDS's consolidated statements of income. Aerial and
TDS entered into a tax allocation agreement which became effective as of January
1, 1996 (the "1996 tax allocation agreement"), pursuant to which, among other
things, TDS no longer reimburses Aerial on a current basis for losses or credits
used by TDS in the year they are generated. Instead, Aerial will be compensated
(i.e., future tax liabilities will be reduced) for TDS's use of tax benefits at
such time as Aerial would be able to utilize such benefits on a separate return
basis.
If the 1996 tax allocation agreement had been in place during 1995, Aerial
would have recorded a deferred tax asset of $11.9 million (net of a valuation
allowance of $6.2 million) and a deferred tax liability of $14.0 million,
resulting in deferred tax expense of $2.1 million being recognized in the
Consolidated Statements of Operations.
IV-11
<PAGE>
The deferred tax asset primarily relates to the net operating loss ("NOL")
carryforward, which requires a valuation allowance to be provided when it is
more likely than not that some portion of the deferred tax asset will not be
realized. Due to the absence of an established earnings history of Aerial, a
valuation allowance has been provided to the extent that temporary differences
related to the deferred tax liability do not reverse in the 15 year NOL
carryforward period. The deferred tax liability is primarily created due to the
accelerated amortization of the PCS license cost and the current deduction of
interest that was capitalized for book purposes. Therefore, the deferred tax
expense represents that portion of the NOL which was created by accelerated tax
amortization of the PCS licenses and the related interest deduction which may
not be realized because those temporary differences reverse over 40 years.
INFLATION
Management believes that inflation affects Aerial's business to no greater
extent than the general economy.
LIQUIDITY AND CAPITAL RESOURCES
The costs of development, construction and start-up activities of Aerial
will require substantial capital. As of December 31, 1996, Aerial had expended
$305.8 million for licenses, including capitalized interest, $254.4 million for
all other capital expenditures and incurred cumulative net losses of $45.9
million. Aerial expects to incur significant operating losses and to generate
negative cash flow from operating activities during the next several years,
while it develops and constructs its PCS networks and builds its customer base.
Cash flows used by operating activities were $17.8 million in 1996, cash
flows provided by operating activities were $0.1 million in 1995 and cash flows
used by operating activities were $1.6 million in 1994. Cash used in 1996
resulted from the $37.9 million net loss for the period, offset by a $12.5
million decrease in income tax receivable-affiliate, an increase in other
accounts payable of $3.5 million, and $4.1 million net in other items. The cash
provided in 1995 resulted largely from a total $9.1 million increase in accounts
payable-other, accounts payable-affiliate and accrued interest-affiliate, and
from a $10.4 million increase in deferred tax liability. The cash provided by
these activities was offset by a $12.3 million increase in income tax refund
receivable-affiliate and the $6.5 million net loss for the period. The cash used
in 1994 was primarily due to the $1.3 million net loss.
Cash flows from financing activities provided $164.1 million in 1996, $297.9
million in 1995 and $22.0 million in 1994. In April 1996, Aerial received
proceeds from its IPO of $195.3 million, net of underwriting discounts and
commissions. Aerial used a portion of the net proceeds to repay the outstanding
balance under the Revolving Credit Agreement with TDS. In 1996 Aerial received
from TDS $28.8 million representing the balance due in connection with TDS's
$289.2 million contribution to the equity capital of Aerial in 1995. The 1995
equity contribution was made to cover the original cost of the licenses acquired
in the FCC auction. Cash flows from financing activities in 1995 and 1994 were
generated by borrowings under the Revolving Credit Agreement with TDS.
Cash flows used in investing activities totaled $111.3 million in 1996,
$297.8 million in 1995 and $20.4 million in 1994. Such cash requirements in 1996
consisted primarily of $16.5 million of additions to property and equipment and
$96.4 million of additions to work in process. Total 1996 additions to work in
progress and property and equipment, including noncash transactions, were $242.3
million, including $53.2 million for switching equipment, $150.4 million for
cell sites, and $38.7 million for other activity, including information systems
development and property and equipment in service (primarily computer equipment
and software, office equipment, and leasehold improvements). Cash requirements
in 1995 related largely to Aerial's $285.4 million acquisition of eight licenses
in the FCC auction and $12.1 million in additions to property and equipment and
capitalized construction costs. Cash requirements in 1994 consisted primarily of
a $20.4 million payment to the FCC to ensure eligibility in the FCC auction.
Aerial continues to construct networks in its MTAs. Commercial operations
are anticipated to commence in the first market in March 1997.
Aerial 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, Aerial estimates that the aggregate funds required for 1997 will total
approximately $600 million. This amount includes an estimated $365 million of
capital expenditures for construction of PCS networks and information systems
development and $255 million of estimated working capital requirements.
IV-12
<PAGE>
Aerial expects 1997 construction and working capital requirements to be
financed using a variety of sources, including but not limited to, borrowings
under the TDS Revolving Credit Agreement (See Note 4-Revolving Credit
Agreement), vendor financing and private equity investors in Aerial. In March
1996, Aerial 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 through a Credit Agreement with Aerial
dated June 19, 1996 (the "Credit Agreement" or "Nokia Credit Agreement").
At Aerial's option it may issue, in tranches, 10-year unsecured zero coupon
promissory notes in accordance with the provisions of the Credit Agreement, the
proceeds of which are to be paid to Nokia in satisfaction of borrowings by
Aerial under the Credit Agreement.
On November 4, 1996 Aerial issued $226.2 million in aggregate principal
amount at maturity of 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 $100 million proceeds
of the sale of the Notes were paid to Nokia in satisfaction of all outstanding
obligations and future obligations up to $100 million of Aerial under the Credit
Agreement. 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. The Notes
will rank in the same priority with all other unsecured and unsubordinated
indebtedness of Aerial. The Notes and the obligations under the Credit Agreement
are fully and unconditionally guaranteed by TDS at an annual fee rate of 3%. The
Notes are subject to optional redemption by Aerial on and after November 1,
2001, at a purchase price equal to the issue price plus accrued interest through
the date of redemption.
In April 1996, Aerial sold 12,250,000 of its Common Shares, approximately
17.2% of total outstanding shares of common stock, at a price of $17 per share
in an initial public offering. The net proceeds from the offering, after
underwriters fees, were $195.3 million. A portion of the net proceeds was
applied to the repayment of $64.1 million in outstanding indebtedness (including
accrued interest) to TDS under the Revolving Credit Agreement. Aerial had
available $250 million under the Revolving Credit Agreement with TDS as of
December 31, 1996.
In November 1996 Aerial entered into a Member Control Agreement
("Agreement") to establish a joint venture with Rural Cellular Corporation
("RCC") to be known as the Wireless Alliance, LLC. The joint venture was formed
to build out certain rural areas covering approximately 530,000 population
equivalents ("POPs") in the Minneapolis MTA. Aerial has agreed to contribute 20
MHZ of its Minneapolis MTA license covering certain territories as defined in
the Agreement in return for a 49% equity interest in the joint venture. RCC will
be responsible for building out the network and for the ongoing operations. It
is anticipated that the joint venture will purchase services such as network
switching and customer billing from Aerial. Aerial expects to benefit from the
joint venture by extending its footprint without the capital investment required
to build the network. The Agreement is awaiting FCC approval.
Aerial believes that its capital resources will be sufficient to fund its
complete network build-out and cover operating losses into the second half of
1997. In addition to the Revolving Credit Agreement with TDS, sources of
additional capital may include additional vendor financing as well as private
equity and debt financing by Aerial or its subsidiaries. If sufficient funding
is not made available to Aerial on terms and prices acceptable to Aerial, Aerial
would have to reduce its construction and development programs, which could have
a material adverse impact on Aerial's financial condition and results of future
operations.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION AND OTHER SECTIONS OF THIS PROXY STATEMENT/PROSPECTUS
CONTAIN "FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES
AND PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL FACTS, INCLUDING STATEMENTS
ABOUT TDS'S BELIEFS AND EXPECTATIONS ARE FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS CONTAIN POTENTIAL RISKS AND UNCERTAINTIES AND THEREFORE, ACTUAL
RESULTS MAY DIFFER MATERIALLY. TDS UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY
ANY FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE,
BUT ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION
IN AERIAL'S MARKETS; ADVANCES IN TELECOMMUNICATIONS TECHNOLOGY; CHANGES IN THE
TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING AND FUTURE LITIGATION;
AVAILABILITY OF FUTURE FINANCING; AND UNANTICIPATED CHANGES IN GROWTH IN PCS
CUSTOMERS, PENETRATION RATES, CHURN RATES AND THE MIX OF PRODUCTS AND SERVICES
OFFERED IN AERIAL'S MARKETS. READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF
THESE IMPORTANT FACTORS.
IV-13
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE
YEAR ENDED DECEMBER 31, JULY 23, 1991
-------------------------------- TO DECEMBER
1996 1995 1994 31, 1996
---------- --------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
PRE-OPERATING EXPENSES:
Development costs--affiliate............................................. $ 1,163 $ 1,221 $ 856 $ 3,410
Development costs--other................................................. 15,107 3,034 851 19,070
General and administrative............................................... 27,680 3,574 2 31,266
---------- --------- --------- -------------
PCS DEVELOPMENT COSTS...................................................... (43,950) (7,829) (1,709) (53,746)
---------- --------- --------- -------------
OTHER INCOME, NET
Interest income--affiliate............................................... 4,488 -- -- 4,488
Interest income--other................................................... 1,158 48 2 1,215
Investment losses........................................................ (304) -- -- (304)
Gain on sale of PCS licenses............................................. 2,582 -- -- 2,582
Other income (expense)................................................... -- 268 (268) --
---------- --------- --------- -------------
7,924 316 (266) 7,981
---------- --------- --------- -------------
(LOSS) BEFORE INTEREST AND INCOME TAXES.................................... (36,026) (7,513) (1,975) (45,765)
Interest expense--affiliate................................................ 1,960 1,051 50 3,116
Interest expense--other.................................................... 802 -- -- 802
---------- --------- --------- -------------
(LOSS) BEFORE INCOME TAXES................................................. (38,788) (8,564) (2,025) (49,683)
Income tax (benefit)....................................................... (867) (2,096) (742) (3,810)
---------- --------- --------- -------------
NET (LOSS)................................................................. $ (37,921) $ (6,468) $ (1,283) $ (45,873)
Net (Loss) to Minority Shareholders of Aerial.............................. 4,944 -- -- --
---------- --------- --------- -------------
Net (Loss) to TDS.......................................................... $ (32,977) $ (6,468) $ (1,283) $ (45,873)
---------- --------- --------- -------------
---------- --------- --------- -------------
Pro Forma (Unaudited): (See Note 2)
Net (Loss) Attributable to the TDS Group through Retained Interest......... $ (8,244) $ (1,617) $ (321) $ (11,468)
Net (Loss) Attributable to Aerial Communications Group Common Shares....... $ (24,733) $ (4,851) $ (962) $ (34,405)
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
IV-14
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
YEAR ENDED DECEMBER 31, JULY 23, 1991
-------------------------------------- TO DECEMBER
1996 1995 1994 31, 1996
------------ ------------ ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss)............................................................ $ (37,921) $ (6,468) $ (1,283) $ (45,873)
Add (Deduct) adjustments to reconcile net (loss) to net cash (used)
provided by operating activities:
Depreciation.......................................................... 1,934 47 -- 1,981
Investment losses..................................................... 304 -- -- 304
Gain on sales of PCS licenses......................................... (2,582) -- -- (2,582)
Change in accounts payable--affiliates and accrued
interest--affiliate................................................. (2,292) 2,676 47 489
Change in accounts payable--other..................................... 3,491 6,401 -- 9,892
Change in other accrued interest and other liabilities................ 5,721 -- -- 5,721
Change in income tax refund receivable--affiliate..................... 12,502 (12,320) (112) --
Change in deferred tax asset/liability--net........................... 2,231 10,407 (630) 11,973
Change in other assets and deferred costs............................. (1,169) (617) 414 (1,786)
------------ ------------ ---------- -------------
(17,781) 126 (1,564) (19,881)
------------ ------------ ---------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in note receivable--affiliate.................................. 28,836 -- -- 28,836
Change in Revolving Credit Agreement--TDS............................. (60,238) 297,937 22,009 260,358
Issuance of common stock.............................................. 195,485 -- -- 195,525
------------ ------------ ---------- -------------
164,083 297,937 22,009 484,719
------------ ------------ ---------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in PCS licenses............................................ -- (285,417) (20,401) (305,818)
Additions to work in process.......................................... (96,443) (8,058) -- (104,501)
Additions to property and equipment................................... (16,497) (4,076) -- (20,573)
Proceeds from sale of PCS licenses.................................... 2,275 -- -- 2,275
Change in temporary cash and other investments........................ (614) (261) (38) (937)
------------ ------------ ---------- -------------
(111,279) (297,812) (20,439) (429,554)
------------ ------------ ---------- -------------
Net Increase in Cash and Cash Equivalents............................. 35,023 251 6 35,284
Cash and Cash Equivalents--
Beginning of Period................................................. 261 10 4 --
------------ ------------ ---------- -------------
End of Period....................................................... $ 35,284 $ 261 $ 10 $ 35,284
------------ ------------ ---------- -------------
------------ ------------ ---------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
IV-15
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents:
General funds..................................................................................... $ 869 $ 261
Affiliated cash equivalents....................................................................... 34,415 --
----------- -----------
35,284 261
Temporary cash investments........................................................................ 315 107
Note receivable-affiliate......................................................................... -- 28,836
Note receivable-other............................................................................. 1,925 --
Income tax refund receivable-affiliate............................................................ -- 12,502
Interest receivable-affiliate..................................................................... 243 --
Interest receivable-other......................................................................... 508 --
Other............................................................................................. 556 617
----------- -----------
38,831 42,323
----------- -----------
FIXED ASSETS AND LICENSES
Property and equipment-net of accumulated depreciation of $1,981 in 1996 and
$47 in 1995..................................................................................... 18,592 4,029
Work in process................................................................................... 233,831 8,058
Prepaid network infrastructure costs.............................................................. 70,300 --
Investment in PCS licenses........................................................................ 304,354 305,818
----------- -----------
627,077 317,905
----------- -----------
OTHER INVESTMENTS................................................................................... 6,771 216
DEFERRED COSTS...................................................................................... 148 --
----------- -----------
TOTAL ASSETS........................................................................................ $ 672,827 $ 360,444
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
IV-16
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
BALANCE SHEETS
LIABILITIES AND GROUP EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable-affiliates....................................................................... $ 489 $ 1,284
Accounts payable-other............................................................................ 93,360 6,401
Accrued interest-affiliate........................................................................ -- 1,497
Microwave relocation costs payable................................................................ 17,046 --
Contribution payable.............................................................................. 6,453 --
Other............................................................................................. 1,978 --
----------- -----------
119,326 9,182
----------- -----------
REVOLVING CREDIT AGREEMENT--TDS..................................................................... -- 60,238
----------- -----------
LONG-TERM DEBT...................................................................................... 103,743 --
----------- -----------
DEFERRED TAX LIABILITY--NET......................................................................... 11,973 9,742
----------- -----------
AERIAL COMMUNICATIONS GROUP EQUITY.................................................................. 437,785 281,282
----------- -----------
TOTAL LIABILITIES AND GROUP EQUITY.................................................................. $ 672,827 $ 360,444
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
IV-17
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS
The Aerial Communications Group ("Aerial Group") consists solely of Aerial
Communications, Inc. and its subsidiaries ("Aerial"), an 82.8%-owned subsidiary
of Telephone and Data Systems, Inc. ("TDS") which is developing broadband
personal communications services. The Aerial Group may in the future also
include such other assets and liabilities of TDS as the Board of Directors of
TDS may determine to attribute to the Aerial Group and such other businesses,
assets and liabilities as TDS or any of its subsidiaries may in the future
acquire for the Aerial Group, as determined by the Board of Directors of TDS.
1. ORGANIZATION OF BUSINESS
Aerial was incorporated in Delaware on July 23, 1991, as American Portable
Telecommunications, Inc. and changed its name to American Portable Telecom,
Inc.("APTI") effective December 14, 1995. On November 12, 1996, Aerial changed
its name to Aerial Communications, Inc. Aerial was formed to acquire Personal
Communications Services ("PCS") licenses, construct PCS networks in its Major
Trading Areas ("MTAs") and offer wireless PCS communications services in these
areas. Aerial acquired its licenses in the Federal Communications Commission
("FCC") broadband Block A and Block B PCS auction (the "PCS auction") which
concluded in March 1995. Aerial acquired licenses in the Columbus (Ohio),
Houston (Texas), Kansas City (Missouri), Minneapolis (Minnesota), Pittsburgh
(Pennsylvania), and Tampa-St. Petersburg-Orlando (Florida) MTAs covering
approximately 27.6 million population equivalents ("POPs").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal (the "Tracking Stock Proposal") which, if approved by
shareholders and implemented by the Board, would authorize the Board to issue
three new classes of common stock designated as United States Cellular Group
Common Shares (the "Cellular Group Shares"), TDS Telecommunications Group Common
Shares (the "Telecom Group Shares") and Aerial Communications Group Common
Shares (the "Aerial Group Shares"), and change the state of incorporation of
Telephone and Data Systems, Inc. from Iowa to Delaware. While each of the new
classes of common stock would constitute common stock of Telephone and Data
Systems, Inc., each is intended to reflect the separate performance of Telephone
and Data Systems, Inc.'s cellular telephone, landline telephone and personal
communications services businesses ("Tracking Stocks"). The Cellular Group
Shares, when issued, are intended to reflect the separate performance of the
United States Cellular Group (the "Cellular Group"), which includes Telephone
and Data Systems, Inc.'s interest in United States Cellular Corporation, an
81%-owned subsidiary of Telephone and Data Systems, Inc. which operates and
invests in cellular telephone companies and properties. The Telecom Group
Shares, when issued, are intended to reflect the separate performance of the TDS
Telecommunications Group (the "Telecom Group"), which primarily includes
Telephone and Data Systems, Inc.'s interest in TDS Telecommunications
Corporation, a wholly-owned subsidiary of Telephone and Data Systems, Inc. which
operates landline telephone companies. The Aerial Group Shares, when issued, are
intended to reflect the separate performance of the Aerial Communications Group
(the "Aerial Group"), which includes Telephone and Data Systems, Inc.'s interest
in Aerial Communications, Inc., an 83%-owned subsidiary of Telephone and Data
Systems, Inc. which is developing broadband personal communications services.
The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of a residual group (the
"TDS Group"), which includes retained interests ("Retained Interests") in each
of the United States Cellular Group, the TDS Telecommunications Group, and the
Aerial Communications Group to the extent of the Retained Interests in the
respective groups, and all other business of TDS. The TDS Group includes
Telephone and Data Systems, Inc. and all of its subsidiaries and their
respective properties and assets other than (except with respect to the Retained
Interests): United States Cellular and its subsidiaries (which are included in
the United States Cellular Group), TDS Telecom and its subsidiaries (which are
included in the TDS Telecommunications Group), and Aerial and its subsidiaries
(which are included in the Aerial Communications Group) and any other assets or
liabilities or subsidiaries of Telephone and Data Systems, Inc. attributed to
the United States Cellular Group, the TDS Telecommunications Group or the Aerial
Communications Group.
IV-18
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The TDS Group reflects primarily the TDS Retained Interest in the Cellular
Group, the Telecom Group, and the Aerial Group, the Corporate operations
(including corporate management, intercompany financing, cash management and
intercompany income tax allocation activities) and the operations of American
Paging, Inc., an 82%-owned subsidiary.
Following approval by shareholders of the Tracking Stock Proposal, Telephone
and Data Systems, Inc. currently intends to a) offer and sell Telecom Group
Shares in a public offering for cash, subject to prevailing market and other
conditions (the "Telecom Public Offering"), and to allocate the net proceeds
thereof to the Telecom Group, b) issue Cellular Group Shares in exchange for all
of the Common Shares of United States Cellular Corporation which are not owned
by Telephone and Data Systems, Inc., subject to approval by the board of
directors and the shareholders of United States Cellular Corporation (the "U. S.
Cellular Merger"), c) issue Aerial Group Shares in exchange for all of the
Common Shares of Aerial Communications, Inc. which are not owned by Telephone
and Data Systems, Inc., subject to approval by the board of directors and the
shareholders of Aerial Communications, Inc.(the "Aerial Merger"), and d)
distribute one Cellular Group Share, two-thirds of a Telecom Group Share and
two-thirds of an Aerial Group Share in the form of a stock dividend with respect
to each outstanding Series A Common Share and Common Share of Telephone and Data
Systems, Inc. (the "Distribution"). It is currently expected that the
Distribution would take place in June 1998 or later, after the completion of the
Telecom Public Offering, the U. S. Cellular Merger and the Aerial Merger,
although the Board reserves the right to effect all or any part of the
Distribution at any time, or not to make the Distribution, regardless of whether
or not such other transactions have taken place.
The shares of Tracking Stock which would be issued in the Distribution would
represent an approximately 75% interest of the common equity value of TDS in
each Tracking Group (the "Outstanding Interest"). When considering the shares of
Tracking Stock which would also be issued in the Telecom Public Offering, the U.
S. Cellular Merger and the Aerial Merger, as well as the Distribution, the
Outstanding Interest would initially represent in the aggregate an approximately
80% interest in each Tracking Group. Upon completion of all of the Transactions
as contemplated, approximately 20% of the common shareholders' value of
Telephone and Data Systems, Inc. in each Tracking Group would initially be
retained as Retained Interest in the TDS Group, along with all other interests
held by Telephone and Data Systems, Inc.
Following the Distribution, subject to the legal restrictions on the payment
of dividends, the Board currently intends to establish an annual dividend on the
Telecom Group Shares in an amount equal to $.48 per share. The Board also
currently intends to establish an annual dividend on the Common Shares and
Series A Common Shares in an amount equal to $.10 per share. (Based on the
expected distribution ratio of two-thirds of a Telecom Group Share for each
existing Common Share and Series A Common Share, the dividend on Telecom Group
shares would equate to a per share dividend of $.32 per existing Common Share
and Series A Common Share. The total of the dividend on Common Shares and Series
A Common Shares of $.10 and the equivalent dividend on Telecom Group Shares of
$.32 equals the existing current annual dividend on the existing Common Shares
and Series A Common Shares of $.42). With regard to the Cellular Group and the
Aerial Group Shares, the Board currently intends to retain future earnings, if
any, for the development of the businesses of the Cellular Group and Aerial
Group, respectively, and does not anticipate paying dividends on the Cellular
Group or the Aerial Group Shares in the foreseeable future. Future dividends on
the shares of common stock will be payable when, as and if declared by the Board
out of the lessor of (1) all funds of Telephone and Data Systems, Inc. legally
available therefor and (2) the available dividend amount with respect to the
relevant Group.
Funds of the Company legally available for the payment of dividends
("Surplus") (approximately $2,031 million as of December 31, 1996, based on the
financial statements) is an amount approximately equal to the Total Common and
Preferred Equity of the Company less the par or stated value of all shares of
common and preferred stock outstanding (204,155,000 shares as of December 31,
1996 after the Distribution). With respect to any Tracking Group, the Available
Dividend Amount (approximately $1,107 million for the Cellular Group, $258
million for the Telecom Group and $328 million for the Aerial Group as of
December 31, 1996, based on the financial statements) is an amount approximately
equal to the Outstanding Interest Fraction of such Tracking Group (approximately
75% after the Distribution) times the respective Tracking Group Equity less the
par value of the
IV-19
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
respective outstanding Tracking Group shares. With respect to the TDS Group, the
Available Dividend Amount (approximately $610 million as of December 31, 1996)
is an amount approximately equal to the greater of a) an amount (approximately
$339 million) which is approximately equal to the Surplus of the Company less
the sum of all Available Dividend Amounts of all Tracking Groups or b) an amount
(approximately $610 million) which is approximately equal to the TDS Group
Equity and Preferred Stock less the par or stated value of all Common and Series
A Common Shares and Preferred Stock outstanding.
The financial statements of the Groups comprise all of the accounts included
in the corresponding consolidated financial statements of Telephone and Data
Systems, Inc. The separate Cellular Group, Telecom Group, Aerial Group, and TDS
Group financial statements give effect to the management and accounting policies
that would be applicable upon implementation of the Tracking Stock Proposal.
Subject to the completion of the U.S. Cellular Merger and the Aerial Merger,
Telephone and Data Systems, Inc. intends to terminate certain intercompany
agreements between Telephone and Data Systems, Inc. and U. S. Cellular and
Aerial, respectively. Thereafter, all of the relationships between Telephone and
Data Systems, Inc. and such subsidiaries would be determined solely by methods
that management of Telephone and Data Systems, Inc. believes to be reasonable.
Many of such policies would continue the arrangements which presently exist
between Telephone and Data Systems, Inc. and U. S. Cellular or Aerial pursuant
to the intercompany agreements, but Telephone and Data Systems, Inc. would have
no contractual obligation to continue such policies after the intercompany
agreements have been terminated. The separate Group financial statements have
been prepared on a basis that management believes to be reasonable and
appropriate and include (1) the historical financial position, results of
operations and cash flows of the businesses that comprise each of the Groups,
(2) any assets and liabilities (including contingent liabilities) which have
been attributed to any Group from any other Group, and (3) with respect to the
TDS Group, the Retained Interest in each of the Tracking Groups. The effects of
the issuance of the Tracking Stocks have not been reflected in these historical
financial statements.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, Telephone and Data
Systems, Inc. will prepare and file with the Securities and Exchange Commission,
consolidated financial statements of Telephone and Data Systems, Inc., and
financial statements of the Cellular Group, the Telecom Group, and the Aerial
Group for so long as the respective Tracking Stock is outstanding, and the TDS
Group for as long as any Tracking Stock is outstanding. Although the financial
statements of the Cellular Group, the Telecom Group, the Aerial Group, and the
TDS Group will separately report the assets, liabilities (including contingent
liabilities) and shareholders' equity of Telephone and Data Systems, Inc.
attributed to the Cellular Group, the Telecom Group, the Aerial Group, and the
TDS Group, such attribution will not affect the legal title to such assets or
responsibility for such liabilities. Holders of Cellular Group, Telecom Group,
and Aerial Group Common Shares will be, and holders of Telephone and Data
Systems, Inc. Common Shares and Series A Common Shares are, shareholders of
Telephone and Data Systems, Inc. Telephone and Data Systems, Inc. and its
subsidiaries would each continue to be responsible for their respective
liabilities.
Financial effects arising from the Cellular Group, Telecom Group, Aerial
Group or TDS Group that affect the consolidated results of operations or
financial condition of Telephone and Data Systems, Inc. could affect the results
of operations or financial condition of the Cellular Group, Telecom Group,
Aerial Group or TDS Group, or could affect the market price of any or all
classes of Common Stock. In addition, any net losses of Telephone and Data
Systems, Inc., or the Cellular Group, the Telecom Group, the Aerial Group or the
TDS Group, and dividends or distributions on, or repurchases of, any class of
Common Stock will reduce the assets of Telephone and Data Systems, Inc. legally
available for payment of dividends on any class of Common Stock. Accordingly,
Telephone and Data Systems, Inc.'s consolidated financial statements should be
read in conjunction with the Cellular Group, the Telecom Group, the Aerial Group
and the TDS Group financial information.
The management and accounting policies applicable to the preparation of the
financial statements of the TDS Group could be modified or rescinded by the
Board, in its sole discretion and without the approval of shareholders, although
there is no present intention to do so. The Board could also adopt additional
policies depending upon the circumstances. Any determination by the Board to
modify or rescind such policies, or to adopt additional policies, including any
such decision that could have disparate effects upon the holders of different
series of common stock,
IV-20
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
would be made by the Board in good faith and in the honest belief that such
decision is in the best interests of Telephone and Data Systems, Inc. In
addition, generally accepted accounting principles require that changes in
accounting policy must be preferable (in accordance with such principles) to the
policy previously in place.
(A) DEVELOPMENT STAGE COMPANY
Aerial was originally incorporated to conduct development activities to
obtain a "pioneer's preference" broadband PCS license from the FCC. In 1994,
Aerial learned it would not be obtaining a pioneer's preference and charged to
expense the book value of all assets related to that activity. Subsequent to
that event, Aerial devoted substantially all of its efforts to planning for and
participating in the PCS auction. Since its acquisition of PCS licenses, Aerial
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 a PCS network in each of its MTAs. Its planned
principal operations have not yet commenced as of December 31, 1996.
Accordingly, Aerial is a development stage company as defined in Statement of
Financial Accounting Standards No. 7, "Accounting and Reporting by Development
Stage Enterprises."
(B) PRINCIPLES APPLIED IN FINANCIAL STATEMENTS
The financial statements include the accounts of Aerial Communications, Inc.
and its subsidiaries. During 1995, Aerial established the following subsidiaries
which are wholly-owned: APT Operating Company, Inc., which owns 100% of APT
Columbus, Inc., APT Kansas City, Inc., APT Tampa/Orlando, Inc., APT Minneapolis,
Inc., APT Houston, Inc., APT Pittsburgh General Partner, Inc., APT Alaska, Inc.
(license was sold in December 1996), and APT Guam, Inc. (license was sold in May
1996), and 46% of APT Pittsburgh Limited Partnership. APT Pittsburgh General
Partner, Inc. owns the remaining 54% of APT Pittsburgh Limited Partnership. All
significant intercompany balances and transactions between companies within the
Aerial Group have been eliminated.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of expenses during the reporting period. Actual results
could differ from those estimates.
(C) PENSION PLAN
Effective July 1, 1995, Aerial began providing pension benefits for its
employees under a qualified, noncontributory, defined contribution plan. Under
this plan, pension benefits and costs are calculated separately for each
participant and are funded currently. Pension costs were $72,000 and $11,000 in
1996 and 1995, respectively.
(D) CASH AND CASH EQUIVALENTS AND TEMPORARY CASH INVESTMENTS
Cash and cash equivalents consists of cash on hand 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 and up
to twelve months are classified as temporary cash investments. The carrying
amounts reported in the balance sheet for cash and cash equivalents and
temporary cash investments approximate their fair values.
(E) OTHER INVESTMENTS
Other investments consists of a $6.1 million investment in Wireless
Alliance, LLC (the "Investment") and $622,000 of marketable non-equity
securities. The marketable non-equity securities are classified as held to
IV-21
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
maturity. At December 31, 1996, the amortized cost of the marketable non-equity
securities (having maturities between one and five years) approximated their
aggregate fair value.
The Investment represents Aerial's interest in a joint venture with Rural
Cellular Corporation ("RCC"). Aerial follows the equity method of accounting for
the Investment, which recognizes Aerial's proportionate share of income and
losses to it under the terms of the November 14, 1996, Member Control Agreement
(the "Member Control Agreement"). Income and losses from the Investment are
reflected in the statement of operations. At December 31, 1996, Aerial's
cumulative share of losses from the Investment was $304,000.
In connection with the Investment, Aerial recorded a contribution payable
which represents the value assigned under the Member Control Agreement to the
portion of Aerial's Minneapolis PCS license that will be partitioned and
contributed to Wireless Alliance, LLC, pending FCC approval.
(F) PROPERTY AND EQUIPMENT
Property and equipment is stated at original cost and includes primarily
computer equipment and software, office equipment, leasehold improvements and
vehicles. Depreciation is provided based on the straight-line method over the
estimated useful lives of the respective assets, generally three years for
vehicles and five years for computer equipment and software and office
equipment. Leasehold improvements are amortized over ten years or the lease
term, whichever is shorter.
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Computer equipment/software...................................................... $ 15,951 $ 2,120
Office equipment................................................................. 3,180 1,462
Leasehold improvements........................................................... 1,305 494
Vehicles......................................................................... 137 --
--------- ---------
20,573 4,076
Accumulated depreciation......................................................... (1,981) (47)
--------- ---------
Property and equipment-net....................................................... $ 18,592 $ 4,029
--------- ---------
--------- ---------
</TABLE>
(G) WORK IN PROCESS
Work in process includes expenditures for the design, construction and
testing of Aerial's PCS networks as well as the cost to relocate dedicated
private microwave links currently operating in Aerial's spectrum in its MTAs.
Work in process also includes the costs associated with developing information
systems. Aerial capitalizes interest on certain of its work in process
expenditures. When the assets are placed in service, Aerial will transfer the
assets to the appropriate property and equipment category and depreciate these
assets over their respective estimated useful lives, generally ten years for
network infrastructure equipment and five years for information systems.
(H) INVESTMENT IN PCS LICENSES
Investment in PCS licenses is recorded at historical cost, which includes
the $289.2 million purchase price of the licenses acquired by Aerial in the PCS
auction plus capitalized interest of $16.6 million incurred while readying the
licenses in Aerial's MTAs for use. Aerial recorded capitalized interest through
December 31, 1995, when TDS contributed approximately $289.2 million in equity
capital to Aerial for the original cost of its licenses. Aerial will begin
amortizing its licenses over 40 years upon commencement of service.
(I) MICROWAVE RELOCATION COSTS PAYABLE
Microwave relocation costs payable represent obligations of Aerial to pay
its share of the costs to relocate dedicated private microwave links currently
operating in Aerial's spectrum in its MTAs. The carrying amount
IV-22
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
reported in the balance sheet for microwave relocation costs payable
approximates fair value because of the short maturity of those instruments.
(J) PRO FORMA NET (LOSS) AND (LOSS) PER SHARE
Pro forma net (loss) attributable to the Aerial Group and to the TDS Group
through Retained Interest assumes that the Aerial Merger has not taken place and
therefore 75% of Net (Loss) is attributable to the Aerial Group Shares and 25%
of Net (Loss) is attributable to the Retained Interest for the TDS Group. A
portion of the Net (loss) is allocated to the minority public shareholders of
Aerial prior to attributing the Net (Loss) to the Aerial Group and the TDS Group
through Retained Interest.
(Loss) per Share was omitted from the historical statements of earnings
since the Aerial Group Shares were not a part of the equity structure of TDS and
the Articles of Incorporation had not been amended to allow for the issuance of
the Aerial Group Shares for the periods presented.
(K) SUPPLEMENTAL CASH FLOW DISCLOSURES
The following summarizes interest and income taxes paid and certain noncash
transactions.
<TABLE>
<CAPTION>
1996 1995
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest paid........................................................................................ $ 1,107 $ --
Income tax benefits--cash payments from TDS resulting from taxable losses generated by Aerial in
prior years........................................................................................ 15,598 185
Accrued interest converted to debt under the Revolving Credit Agreement with TDS..................... 2,973 17,699
TDS equity contribution-conversion of debt under the Revolving Credit Agreement to equity and receipt
of note receivable-affiliate....................................................................... -- 289,194
</TABLE>
In 1996, $199.6 million in additions to work in process and prepaid network
infrastructure costs were financed through a combination of long-term debt,
accounts payable-other and microwave relocation costs payable.
During 1996, Aerial incurred interest charges totaling $4.0 million. The
interest charges were comprised of $2.0 million paid to TDS relating to the
Revolving Credit Agreement (See Note 4--Revolving Credit Agreement), $0.6
million paid to TDS for guarantee fees on the Series A Zero Coupon Notes and
obligations under the Nokia Credit Agreement (See Note 5--Long-Term Debt),
$70,000 paid to Nokia for interest charges relating to the Credit Agreement and
$1.3 million in accrued interest on the Series A Zero Coupon Notes. Of these
amounts, Aerial capitalized $1.2 million relating to its work in process
expenditures. The remaining $2.8 million was charged to expense.
During 1995, Aerial incurred interest charges of $17.7 million related to
its Revolving Credit Agreement with TDS. Of this amount, Aerial capitalized
$16.6 million relating to the development of its PCS licenses. The remaining
$1.1 million was charged to expense.
(L) RECLASSIFICATION
Certain amounts in prior years have been reclassified to conform to the
current year presentation.
3. INCOME TAXES
Aerial entered into a tax allocation agreement with TDS under which Aerial
will continue to join in filing consolidated federal income tax returns with the
TDS affiliated group unless TDS's ownership of Aerial falls beneath 80%. For
1995, TDS reimbursed Aerial for the reduction in the provision for federal
income taxes reflected in TDS's consolidated statements of income resulting from
the inclusion of Aerial and its subsidiaries in the TDS affiliated group. Aerial
had recorded these amounts in "Income tax refund receivable -affiliate" (See
Note 2 (k)--Summary of Significant Accounting Policies--Supplemental Cash Flow
Disclosures).
For tax years beginning after December 31, 1995, TDS no longer reimburses
Aerial on a current basis for losses or credits used by the TDS affiliated
group. Instead, Aerial is compensated (by an offset to amounts Aerial would
IV-23
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
otherwise be required to pay to TDS for federal income taxes) for TDS's use of
tax benefits at such time as Aerial could utilize such benefits on a separate
return basis. Aerial will be required to pay TDS an amount equal to the greater
of the federal income tax liability of Aerial, calculated as if it were a
separate affiliated group (including any minimum tax liability, notwithstanding
the absence of consolidated group liability for minimum tax), or the tax
calculated using the highest marginal tax rate (before taking into account tax
credits) of the TDS affiliated group. Aerial records all deferred tax
liabilities or assets for the deferred tax consequences of all temporary
differences. Income tax provisions are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision (benefit):
Current................................................................ $ (3,098) $ (12,502) $ (112)
Deferred............................................................... 1,671 9,574 (630)
State income tax provision:
Current................................................................ -- -- --
Deferred............................................................... 560 832 --
--------- ---------- ---------
Income tax (benefit)..................................................... $ (867) $ (2,096) $ (742)
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The temporary differences which gave rise to significant portions of the net
deferred tax liability were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred tax asset:
Deferred charges................................................................ $ -- $ 3,494
Net operating loss carryforwards................................................ 26,419 1,539
Less: valuation allowance....................................................... (15,029) (1,291)
---------- ---------
Total deferred tax asset.......................................................... $ 11,390 $ 3,742
---------- ---------
Deferred tax liability:
Licenses........................................................................ $ 13,650 $ 6,612
Deferred charges-interest....................................................... 6,088 6,092
Partnership investment.......................................................... 2,573 780
Property and equipment.......................................................... 435 --
Other........................................................................... 617 --
---------- ---------
Total deferred tax liability...................................................... $ 23,363 $ 13,484
---------- ---------
Net deferred tax liability........................................................ $ 11,973 $ 9,742
---------- ---------
---------- ---------
</TABLE>
Aerial records a deferred tax asset associated with net operating loss
carryforwards and then assesses the need for any valuation allowance associated
with those carryforwards. At December 31, 1996, the federal net operating loss
carryforward available to offset future taxable income is $60.2 million and
expires in 2012. The amount of state net operating loss carryforward available
to offset future taxable income is $78.0 million and expires between 1997 and
2012.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. During 1996, the
valuation allowance increased $13.7 million primarily due to Aerial's increased
net
IV-24
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
operating losses which will not be reimbursed currently by TDS under the tax
allocation agreement effective January 1, 1996. The statutory federal income tax
rate is reconciled to Aerial's effective income tax rate below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate.......................................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit................................. (0.9) (6.3) --
Effects of valuation allowance on deferred tax asset....................... (29.7) -- --
Other...................................................................... (2.2) (4.2) --
--------- --------- ---------
Effective income tax rate.................................................. 2.2% 24.5% 35.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
4. REVOLVING CREDIT AGREEMENT
Aerial entered into a Revolving Credit Agreement with TDS on August 1, 1995,
which was last amended on December 31, 1995, under which all of the outstanding
obligations of Aerial to TDS are incorporated. Pursuant to the Revolving Credit
Agreement, Aerial may borrow up to an aggregate of $250 million at an interest
rate equal to 1.5% above prime rate until the principal amount becomes due, and
pay on demand an interest rate equal to 3.5% above such prime rate on any
overdue principal or overdue installment of interest. The advances made under
the Revolving Credit Agreement are unsecured. Interest on the balance due under
the Revolving Credit Agreement is payable quarterly and no principal is payable
until its maturity, which is December 31, 1998. The terms of the Revolving
Credit Agreement also include, among others, restrictions on incurring certain
additional indebtedness and on paying dividends.
In April, 1996, Aerial used a portion of the net proceeds from its IPO (See
Note 8--Common Stock) to repay TDS $64.1 million, representing the outstanding
balance (including accrued interest) under the Revolving Credit Agreement.
The total amount advanced to Aerial under the Revolving Credit Agreement
through December 31, 1995, aggregated $320.6 million. On December 31, 1995, TDS,
Aerial's sole shareholder at such time, contributed $289.2 million to the equity
capital of Aerial. No cash was paid to Aerial for the equity contribution by
TDS. Rather, Aerial reduced the amount outstanding under the Revolving Credit
Agreement by $260.4 million and recorded a note receivable-affiliate from TDS
for the remaining $28.8 million. Aerial received payment of the entire note
receivable from TDS by February 14, 1996. Additionally, in connection with the
equity contribution a condition was added which provided that if TDS's ownership
of Aerial falls below 70%, the outstanding principal will become payable in full
six months after such date. The carrying value of Aerial's borrowings under the
Revolving Credit Agreement approximates the fair value of the borrowings, since
the Revolving Credit Agreement is variable debt with the interest rate based on
the prime lending rate.
5. LONG-TERM DEBT
On November 4, 1996, Aerial issued $226.2 million in aggregate principal
amount at maturity of 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 $100 million issue
price of the Notes reflects a yield to maturity of 8.34% per annum (computed on
a semi-annual bond equivalent basis) calculated from November 4, 1996. The
proceeds from the sale of the Notes were paid to Nokia Telecommunications Inc.
("Nokia") in satisfaction of all outstanding obligations and future obligations
up to $100 million of Aerial under the June 19, 1996, Credit Agreement with
Nokia ( the "Credit Agreement" or "Nokia Credit Agreement"). The obligations of
Aerial under the Notes are fully and unconditionally guaranteed by TDS, at an
annual fee rate of 3%. Guarantee fees owed TDS are payable semiannually.
The Notes are subject to optional redemption by Aerial on and after November
1, 2001, at a purchase price equal to the issue price plus accrued interest
through the date of redemption. The Notes are unsecured obligations of Aerial.
The Notes rank in the same priority with all other unsecured and unsubordinated
indebtedness of Aerial.
The excess of the proceeds from the sale of the Notes over Aerial's current
obligations (i.e., financed purchases under the Credit Agreement) to Nokia is
recorded as "Prepaid network infrastructure costs." Aerial will
IV-25
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
pay Nokia for future equipment purchases by reducing the amount of the prepaid
balance by the cost of the equipment purchased. Nokia is paying Aerial monthly
interest on the unused portion of the Note proceeds.
The carrying value of Aerial's Notes is greater than its fair value,
estimated to be $101.7 million. The fair value was estimated using discounted
cash flow analysis.
6. RELATED PARTY TRANSACTIONS
Aerial is billed for all services it receives from TDS and other Groups,
consisting primarily of general management services and information services.
Unless otherwise specified by written agreement, services provided by TDS or
other Groups to another Group are charged on the basis of time reports. The
costs of such services and any other expenses incurred jointly on behalf of a
number of subsidiaries are charged to those subsidiaries on the basis of the
subsidiaries' relative operating revenues and total assets. Aerial believes that
this method of allocation is reasonable.
TDS and certain of its affiliates provided Aerial with centralized
management, accounting, commercial, engineering, and data processing services
aggregating $2.0 million, $1.2 million and $0.9 million during 1996, 1995 and
1994, respectively.
TDS completed development of a new financial reporting system for all of its
subsidiaries, including Aerial. Aerial recorded approximately $2.4 million
related to this system in "Property and Equipment."
On December 31, 1995, Aerial received equity funding of $289.2 million from
TDS. Aerial recorded the $289.2 million in "Additional paid-in capital."
Aerial deposits its excess cash through a cash management program
administered by TDS. Deposits made into the program are generally available to
Aerial and bear interest each month equal to 30 day commercial paper rates, plus
0.25%.
7. COMMITMENTS
The costs of Aerial's development, construction and initial start-up
activities will require substantial capital. As of December 31, 1996, Aerial had
expended approximately $305.8 million for licenses, including capitalized
interest, approximately $254.4 million for other capital expenditures and
approximately $45.9 million for operations. Also, as of December 31, 1996,
Aerial had orders totaling approximately $40.1 million with Nokia and certain
tower vendors for infrastructure equipment as part of Aerial's initial build-out
of its PCS networks. Aerial expects to incur significant operating losses and to
generate negative cash flow from operating activities during the next several
years, while it develops and constructs its PCS network and builds a PCS
customer base. Aerial estimates that the aggregate funds required for 1997 will
total approximately $600 million, with $345 million needed for capital additions
and $255 million needed to fund operations. Aerial believes that its capital
resources will be sufficient to fund its complete network build-out and cover
operating losses into the second half of 1997.
Aerial and its subsidiaries have leases for certain office facilities and
warehouses which are classified as operating leases. For the year ended December
31, 1996, rent expense was $2.1 million for term leases and $0.5 million for
cancelable leases. For the year ended December 31, 1995, rent expense was
$247,000 for term leases and $75,000 for cancelable leases. Aerial incurred no
rent expense in 1994. At December 31, 1996, the aggregate minimum rental
commitments under noncancelable operating leases (including those for cell
sites) for the years 1997 through 2001, and 2002 and thereafter, are
approximately $5.6 million, $5.4 million, $5.5 million, $5.6 million, $5.0
million and $10.4 million, respectively.
IV-26
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. AERIAL COMMUNICATIONS GROUP EQUITY
The changes in the Aerial Group equity for the periods presented is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- ----------- ---------
<S> <C> <C> <C>
Balance at beginning of period....................................... $ 281,282 $ (1,444) $ (161)
Net (Loss)........................................................... (37,921) (6,468) (1,283)
Equity Contribution.................................................. -- 289,194 --
Initial Public Offering.............................................. 194,204 -- --
Other................................................................ 220 -- --
----------- ----------- ---------
Balance at end of period............................................. $ 437,785 $ 281,282 $ (1,444)
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
Aerial has 31,359,460 Common Shares and 40,000,000 Series A Common Shares
issued and outstanding as of December 31, 1996. Aerial Group Shares will be
exchanged for all of the Common Shares of Aerial which are not owned by TDS,
subject to approval by the board of directors and the shareholders of Aerial.
See Basis of Presentation in Footnote 2.
EMPLOYEE STOCK PURCHASE PLAN
Aerial adopted the 1996 APTI Employee Stock Purchase Plan (the "Plan")
effective October 1, 1996. Aerial has reserved 200,000 Common Shares for sale to
the employees of Aerial and its subsidiaries, in connection with the Plan.
Shares can be purchased twice a year on Plan purchase dates. The price per share
is 85% of the stock's closing price on the designated purchase dates. The first
purchase date under the Plan is in March 1997.
TAX-DEFERRED SAVINGS PLAN
Effective July 1, 1995, Aerial adopted the TDS Tax-Deferred Savings Plan
(the "Plan"), a qualified profit sharing plan pursuant to Sections 401(a) and
401(k) of the Internal Revenue Code. As amended on August 15, 1996,
participating employees have the option of investing their contributions in
Aerial Common Shares, TDS Common Shares, United States Cellular Corporation (a
subsidiary of TDS) Common Shares, American Paging, Inc. (a subsidiary of TDS)
Common Shares, or five other non-affiliated funds. Aerial has reserved 200,000
Common Shares for issuance under the Plan. Employer matching contributions,
equal to 33 1/3% of employee contributions up to a certain limit, are made in
Aerial Common Shares. Aerial employees were issued 23,460 shares in connection
with the Plan in 1996.
EMPLOYEE STOCK OPTIONS
To account for its employee stock option plan, Aerial continues to apply the
intrinsic value based method prescribed by Accounting Principles Board Opinion
25, "Accounting for Stock Issued to Employees" ("APB 25"). The intrinsic value
of an option at any point during its term is the difference between its exercise
price and the current price of the underlying stock. As defined in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), under the fair value based method, compensation cost
is measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. Had the fair value
based method described in SFAS 123 been used to determine compensation cost
associated with its employee stock option plan, Aerial's net loss and loss per
share would have been increased by insignificant amounts.
Effective April 25, 1996, Aerial began providing long-term incentive
benefits for its senior managers by adopting the Aerial Communications, Inc.
Long Term Incentive Plan. Aerial has reserved 1,500,000 Common Shares for option
grants. The options are exercisable over a specified period not in excess of ten
years from the date they are granted. Options granted in 1996 expire in 2006, or
the date of the employee's termination of employment, if earlier. These options
vest annually over five years in 20% increments, from December 15, 1996, through
December 15, 2000. Aerial's employee stock options were granted at fair market
value. In accordance with APB 25, no compensation expense was recorded related
to these options. A summary of the status of the Aerial
IV-27
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Long Term Incentive Plan as of December 31, 1996, and changes during the year
ending on that date is presented below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
--------------------------------------
REMAINING
EXERCISE CONTRACTUAL
SHARES PRICE LIFE
----------- ----------- ------------
<S> <C> <C> <C>
Outstanding at beginning of year................................... -- --
Granted............................................................ 310,305 $ 17.00
----------- ----------- ------------
Outstanding at end of year......................................... 310,305 $ 17.00 9.33 years
Options exercisable at year-end.................................... 61,397 $ 17.00
Weighted-average fair value of options granted during the year..... $ 7.41
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for 1996:
risk free interest rate of 5.53%; dividend yield of 0%; expected life of 7.4
years; and volatility of 26.36%.
INITIAL PUBLIC OFFERING
Aerial sold 12,250,000 Common Shares at a price of $17 per share in an
initial public offering on April 25, 1996. Proceeds of the offering, net of
underwriting discounts and commissions, totaled $195.3 million. Aerial used a
portion of the net proceeds to repay TDS approximately $64.1 million,
representing the outstanding balance (including accrued interest) under the
Revolving Credit Agreement, and used the balance of the funds to partially
finance construction, development and operating costs incurred to establish its
PCS networks.
RECAPITALIZATION
On March 28, 1996, TDS, as the sole shareholder of Aerial at such time,
executed a consent to action in lieu of a meeting, voting all 1,000 shares of
common stock of Aerial then outstanding for the approval of a Restated
Certificate of Incorporation of Aerial. Such Restated Certificate of
Incorporation authorized (a) 60,000,000 Common Shares, $1.00 par value per
share; (b) 60,000,000 Series A Common Shares, $1.00 par value per share; (c)
60,000,000 Series B Common Shares, $1.00 par value; and (d) 10,000,000 Preferred
Shares, $1.00 par value per share. Upon the filing of the Restated Certificate
of Incorporation with the Secretary of State of the State of Delaware on April
19, 1996, the 1,000 shares of Common Stock of Aerial theretofore held by TDS
were converted into 19,086,000 Common Shares and 40,000,000 Series A Common
Shares of Aerial.
SERIES A COMMON SHARES
Series A Common Shares are convertible on a share-for-share basis into
Common Shares and are entitled to 15 votes per share. No Series A Common Shares
were converted during 1996.
9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1996
Operating (Loss).............................................................. $ (5,746) $ (7,761) $ (10,805) $ (19,638)
Net (Loss).................................................................... $ (6,671) $ (7,206) $ (9,829) $ (14,215)
1995
Operating (Loss).............................................................. $ (611) $ (458) $ (1,276) $ (5,217)
Net (Loss) $ (507) $ (412) $ (1,250) $ (4,299)
</TABLE>
IV-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Telephone and Data Systems, Inc.:
We have audited, the accompanying balance sheets of the Aerial
Communications Group (representing a development stage business unit of
Telephone and Data Systems, Inc.) as of December 31, 1996 and 1995, and the
related statements of operations and cash flows for each of the three years in
the period ended December 31, 1996 and for the period from inception (July 23,
1991) to December 31, 1996. These financial statements are the responsibility of
the management of Telephone and Data Systems, Inc. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Aerial Communications
Group as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1996
and for the period from inception (July 23, 1991) to December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
December 15, 1997
IV-29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The Aerial Communications Group ("Aerial Group") consists solely of Aerial
Communications, Inc. and its subsidiaries ( "Aerial"), an 82.6%-owned subsidiary
of Telephone and Data Systems, Inc. ("TDS") which is developing broadband
personal communications services. The Aerial Group may in the future also
include such other assets and liabilities of TDS as the Board of Directors of
TDS may determine to attribute to the Aerial Group and such other businesses,
assets and liabilities as TDS or any of its subsidiaries may in the future
acquire for the Aerial Group, as determined by the Board of Directors of TDS.
RESULTS OF OPERATIONS
Aerial Communications, Inc., an 82.6%-owned subsidiary of TDS, was formed to
acquire Personal Communications Services ("PCS") licenses from the Federal
Communications Commission ("FCC"), construct PCS networks in its Major Trading
Areas ("MTAs") and offer wireless PCS communications services in these areas.
Since its acquisition of PCS licenses in the FCC broadband Block A and Block
B PCS auction, which concluded in March of 1995, Aerial has been devoting its
efforts to recruiting an experienced management team, developing and executing a
business plan, raising capital and designing and constructing a PCS network in
each of its MTAs (Minneapolis, Tampa-St. Petersburg-Orlando, Houston,
Pittsburgh, Kansas City and Columbus).
Aerial's focus in 1997 has been the preparation of each of its markets for
initial service launch and the development of its PCS business. The Columbus MTA
launched service on March 27, 1997. Aerial's five remaining MTAs launched
service during the second quarter of 1997. Across all six markets, Aerial
launched service with approximately 600 cell sites in service. Aerial launched
service in its Orlando market in early November of 1997. Although cell site
zoning moratoria and other zoning restrictions have been and remain a challenge,
Aerial currently has more than 850 cell sites in service across all its markets
and anticipates having more than 1,000 cell sites in service by the end of 1997.
With the launch of service in its MTAs between March and June of 1997,
Aerial transitioned from the development stage to being an established operating
enterprise. As a result of this transition, Aerial has experienced in 1997
increasing revenues and operating expenses, and is incurring substantial losses.
Aerial had no revenues and significantly less expenses in 1996 and for the first
quarter of 1997.
Aerial is currently capitalizing, as work in process, expenditures for the
design, construction and testing of Aerial's PCS networks as well as the cost to
relocate dedicated private microwave links currently operating in Aerial's
spectrum. Aerial capitalizes interest on such PCS network expenditures where
appropriate. When the assets are placed in service, Aerial transfers the assets
to the appropriate property and equipment category.
NINE MONTHS ENDED 9/30/97 COMPARED TO NINE MONTHS ENDED 9/30/96
OPERATING REVENUES
OPERATING REVENUES totaled $25.8 million for the nine months ended September
30, 1997, reflecting the launch of service in all six markets during 1997.
SERVICE REVENUE primarily consists of charges for access, airtime and
value-added services provided to the Aerial's retail customers who use the
network operated by Aerial, and charges for long-distance calls made on the
Aerial's systems. Service revenue totaled $12.9 million in the first nine months
of 1997. In late March 1997 Aerial began offering PCS service in Columbus, Ohio
and during the second quarter Aerial began offering service in Houston,
Minneapolis, Kansas City, Pittsburgh and Tampa/St. Petersburg. At September 30,
1997, Aerial had nearly 65,000 customers.
EQUIPMENT SALES REVENUE totaled $12.9 million in the first nine months of
1997. Equipment revenue represents the sale of handsets and related accessories
to retailers, independent agents and end user customers.
OPERATING EXPENSES
OPERATING EXPENSES totaled $142.0 million in the first nine months of 1997,
reflecting Aerial's expanded level of business activity required to launch
service and transition from start-up operations.
IV-30
<PAGE>
SYSTEM OPERATIONS EXPENSE totaled $13.9 million in the first nine months of
1997, reflecting the costs of operating Aerial's network in all markets.
Significant costs include cell site rent and maintenance expenses, utilities,
local landline interconnection and toll charges and salaries and benefits of
engineering and maintenance employees.
MARKETING AND SELLING EXPENSE totaled $27.0 million in the first nine months
of 1997, primarily reflecting Aerial's aggressive advertising campaign that
accompanied the launch of service and continued throughout the third quarter.
Marketing and selling expenses primarily consist of the cost of print,
television and radio advertising, salaries and benefits for sales and marketing
personnel and sales commissions.
CUSTOMER SERVICE EXPENSE totaled $6.8 million in the first nine months of
1997, reflecting customer service activity at Aerial's National Operations
Center in connection with the launch and support of its six markets.
COST OF EQUIPMENT SOLD totaled $40.8 million in the first nine months of
1997, reflecting the launch of service and filling of third-party distribution
channels for handsets.
GENERAL AND ADMINISTRATIVE EXPENSE totaled $31.5 million in the first nine
months of 1997, reflecting expenses associated with the growth of Aerial's
management and operating teams required to launch service and transition from
start-up operations, and the resulting increases in salaries, employee benefits,
and overhead expenses.
OTHER
INVESTMENT LOSSES totaled $2.2 million in the first nine months of 1997.
Investment losses represent Aerial's 49% share of the 1997 losses of the
Wireless Alliance, LLC., a joint venture associated with Aerial's Minneapolis
MTA and designed to extend the PCS footprint to areas that were not in Aerial's
initial build-out.
INTEREST INCOME--AFFILIATE totaled $95,000 in the first nine months of 1997
as compared to $3.5 million in the first nine months of 1996. Interest
income-affiliate represents interest income earned on the proceeds of Aerial's
April 1996 Initial Public Offering ("IPO") invested in the TDS cash management
program pending use in PCS network development and construction. Proceeds from
the IPO were fully utilized by the end of January 1997.
INTEREST INCOME--OTHER totaled $2.2 million in the first nine months of
1997, due to interest income earned on the excess proceeds from Aerial's
November 1996 sale of Series A Zero Coupon Notes pending use in PCS network
development and construction. The proceeds from the sale of the Series A Zero
Coupon Notes were fully utilized by the end of August 1997.
INTEREST EXPENSE--AFFILIATE increased $9.0 million in the first nine months
of 1997, primarily due to the average outstanding balance of borrowings under
the Revolving Credit Agreement (See Note 8--Revolving Credit Agreement) being
greater in 1997. Interest expense-affiliate in 1997 represents interest on
amounts borrowed under the Revolving Credit Agreement with TDS and the TDS 3%
guarantee fees associated with the Series A Zero Coupon Notes, less interest
capitalized of $2.7 million. The 1996 amount primarily represents interest on
amounts borrowed under the Revolving Credit Agreement, less interest capitalized
of $0.4 million.
INTEREST EXPENSE--OTHER totaled $3.1 million in the first nine months of
1997 and relates to the Series A Zero Coupon Notes issued in November 1996, less
interest capitalized. Aerial capitalized interest expense of $3.1 million
related to the Series A Zero Coupon Notes in 1997.
Aerial is included in a consolidated federal income tax return with other
members of the TDS consolidated group. For financial reporting purposes, Aerial
computes federal income taxes as if it were filing a separate return as its own
affiliated group and was not included in the TDS group. TDS and Aerial are
parties to a Tax Allocation Agreement under which Aerial is able to carry
forward any losses and credits and use them to offset any future income tax
liabilities to TDS.
LIQUIDITY AND CAPITAL RESOURCES
The costs of development, construction, start-up and post-launch activities
of Aerial will continue to require substantial capital. From inception through
September 30, 1997, the Company had expended $304.4 million for its licenses,
including capitalized interest, $568.9 million for all other capital
expenditures and incurred cumulative net losses of $200.3 million. Aerial
expects to incur significant operating losses and generate negative cash flow
from operating activities during the next several years as it continues to build
its customer base.
Cash flows used by operating activities were $165.7 million during the first
nine months of 1997 compared to $14.5 million in 1996. Cash used in 1997
primarily resulted from the operating cash outflow (operating loss before
IV-31
<PAGE>
depreciation and amortization expense) of $116.4 million, plus launch related
increases in accounts receivable and inventory aggregating $48.9 million. Cash
used in 1996 resulted primarily from an operating cash outflow of $23.2 million
for the period and a $1.1 million reduction in affiliated accounts payable and
accrued interest, offset by a reduction in income tax refund
receivable-affiliate of $10.2 million.
Cash flows from financing activities totaled $331.8 million during the first
nine months of 1997 compared to $163.9 million in 1996. Cash provided in 1997
was due primarily to $330.4 million in borrowings under the Revolving Credit
Agreement (See Note 8--Revolving Credit Agreement). In 1996 Aerial received from
TDS $28.8 million representing the balance due in connection with TDS's $289.2
million contribution to the equity capital of Aerial in 1995. Also in 1996,
Aerial received proceeds of $195.3 million from its IPO and used a portion of
the proceeds to repay the then outstanding balance under the Revolving Credit
Agreement with TDS.
Cash flows used in investing activities totaled $201.1 million during the
first nine months of 1997 compared to $50.3 million in 1996. Cash used in 1997
resulted primarily from $203.4 million in additions to property and equipment,
primarily launch-related network and information system assets, offset by a $1.9
million reduction in note receivable-other. Cash requirements in 1996 also
consisted primarily of additions to property and equipment (primarily computer
equipment, office equipment, and leasehold improvements).
While start-up and post-launch activities may be impacted by many factors,
Aerial anticipates that the continuing development of its PCS networks and
services will require substantial capital over the next several years. Aerial
estimates that the aggregate funds required for 1997 will total approximately
$620 million. This amount includes an estimated $365 million for capital
expenditures and $255 million of estimated working capital requirements. For the
first nine months of 1997, Aerial's capital expenditures totaled approximately
$314 million (including noncash transactions), and cash flows used in operations
totaled $166 million. Capital and operating expenditures in the fourth quarter
of approximately $140 million are expected to be funded by unused borrowings of
$95 million under the Revolving Credit Agreement with TDS and $45 million
available ($200 million in financing less $155 million in expenditures) under
the June 19, 1996 Credit Agreement ("Credit Agreement") with Nokia
Telecommunications, Inc. ("Nokia"). Aerial plans to have substantially completed
all phases of its network build-out by the end of 1997.
Aerial expects 1998 constuction and operating expenditures to be financed
using a variety of sources, including but not limited to, additional borrowings
under the TDS Revolving Credit Agreement, vendor financing and potential
investment by a minority equity investor in Aerial or its subsidiaries.
In March 1996, Aerial selected 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 the equipment through the Credit Agreement. At Aerial's option it may issue,
in tranches, 10-year unsecured zero coupon promissory notes in accordance with
the provisions of the Credit Agreement, the proceeds of which are to be paid to
Nokia in satisfaction of borrowings by Aerial under the Credit Agreement.
Pursuant to the Credit Agreement, on November 4, 1996, Aerial issued $226.2
million in aggregate principal amount at maturity of Series A Zero Coupon Notes
("Series A Notes") due in 2006. The issue price of the Series A Notes was $100
million and there is no periodic payment of interest. The proceeds of the sale
of the Series A Notes were paid to Nokia in satisfaction of all then outstanding
obligations and future obligations of Aerial up to $100 million under the Credit
Agreement. The effective rate on the Series A Notes is 8.09%.
Pursuant to the Credit Agreement, in early 1998 Aerial expects to issue
Series B Zero Coupon Notes ("Series B Notes") due in 2007 (representing the
final issuance of zero coupon notes under the Credit Agreement). The issue price
of the Series B Notes is expected to be $100 million with no periodic payment of
interest. The proceeds from the sale of the Series B Notes would be paid to
Nokia in satisfaction of all then outstanding obligations and future obligations
of Aerial (to the extent not satisfied from the proceeds of the sale of the
Series A Notes) up to $100 million under the Credit Agreement.
The Series A and Series B Notes ("Notes") rank in the same priority with all
other unsecured and unsubordinated indebtedness of Aerial. The Notes and the
obligations under the Credit Agreement are fully and unconditionally guaranteed
by TDS at an annual fee rate of 3%. The Notes are subject to optional redemption
by Aerial after five years from the applicable date of issuance at a purchase
price equal to the issue price plus accrued interest through the date of
redemption.
In April 1996, Aerial sold 12,250,000 of its Common Shares, approximately
17.2% of the then total outstanding shares of common stock, at a price of $17
per share in an initial public offering ("IPO"). The net proceeds from the
offering, after underwriters' fees, were $195.3 million. A portion of the net
proceeds was applied to the repayment of
IV-32
<PAGE>
the $64.1 million then outstanding indebtedness (including accrued interest) to
TDS under the Revolving Credit Agreement. Proceeds from the IPO were fully
utilized by the end of January 1997.
At September 30, 1997 Aerial had approximately $95 million available for
borrowing under its $425 million Revolving Credit Agreement with TDS (See Note
8--Revolving Credit Agreement). Borrowings under the Revolving Credit Agreement
mature December 31, 1998. In addition to the Revolving Credit Agreement with
TDS, other sources of capital may include additional vendor financing as well as
private equity and debt financing by Aerial or its subsidiaries. If sufficient
additional funding is not made available to Aerial on terms and prices
acceptable to Aerial, Aerial would have to reduce its operating activities,
which could have a material adverse impact on Aerial's financial condition and
results of future operations.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION AND OTHER SECTIONS OF THIS PROXY STATEMENT/PROSPECTUS
CONTAINS "FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES
AND PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL FACTS, INCLUDING STATEMENTS
ABOUT TDS'S BELIEFS AND EXPECTATIONS ARE FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS CONTAIN POTENTIAL RISKS AND UNCERTAINTIES AND, THEREFORE, ACTUAL
RESULTS MAY DIFFER MATERIALLY. TDS UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY
ANY FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE,
BUT ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION
IN AERIAL'S MARKETS; ADVANCES IN TELECOMMUNICATIONS TECHNOLOGY; CHANGES IN THE
TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING AND FUTURE LITIGATION;
AVAILABILITY OF FUTURE FINANCING; AND UNANTICIPATED CHANGES IN GROWTH IN PCS
CUSTOMERS, PENETRATION RATES, CHURN RATES AND THE MIX OF PRODUCTS AND SERVICES
OFFERED IN AERIAL'S MARKETS. READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF
THESE IMPORTANT FACTORS.
IV-33
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING REVENUES
Service.................................................................. $ 12,922 $ --
Equipment sales.......................................................... 12,869 --
------------ -----------
Total Operating Revenues................................................. 25,791 --
------------ -----------
OPERATING EXPENSES
System operations........................................................ 13,857 --
Marketing and selling.................................................... 27,003 --
Customer service......................................................... 6,757 --
Cost of equipment sold................................................... 40,770 --
General and administrative............................................... 31,548 --
Depreciation............................................................. 18,759 --
Amortization of intangibles.............................................. 2,581 --
Development costs........................................................ 686 --
------------ -----------
Total Operating Expenses................................................. 141,961 --
------------ -----------
OPERATING (LOSS)........................................................... (116,170) --
------------ -----------
INVESTMENT AND OTHER INCOME (EXPENSE)
PCS Development costs.................................................... (21,614) (24,312)
Investment (losses)...................................................... (2,165) --
Interest income--affiliate............................................... 95 3,547
Interest income--other................................................... 2,204 --
Gain on sale of PCS license.............................................. -- 189
------------ -----------
Total Investment and Other Income........................................ (21,480) (20,576)
------------ -----------
(LOSS) BEFORE INTEREST AND INCOME TAXES.................................... (137,650) (20,576)
------------ -----------
INTEREST EXPENSE
Interest expense--affiliate.............................................. 10,631 1,669
Interest expense--other.................................................. 3,104 8
------------ -----------
Total Interest Expense................................................... 13,735 1,677
------------ -----------
(LOSS) BEFORE INCOME TAXES................................................. (151,385) (22,253)
Income tax expense......................................................... 3,028 1,453
------------ -----------
NET (LOSS)................................................................. $ (154,413) $ (23,706)
Net (Loss) to Minority Shareholders of Aerial.............................. 26,840 2,500
------------ -----------
Net (Loss) to TDS.......................................................... $ (127,573) $ (21,206)
------------ -----------
------------ -----------
Pro Forma: (See Note 4)
Net (Loss) Attributable to TDS Group through Retained Interest............. $ (31,893) $ (5,301)
Net (Loss) Attributable to Aerial Communications Group Common Shares....... $ (95,680) $ (15,905)
------------ -----------
------------ -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
IV-34
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss).................................................................. $ (154,413) $ (23,706)
Add (Deduct) adjustments to reconcile net (loss) to net cash (used) by
operating activities:
Depreciation and amortization............................................... 21,340 1,091
Noncash interest expense.................................................... 6,171 --
Investment losses........................................................... 2,165 --
Gain on sale of PCS license................................................. -- (189)
Change in accounts receivable............................................... (16,222) --
Change in inventory......................................................... (32,719) --
Change in income tax refund receivable--affiliate........................... -- 10,206
Change in accounts payable--affiliates...................................... 45 (1,075)
Change in accounts payable--trade and other................................. (192) (2,584)
Change in deferred tax liability--net....................................... 3,027 3,926
Change in other assets and liabilities...................................... 5,146 (2,138)
------------ ------------
(165,652) (14,469)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in note receivable--affiliate........................................ -- 28,836
Change in Revolving Credit Agreement--TDS................................... 330,426 (60,238)
Issuance of common stock.................................................... 1,333 195,265
------------ ------------
331,759 163,863
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in note receivable--other............................................ 1,925 --
Additions to property and equipment......................................... (203,374) (51,337)
Proceeds from sale of PCS license........................................... -- 350
Change in temporary cash and other investments.............................. 319 689
------------ ------------
(201,130) (50,298)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... (35,023) 99,096
CASH AND CASH EQUIVALENTS--
Beginning of period......................................................... 35,284 261
------------ ------------
End of period............................................................... $ 261 $ 99,357
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
IV-35
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents:
General funds................................................................... $ 261 $ 869
Affiliated cash equivalents..................................................... -- 34,415
---------- ----------
261 35,284
Temporary cash investments........................................................ 108 315
Accounts receivable............................................................... 16,222 --
Interest receivable-affiliate..................................................... -- 243
Interest receivable-other......................................................... 4 508
Note receivable................................................................... -- 1,925
Inventory......................................................................... 32,719 --
Other............................................................................. 2,071 556
---------- ----------
51,385 38,831
---------- ----------
PROPERTY and EQUIPMENT
Property and equipment-net of accumulated depreciation of $20,740 and $1,981,
respectively.................................................................... 509,293 18,592
Work in process................................................................... 38,898 233,831
Prepaid network infrastructure costs.............................................. -- 70,300
---------- ----------
548,191 322,723
---------- ----------
INVESTMENTS
Investment in PCS licenses-net of accumulated amortization of $2,567 in 1997...... 295,333 304,354
Other............................................................................. 4,495 6,771
---------- ----------
299,828 311,125
---------- ----------
DEFERRED COSTS...................................................................... 176 148
---------- ----------
TOTAL ASSETS........................................................................ $ 899,580 $ 672,827
---------- ----------
---------- ----------
LIABILITIES AND GROUP EQUITY
CURRENT LIABILITIES
Accounts payable
Affiliates...................................................................... $ 534 $ 489
Trade........................................................................... 87,252 57,114
Other........................................................................... -- 36,246
Accrued interest-affiliate........................................................ 3,475 --
Microwave relocation costs payable................................................ 8,450 17,046
Contribution payable.............................................................. -- 6,453
Other............................................................................. 4,460 1,978
---------- ----------
104,171 119,326
---------- ----------
REVOLVING CREDIT AGREEMENT-TDS...................................................... 330,426 --
---------- ----------
LONG-TERM DEBT...................................................................... 165,278 103,743
---------- ----------
DEFERRED TAX LIABILITY-NET.......................................................... 15,000 11,973
---------- ----------
AERIAL COMMUNICATIONS GROUP EQUITY.................................................. 284,705 437,785
---------- ----------
TOTAL LIABILITIES AND GROUP EQUITY.................................................. $ 899,580 $ 672,827
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
IV-36
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS
The Aerial Communications Group ("Aerial Group") consists solely of Aerial
Communications, Inc. and its subsidiaries (the "Company" or "Aerial"), an
82.6%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS") which is
developing broadband personal communications services. The Aerial Group may
in the future also include such other assets and liabilities of TDS as the
Board of Directors of TDS may determine to attribute to the Aerial Group and
such other businesses, assets and liabilities as TDS or any of its
subsidiaries may in the future acquire for the Aerial Group, as determined
by the Board of Directors of TDS.
1. The interim, unaudited 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 the 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 unaudited
financial statements be read in conjunction with the audited financial
statements and the notes thereto included elsewhere in this proxy.
The accompanying unaudited interim financial statements contain all
adjustments (consisting of only normal recurring items) necessary to present
fairly the financial position as of September 30, 1997, and December 31,
1996, the results of operations and the cash flows for the nine months ended
September 30, 1996 and 1997. The results of operations for the nine months
ended September 30, 1997 and 1996, are not necessarily indicative of the
results to be expected for the full year.
2. BASIS OF PRESENTATION
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal (the "Tracking Stock Proposal") which, if approved by
shareholders and implemented by the Board, would authorize the Board to
issue three new classes of common stock designated as United States Cellular
Group Common Shares (the "Cellular Group Shares"), TDS Telecommunications
Group Common Shares (the "Telecom Group Shares") and Aerial Communications
Group Common Shares (the "Aerial Group Shares"), and change the state of
incorporation of Telephone and Data Systems, Inc. from Iowa to Delaware.
While each of the new classes of common stock would constitute common stock
of Telephone and Data Systems, Inc., each is intended to reflect the
separate performance of Telephone and Data Systems, Inc.'s cellular
telephone, landline telephone and personal communications services
businesses ("Tracking Stocks"). The Cellular Group Shares, when issued, are
intended to reflect the separate performance of the United States Cellular
Group (the "Cellular Group"), which includes Telephone and Data Systems,
Inc.'s interest in United States Cellular Corporation, an 81%-owned
subsidiary of Telephone and Data Systems, Inc. which operates and invests in
cellular telephone companies and properties. The Telecom Group Shares, when
issued, are intended to reflect the separate performance of the TDS
Telecommunications Group (the "Telecom Group"), which primarily includes
Telephone and Data Systems, Inc.'s interest in TDS Telecommunications
Corporation, a wholly-owned subsidiary of Telephone and Data Systems, Inc.
which operates landline telephone companies. The Aerial Group Shares, when
issued, are intended to reflect the separate performance of the Aerial
Communications Group (the "Aerial Group"), which includes Telephone and Data
Systems, Inc.'s interest in Aerial Communications, Inc., an 83%-owned
subsidiary of Telephone and Data Systems, Inc. which is developing broadband
personal communications services.
The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the residual
group (the "TDS Group"), which includes retained interests ("Retained
Interests") in each of United States Cellular Group, the TDS
Telecommunications Group, and the Aerial Communications Group to the extent
of the Retained Interests in the respective groups, and all other businesses
of TDS. The TDS Group includes Telephone and Data Systems, Inc. and all of
its subsidiaries and their respective properties and assets other than
(except with respect to the Retained Interests): United States Cellular and
its subsidiaries (which are included in the United States Cellular Group),
TDS Telecom and its subsidiaries (which are included in the TDS
Telecommunications Group), and Aerial and its subsidiaries (which are
included in the Aerial Communications Group) and any other assets or
liabilities or subsidiaries of Telephone and Data Systems, Inc. attributed
to the United States Cellular Group, the TDS Telecommunications Group or the
Aerial Communications Group. The TDS Group reflects primarily the TDS
Retained Interest in the Cellular Group, the Telecom Group, and the Aerial
Group, the Corporate operations (including corporate
IV-37
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
management, intercompany financing, cash management and intercompany income
tax allocation activities) and the operations of American Paging, Inc., an
82%-owned subsidiary.
Following approval by shareholders of the Tracking Stock Proposal, Telephone
and Data Systems, Inc. currently intends to a) offer and sell Telecom Group
Shares in a public offering for cash, subject to prevailing market and other
conditions (the "Telecom Public Offering"), and to allocate the net proceeds
thereof to the Telecom Group, b) issue Cellular Group Shares in exchange for
all of the Common Shares of United States Cellular Corporation which are not
owned by Telephone and Data Systems, Inc., subject to approval by the board
of directors and the shareholders of United States Cellular Corporation (the
"U. S. Cellular Merger"), c) issue Aerial Group Shares in exchange for all
of the Common Shares of Aerial Communications, Inc. which are not owned by
Telephone and Data Systems, Inc., subject to approval by the board of
directors and the shareholders of Aerial Communications, Inc.(the "Aerial
Merger"), and d) distribute one Cellular Group Share, two-thirds of a
Telecom Group Share and two-thirds of an Aerial Group Share in the form of a
stock dividend with respect to each outstanding Series A Common Share and
Common Share of Telephone and Data Systems, Inc. (the "Distribution"). It is
currently expected that the Distribution would take place in June 1998 or
later, after the completion of the Telecom Public Offering, the U. S.
Cellular Merger and the Aerial Merger, although the Board reserves the right
to effect all or any part of the Distribution at any time, or not to make
the Distribution, regardless of whether or not such other transactions have
taken place.
The shares of Tracking Stock which would be issued in the Distribution would
represent an approximately 75% interest of the common equity value of TDS in
each Tracking Group (the "Outstanding Interest"). When considering the
shares of Tracking Stock which would also be issued in the Telecom Public
Offering, the U. S. Cellular Merger and the Aerial Merger, as well as the
Distribution, the Outstanding Interest would initially represent in the
aggregate an approximately 80% interest in each Tracking Group. Upon
completion of all of the Transactions as contemplated, approximately 20% of
the common shareholders' value of Telephone and Data System's Inc. in each
Tracking Group would initially be retained as Retained Interests in the TDS
Group, along with all other interests held by Telephone and Data Systems,
Inc.
Following the Distribution, subject to the legal restrictions on the payment
of dividends, the Board currently intends to establish an annual dividend on
the Telecom Group Shares in an amount equal to $.48 per share. The Board
also currently intends to establish an annual dividend on the Common Shares
and Series A Common Shares in an amount equal to $.10 per share. (Based on
the expected distribution ratio of two-thirds of a Telecom Group Share for
each existing Common Share and Series A Common Share, the dividend on
Telecom Group shares would equate to a per share dividend of $.32 per
existing Common Share and Series A Common Share. The total of the dividend
on Common Shares and Series A Common Shares of $.10 and the equivalent
dividend on Telecom Group Shares of $.32 equals the existing current annual
dividend on the existing Common Shares and Series A Common Shares of $.42).
With regard to the Cellular Group and the Aerial Group Shares, the Board
currently intends to retain future earnings, if any, for the development of
the businesses of the Cellular Group and Aerial Group, respectively, and
does not anticipate paying dividends on the Cellular Group or the Aerial
Group Shares in the foreseeable future. Future dividends on the shares of
common stock will be payable when, as and if declared by the Board out of
the lessor of (1) all funds of Telephone and Data Systems, Inc. legally
available therefor and (2) the available dividend amount with respect to the
relevant Group.
Funds of the Company legally available for the payment of dividends
("Surplus") (approximately $1,966 million as of September 30, 1997, based on
the financial statements) is an amount approximately equal to the Total
Common and Preferred Equity of the Company less the par or stated value of
all shares of common and preferred stock outstanding (204,725,000 shares as
of September 30, 1997 after the Distribution). With respect to any Tracking
Group, the Available Dividend Amount (approximately $1,178 million for the
Cellular Group, $280 million for the Telecom Group and $213 million for the
Aerial Group as of September 30, 1997, based on the financial statements) is
an amount approximately equal to the Outstanding Interest Fraction of such
Tracking Group (approximately 75% after the Distribution) times the
respective Tracking Group Equity less the par value of the respective
outstanding Tracking Group shares. With respect to the TDS Group, the
Available Dividend Amount (approximately $557 million as of September 30,
1997) is an amount approximately equal to the greater of a) an amount
(approximately $295 million) which is approximately equal to the Surplus of
the
IV-38
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company less the sum of all Available Dividend Amounts of all Tracking
Groups or b) an amount (approximately $557 million) which is approximately
equal to the TDS Group Equity and Preferred Stock less the par or stated
value of all Common and Series A Common Shares and Preferred Stock
outstanding.
The financial statements of the Groups comprise all of the accounts included
in the corresponding consolidated financial statements of Telephone and Data
Systems, Inc. The separate Cellular Group, Telecom Group, Aerial Group, and
TDS Group financial statements give effect to the management and accounting
policies that would be applicable upon implementation of the Tracking Stock
Proposal. Subject to the completion of the U.S. Cellular Merger and the
Aerial Merger, Telephone and Data Systems, Inc. intends to terminate certain
intercompany agreements between Telephone and Data Systems, Inc. and U. S.
Cellular and Aerial, respectively. Thereafter, all of the relationships
between Telephone and Data Systems, Inc. and such subsidiaries would be
determined solely by methods that management of Telephone and Data Systems,
Inc. believes to be reasonable. Many of such policies would continue the
arrangements which presently exist between Telephone and Data Systems, Inc.
and U. S. Cellular or Aerial pursuant to the intercompany agreements, but
Telephone and Data Systems, Inc. would have no contractual obligation to
continue such policies after the intercompany agreements have been
terminated. The separate Group financial statements have been prepared on a
basis that management believes to be reasonable and appropriate and include
(1) the historical financial position, results of operations and cash flows
of the businesses that comprise each of the Groups, (2) any assets and
liabilities (including contingent liabilities) which have been attributed to
any Group from any other Group, and (3) with respect to the TDS Group, the
Retained Interest in each of the Tracking Groups. The effects of the
issuance of the Tracking Stocks have not been reflected in these historical
financial statements.
If the Tracking Stock Proposal is approved by shareholders and implemented by
the Board, following the issuance of the Tracking Stocks, Telephone and Data
Systems, Inc. will prepare and file with the Securities and Exchange
Commission, consolidated financial statements of Telephone and Data Systems,
Inc., and financial statements of the Cellular Group, the Telecom Group, and
the Aerial Group for so long as the respective Tracking Stock is
outstanding, and the TDS Group for as long as any Tracking Stock is
outstanding. Although the financial statements of the Cellular Group, the
Telecom Group, the Aerial Group, and the TDS Group will separately report
the assets, liabilities (including contingent liabilities) and shareholders'
equity of Telephone and Data Systems, Inc. attributed to the Cellular Group,
the Telecom Group, the Aerial Group, and the TDS Group, such attribution
will not affect the legal title to such assets or responsibility for such
liabilities. Holders of Cellular Group, Telecom Group, and Aerial Group
Common Shares will be, and holders of Telephone and Data Systems, Inc.
Common Shares and Series A Common Shares are, shareholders of Telephone and
Data Systems, Inc. Telephone and Data Systems, Inc. and its subsidiaries
would each continue to be responsible for their respective liabilities.
Financial effects arising from the Cellular Group, Telecom Group, Aerial
Group or TDS Group that affect the consolidated results of operations or
financial condition of Telephone and Data Systems, Inc. could affect the
results of operations or financial condition of the Cellular Group, Telecom
Group, Aerial Group or TDS Group, or could affect the market price of any or
all classes of Common Stock. In addition, any net losses of Telephone and
Data Systems, Inc., or the Cellular Group, the Telecom Group, the Aerial
Group or the TDS Group, and dividends or distributions on, or repurchases
of, any class of Common Stock will reduce the assets of Telephone and Data
Systems, Inc. legally available for payment of dividends on any class of
Common Stock. Accordingly, Telephone and Data Systems, Inc.'s consolidated
financial statements should be read in conjunction with the Cellular Group,
the Telecom Group, the Aerial Group and the TDS Group financial information.
The management and accounting policies applicable to the preparation of the
financial statements of the TDS Group could be modified or rescinded by the
Board, in its sole discretion and without the approval of shareholders,
although there is no present intention to do so. The Board could also adopt
additional policies depending upon the circumstances. Any determination by
the Board to modify or rescind such policies, or to adopt additional
policies, including any such decision that could have disparate effects upon
the holders of different series of common stock, would be made by the Board
in good faith and in the honest belief that such decision is in the best
interests of Telephone and Data Systems, Inc. In addition, generally
accepted accounting principles require that changes in accounting policy
must be preferable (in accordance with such principles) to the policy
previously in place.
IV-39
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. REVENUE RECOGNITION. Revenues from operations consist of charges to
customers for monthly access, airtime, value-added services and
long-distance charges. Revenues are recognized as the services are rendered.
Unbilled revenues, resulting from PCS services provided from the billing
cycle date to the end of each month, are estimated and recorded.
Revenues from operations also consist of equipment sales to national
retailers, independent agents, and end user customers. Revenues from
equipment sales are recognized upon the shipment of goods to retailers and
independent agents or upon sale through direct distribution channels to end
user customers.
Handset inventory is stated at current replacement cost.
3. DEPRECIATION AND AMORTIZATION. Depreciation is provided based upon the
straight-line method over the estimated useful lives of the respective
assets, generally ten years for network assets and five years for
information system assets and office equipment. Leasehold improvements are
amortized over ten years or the lease term, whichever is shorter. PCS
licenses are amortized straight-line over forty years. Depreciation of
network assets and amortization of the related PCS license commences in the
month a market launches service provided the launch occurs on or before the
fifteenth day of that month. Depreciation and amortization commences in the
following month for those markets that launch service after the fifteenth
day of the month.
4. PRO FORMA NET (LOSS) AND (LOSS) PER SHARE. Pro forma Net (Loss) attributable
to the Aerial Group and to the TDS Group through Retained Interest assumes
that the Aerial Merger has not taken place and therefore 75% of Net (Loss)
is attributable to the Aerial Group Shares and 25% of Net (Loss) is
attributable to the Retained Interest for the TDS Group. A portion of the
Net (Loss) is allocated to the minority public shareholders of Aerial prior
to attributing the Net (Loss) to the Aerial Group and the TDS Group through
Retained Interest.
(Loss) per Share was omitted from the historical statements of earnings since
the Aerial Group Shares were not a part of the equity structure of TDS and
the Articles of Incorporation did not allow for the issuance of the Aerial
Group Shares for the periods presented.
5. SUPPLEMENTAL CASH FLOW INFORMATION. In the first nine months of 1997, a net
$40.8 million in additions to work in process were financed through the June
19, 1996 Credit Agreement ("Credit Agreement") with Nokia
Telecommunications, Inc. ("Nokia"), accounts payable-other and microwave
relocation costs payable. An additional $70.3 million in additions to work
in process were financed through a decrease in prepaid network
infrastructure costs.
During the nine months ended September 30, 1997, the Company incurred
interest charges totaling $19.6 million. The interest charges were comprised
of $11.0 million relating to the Revolving Credit Agreement (See Note
8-Revolving Credit Agreement), $2.4 million for TDS guarantee fees on its
Long-term debt (Series A Zero Coupon Notes) and $6.2 million in accrued
interest on the Series A Zero Coupon Notes. Of these amounts, the Company
capitalized $5.9 million relating to its work in process expenditures. The
remaining $13.7 million was charged to expense. The Company converted $11.0
million of accrued interest and $1.5 million in accrued TDS guarantee fees
to debt under the Revolving Credit Agreement in 1997.
During the nine months ended September 30, 1996, the Company incurred
interest charges of $2.1 million related to the Revolving Credit Agreement.
Of this amount, the Company capitalized $0.4 million relating to the
development of its PCS network. The remaining $1.7 million was charged to
expense. The Company also converted $3.0 million of accrued interest to debt
under the Revolving Credit Agreement in 1996.
6. RECLASSIFICATION. Certain amounts reported in the first nine months of 1996
have been reclassified to conform to the 1997 presentation.
7. DEVELOPMENT STAGE COMPANY. Effective with the second quarter of 1997, the
Company ceased to be a development stage company and presents its 1997
results of operations, cash flows and financial position in a manner similar
to established operating enterprises within the industry.
8. REVOLVING CREDIT AGREEMENT. The Company entered into a Revolving Credit
Agreement with TDS on August 1, 1995, which incorporates all of the
outstanding obligations of the Company to TDS. The Company may borrow up to
$425 million under the Revolving Credit Agreement. Pursuant to the Revolving
Credit Agreement the Company may borrow at an interest rate equal to 1.5%
above prime rate until the principal becomes due, and
IV-40
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
pay on demand an interest rate equal to 3.5% above such prime rate on any
overdue principal or overdue installment of interest. The advances made
under the Revolving Credit Agreement are unsecured. Interest on the balance
due under the Revolving Credit Agreement is payable quarterly and no
principal is payable until maturity, which is December 31, 1998. The terms
of the Revolving Credit Agreement also include, among others, restrictions
on incurring certain additional indebtedness and on paying dividends. The
total amount advanced to the Company under the Revolving Credit Agreement as
of September 30, 1997, was $330.4 million.
9. Accounts Payable-other represents the uninvoiced value of network
infrastructure equipment received by the Company, which is subsequently
financed under terms of the Credit Agreement with Nokia.
10. COMMITMENTS. At September 30, 1997, the Company had orders totaling
approximately $39.2 million with Nokia Telecommunications, Inc. and certain
tower vendors for infrastructure equipment as part of the Company's
build-out of its PCS networks. Also at September 30, 1997, the Company had
orders totaling approximately $40.5 million with various handset vendors for
handsets and accessories.
RECENT DEVELOPMENTS
RECENT FINANCIAL RESULTS
Aerial Communications Group operating revenues for the three and
twelve-month periods ended December 31, 1997 totaled $30.2 million and $56.0
million. In early 1997, Aerial commenced operations in all six of its markets
and, therefore, there was no comparative data in 1996.
Operating expenses totaled $110.5 million and $252.5 million for the three
and twelve-month periods ended December 31, 1997.
Operating (Loss) for the three and twelve-month periods ended December 31,
1997 totaled $(80.4 million) and $(218.2 million). The primary reason for the
increased losses are the costs associated with the launch of service in Aerial's
markets.
Net (Loss) for the three months ended totaled $(92.6 million) compared to
$(14.2 million) in 1996. Net loss totaled $(247.1 million) for the twelve months
ended, 1997 compared to $(37.9 million) in 1996.
PROPOSED CORPORATE RESTRUCTURING
On December 29, 1997, Airmont Plaza Associates, which claims to be a holder
of common shares of U.S. Cellular, filed a putative class action complaint on
behalf of the minority shareholders of U.S. Cellular in the Court of Chancery of
the State of Delaware in New Castle County. The complaint names as defendants
TDS, U.S. Cellular and the directors of U.S. Cellular. The complaint alleges a
breach of fiduciary duties by the defendants in connection with the proposed
U.S. Cellular Merger and seeks to have the U.S. Cellular Merger enjoined or, if
it is consummated, to have it rescinded and to recover unspecified damages, fees
and expenses. On January 5, 1998, Richard Greenfield, who claims to be a holder
of common shares of Aerial, filed a putative class action complaint on behalf of
the minority shareholders of Aerial in the Court of Chancery of the State of
Delaware in New Castle County. The complaint names as defendants TDS, Aerial and
the directors of TDS and Aerial. The complaint alleges a breach of fiduciary
duties by the defendants in connection with the proposed Aerial Merger and seeks
to have the Aerial Merger enjoined or, if it is consummated, to have it
rescinded and to recover unspecified damages, fees and expenses. TDS intends to
vigorously defend against these lawsuits.
IV-41
<PAGE>
ANNEX V
DESCRIPTION OF THE TDS GROUP
The TDS Group is a residual group which is primarily intended to reflect (i)
retained interests (the "Retained Interests") in the Company's common equity
interest in each of the United States Cellular Group (the "Cellular Group"), the
TDS Telecommunications Group (the "Telecom Group") and the Aerial Communications
Group (the "Aerial Group") (collectively, the "Tracking Groups"); (ii) the
effects of certain corporate management, intercompany financing, cash management
and intercompany income tax allocation activities (the "Corporate Operations");
and (iii) the operations of American Paging, Inc., currently an 82%-owned
subsidiary ("American Paging") and all other businesses and investments of the
Company not attributed to a Tracking Group. Capitalized terms used herein are
used as defined elsewhere in this Proxy Statement/Prospectus. See "Exhibit G
- -Index of Certain Defined Terms."
In structuring the terms of the Tracking Stock Proposal, the Board
determined that the retention by the TDS Group of Retained Interests in the
Cellular Group, the Telecom Group and the Aerial Group was appropriate. In
making this determination, the Board concluded that it would be desirable for
shareholders to have the opportunity of continuing to maintain a common equity
investment in all of the businesses of the Company and its subsidiaries by
retaining ownership of the Common Shares and Series A Common Shares.
Accordingly, the Tracking Stock Proposal contemplates that, upon the
completion of all of the Transactions as contemplated, the Series A Common
Shares and the Common Shares of TDS Delaware would represent a common equity
interest in the TDS Group. Following such Transactions, the Series A Common
Shares and Common Shares of TDS Delaware are intended to reflect the interest of
the TDS Group in the performance of each of the Tracking Groups of TDS, the
effects of the Corporate Operations and the performance of APP and all other
interests held by the Company which are not attributed to a Tracking Group.
Holders of Common Shares and Series A Common Shares will continue to be
subject to all of the risks associated with an investment in the Company and all
of its businesses, assets and liabilities. There is no assurance as to the
degree to which the market value of the Common Shares will reflect the separate
performance of the TDS Group or its Retained Interests in the Tracking Groups.
The TDS Group would also include such other assets and liabilities of the
Company as the Board may in the future determine to attribute to the TDS Group
and such other businesses, assets and liabilities as the Company or any of its
subsidiaries may in the future acquire for the TDS Group, as determined by the
Board.
The Board intends to adopt a policy providing that the TDS Group may own,
invest or otherwise have an interest in, lease, operate or manage any business
other than a Cellular Business, a Telecom Business or a PCS Business. At the
present time, the TDS Group owns interests in businesses which may be considered
to include such other businesses. The TDS Group will continue to be permitted to
operate these existing businesses. Except with respect to such existing
businesses, the TDS Group will generally not engage in the Cellular Business,
the Telecom Business or the PCS Business, except through the Retained Interests,
unless the Board determines to permit the TDS Group to pursue such
opportunities. This will be done on a case-by-case basis. It is currently the
intention of the Board that any businesses, opportunities, assets and
liabilities attributed to the TDS Group in the future would not include assets
and liabilities of the Cellular Group, the Telecom Group or the Aerial Group.
The Board also determined that it would be desirable for the Company to have
a Group such as the TDS Group which could enter into new ventures and possibly
create additional tracking stocks for such ventures by designating series of
Undesignated Shares. For example, such new shares of tracking stock could be
distributed to the holders of Common Shares and Series A Common Shares upon the
creation or separation of a business, sold for cash in a public or private
offering to finance a new business for the benefit of the TDS Group or delivered
in connection with the acquisition of a business by the TDS Group. The Company
has no current plans to create any additional tracking stocks or to make any
material investments in any new businesses.
RETAINED INTERESTS
Upon completion of all of the Transactions as described in this Proxy
Statement/Prospectus, the outstanding shares of each class of Tracking Stock
would initially represent in the aggregate an approximately 80% interest in the
related Tracking Group. Approximately 20% of the common shareholders' value of
the Company in each Tracking Group would initially be retained as Retained
Interests of the TDS Group. The following briefly describes each of the Tracking
Groups of TDS.
V-1
<PAGE>
THE CELLULAR GROUP. The Cellular Group consists of the Company's interest
in U.S. Cellular, currently an 81%-owned subsidiary of the Company which
operates and invests in Cellular telephone companies and properties. TDS has
made an offer to acquire all of the outstanding shares of common stock of U.S.
Cellular which it does not own in exchange for Cellular Group Shares, in which
case U.S. Cellular would become a wholly-owned subsidiary of TDS. The U.S.
Cellular Restated Certificate of Incorporation currently provides that U.S.
Cellular may not own, invest or otherwise have an interest in, lease, operate or
manage any business other than a business engaged solely in the construction of,
the ownership of interests in and/or the management of Cellular telephone
systems (the "Cellular Business"), unless it first obtains the written consent
of the Company. If U.S. Cellular becomes a wholly-owned subsidiary of the
Company as contemplated, this provision is expected to be eliminated from the
U.S. Cellular Restated Certificate of Incorporation. However, the Board intends
to continue this provision as a policy with respect to the Cellular Group.
Accordingly, the Cellular Group will generally only engage in the Cellular
Business, unless the Board determines to permit the Cellular Group to pursue
other opportunities. This will be done on a case-by-case basis. It is currently
the intention of the Board that any businesses, opportunities, assets and
liabilities attributed to the Cellular Group in the future would not include
assets and liabilities of the TDS Group, the Telecom Group or the Aerial Group.
A more complete description of the Cellular Group is included in Annex II of
this Proxy Statement/Prospectus.
THE TELECOM GROUP. The Telecom Group consists of the Company's interest in
TDS Telecom, a wholly-owned subsidiary of the Company which operates landline
telephone companies, and includes the allocation of certain corporate debt. The
Board intends to adopt a policy providing that the Telecom Group may not own,
invest or otherwise have an interest in, lease, operate or manage any business
other than a business engaged solely in the construction of, the ownership of
interests in and/or the management of landline telephone systems (the "Telecom
Business"), unless it first obtains the consent of the Board. At the present
time, the Telecom Group operates certain businesses which are not considered
Telecom Business. The Telecom Group will initially be permitted to continue to
operate these existing businesses. Except with respect to such existing
businesses, the Telecom Group will generally only engage in the Telecom
Business, unless the Board determines to permit the Telecom Group to pursue
other opportunities. This will be done on a case-by-case basis. It is currently
the intention of the Board that any businesses, opportunities, assets and
liabilities attributed to the Telecom Group in the future would not include
assets and liabilities of the TDS Group, the Cellular Group or the Aerial Group.
A more complete description of the Telecom Group is included in Annex III of
this Proxy Statement/Prospectus.
THE AERIAL GROUP. The Aerial Group consists of the Company's interest in
Aerial, currently an 82%-owned subsidiary of the Company which is developing
broadband personal communications services. TDS has made an offer to acquire all
of the outstanding shares of common stock of Aerial which it does not own in
exchange for Aerial Group Shares, in which case Aerial would become a
wholly-owned subsidiary of TDS. The Aerial Restated Certificate of Incorporation
currently provides that Aerial may not own, invest or otherwise have an interest
in, lease, operate or manage any business other than a business engaged solely
in the construction of, the ownership of interests in and/or the management of
personal communications systems (the "PCS Business"), unless it first obtains
the written consent of the Company. If Aerial becomes a wholly-owned subsidiary
of the Company as contemplated, this provision is expected to be eliminated from
the Aerial Restated Certificate of Incorporation. However, the Board intends to
continue this provision as a policy with respect to the Aerial Group.
Accordingly, the Aerial Group will generally only engage in the PCS Business,
unless the Board determines to permit the Aerial Group to pursue other
opportunities. This will be done on a case-by-case basis. It is currently the
intention of the Board that any businesses, opportunities, assets and
liabilities attributed to the Aerial Group in the future would not include
assets and liabilities of the TDS Group, the Cellular Group or the Telecom
Group.
A more complete description of the Aerial Group is included in Annex IV of
this Proxy Statement/Prospectus.
NUMBER OF SHARES ISSUABLE WITH RESPECT TO RETAINED INTEREST. The amount of
the Retained Interest in a Tracking Group at any point in time would be
expressed in terms of the "Number of Shares Issuable With Respect to Retained
Interest," which is intended to provide a measure of the Retained Interest on a
basis as if the TDS Group held shares of Tracking Stock in the Tracking Groups.
The Retained Interest will not be represented by issued and outstanding
shares of Tracking Stock. Accordingly, the TDS Group will not have any voting
rights with respect to any Retained Interest, and the outcome of any vote of any
class of Tracking Stock would be determined by the holders of the outstanding
shares of such Tracking Stock.
The Number of Shares Issuable with Respect to Retained Interest would (i) be
adjusted from time to time as appropriate to reflect (a) subdivisions (by stock
split or otherwise) and combinations (by reverse stock split or
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<PAGE>
otherwise) of any Tracking Stock, (b) dividends or distributions payable in
shares of Tracking Stock to holders of such Tracking Stock and (c)
reclassifications of Tracking Stock and (ii) be decreased by the number of
shares of Tracking Stock (a) issued upon conversion, exercise or exchange of
Convertible Securities that are attributed to the TDS Group or (b) issued by the
Company as a dividend or distribution or by reclassification or exchange to
holders of Common Shares, Series A Common Shares or any issued Special Common
Shares.
In the event of any dividend or other distribution paid or distributed in
respect of the outstanding shares of any class of Tracking Stock (other than in
shares of Tracking Stock, which will result in the adjustment to the Number of
Shares Issuable with Respect to Retained Interest, as described in the preceding
paragraph), the TDS Group's combined financial statements would be credited, and
the related Tracking Group's combined financial statements would be charged (in
addition to the charge for such dividend or other distribution paid upon
outstanding shares of Tracking Stock), with an amount equal to the product of
(i) the aggregate amount of such dividend or other distribution paid or
distributed in respect of outstanding shares of Tracking Stock (including any
dividend related to the Fair Value of the Net Proceeds from the Disposition of
all or substantially all of the assets and properties of a Tracking Group),
times (ii) a fraction, the numerator of which is the Retained Interest Fraction
and the denominator of which is the Outstanding Interest Fraction for such
Tracking Group.
The "Outstanding Interest Fraction" represents the percentage interest in
the common shareholders' equity value of the Company attributable to a Tracking
Group that is represented at any time by the outstanding shares of Tracking
Stock, and the "Retained Interest Fraction" represents any remaining percentage
interest in the common shareholders' equity value of the Company attributable to
a Tracking Group that is attributed to the TDS Group by virtue of a Retained
Interest. Assuming no Inter-Group Interest Fractions, the sum of the Outstanding
Interest Fraction and the Retained Interest Fraction for a Tracking Group will
always equal 100%.
The Board could, in its sole discretion, determine from time to time to have
the TDS Group contribute cash or other property as additional equity to any
Tracking Group, and have this be reflected as an increase in the Number of
Shares Issuable with Respect to Retained Interest. In such event, the Retained
Interest Fraction with respect to such Tracking Group will increase and the
related Outstanding Interest Fraction will decrease accordingly.
The Board could, in its sole discretion, determine from time to time to
transfer cash or other property of a Tracking Group to the TDS Group and have
such transfer reflected as a reduction in the Retained Interest, in which case
the Number of Shares Issuable with Respect to Retained Interest would be
decreased. In such event, such Retained Interest Fraction would decrease and the
related Outstanding Interest Fraction would increase accordingly.
In general, if the Retained Interest is increased by a transfer of funds or
other assets from the TDS Group to a Tracking Group, the Number of Shares
Issuable with Respect to Retained Interest would be increased by an amount
determined by dividing the amount of funds or value of assets transferred by the
Market Value of a share of Tracking Stock of such Group as of the date of such
transfer. Any transfer of funds or other assets from a Tracking Group to the TDS
Group in respect of a decrease in the Number of Shares Issuable with Respect to
Retained Interest would be similarly calculated.
To the extent outstanding shares of Tracking Stock are retired or otherwise
cease to be outstanding following their purchase with funds attributed to the
TDS Group, the Number of Shares Issuable with Respect to Retained Interest would
increase on a share-for-share basis. Tracking Stock purchased with funds
attributed to the TDS Group which remain outstanding (as a result of being held
by a subsidiary included in the TDS Group) would not increase the Retained
Interest but would represent an outstanding interest in the common shareholders'
equity value of the TDS Group attributable to such Tracking Group.
Whenever shares of Tracking Stock are issued or sold by the Company, the
Company will identify (i) the number of shares of Tracking Stock issued and sold
that represent a Retained Interest, if any, the sale of which shares will reduce
the Number of Shares Issuable with Respect to Retained Interest on a
share-for-share basis and the net proceeds of which sale will be reflected
entirely in the combined financial statements of the TDS Group, and (ii) the
number of such shares that represent an additional equity interest in the
Tracking Group, the sale of which shares will reduce the available shares of
Tracking Stock and the net proceeds of which sale will be reflected entirely in
the combined financial statements of the applicable Tracking Group.
If shares of Tracking Stock are retired or otherwise cease to be outstanding
following their purchase with funds attributed to the TDS Group, the Number of
Shares Issuable with Respect to Retained Interest would increase on a
share-for-share basis and the related Retained Interest Fraction would increase
and the related Outstanding Interest Fraction would decrease accordingly. If the
purchase of shares of Tracking Stock were made with funds
V-3
<PAGE>
attributed to the Tracking Group, the Number of Shares Issuable with Respect to
Retained Interest would not be increased, but the Retained Interest Fraction
would increase and the Outstanding Interest Fraction would decrease accordingly.
If the Number of Shares Issuable with Respect to Retained Interest is
reduced to zero as a result of any combination of one or more of issuances or
sales of shares of Tracking Stock for the benefit of the TDS Group or other
events, shares of Tracking Stock could no longer be issued or sold by the
Company for the benefit of the TDS Group unless a further Retained Interest is
subsequently created or some other appropriate allocation is made.
CORPORATE OPERATIONS
The Company and certain affiliates provide the U.S. Cellular Group, the
Telecom Group and the Aerial Group with centralized management, accounting,
commercial, engineering, and data processing services.
Subject to the completion of the U.S. Cellular Merger and the Aerial Merger,
the Company intends to terminate certain intercompany agreements between TDS and
U.S. Cellular and Aerial, respectively. Thereafter, all of the relationships
between the Company and such subsidiaries would be determined solely by methods
that management of the Company believes to be reasonable. Many of such policies
would continue the arrangements which presently exist between the Company and
U.S. Cellular or Aerial pursuant to the intercompany agreements, but TDS would
have no contractual obligation to continue such policies after the intercompany
agreements have been terminated.
Management and accounting policies could be modified or rescinded by the
Board, in its sole discretion and without the approval of shareholders, although
there is no present intention to do so. The Board could also adopt additional
policies depending upon the circumstances. Any determination by the Board to
modify or rescind such policies, or to adopt additional policies, including any
such decision that could have disparate effects upon the holders of different
series of common stock, would be made by the Board in good faith and in the
honest belief that such decision is in the best interests of TDS. In addition,
generally accepted accounting principles require that changes in accounting
policy must be preferable (in accordance with such principles) to the policy
previously in place.
CORPORATE MANAGEMENT. The Company and certain subsidiaries make available
to affiliates from time-to-time management and consulting services such as
general management oversight; marketing and customer support, counsel and
advice; financial services including general accounting, business planning and
budgeting counsel and support, financial reporting, income and other tax
consulting and return preparation services, internal auditing, financial
information systems support, and treasury services. Unless otherwise specified
by written agreement, services provided are charged on the basis of time
reports. The costs of such services and any other expenses incurred jointly on
behalf of a number of subsidiaries are charged to those subsidiaries on the
basis of the subsidiaries' relative operating revenues and total assets, the
number of employees or other basis. Management believes that these methods of
allocation are reasonable.
INTERCOMPANY FINANCING. The Cellular Group, the Telecom Group and the
Aerial Group operate relatively capital-intensive businesses. Rapid growth has
required and may in the future require substantial expenditures for
construction, expansion and development. The Tracking Groups may finance these
investments in the form of loans from the TDS Group to the Tracking Groups or by
increases in the Retained Interests in the Tracking Groups. Loans to the
Tracking Groups will bear interest at such rates and have such repayment terms
and other terms as are established from time-to-time by management. Management
will consider, in establishing such rates and terms, either in specific
instances or by setting generally applicable policies from time-to-time, such
factors including, without limitation, the needs of the Company, the financing
needs and objectives of the Groups, the investment objectives of the Groups, the
availability, cost and time associated with alternative financing sources,
prevailing interest rates and general economic conditions.
The TDS Group had loans outstanding to the Groups as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- -------------
<S> <C> <C>
Cellular Group............................................................. $ -- $ --
Telecom Group.............................................................. 257,436 264,568
Aerial Group............................................................... 330,426 --
-------------- -------------
Total.................................................................... $ 587,863 $ 246,568
</TABLE>
V-4
<PAGE>
The TDS Group expects to continue to use short-term debt, long-term debt and
equity to finance these investments.
CASH MANAGEMENT SERVICES. The TDS Group administers cash management
programs whereby the Tracking Groups may deposit excess cash for investment.
Cash deposited by U.S. Cellular and Aerial in the cash management program
are available on demand and bear interest each month at the 30-day Commercial
Paper Rate reported in THE WALL STREET JOURNAL on the last business day of the
preceding month, plus 1/4%, (5.75% at December 31, 1997) or such higher rate as
the Company may in its discretion offer on such demand deposits. U.S. Cellular
or Aerial may elect to place funds for a longer period than on demand in which
event they will bear interest at the Commercial Paper Rate for investments of
similar maturity plus 1/4%,) or such higher rate as the Company may in its
discretion cause the TDS Group to offer on such investment deposits. The amounts
of such investments totaled $4 million, $51 million and $42 million at December
31, 1997, 1996 and 1995, respectively.
Certain subsidiaries of TDS Telecom also deposit their excess cash with the
TDS Group. Such investments earn interest at a rate equal to the average monthly
rate paid on cash invested in the general cash management program (5.79% at
December 31, 1997). The amounts of such investments totaled $162 million, $150
million and $158 million at December 31, 1997, 1996 and 1995, respectively.
INCOME TAX ALLOCATION. The Company has entered into Tax Allocation
Agreements with U.S. Cellular and Aerial. The Agreements provide that U.S.
Cellular and Aerial and their respective subsidiaries are included in a
consolidated federal income tax return and in state income or franchise tax
returns in certain situations with the TDS affiliated group. U.S. Cellular and
Aerial and their respective subsidiaries calculate their losses and credits as
if they comprised separate affiliated groups. Under the Agreements, the Company
does not reimburse U.S. Cellular or Aerial on a current basis for their
respective losses and credits, if any, used by the affiliated group. U.S.
Cellular and Aerial are able to carry forward their losses and credits, if any,
and use them to offset any future income tax liabilities to TDS. After all loss
and credit carryforwards have either been utilized or expired, U.S. Cellular and
Aerial compute income taxes as defined in the agreements and pay to the Company
the required income tax due. All of the benefits and obligations of the Company
under these Tax Allocation Agreements have been attributed to the TDS Group.
TDS Telecom and its subsidiaries are included in a consolidated federal
income tax return and in state income or franchise tax returns in certain
situations with the TDS affiliated group. TDS Telecom and its subsidiaries
currently calculate income taxes on a separate company basis. The separate
companies pay TDS for income tax liabilities and are reimbursed by TDS for any
losses or credits.
The Board expects to follow a policy with respect to the Telecom Group which
is similar to the policies which are expected to be followed for U.S. Cellular
and Aerial based on the existing Tax Allocation Agreements. Under this policy,
in general, TDS Telecom would continue to join in the filing of consolidated
income tax returns with TDS and its subsidiaries which are part of the TDS
affiliated group for tax purposes. Provided that the Telecom Group continues to
have taxable income, the Telecom Group will be required to reimburse the TDS
Group for Federal income taxes paid by the TDS affiliated group in an amount
equal to the greater of the Federal income tax liability of the Telecom Group
calculated as if it were a separate affiliated group, or the tax calculated
using the average tax rate (before taking into account tax credits) of the TDS
affiliated group. In the event that the Telecom Group incurs any tax losses
which it cannot utilize, the tax benefits of such losses would be allocated to
the TDS Group, and the TDS Group would be required to reimburse the Telecom
Group at such time that it would be able to utilize such tax benefits as a
stand-alone entity.
AMERICAN PAGING AND OTHER BUSINESSES
At the present time, the TDS Group's other businesses consist primarily of
the Company's investment in American Paging. American Paging is currently an
82%-owned subsidiary of the Company which offers radio paging and related
services.
In December 1997, TDS announced an agreement with TSR Paging, Inc. ("TSR")
to combine their respective paging businesses. Pursuant to the agreement, TDS
made an offer to American Paging to negotiate and enter into a merger agreement
pursuant to which TDS would acquire all of the outstanding Common Shares of
American Paging held by persons other than TDS (the "Minority Shareholders") for
cash in an amount equal to $2.25 per American Paging Common Share. The TDS offer
was considered by a special committee of the Board of Directors of American
Paging, which consists of two independent directors of American Paging.
Following review of the offer
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by the special committee and negotiations between the special committee and TDS,
TDS increased its offer to $2.50 per American Paging Common Share. On February
10, 1998, the special committee approved the revised offer and recommend that
the full Board of Directors of American Paging approve the revised offer. As a
result, on February 10, 1998, the Board of Directors of each of American Paging
and TDS approved a merger agreement providing for the acquisition by TDS
(through a wholly-owned subsidiary ("TDS Sub")) of all the issued and
outstanding American Paging Common Shares held by the Minority Shareholders for
cash in an amount equal to $2.50 per American Paging Common Share.
The merger agreement provides that TDS Sub will initially commence a tender
offer for each of the American Paging Common Shares held by the Minority
Shareholders in exchange for $2.50 in cash. Following the offer, TDS will effect
a merger of American Paging and TDS Sub. In such merger, all Minority
Shareholders will receive $2.50 in cash for each American Paging Common Share.
Following the effectiveness of such merger, American Paging Common Shares will
cease to be traded on the American Stock Exchange and American Paging will cease
to be a reporting company under the Securities Exchange Act of 1934.
Upon consummation of the merger, TDS will cause American Paging to
contribute substantially all of its assets and certain, limited liabilities, and
TSR would contribute all of its assets and liabilities to a new limited
liability company. The asset contribution agreement provides that, subject to
adjustment, TDS will have a 30% interest and TSR will have a 70% interest in the
new company. The formation of the new company, while subject to a number of
conditions, including consummation of the merger and regulatory approvals, is
expected to occur in the first half of 1998. TDS will adopt the equity method of
accounting for its investment in American Paging upon the completion of the
merger.
A more complete description of the business of American Paging is included
in Annex I of this Proxy Statement/ Prospectus.
V-6
<PAGE>
EXPLANATORY NOTE REGARDING FINANCIAL INFORMATION
Effective upon completion of the Transactions, Telephone and Data Systems,
Inc. will have outstanding five classes of Common Stock: United States Cellular
Group Common Shares, which are intended to reflect the performance of the United
States Cellular Group; TDS Telecommunications Group Common Shares, which are
intended to reflect the performance of the TDS Telecommunications Group; Aerial
Communications Group Common Shares, which are intended to reflect the
performance of the Aerial Communications Group; and Common Shares and Series A
Common Shares which are intended to reflect the performance of a residual group
(the "TDS Group") (which will also reflect the performance of the United States
Cellular Group, the TDS Telecommunications Group, and the Aerial Communications
Group to the extent of the Retained Interests in those groups.)
Although the financial statements of the TDS Group will separately report
the assets, liabilities (including contingent liabilities) and shareholders'
equity of Telephone and Data Systems, Inc. attributed to the TDS Group such
attribution will not affect the legal title to such assets or responsibility for
such liabilities. Holders of United States Cellular Group Common Shares, TDS
Telecommunications Group Common Shares, and Aerial Communications Group Common
Shares will be, and holders of Telephone and Data Systems, Inc. Common Shares
and Series A Common Shares are, shareholders of Telephone and Data Systems, Inc.
Telephone and Data Systems, Inc. and its subsidiaries would each continue to be
responsible for their respective liabilities. Financial results arising from the
business of the TDS Group (including its Retained Interests in the United States
Cellular Group, the TDS Telecommunications Group, and the Aerial Communications
Group) or from the business of the United States Cellular Group, the TDS
Telecommunications Group, and the Aerial Communications Group, could affect the
market price of all classes of Common Stock. In addition, any net losses of any
of the Telephone and Data Systems, Inc. Groups, including the United States
Cellular Group, the TDS Telecommunications Group, or the Aerial Communications
Group, and dividends or distributions on, or repurchases of, any class of Common
Stock will reduce the assets of Telephone and Data Systems, Inc. legally
available for payment of dividends on all classes of Common Stock. Accordingly,
Telephone and Data Systems, Inc.'s consolidated financial statements should be
read in conjunction with the TDS Group's financial information.
V-7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
The TDS Group includes Telephone and Data Systems, Inc. and all of its
subsidiaries and their respective properties and assets other than (except with
respect to the Retained Interests): United States Cellular Corporation and its
subsidiaries (which are included in the United States Cellular Group), TDS
Telecommunications Corporation, Inc. and its subsidiaries (which are included in
the TDS Telecom Group), Aerial Communications, Inc. and its subsidiaries (which
are included in the Aerial Group) and any other assets or liabilities or
subsidiaries of Telephone and Data Systems, Inc. which have been attributed to
the United States Cellular Group, the TDS Telecom Group or the Aerial Group. The
TDS Group reflects primarily the TDS Group's Retained Interest in the United
States Cellular Group, the TDS Telecom Group and the Aerial Group, the Corporate
operations (including, corporate management, intercompany financing, cash
management and intercompany income tax allocation activities) and the operations
of American Paging, Inc., an 82.3%-owned subsidiary.
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal (the "Tracking Stock Proposal") which, if approved by
shareholders and implemented by the Board, would authorize the Board to issue
three new classes of common stock designated as United States Cellular Group
Common Shares (the "Cellular Group Shares"), TDS Telecommunications Group Common
Shares (the "Telecom Group Shares") and Aerial Communications Group Common
Shares (the "Aerial Group Shares"), and change the state of incorporation of
Telephone and Data Systems, Inc. from Iowa to Delaware. While each of the new
classes of common stock would constitute common stock of Telephone and Data
Systems, Inc., each is intended to reflect the separate performance of Telephone
and Data Systems, Inc.'s cellular telephone, landline telephone and personal
communications services businesses ("Tracking Stocks"). The Cellular Group
Shares, when issued, are intended to reflect the separate performance of the
United States Cellular Group (the "Cellular Group"), which includes Telephone
and Data Systems, Inc.'s interest in United States Cellular Corporation, an
81%-owned subsidiary of Telephone and Data Systems, Inc. which operates and
invests in cellular telephone companies and properties. The Telecom Group
Shares, when issued, are intended to reflect the separate performance of the TDS
Telecommunications Group (the "Telecom Group"), which primarily includes
Telephone and Data Systems, Inc.'s interest in TDS Telecommunications
Corporation, a wholly-owned subsidiary of Telephone and Data Systems, Inc. which
operates landline telephone companies. The Aerial Group Shares, when issued, are
intended to reflect the separate performance of the Aerial Communications Group
(the "Aerial Group"), which includes Telephone and Data Systems, Inc.'s interest
in Aerial Communications, Inc., an 83%-owned subsidiary of Telephone and Data
Systems, Inc. which is developing broadband personal communications services.
Following approval by shareholders of the Tracking Stock Proposal, Telephone
and Data Systems, Inc. currently intends to a) offer and sell Telecom Group
Shares in a public offering for cash, subject to prevailing market and other
conditions (the "Telecom Public Offering"), and to allocate the net proceeds
thereof to the Telecom Group, b) issue Cellular Group Shares in exchange for all
of the Common Shares of United States Cellular Corporation which are not owned
by Telephone and Data Systems, Inc., subject to approval by the board of
directors and the shareholders of United States Cellular Corporation (the "U. S.
Cellular Merger"), c) issue Aerial Group Shares in exchange for all of the
Common Shares of Aerial Communications, Inc. which are not owned by Telephone
and Data Systems, Inc., subject to approval by the board of directors and the
shareholders of Aerial Communications, Inc. (the "Aerial Merger"), and d)
distribute one Cellular Group Share, two-thirds of a Telecom Group Share and
two-thirds of an Aerial Group Share in the form of a stock dividend with respect
to each outstanding Series A Common Share and Common Share of Telephone and Data
Systems, Inc. (the "Distribution"). It is currently expected that the
Distribution would take place in June 1998 or later, after the completion of the
Telecom Public Offering, the U. S. Cellular Merger and the Aerial Merger,
although the Board reserves the right to effect all or any part of the
Distribution at any time, or not to make the Distribution, regardless of whether
or not such other transactions have taken place.
The shares of Tracking Stock which would be issued in the Distribution would
represent an approximately 75% interest of the common equity value of Telephone
and Data Systems, Inc. in each Tracking Group (the "Outstanding Interest"). When
considering the shares of Tracking Stock which would also be issued in the
Telecom Public Offering, the U. S. Cellular Merger and the Aerial Merger, as
well as the Distribution, the Outstanding Interest would initially represent in
the aggregate an approximately 80% interest in each Tracking Group. Upon
completion of all of the Transactions as contemplated, approximately 20% of the
common shareholders' value of Telephone and Data Systems, Inc. in each Tracking
Group would initially be retained as Retained Interest of the TDS Group, along
with all other interests held by Telephone and Data Systems, Inc.
V-8
<PAGE>
EQUITY IN NET INCOME OF THE CELLULAR GROUP, EQUITY IN NET INCOME OF THE
TELECOM GROUP AND EQUITY IN NET (LOSS) OF THE AERIAL GROUP reflects net income
to the Telephone and Data Systems, Inc. Common and Series A Common Shareholders
from the Cellular Group, the TDS Telecom Group and the Aerial Group,
respectively. NET (LOSS) OF AMERICAN PAGING, INC. reflects net loss to the
Telephone and Data Systems, Inc. Common and Series A Common Shareholders from
American Paging, Inc. See the Telephone and Data Systems, Inc. Consolidated
Financial Statements and Management's Discussion as well as the Cellular Group,
Telecom Group, and Aerial Group Financial Statements and Management's
Discussions for a discussion of the operations and results for the Cellular
Group, the TDS Telecom Group and the Aerial Group, and American Paging, Inc.
INVESTMENT AND OTHER INCOME (EXPENSE) totaled $34.9 million in 1996 compared
to $27.6 million in 1995 and $29.2 million in 1994.
INTEREST INCOME--AFFILIATE totaled $24.3 million in 1996, compared to $46.0
million in 1995 and $35.9 million in 1994. Interest Income--affiliate is related
to loans to companies within the affiliated groups. The amount of loans to
affiliated companies varies from year to year reflecting the affiliated
companies financing needs and their abiltiy to secure more permanent financing
arrangements. United States Cellular Corporation reduced its affiliated debt
balances to zero in 1995 from proceeds from sales of non-strategic investments
and the sales of debentures in 1994 which reduced interest income--affiliate in
1995 and 1994. During 1995 Aerial Communications, Inc. purchased certain PCS
licenses which were financed with affiliated debt which increased interest
income--affiliate in 1995. Such debt was converted to equity at the end of 1995
reducing interest income--affiliate in 1996.
INTEREST EXPENSE--AFFILIATE totaled $17.9 million in 1996 as compared to
$8.7 million in 1995 and $6.6 million in 1994 relating to interest paid to
affiliates on their excess cash balances deposited with the parent.
GAIN (LOSS) ON SALE OF INVESTMENTS represents the gain or (loss) on the sale
of miscellaneous investments.
INVESTMENT INCOME reflects equity income from minority investments and has
varied as the net income from such investments has varied.
INTEREST EXPENSE--OTHER totaled $6.6 million in 1996 as compared to $9.3
million in 1995 and $4.6 million in 1994 as a result of interest on short-term
borrowings under Telephone and Data Systems, Inc.'s bank lines of credit.
The TDS Group financial statements do not reflect interest expense totaling
$21.8 million in 1996, $21.6 million in 1995, and $17.7 million in 1994 related
to certain long-term debt of Telephone and Data Systems, Inc. attributed to the
TDS Telecom Group. The long-term debt and related interest expense is reflected
on the balance sheet and income statement of the TDS Telecom Group.
The TDS Group capitalized interest costs totaling $22.7 million related to
the acquisition of PCS licenses during 1996. These costs will be amortized
through charges to expense upon commencement of operations.
INCOME TAX (BENEFIT) EXPENSE totaled ($13.2 million) in 1996 as compared to
$26.1 million in 1995 and $14.5 million in 1994. The benefit in 1996 as compared
to the expense in 1995 and 1994 reflects primarily the tax benefits and credits
generated by Aerial Communications in 1996 which Aerial Communications could not
use on a separate company basis but which Telephone and Data Systems, Inc. could
use in the consolidated federal income tax return. The expense in 1995 and 1994
reflects primarily the tax benefits and credits of U.S. Cellular which Telephone
and Data Systems, Inc. had used in prior years but which U.S. Cellular could use
on a separate company basis.
Telephone and Data Systems, Inc. has entered into Tax Allocation Agreements
with United States Cellular, Aerial Communications and American Paging. The
Agreements provide that United States Cellular, Aerial Communications and
American Paging and their respective subsidiaries are included in a consolidated
federal income tax return and in state income or franchise tax returns in
certain situations with the Telephone and Data Systems, Inc. affiliated group.
United States Cellular, Aerial Communications and American Paging and their
respective subsidiaries calculate their losses and credits as if they comprised
separate affiliated groups. Under the Agreements, Telephone and Data Systems,
Inc. does not reimburse United States Cellular, Aerial Communications and
American Paging on a current basis for their respective losses and credits, if
any, used by the affiliated group. United States Cellular, Aerial Communications
and American Paging are able to carry forward their losses and credits, if any,
and use them to offset any future income tax liabilities to Telephone and Data
Systems, Inc. After all loss and credit carryforwards have either been utilized
or expired, United States Cellular, Aerial Communications and American Paging
compute income taxes as defined in the agreements and pay to Telephone and Data
Systems, Inc. the required income tax due. All of the benefits and obligations
of Telephone and Data Systems, Inc. under these Tax Allocation Agreements have
been attributed to the TDS Group.
V-9
<PAGE>
The TDS Telecom Group currently calculates income taxes on a separate
company basis. The separate companies pay Telephone and Data Systems, Inc. for
income tax liabilities and are reimbursed by Telephone and Data Systems, Inc.
for any losses or credits. The Board expects to follow a policy with respect to
the Telecom Group which is similar to the policies which are expected to be
followed for U.S. Cellular and Aerial based on the existing Tax Allocation
Agreements. Under this policy, in general, TDS Telecom would continue to join in
the filing of consolidated income tax returns with TDS and its subsidiaries
which are part of the TDS affiliated group for tax purposes. Provided that the
Telecom Group continues to have taxable income, the Telecom Group will be
required to reimburse the TDS Group for Federal income taxes paid by the TDS
affiliated group in an amount equal to the greater of the Federal income tax
liability of the Telecom Group calculated as if it were a separate affiliated
group, or the tax calculated using the average tax rate (before taking into
account tax credits) of the TDS affiliated group. In the event that the Telecom
Group incurs any tax losses which it cannot utilize, the tax benefits of such
losses would be allocated to the TDS Group, and the TDS Group would be required
to reimburse the Telecom Group at such time that it would be able to utilize
such tax benefits as a stand-alone entity.
INFLATION
Management believes that inflation affects the TDS Group's business to no
greater extent than the general economy.
FINANCIAL RESOURCES
The subsidiaries of Telephone and Data Systems, Inc. operate relatively
capital-intensive businesses. Rapid growth has required substantial expenditures
for construction, expansion and development. The TDS Group provides financing to
affiliates as required by the affiliates' operating plans. The TDS Group has
provided this financing primarily with short-term debt.
CASH FLOWS FROM OPERATING ACTIVITIES provided cash totaling $1.2 million in
1996, required cash totaling $14.7 million in 1995 and provided cash totaling
$26.9 million in 1994.
CASH FLOWS FROM FINANCING ACTIVITIES provided cash totaling $121.7 million
in 1996, $115.4 million in 1995 and $36.4 million in 1994. Changes in notes
payable--other required $22.9 million in 1996 and provided $84.9 million in 1995
and $91.7 million in 1994. Changes in notes payable---affiliates provided $109.0
million in 1996 and $82.0 million in 1995 and required $15.4 million in 1994.
Changes in notes receivable--affiliated provided $33.9 million in 1996 and
required $87.6 million in 1995 and $88.1 million in 1994. In addition, the TDS
Group received $39.0 million from Telephone and Data Systems, Inc. sale of
Medium term notes in 1995 and received $44.6 million from American Paging,
Inc.'s initial public offering in 1994.
CASH FLOWS FROM INVESTING ACTIVITIES required cash totaling $129.4 million
in 1996, $99.4 million in 1995 and $89.9 million in 1994. Cash expenditures for
property and equipment additions totaled $44.6 million in 1996, $36.9 million in
1995 and $37.7 million in 1994. The purchase and development of PCS licenses,
including captialized interest, required $26.6 million in 1996, $42.1 million in
1995 and $11.2 million in 1994. Cash used for acquisitions totaled $7.9 million
in 1996, $27.2 million in 1995 and $34.2 million in 1994.
PROPERTY AND EQUIPMENT
The following table summarizes the TDS Group's investment in property and
equipment during the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Radio paging
Pagers............................................................... $ 12,081 $ 15,582 $ 15,641
Terminals and transmitters........................................... 4,595 6,353 11,056
Customer Telecare Center............................................. 10,216 -- --
Other................................................................ 5,625 4,592 2,269
--------- --------- ---------
32,517 26,527 28,966
Other.................................................................. 12,043 10,378 8,771
--------- --------- ---------
$ 44,560 $ 36,905 $ 37,737
--------- --------- ---------
--------- --------- ---------
</TABLE>
V-10
<PAGE>
Radio paging capital additions are anticipated to total about $17 million,
including $6 million for systems and transmitters and $11 million for pagers.
ACQUISITIONS
In 1996, Telephone and Data Systems, Inc. acquired five telephone companies,
a majority interest in one cellular market and several cellular minority
interests for cash and Telephone and Data Systems, Inc. Common Shares. In 1995,
Telephone and Data Systems, Inc. acquired five telephone companies, majority
interests in six cellular markets, several cellular minority interests and two
paging companies for cash and Telephone and Data Systems, Inc. Common Shares. In
1994, Telephone and Data Systems, Inc. acquired three telephone companies,
majority interests in nine cellular markets, several cellular minority interests
and one paging company for cash and Telephone and Data Systems, Inc. Common
Shares. The telephone and cellular acquisitions were attributed to the TDS
Telecom Group and United States Cellular Group, respectively.
LIQUIDITY
The TDS Group has cash and temporary investments totaling $58.3 million at
December 31, 1996. The temporary investments are primarily the result of
telephone operations' internally generated cash which have been deposited with
the TDS Group for investment. While certain regulated telephone subsidiaries'
debt agreements place limits on intercompany dividend payments, these
restrictions are not expected to affect the TDS Group's ability to meet its cash
obligations.
Telephone and Data Systems, Inc. has access to a variety of external capital
sources. Telephone and Data Systems, Inc. had $653 million of bank lines of
credit for general corporate purposes at December 31, 1996. Unused amounts of
such lines totaled $496 million. Telephone and Data Systems, Inc. has used
short-term debt to finance its investments in PCS, cellular telephone, and radio
paging operations, for acquisitions and for general corporate purposes. These
line of credit agreements provide for borrowings at negotiated rates up to the
prime rate. Long-term debt and equity financing from time to time have retired
such short-term debt.
In December 1996, Telephone and Data Systems, Inc. authorized the repurchase
of up to 3.0 million Telephone and Data Systems, Inc. Common Shares over a
period of three years. Telephone and Data Systems, Inc. plans to finance the
repurchase program using internally generated funds and borrowings under
short-term lines of credit. Telephone and Data Systems, Inc. may use repurchased
shares to fund acquisitions and for general corporate purposes. Subject to
prevailing market conditions, purchases may be made from time to time through
open market purchases or at negotiated prices in private transactions. The
actual number of Common Shares which may be repurchased will be subject to the
trading price of the Common Shares, Telephone and Data Systems, Inc,'s financial
position and other factors.
V-11
<PAGE>
PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 SAFE HARBOR CAUTIONARY STATEMENT
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER SECTIONS OF THIS PROXY STATEMENT/PROSPECTUS CONTAIN
"FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995, THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL FACTS, INCLUDING STATEMENT ABOUT
TDS'S BELIEFS AND EXPECTATIONS ARE FORWARD-LOOKING STATEMENTS. THESE STATEMENTS
CONTAIN POTENTIAL RISKS AND UNCERTAINTIES AND, THEREFORE, ACTUAL RESULTS MAY
DIFFER MATERIALLY. TDS UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS
OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE,
BUT ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION
IN MARKETS IN WHICH THE TDS GROUP OPERATES; ADVANCES IN TELECOMMUNICATIONS
TECHNOLOGY; CHANGES IN THE TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING
AND FUTURE LITIGATION; AVAILABILITY OF FUTURE FINANCING; START-UP OF PCS
OPERATIONS; AND UNANTICIPATED CHANGES IN GROWTH IN CELLULAR AND PCS CUSTOMERS,
PENETRATION RATES, CHURN RATES AND THE MIX OF PRODUCTS AND SERVICES OFFERED IN
OUR MARKETS. READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF THESE IMPORTANT
FACTORS.
V-12
<PAGE>
THE TDS GROUP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
RETAINED INTEREST IN NET INCOME OF CELLULAR GROUP....................................... $ 26,188 $ 20,174 $ 3,413
RETAINED INTEREST IN NET INCOME OF TELECOM GROUP........................................ 8,924 8,539 8,163
RETAINED INTEREST IN NET (LOSS) OF AERIAL GROUP......................................... (8,244) (1,617) (321)
---------- ---------- ----------
26,868 27,096 11,255
---------- ---------- ----------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest income--affiliates........................................................... 24,253 45,980 35,917
Interest expense--affiliates.......................................................... (17,875) (8,672) (6,574)
Gain (loss) on sale of investments.................................................... 3,435 (963) --
Investment income..................................................................... 4,188 467 2,647
Other, net............................................................................ 4,824 101 1,871
Interest expense--other............................................................... (6,635) (9,265) (4,614)
Capitalized interest.................................................................. 22,688 -- --
---------- ---------- ----------
34,878 27,648 29,247
---------- ---------- ----------
Net (loss) of American Paging, Inc...................................................... (39,159) (12,928) (1,100)
Less: Intra-group interest.............................................................. 11,797 6,952 1,165
---------- ---------- ----------
(27,362) (5,976) 65
---------- ---------- ----------
Income tax (benefit) expense............................................................ (13,155) 26,077 14,515
---------- ---------- ----------
NET INCOME.............................................................................. 47,539 22,691 26,052
Preferred Dividend Requirement.......................................................... (1,846) (1,934) (1,809)
---------- ---------- ----------
NET INCOME AVAILABLE TO COMMON.......................................................... $ 45,693 $ 20,757 $ 24,243
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
V-13
<PAGE>
THE TDS GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................................................... $ 47,539 $ 22,691 $ 26,052
Add (Deduct) adjustments to reconcile net income to net cash provided (required) by
operating activities
Depreciation and amortization.................................................... 46,175 32,481 25,672
Deferred taxes................................................................... 11,931 4,459 10,703
Equity in net income of Cellular, Telecom and Aerial Groups...................... (26,868) (27,096) (11,255)
Investment income................................................................ (4,185) (467) (2,647)
(Gain) loss on sale of investments............................................... (3,435) 963 --
Interest attributed to Telecom Group............................................. (21,848) (21,576) (17,685)
Other noncash income............................................................. (8,218) (7,185) (6,203)
Change in accounts receivable.................................................... 13,806 8,667 (25,299)
Change in accounts payable....................................................... (34,043) (21,694) 27,640
Change in other assets and liabilities........................................... (19,689) (5,953) (88)
------------ ------------ ----------
1,165 (14,710) 26,890
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings.......................................................... -- 39,000 --
Long-term debt repayments.......................................................... (1,004) (1,149) (1,611)
Change in notes payable-affiliates................................................. 108,997 81,955 (15,381)
Change in notes payable-other...................................................... (22,899) 84,901 91,665
Change in notes receivable-affiliates.............................................. 33,906 (87,604) (88,114)
Dividends received from affiliates................................................. 24,762 16,828 15,808
Dividends paid..................................................................... (26,704) (24,602) (21,082)
Proceeds from the issuance of affiliates' stock.................................... -- -- 44,581
Other financing activities......................................................... 4,658 6,039 10,542
------------ ------------ ----------
121,716 115,368 36,408
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment......................................... (44,560) (36,905) (37,737)
Investments in PCS licenses........................................................ (26,550) (42,053) (11,204)
Other investments.................................................................. (5,176) (3,775) (586)
Proceeds from investment sales..................................................... 500 4,800 --
Acquisitions....................................................................... (7,925) (27,157) (34,172)
Change in temporary investments.................................................... (45,695) 5,693 (6,163)
------------ ------------ ----------
(129,406) (99,397) (89,862)
------------ ------------ ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................. (6,525) 1,261 (26,564)
CASH AND CASH EQUIVALENTS
Beginning of period................................................................ 7,366 6,105 32,669
------------ ------------ ----------
End of period...................................................................... $ 841 $ 7,366 $ 6,105
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
V-14
<PAGE>
THE TDS GROUP
BALANCE SHEETS--ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.......................................................... $ 841 $ 7,366
Temporary investments.............................................................. 57,441 11,745
Notes receivable-affiliates........................................................ 25,039 28,002
Accounts receivable................................................................
Customers, less allowance of $1,883 and $1,284, respectively..................... 13,237 12,585
Other............................................................................ 3,965 3,095
Affiliates....................................................................... 6,810 24,105
Taxes receivable-affiliates...................................................... 13,425 20,757
Prepaid income taxes............................................................... 21,532 4,442
Inventory.......................................................................... 9,010 4,065
Other.............................................................................. 3,641 6,068
------------------ ------------------
154,941 122,230
------------------ ------------------
INVESTMENTS
Investment in affiliated groups
United States Cellular Group..................................................... 297,592 269,828
TDS Telecommunications Group..................................................... 85,565 65,943
Aerial Communications Group...................................................... 90,472 70,573
Notes receivable-affiliates........................................................ 239,530 279,060
Investment in PCS license costs.................................................... 78,369 50,742
Investment in minority interests................................................... 26,856 28,060
Other investments.................................................................. 1,680 1,538
------------------ ------------------
820,064 765,744
------------------ ------------------
PROPERTY, PLANT AND EQUIPMENT
Radio Paging
In service and under construction................................................ 113,000 102,385
Less accumulated depreciation.................................................... 61,528 42,933
------------------ ------------------
51,472 59,452
------------------ ------------------
Other
In service and under construction................................................ 82,781 70,677
Less accumulated depreciation.................................................... 48,202 38,436
------------------ ------------------
34,579 32,241
------------------ ------------------
Total Property, Plant and Equipment.......................................... 86,051 91,693
------------------ ------------------
OTHER ASSETS AND DEFERRED CHARGES.................................................... 18,919 27,061
------------------ ------------------
TOTAL ASSETS......................................................................... $ 1,079,975 $ 1,006,728
------------------ ------------------
------------------ ------------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
V-15
<PAGE>
THE TDS GROUP
BALANCE SHEETS--LIABILITIES AND GROUP EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of preferred shares................................................ $ 1,578 $ 13,506
Due to affiliates
Notes payable.................................................................... 201,641 190,085
Accounts payable................................................................. 1,166 31,547
Accrued interest................................................................. 996 2,189
Notes payable...................................................................... 159,162 182,625
Accounts payable................................................................... 5,005 14,141
Unearned revenue and deposits...................................................... 10,815 11,792
Accrued interest................................................................... 10,750 10,733
Accrued taxes...................................................................... 653 457
Other current liabilities.......................................................... 6,319 7,166
------------------ ------------------
398,085 464,241
------------------ ------------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability.................................................. 35,769 30,018
Postretirement benefit obligations other than pensions............................. 626 471
Other.............................................................................. 4,932 9,603
------------------ ------------------
41,327 40,092
------------------ ------------------
REDEEMABLE PREFERRED SHARES, excluding current portion............................... 280 1,587
------------------ ------------------
MINORITY INTEREST in subsidiaries.................................................... 136 6,480
------------------ ------------------
NONREDEEMABLE PREFERRED SHARES....................................................... 29,000 29,710
------------------ ------------------
TDS GROUP EQUITY..................................................................... 611,147 464,618
------------------ ------------------
TOTAL LIABILITIES AND GROUP EQUITY................................................... $ 1,079,975 $ 1,006,728
------------------ ------------------
------------------ ------------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
V-16
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The TDS Group is a residual group which is primarily intended to reflect (i)
retained interests (the "Retained Interests") in the Company's common equity
interest in each of the United States Cellular Group (the "Cellular Group"), the
TDS Telecommunications Group (the "Telecom Group") and the Aerial Communications
Group (the "Aerial Group") (collectively, the "Tracking Groups"); (ii) the
effects of certain corporate management, intercompany financing, cash management
and intercompany income tax allocation activities (the "Corporate Operations");
and (iii) the operations of American Paging, Inc., currently an 82%-owned
subsidiary ("American Paging") and all other businesses and investments of the
Company not attributed to a Tracking Group. Capitalized terms used herein are
used as defined elsewhere in this Proxy Statement/Prospectus. See "Exhibit
G--Index of Certain Defined Terms."
In structuring the terms of the Tracking Stock Proposal, the Board
determined that the retention by the TDS Group of Retained Interests in the
Cellular Group, the Telecom Group and the Aerial Group was appropriate. In
making this determination, the Board concluded that it would be desirable for
shareholders to have the opportunity of continuing to maintain a common equity
investment in all of the businesses of the Company and its subsidiaries by
retaining ownership of the Common Shares and Series A Common Shares.
Accordingly, the Tracking Stock Proposal contemplates that, upon the
completion of all of the Transactions as contemplated, the Series A Common
Shares and the Common Shares of TDS Delaware would represent a common equity
interest in the TDS Group. Following such Transactions, the Series A Common
Shares and Common Shares of TDS Delaware are intended to reflect the interest of
the TDS Group in the performance of each of the Tracking Groups of TDS, the
effects of the Corporate Operations and the performance of APP and all other
interests held by the Company which are not attributed to a Tracking Group.
Holders of Common Shares and Series A Common Shares will continue to be
subject to all of the risks associated with an investment in the Company and all
of its businesses, assets and liabilities. There is no assurance as to the
degree to which the market value of the Common Shares will reflect the separate
performance of the TDS Group or its Retained Interests in the Tracking Groups.
The TDS Group would also include such other assets and liabilities of the
Company as the Board may in the future determine to attribute to the TDS Group
and such other businesses, assets and liabilities as the Company or any of its
subsidiaries may in the future acquire for the TDS Group, as determined by the
Board.
The Board intends to adopt a policy providing that the TDS Group may own,
invest or otherwise have an interest in, lease, operate or manage any business
other than a Cellular Business, a Telecom Business or a PCS Business. At the
present time, the TDS Group owns interests in businesses which may be considered
to include such other businesses. The TDS Group will continue to be permitted to
operate these existing businesses. Except with respect to such existing
businesses, the TDS Group will generally not engage in the Cellular Business,
the Telecom Business or the PCS Business, except through the Retained Interests,
unless the Board determines to permit the TDS Group to pursue such
opportunities. This will be done on a case-by-case basis. It is currently the
intention of the Board that any businesses, opportunities, assets and
liabilities attributed to the TDS Group in the future would not include assets
and liabilities of the Cellular Group, the Telecom Group or the Aerial Group.
The Board also determined that it would be desirable for the Company to have
a Group such as the TDS Group which could enter into new ventures and possibly
create additional tracking stocks for such ventures by designating series of
Undesignated Shares. For example, such new shares of tracking stock could be
distributed to the holders of Common Shares and Series A Common Shares upon the
creation or separation of a business, sold for cash in a public or private
offering to finance a new business for the benefit of the TDS Group or delivered
in connection with the acquisition of a business by the TDS Group. The Company
has no current plans to create any additional tracking stocks or to make any
material investments in any new businesses.
V-17
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RETAINED INTERESTS
Upon completion of all of the Transactions as described in this Proxy
Statement/Prospectus, the outstanding shares of each class of Tracking Stock
would initially represent in the aggregate an approximately 80% interest in the
related Tracking Group. Approximately 20% of the common shareholders' value of
the Company in each Tracking Group would initially be retained as Retained
Interests of the TDS Group. The following briefly describes each of the Tracking
Groups of TDS.
THE CELLULAR GROUP. The Cellular Group consists of the Company's interest
in U.S. Cellular, currently an 81%-owned subsidiary of the Company which
operates and invests in Cellular telephone companies and properties. TDS has
made an offer to acquire all of the outstanding shares of common stock of U.S.
Cellular which it does not own in exchange for Cellular Group Shares, in which
case U.S. Cellular would become a wholly-owned subsidiary of TDS. The U.S.
Cellular Restated Certificate of Incorporation currently provides that U.S.
Cellular may not own, invest or otherwise have an interest in, lease, operate or
manage any business other than a business engaged solely in the construction of,
the ownership of interests in and/or the management of Cellular telephone
systems (the "Cellular Business"), unless it first obtains the written consent
of the Company. If U.S. Cellular becomes a wholly-owned subsidiary of the
Company as contemplated, this provision is expected to be eliminated from the
U.S. Cellular Restated Certificate of Incorporation. However, the Board intends
to continue this provision as a policy with respect to the Cellular Group.
Accordingly, the Cellular Group will generally only engage in the Cellular
Business, unless the Board determines to permit the Cellular Group to pursue
other opportunities. This will be done on a case-by-case basis. It is currently
the intention of the Board that any businesses, opportunities, assets and
liabilities attributed to the Cellular Group in the future would not include
assets and liabilities of the TDS Group, the Telecom Group or the Aerial Group.
A more complete description of the Cellular Group is included in Annex II of
this Proxy Statement/Prospectus.
THE TELECOM GROUP. The Telecom Group consists of the Company's interest in
TDS Telecom, a wholly-owned subsidiary of the Company which operates landline
telephone companies, and includes the allocation of certain corporate debt. The
Board intends to adopt a policy providing that the Telecom Group may not own,
invest or otherwise have an interest in, lease, operate or manage any business
other than a business engaged solely in the construction of, the ownership of
interests in and/or the management of landline telephone systems (the "Telecom
Business"), unless it first obtains the consent of the Board. At the present
time, the Telecom Group operates certain businesses which are not considered
Telecom Business. The Telecom Group will initially be permitted to continue to
operate these existing businesses. Except with respect to such existing
businesses, the Telecom Group will generally only engage in the Telecom
Business, unless the Board determines to permit the Telecom Group to pursue
other opportunities. This will be done on a case-by-case basis. It is currently
the intention of the Board that any businesses, opportunities, assets and
liabilities attributed to the Telecom Group in the future would not include
assets and liabilities of the TDS Group, the Cellular Group or the Aerial Group.
A more complete description of the Telecom Group is included in Annex III of
this Proxy Statement/Prospectus.
THE AERIAL GROUP. The Aerial Group consists of the Company's interest in
Aerial, currently an 82%-owned subsidiary of the Company which is developing
broadband personal communications services. TDS has made an offer to acquire all
of the outstanding shares of common stock of Aerial which it does not own in
exchange for Aerial Group Shares, in which case Aerial would become a
wholly-owned subsidiary of TDS. The Aerial Restated Certificate of Incorporation
currently provides that Aerial may not own, invest or otherwise have an interest
in, lease, operate or manage any business other than a business engaged solely
in the construction of, the ownership of interests in and/or the management of
personal communications systems (the "PCS Business"), unless it first obtains
the written consent of the Company. If Aerial becomes a wholly-owned subsidiary
of the Company as contemplated, this provision is expected to be eliminated from
the Aerial Restated Certificate of Incorporation. However, the Board intends to
continue this provision as a policy with respect to the Aerial Group.
Accordingly, the Aerial Group will generally only engage in the PCS Business,
unless the Board determines to permit the Aerial Group to pursue other
opportunities. This will be done on a case-by-case basis. It is currently the
intention of the
V-18
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Board that any businesses, opportunities, assets and liabilities attributed to
the Aerial Group in the future would not include assets and liabilities of the
TDS Group, the Cellular Group or the Telecom Group.
A more complete description of the Aerial Group is included in Annex IV of
this Proxy Statement/Prospectus.
Upon completion of all the Transactions as described in the Proxy
Statement/Prospectus, approximately 20% of the common shareholders' value of the
Company in each Tracking Stock would be retained as Retained Interest by the TDS
Group. Although the TDS Group is not a legal entity, it will represent a legal
interest. The TDS Group will be defined in the Restated Certificate of
Incorporation of TDS Delaware (see below) and assets and liabilities will be
attributed to that Group. Shareholders of TDS will have legal rights with
respect to the TDS Group to the extent provided in the Restated Certificate of
Incorporation and, thus, the Group will involve a legal interest.
The TDS Group financial statements have been prepared reflecting the TDS
Group's equity interest in the Cellular Group, the Telecom Group and the Aerial
Group through the Retained Interests attributed to the TDS Group.
The Restated Certificate of Incorporation of the Company provides that the
"TDS GROUP" means, as of any date that any shares of any class or series of
Tracking Stock have been issued and continue to be outstanding:
(a) the interest of the Company and all of its subsidiaries, (including
any successors thereto by merger, consolidation or sale of all or
substantially all of its assets) and their respective properties and assets,
other than (except as provided in paragraph (e) of this definition) the
interest of the Company and its subsidiaries in Aerial and its subsidiaries,
TDS Telecom and its subsidiaries, U.S. Cellular and its subsidiaries, and
any other subsidiaries attributed by the Board to a Group other than the TDS
Group (including any successors thereto by merger, consolidation or sale of
all or substantially all of its assets, whether or not in connection with
Related Business Transactions) and their respective businesses, assets and
liabilities;
(b) all businesses, assets and liabilities of the Company or any of its
subsidiaries to the extent attributed to the TDS Group by the Board, whether
or not such businesses, assets or liabilities are businesses, assets and
liabilities of the TDS Group or any of its subsidiaries (or a successor as
described in clause (a) of the sentence);
(c) all businesses, assets and liabilities contributed or otherwise
transferred to the TDS Group from any of the Tracking Groups;
(d) the interest of the Company or any of its subsidiaries in the
business, assets and liabilities acquired by the Company or any of its
subsidiaries for the TDS Group, as determined by the Board;
(e) a proportionate undivided interest in each and every business, asset
and liability attributed to a Tracking Group equal to the Retained Interest
Fraction of the TDS Group in such other Tracking Group; and
(f) such other businesses, assets and liabilities and such adjustments
to the foregoing as may be contemplated hereby or which may be determined in
good faith by the Board.
If a Retained Interest in any Tracking Group is then existing and if the
Company shall pay a dividend or make any other distribution with respect to
holders of Tracking Stock of such Tracking Group payable in cash, securities or
other property of the Company attributed to such Tracking Group, other than
shares of Tracking Stock, the TDS Group shall be deemed to hold an amount or
fair value thereof (as determined in good faith by the Board) of such cash,
securities or other property equal to the amount or fair value so distributed
multiplied by a fraction the numerator of which is such Tracking Group's
Retained Interest Fraction and the denominator of which is such Tracking Group's
Outstanding Interest Fraction in effect immediately prior to the record date for
such dividend or other distribution and, to the extent interest or dividends are
paid or other distributions are made on any securities other than shares of
Tracking Stock so distributed to the holders of such shares of Tracking Stock,
such Tracking Group shall no longer include a corresponding ratable amount or
fair value of the kind of assets paid as such interest or dividends or other
distributions in respect of such securities deemed to be held by the TDS Group.
From and after any transfer of cash, securities or other property from a
Tracking Group to the TDS Group, such Tracking Group shall no longer include the
cash, securities or other property so transferred and the TDS Group
V-19
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shall include such cash, securities or other property and from and after any
transfer of cash, securities or other property from the TDS Group to a Tracking
Group, the TDS Group shall no longer include the cash, securities or property so
transferred and such Tracking Group shall include such cash, securities or other
property.
BASIS OF PRESENTATION
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal (the "Tracking Stock Proposal") which, if approved by
shareholders and implemented by the Board, would authorize the Board to issue
three new classes of common stock designated as United States Cellular Group
Common Shares (the "Cellular Group Shares"), TDS Telecommunications Group Common
Shares (the "Telecom Group Shares") and Aerial Communications Group Common
Shares (the "Aerial Group Shares"), and change the state of incorporation of
Telephone and Data Systems, Inc. from Iowa to Delaware. While each of the new
classes of common stock would constitute common stock of Telephone and Data
Systems, Inc., each is intended to reflect the separate performance of Telephone
and Data Systems, Inc.'s cellular telephone, landline telephone and personal
communications services businesses ("Tracking Stocks"). The Cellular Group
Shares, when issued, are intended to reflect the separate performance of the
United States Cellular Group (the "Cellular Group"), which includes Telephone
and Data Systems, Inc.'s interest in United States Cellular Corporation, an
81%-owned subsidiary of Telephone and Data Systems, Inc. which operates and
invests in cellular telephone companies and properties. The Telecom Group
Shares, when issued, are intended to reflect the separate performance of the TDS
Telecommunications Group (the "Telecom Group"), which primarily includes
Telephone and Data Systems, Inc.'s interest in TDS Telecommunications
Corporation, a wholly-owned subsidiary of Telephone and Data Systems, Inc. which
operates landline telephone companies. The Aerial Group Shares, when issued, are
intended to reflect the separate performance of the Aerial Communications Group
(the "Aerial Group"), which includes Telephone and Data Systems, Inc.'s interest
in Aerial Communications, Inc., an 83%-owned subsidiary of Telephone and Data
Systems, Inc. which is developing broadband personal communications services.
The Telephone and Data Systems, Inc. Series A Common Shares and Common
Shares will continue to be outstanding and are intended to reflect the
performance of a residual group (the "TDS Group"), which includes retained
interests ("Retained Interests") in each of the United States Cellular Group,
the TDS Telecommunications Group, and the Aerial Communications Group to the
extent of the Retained Interests in the respective groups, and all other
businesses of Telephone and Data Systems, Inc.
Following approval by shareholders of the Tracking Stock Proposal, Telephone
and Data Systems, Inc. currently intends to a) offer and sell Telecom Group
Shares in a public offering for cash, subject to prevailing market and other
conditions (the "Telecom Public Offering"), and to allocate the net proceeds
thereof to the Telecom Group, b) issue Cellular Group Shares in exchange for all
of the Common Shares of United States Cellular Corporation which are not owned
by Telephone and Data Systems, Inc., subject to approval by the board of
directors and the shareholders of United States Cellular Corporation (the "U. S.
Cellular Merger"), c) issue Aerial Group Shares in exchange for all of the
Common Shares of Aerial Communications, Inc. which are not owned by Telephone
and Data Systems, Inc., subject to approval by the board of directors and the
shareholders of Aerial Communications, Inc. (the "Aerial Merger"), and d)
distribute one Cellular Group Share, two-thirds of a Telecom Group Share and
two-thirds of an Aerial Group Share in the form of a stock dividend with respect
to each outstanding Series A Common Share and Common Share of Telephone and Data
Systems, Inc. (the "Distribution"). It is currently expected that the
Distribution would take place in June 1998 or later, after the completion of the
Telecom Public Offering, the U. S. Cellular Merger and the Aerial Merger,
although the Board reserves the right to effect all or any part of the
Distribution at any time, or not to make the Distribution, regardless of whether
or not such other transactions have taken place.
The shares of Tracking Stock which would be issued in the Distribution would
represent an approximately 75% interest of the common equity value of Telephone
and Data Systems, Inc. in each Tracking Group (the "Outstanding Interest"). When
considering the shares of Tracking Stock which would also be issued in the
Telecom Public Offering, the U. S. Cellular Merger and the Aerial Merger, as
well as the Distribution, the Outstanding Interest would initially represent in
the aggregate an approximately 80% interest in each Tracking Group. Upon
completion of all of
V-20
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the Transactions as contemplated, approximately 20% of the common shareholders'
value of Telephone and Data Systems Inc. in each Tracking Group would initially
be retained as Retained Interests in the TDS Group, along with all other
interests held by Telephone and Data Systems, Inc.
Following the Distribution, subject to the legal restrictions on the payment
of dividends, the Board currently intends to establish an annual dividend on the
Telecom Group Shares in an amount equal to $.48 per share. The Board also
currently intends to establish an annual dividend on the Common Shares and
Series A Common Shares in an amount equal to $.10 per share. (Based on the
expected distribution ratio of two-thirds of a Telecom Group Share for each
existing Common Share and Series A Common Share, the dividend on Telecom Group
shares would equate to a per share dividend of $.32 per existing Common Share
and Series A Common Share. The total of the dividend on Common Shares and Series
A Common Shares of $.10 and the equivalent dividend on Telecom Group Shares of
$.32 equals the existing current annual dividend on the existing Common Shares
and Series A Common Shares of $.42). With regard to the Cellular Group and the
Aerial Group Shares, the Board currently intends to retain future earnings, if
any, for the development of the businesses of the Cellular Group and Aerial
Group, respectively, and does not anticipate paying dividends on the Cellular
Group or the Aerial Group Shares in the foreseeable future. Future dividends on
the shares of common stock will be payable when, as and if declared by the Board
out of the lessor of (1) all funds of Telephone and Data Systems, Inc. legally
available therefor and (2) the available dividend amount with respect to the
relevant Group.
Funds of the Company legally available for the payment of dividends
("Surplus") (approximately $2,031 million as of December 31, 1996, based on the
financial statements) is an amount approximately equal to the Total Common and
Preferred Equity of the Company less the par or stated value of all shares of
common and preferred stock outstanding (204,155,000 shares as of December 31,
1996 after the Distribution). With respect to any Tracking Group, the Available
Dividend Amount (approximately $1,107 million for the Cellular Group, $258
million for the Telecom Group and $328 million for the Aerial Group as of
December 31, 1996, based on the financial statements) is an amount approximately
equal to the Outstanding Interest Fraction of such Tracking Group (approximately
75% after the Distribution) times the respective Tracking Group Equity less the
par value of the respective outstanding Tracking Group shares. With respect to
the TDS Group, the Available Dividend Amount (approximately $610 million as of
December 31, 1996) is an amount approximately equal to the greater of a) an
amount (approximately $339 million) which is approximately equal to the Surplus
of the Company less the sum of all Available Dividend Amounts of all Tracking
Groups or b) an amount (approximately $610 million) which is approximately equal
to the TDS Group Equity and Preferred Stock less the par or stated value of all
Common and Series A Common Shares and Preferred Stock outstanding.
The financial statements of the Groups comprise all of the accounts included
in the corresponding consolidated financial statements of Telephone and Data
Systems, Inc. The separate Cellular Group, Telecom Group, Aerial Group, and TDS
Group financial statements give effect to the management and accounting policies
that would be applicable upon implementation of the Tracking Stock Proposal.
Subject to the completion of the U. S. Cellular Merger and the Aerial Merger,
Telephone and Data Systems, Inc. intends to terminate certain intercompany
agreements between Telephone and Data Systems, Inc. and U. S. Cellular and
Aerial, respectively. Thereafter, all of the relationships between Telephone and
Data Systems, Inc. and such subsidiaries would be determined solely by methods
that management of Telephone and Data Systems, Inc. believes to be reasonable.
Many of such policies would continue the arrangements which presently exist
between Telephone and Data Systems, Inc. and U. S. Cellular or Aerial pursuant
to the intercompany agreements, but Telephone and Data Systems, Inc. would have
no contractual obligation to continue such policies after the intercompany
agreements have been terminated. The separate Group financial statements have
been prepared on a basis that management believes to be reasonable and
appropriate and include (1) the historical financial position, results of
operations and cash flows of the businesses that comprise each of the Groups,
(2) any assets and liabilities (including contingent liabilities) which have
been attributed to any Group from any other Group, and (3) with respect to the
TDS Group, the Retained Interest in each of the Tracking Groups. The effects of
the issuance of the Tracking Stocks have not been reflected in these historical
financial statements.
V-21
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, Telephone and Data
Systems, Inc. will prepare and file with the Securities and Exchange Commission,
consolidated financial statements of Telephone and Data Systems, Inc., and
financial statements of the Cellular Group, the Telecom Group, and the Aerial
Group for so long as the respective Tracking Stock is outstanding, and the TDS
Group for as long as any Tracking Stock is outstanding. Although the financial
statements of the Cellular Group, the Telecom Group, the Aerial Group, and the
TDS Group will separately report the assets, liabilities (including contingent
liabilities) and shareholders' equity of Telephone and Data Systems, Inc.
attributed to the Cellular Group, the Telecom Group, the Aerial Group, and the
TDS Group, such attribution will not affect the legal title to such assets or
responsibility for such liabilities. Holders of Cellular Group, Telecom Group,
and Aerial Group Common Shares will be, and holders of Telephone and Data
Systems, Inc. Common Shares and Series A Common Shares are, shareholders of
Telephone and Data Systems, Inc. Telephone and Data Systems, Inc. and its
subsidiaries would each continue to be responsible for their respective
liabilities.
Financial effects arising from the Cellular Group, Telecom Group, Aerial
Group or TDS Group that affect the consolidated results of operations or
financial condition of Telephone and Data Systems, Inc. could affect the results
of operations or financial condition of the Cellular Group, Telecom Group,
Aerial Group or TDS Group, or could affect the market price of any or all
classes of Common Stock. In addition, any net losses of Telephone and Data
Systems, Inc., or the Cellular Group, the Telecom Group, the Aerial Group or the
TDS Group, and dividends or distributions on, or repurchases of, any class of
Common Stock will reduce the assets of Telephone and Data Systems, Inc. legally
available for payment of dividends on any class of Common Stock. Accordingly,
Telephone and Data Systems, Inc.'s consolidated financial statements should be
read in conjunction with the Cellular Group, the Telecom Group, the Aerial Group
and the TDS Group financial information.
The management and accounting policies applicable to the preparation of the
financial statements of the TDS Group could be modified or rescinded by the
Board, in its sole discretion and without the approval of shareholders, although
there is no present intention to do so. The Board could also adopt additional
policies depending upon the circumstances. Any determination by the Board to
modify or rescind such policies, or to adopt additional policies, including any
such decision that could have disparate effects upon the holders of different
series of common stock, would be made by the Board in good faith and in the
honest belief that such decision is in the best interests of Telephone and Data
Systems, Inc. In addition, generally accepted accounting principles require that
changes in accounting policy must be preferable (in accordance with such
principles) to the policy previously in place.
PRINCIPLES APPLIED IN THE FINANCIAL STATEMENTS
The accounting policies of the TDS Group conform to generally accepted
accounting principles. The financial statements include the accounts of the TDS
Group and its majority-owned subsidiaries since acquisition. All material
transactions between companies within the TDS Group have been eliminated.
The TDS Group includes as investments in subsidiaries the value of the
consideration given and all direct and incremental costs relating to
acquisitions accounted for as purchases. All costs relating to unsuccessful
negotiations for acquisitions are expensed.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS AND TEMPORARY INVESTMENTS
Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. Those investments
with original maturities of more than three months to 12 months are classified
as temporary investments. Temporary investments are stated at cost, which
approximates market. Those
V-22
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investments with original maturities of more than 12 months are classified as
marketable securities and are stated at amortized cost.
INVENTORY
Inventory consists primarily of paging subscriber devices on hand.
Subscriber device cost is determined by the average cost method.
INVESTMENTS
The TDS Group currently lends funds to the United States Cellular Group and
the Aerial Communications Group pursuant to Revolving Credit Agreements at
interest rates of prime plus .75% to prime plus 1.5% (the prime rate was 8.25%
at December 31, 1996). The TDS Group also lends funds to the TDS Telecom Group
at an interest rate of prime plus 1/2%. No principal will be payable until
maturity, January 4, 1999. Certain notes which mature within a year are
classified as a current asset.
PCS license costs consist of costs incurred in acquiring Narrowband PCS
licenses ($54.0 million) and capitalized interest on Broadband ($18.1 million)
and Narrowband ($5.0 million) PCS licenses. These costs are capitalized and will
be amortized through charges to expense over 40 years upon commencement of
operations.
Investments in minority interests consist of amounts invested in entities or
joint ventures in which the TDS Group holds a minority interest. The equity
method of accounting is followed for minority interests in which the TDS Group
holds common stock ownership of at least 20% or can influence the policies of
the affiliated company ($23.8 million and $26.0 million at December 31, 1996 and
1995, respectively). Income and losses from these entities are reflected in the
income statements on a pretax basis. At December 31, 1996, the cumulative share
of income from minority investments accounted for under the equity method was
$8.0 million, of which $6.0 million was undistributed. The cost method of
accounting is followed for certain minority interests managed by others
($227,000 and $177,000 at December 31, 1996 and 1995, respectively).
UNEARNED REVENUE AND DEPOSITS
Unearned revenue and deposits primarily represent monthly charges to
customers for paging subscriber device rental and dispatch services billed in
advance. Such revenue is recognized in the following months when service is
provided and deposits are applied against the customer's final bill.
EARNINGS PER COMMON SHARE
Earnings per Common Share were omitted from the historical statements of
earnings since the recapitalization in connection with the Tracking Stock
Proposal has not been completed and the Telephone and Data Systems, Inc.
articles of incorporation did not provide for the TDS Group at such time.
SUPPLEMENTAL CASH FLOW DISCLOSURES
Following are supplemental cash flow disclosures for interest and income
taxes paid, acquisitions and certain noncash transactions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest paid.......................................................... $ 42,158 $ 40,949 $ 18,421
Income taxes paid...................................................... 45,646 41,040 21,968
Common Shares issued by Telephone and Data Systems,Inc. for conversion
of Preferred Shares.................................................. 4,602 948 1,714
Additions to property, plant and equipment financed through accounts
payable and accrued expenses......................................... $ 3,522 $ (1,743) $ 2,582
</TABLE>
V-23
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Telephone and Data Systems, Inc. has acquired operating cellular, telephone and
paging companies and certain cellular licenses since January 1, 1994. The
cellular and telephone properties were acquired for the benefit of the United
States Cellular Group and the TDS Telecom Group and were recorded as an increase
in the investment in these groups. In conjunction with these acquisitions, the
following assets were acquired and liabilities assumed, and Common and Preferred
Shares issued:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Investment in subsidiaries......................................... $ 84,737 $ 133,292 $ 210,596
Notes receivable-other............................................. (5,400) -- --
Notes receivable-affiliates........................................ -- 16,371 5,184
Other assets and liabilites, excluding cash and cash equivalents... (5,245) 5,330 4,550
Notes payable-affiliates........................................... 102,791 -- --
TDS Group Equity................................................... (168,958) (127,836) (173,658)
Preferred shares issued............................................ -- -- (12,500)
----------- ----------- -----------
Decrease in cash due to acquisitions............................... $ 7,925 $ 27,157 $ 34,172
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 2--INCOME TAXES
Telephone and Data Systems, Inc. has entered into Tax Allocation Agreements
with United States Cellular, Aerial Communications and American Paging. The
Agreements provide that United States Cellular, Aerial Communications and
American Paging and their respective subsidiaries are included in a consolidated
federal income tax return and in state income or franchise tax returns in
certain situations with the Telephone and Data Systems, Inc. affiliated group.
United States Cellular, Aerial Communications and American Paging and their
respective subsidiaries calculate their losses and credits as if they comprised
separate affiliated groups. Under the Agreements, Telephone and Data Systems,
Inc. does not reimburse United States Cellular, Aerial Communications and
American Paging on a current basis for their respective losses and credits, if
any, used by the affiliated group. United States Cellular, Aerial Communications
and American Paging are able to carry forward their losses and credits, if any,
and use them to offset any future income tax liabilities to Telephone and Data
Systems, Inc. After all loss and credit carryforwards have either been utilized
or expired, United States Cellular, Aerial Communications and American Paging
compute income taxes as defined in the agreements and pay to Telephone and Data
Systems, Inc. the required income tax due.
NOTE 3--NOTES PAYABLE--AFFILIATE
The TDS Group provides cash management services to the United States
Cellular Group, the TDS Telecom Group and the Aerial Communications Group.
Amounts invested by the Groups are available upon demand and bear interest each
month at the 30-day Commercial Paper Rate as reported in the Wall Street
Journal, plus 1/4%, or such higher rate as the TDS Group may at its discretion
offer on such deposits.
NOTE 4--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Certain costs relating to
the development of computer software for internal use are capitalized and are
amortized over the estimated five-year life of the software. Depreciation is
V-24
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
provided for book purposes using the straight-line method. Composite
depreciation rates, as applied to the average cost of depreciable property, are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Radio Paging property.............................................. 27.9% 22.1% 23.1%
Other property..................................................... 15.9% 10.0% 12.8%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 5--NOTES PAYABLE
The TDS Group has used short-term debt to finance its investments in PCS,
cellular telephone and radio paging operations, for acquisitions, and for
general corporate purposes. Long-term debt and equity financing from time to
time have retired such short-term debt. Proceeds from an Aerial Communications,
Inc. initial public offering retired $131.2 million of short-term debt in 1996.
(See Note 6--Sale of Stock by Subsidiaries.) Proceeds from the sales of
non-strategic cellular and other investments from time to time in 1996 and 1995
have been used to retire short-term debt. Proceeds from a United States Cellular
Corporation convertible debt offering retired $131.4 million of short-term debt
in 1995. Proceeds from an American Paging, Inc. initial public offering and
Telephone and Data Systems, Inc.'s sales of Common Shares retired $21.2 million
of short-term debt in 1994.
The TDS Group had $678.4 million of bank lines of credit for general
corporate purposes at December 31, 1996, $653.4 million of which were committed.
Unused amounts of such lines totaled $521.0 million, $496.0 million of which
were committed. These line-of-credit agreements provide for borrowings at
negotiated rates up to the prime rate.
Information concerning notes payable is shown in the table below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at end of period........................................... $ 159,162 $ 182,625 $ 97,724
Weighted average interest rate at end of period.................... 6.0% 6.3% 6.2%
Maximum amount outstanding during the period....................... $ 202,765 $ 182,625 $ 105,830
Average amount outstanding during the period(1).................... $ 111,072 $ 139,527 $ 50,197
Weighted average interest rate during the period(1)................ 5.7% 6.4% 5.2%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ---------
(1) The average was computed based on month-end balances.
NOTE 6--SALE OF STOCK BY SUBSIDIARIES
United States Cellular Corporation issued Common Shares during 1996, 1995
and 1994 in connection with acquisitions and employee stock purchase plans.
Aerial Communications, Inc. issued 12.3 million Common Shares in an initial
public offering (at a price of $17 per share) in 1996. The initial public
offering reduced Telephone and Data Systems, Inc.'s ownership percentage from
100% to 82.8%. American Paging, Inc. issued Common Shares during 1996 and 1995
in connection with employee stock purchase plans, and in 1994 issued 3.5 million
Common Shares in an initial public offering (at a price of $14 per share). The
initial public offering reduced Telephone and Data Systems, Inc.'s ownership
percentage from 100% to 82.5%. The United States Cellular Corporation, Aerial
Communications, Inc. and American Paging, Inc. Common Share transactions were
recorded at fair market values which were either less than or in excess of
Telephone and Data Systems, Inc.'s book value investment in United States
Cellular Corporation, Aerial Communications, Inc. and American Paging, Inc. The
TDS Group adjusted its book value investment as a result of these issues and
increased capital in excess of par value $123.2 million, $714,000 and $21.2
million in 1996, 1995 and 1994, respectively.
V-25
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--PREFERRED SHARES
Telephone and Data Systems, Inc. Cumulative Voting Preferred Shares have a
stated value of $100 per share. The authorized Preferred Shares were issuable in
series by the Telephone and Data Systems, Inc. Board of Directors who
established the terms of the issue. Those issues which contain mandatory
redemption features or which are redeemable at the option of the holder are
classified as Redeemable Preferred Shares. Those issues which are not redeemable
or which are redeemable at the option of Telephone and Data Systems, Inc. are
classified as Nonredeemable Preferred Shares.
REDEEMABLE PREFERRED SHARES
Redeemable Preferred Shares include outstanding series of Telephone and Data
Systems, Inc. Cumulative Voting Preferred Shares with mandatory redemption
features or which are redeemable at the option of the holder. At December 31,
1996, 18,581 shares of Redeemable Preferred Shares were outstanding, redeemable
at $100 per share. All other dividends are payable in cash.
The annual requirements for redemption of Redeemable Preferred Shares are
$1.6 million, $103,000, $100,000 and $77,000 for the years 1997 through 2000,
respectively.
The following is a schedule of the Redeemable Preferred Shares' activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period....................................... $ 15,093 $ 25,001 $ 27,367
Add:
Stock dividends.................................................. 113 546 839
Less:
Redemption of preferred.......................................... (9,456) (9,608) (1,005)
Conversion of preferred.......................................... (3,872) -- (1,000)
Expiration of redemption feature................................. (20) (839) (1,200)
Change in redemption feature..................................... -- (7) --
----------- ----------- -----------
1,858 15,093 25,001
Less current portion............................................... 1,578 13,506 11,792
----------- ----------- -----------
Balance, end of period............................................. $ 280 $ 1,587 $ 13,209
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NONREDEEMABLE PREFERRED SHARES
Nonredeemable Preferred Shares include outstanding series of Telephone and
Data Systems, Inc. Cumulative Voting Preferred Shares which have no mandatory
redemption features. At December 31, 1996, 290,002 shares of Nonredeemable
Preferred Shares were outstanding. Outstanding Nonredeemable Preferred Shares
are generally redeemable at the option of Telephone and Data Systems, Inc. at
$100 per share, plus accrued and unpaid dividends. At December 31, 1996, certain
series of Preferred Shares are convertible into Telephone and Data Systems, Inc.
Common Shares. (See Note 8--Convertible Preferred Shares)
V-26
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--PREFERRED SHARES (CONTINUED)
The following is a schedule of the Nonredeemable Preferred Shares activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period....................................... $ 29,710 $ 29,819 $ 16,833
Add:
Acquisitions..................................................... -- -- 12,500
Reclassification from Redeemable Preferred Shares................ 20 839 1,200
Less:
Conversion of preferred.......................................... (730) (948) (714)
----------- ----------- -----------
Balance, end of period............................................. $ 29,000 $ 29,710 $ 29,819
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Preferred dividend requirements include all dividends paid on Preferred Shares
which are not dilutive common stock equivalents. For the year ended December 31,
1996, the preferred dividend requirement on all outstanding Preferred Shares was
$1.8 million.
NOTE 8--COMMON AND SERIES A SHARES
COMMON STOCK ACQUISITIONS
During 1996, 1995 and 1994, Telephone and Data Systems, Inc. issued 2.6
million, 3.0 million and 4.0 million Telephone and Data Systems, Inc. Common
Shares, respectively, for the acquisition of cellular and telephone interests.
COMMON SHARES ISSUABLE
Certain acquisition agreements require Telephone and Data Systems, Inc. to
deliver 20,497 and 10,480 Telephone and Data Systems, Inc. Common Shares in 1997
and 1998, respectively.
DIVIDEND REINVESTMENT, INCENTIVE AND BENEFIT PLANS
The following table summarizes Telephone and Data Systems, Inc. Common and
Series A Common Shares issued for the employee stock ownership plans and
dividend reinvestment plans described below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Common Shares
Tax-deferred savings plan............................................ 36,269 40,624 30,764
Dividend reinvestment plan........................................... 28,827 105,001 85,754
Employee stock options, awards, stock appreciation rights and
employee stock purchase plan....................................... 35,273 40,025 59,278
--------- --------- ---------
100,369 185,650 175,796
--------- --------- ---------
--------- --------- ---------
Series A Common Shares
Dividend reinvestment plan........................................... 26,445 17,855 7,783
--------- --------- ---------
--------- --------- ---------
</TABLE>
TAX-DEFERRED SAVINGS PLAN. Telephone and Data Systems, Inc. has reserved
110,965 Common Shares for issue under the Telephone and Data Systems, Inc.
Tax-Deferred Savings Plan, a qualified profit-sharing plan pursuant to Sections
401(a) and 401(k) of the Internal Revenue Code. Participating employees have the
option of investing their contributions in Telephone and Data Systems, Inc.
Common Shares, United States Cellular Common Shares, Aerial Communications
Common Shares, American Paging Common Shares or five nonaffiliated funds.
V-27
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMON AND SERIES A SHARES (CONTINUED)
DIVIDEND REINVESTMENT PLANS. Telephone and Data Systems, Inc. has reserved
486,015 Common Shares for issue under the Automatic Dividend Reinvestment and
Stock Purchase Plan and 192,254 Series A Common Shares for issue under the
Series A Common Share Automatic Dividend Reinvestment Plan. These plans enable
holders of Telephone and Data Systems, Inc.'s Common Shares and Preferred Shares
to reinvest cash dividends in newly issued Common Shares and holders of Series A
Common Shares to reinvest cash dividends in newly issued Series A Common Shares.
The purchase price of the shares is 95% of the market value, based on the
average of the daily high and low sales prices for Telephone and Data Systems,
Inc.'s Common Shares on the American Stock Exchange for the ten trading days
preceding the date on which the purchase is made.
STOCK-BASED COMPENSATION PLANS
Telephone and Data Systems, Inc. has reserved 1,316,196 Common Shares for
options granted and to be granted to key employees. Telephone and Data Systems,
Inc. has established certain plans that provide for the grant of stock options
and stock appreciation rights for the officers and employees. The options are
exercisable over a specified period not in excess of ten years. The options
expire from 1997 to 2006 or the date of the employee's termination of
employment, if earlier.
Telephone and Data Systems, Inc. accounts for stock options, stock
appreciation rights ("SARS") and employee stock purchase plans under Accounting
Principles Board ("APB") Opinion No. 25. No compensation costs have been
recognized for the stock option and employee stock purchase plans. Compensation
expense for SARS, measured on the difference between the year-end market price
of the Common Shares and SAR prices, was $263,000, $408,000 and $218,000 in
1996, 1995 and 1994, respectively. Had compensation cost for all plans been
determined consistent with Financial Accounting Standards Board Statement of
Accounting Standards ("SFAS") No. 123, the TDS Group's net income would have
been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net Income
As Reported................................................................... $ 126,139 $ 103,978
Pro Forma..................................................................... $ 126,495 $ 103,316
----------- -----------
----------- -----------
</TABLE>
Because SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
V-28
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMON AND SERIES A SHARES (CONTINUED)
A summary of the status of Telephone and Data Systems, Inc.'s stock option
plans at December 31, 1996, 1995 and 1994 and changes during the years ended is
presented in the table and narrative below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
NUMBER OF OPTION AVERAGE
SHARES PRICES FAIR VALUES
--------- ----------- -----------
<S> <C> <C> <C>
Stock Options:
Outstanding January 1, 1994 (107,661 exercisable)....................... 302,685 $ 15.35
Granted............................................................... 221,275 $ 47.59
Exercised............................................................. (25,876) $ 5.30
Cancelled............................................................. (12,487) $ 27.47
---------
Outstanding December 31, 1994 (172,689 exercisable)..................... 485,597 $ 30.25
Granted............................................................... 59,995 $ 38.67 $ 14.84
Exercised............................................................. (26,101) $ 5.52
Cancelled............................................................. (3,046) $ 43.32
---------
Outstanding December 31, 1995 (240,160 exercisable)..................... 516,445 $ 32.47
Granted............................................................... 89,228 $ 41.00 $ 13.30
Exercised............................................................. (11,025) $ 13.10
Cancelled............................................................. (3,210) $ 39.89
---------
Outstanding December 31, 1996 (405,996 exercisable)..................... 591,438 $ 34.08
---------
---------
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 5.6% and 6.6%; expected dividend yields of 1.0% and 1.0%; expected
lives of 5.1 years and 6.9 years and expected volatility of 20.5% and 25.0%.
Stock appreciation rights allow the grantee to receive an amount in cash or
Telephone and Data Systems, Inc. Common Shares, or a combination thereof,
equivalent to the difference between the exercise price and the fair market
value of the Common Shares on the exercise date. The following table summarizes
the SARs outstanding at $4.43 to $36.60 per share. These rights expire March
1997, or the date of the employee's termination of employment, if earlier. The
fair value of each stock appreciation right grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995, respectively:
risk-free interest rates of 5.2% and 5.5%; expected dividend yields of 1.0% and
1.0%; expected lives of 0.2 years and 0.7 years; and expected volatility of
18.4% and 20.2%.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Outstanding beginning of period........................................... 16,034 12,096 9,100
Granted................................................................. 5,923 8,174 7,796
Exercised............................................................... (11,887) (4,236) (4,800)
--------- --------- ---------
Outstanding end of period................................................. 10,070 16,034 12,096
--------- --------- ---------
--------- --------- ---------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. Telephone and Data Systems, Inc. has reserved
201,638 Common Shares for sale to the employees of Telephone and Data Systems,
Inc. The fair value of the employees' purchase rights is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants rights in 1996: risk-free interest
rate of 5.6%; expected dividend yield of 1.0%; expected life of 0.5 year; and
expected volatility of 15.3%.
V-29
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMON AND SERIES A SHARES (CONTINUED)
CONVERTIBLE PREFERRED SHARES
Telephone and Data Systems, Inc. convertible Preferred Shares are
convertible into 933,838 Common Shares (See Note 7--Nonredeemable Preferred
Shares). Telephone and Data Systems, Inc. issued 347,707, 40,734 and 115,542
Common Shares in 1996, 1995 and 1994, respectively, for shares of Telephone and
Data Systems, Inc. and subsidiary preferred stock converted.
SERIES A COMMON SHARES
The holders of Telephone and Data Systems, Inc. Common Shares and the
outstanding Preferred Shares are entitled to one vote per share. The holders of
Telephone and Data Systems, Inc. Series A Common Shares are entitled to ten
votes per share. Series A Common Shares are convertible, on a share-for-share
basis, into Telephone and Data Systems, Inc. Common Shares. Telephone and Data
Systems, Inc. has reserved 6,916,546 Common Shares for possible issuance upon
such conversion.
COMMON SHARE REPURCHASE PROGRAM
In December 1996, Telephone and Data Systems, Inc. authorized the repurchase
of up to 3.0 million Telephone and Data Systems, Inc. Common Shares over a
period of three years. Telephone and Data Systems, Inc. plans to finance the
repurchase program using internally generated funds and borrowings under
short-term lines of credit. Telephone and Data Systems, Inc. may use repurchased
shares to fund acquisitions and for general corporate purposes. Subject to
prevailing market conditions, purchases may be made from time to time through
open market purchases or at negotiated prices in private transactions. The
actual number of Telephone and Data Systems, Inc. Common Shares which may be
repurchased will be subject to the trading price of the Common Shares, Telephone
and Data Systems, Inc.'s financial position and other factors.
NOTE 9--COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
The radio paging capital additions are anticipated to total approximately
$17 million in 1997, including $6 million for systems and transmitters and $11
million for pagers.
LEASE COMMITMENTS
The TDS Group has leases for certain plant facilities, office space and data
processing equipment, most of which are classified as operating leases. For the
years 1996, 1995 and 1994, rent expense for term leases was $4.1 million, $2.6
million and $2.7 million, respectively, and rent expense under cancelable and
short-term leases was $5.2 million, $4.5 million and $4.2 million, respectively.
At December 31, 1996, the aggregate minimum rental commitments under
noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
MINIMUM FUTURE RENTAL
PAYMENTS
---------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
1997............................................................................... $ 4,741
1998............................................................................... 4,452
1999............................................................................... 3,956
2000............................................................................... 3,325
2001............................................................................... 2,973
Thereafter......................................................................... $ 21,918
</TABLE>
V-30
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL PROCEEDINGS
Telephone and Data Systems, Inc. is involved in legal proceedings before the
FCC and various state and federal courts from time-to-time. Management does not
believe that any of such proceedings should have a material adverse impact on
the financial position or results of operations of the TDS Group.
NOTE 10--RESTRICTION ON COMMON STOCK DIVIDENDS
Under Telephone and Data Systems, Inc.'s loan agreements at December 31,
1996, all of the consolidated retained earnings were available for the payment
of cash dividends on shares of Telephone and Data Systems, Inc. common stock.
Certain regulated telephone subsidiaries may not transfer funds to the
parent in the form of cash dividends, loans or advances until certain financial
requirements of their mortgages have been met. All of the $326.6 million
underlying retained earnings of all Telephone and Data Systems, Inc.
subsidiaries at December 31, 1996, was available for the payment of dividends on
the subsidiaries common stock. Of the $2.7 billion underlying net assets of the
Telephone and Data Systems, Inc. subsidiaries at December 31, 1996, $2.1 billion
was available for transfer to Telephone and Data Systems, Inc.
NOTE 11--INVESTMENTS IN ENTITIES ACCOUNTED FOR UNDER THE EQUITY METHOD
The following summarizes the unaudited combined assets, liabilities and
equity, and the unaudited results of operations of the interests in which the
TDS Group's investments are accounted for by the equity method.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets
Current assets................................................................ $ 58,143 $ 50,684
Due from affiliates........................................................... 67 306
Property and other............................................................ 66,534 64,726
----------- -----------
$ 124,744 $ 115,716
----------- -----------
----------- -----------
Liabilities and Equity
Current liabilities........................................................... $ 38,891 $ 26,001
Due to affiliates............................................................. 406 1,814
Deferred credits.............................................................. 2,589 5,039
Long-term debt................................................................ 25,070 22,173
Partners' capital and stockholders' equity.................................... 57,788 60,689
----------- -----------
$ 124,744 $ 115,716
----------- -----------
----------- -----------
</TABLE>
V-31
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INVESTMENTS IN ENTITIES ACCOUNTED FOR UNDER THE EQUITY METHOD
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Results of Operations
Revenues............................................................................. $ 52,954 $ 47,956 $ 46,153
Costs and expenses................................................................... (46,342) (38,835) (39,683)
Other income......................................................................... 1,098 927 1,367
Interest expense..................................................................... (1,683) (2,004) (2,102)
Income taxes......................................................................... (1,680) (3,079) (441)
Extraordinary item................................................................... (2,211) -- --
----------- ----------- -----------
Net income........................................................................... $ 2,136 $ 4,965 $ 5,294
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 12--FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of Cash and Cash Equivalents, Temporary Investments and
Short-term Debt approximate fair value due to the short-term nature of these
instruments.
At December 31, 1996 and 1995, the carrying value of Telephone and Data
Systems, Inc.'s Redeemable Preferred Shares, $1.9 million, and $15.1 million,
respectively, was approximately equal to its fair value. The fair value was
estimated using discounted cash flow analysis based on Telephone and Data
Systems, Inc.'s current dividend yield on issues of its non-convertible
preferred shares and, for convertible series, the net present value of the
common stock to be issued upon conversion (valued at quoted market prices).
It was not practicable to estimate the fair value of the TDS Group's cost
method investments in other companies because of the lack of quoted market
prices. The carrying amounts at December 31, 1996 and 1995 represent the
original cost of the investments, which management believes is not impaired.
NOTE 13--OTHER CONTINGENCIES
Aerial Communications, Inc. Group sold $226 million principle amount at
maturity of 10-year zero coupon 8.34% yield to maturity debt in November 1996 at
an issue price of $100 million. The notes are fully and unconditionally
guaranteed by Telephone and Data Systems, Inc.
V-32
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--AMERICAN PAGING, INC. OPERATIONS
The table below details the TDS Group's (loss) resulting from American
Paging, Inc.'s results of operations for each of the years in the three year
period ended December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Revenues
Service revenue................................................... $ 93,841 $ 93,034 $ 77,520
Equipment sales revenue........................................... 10,346 14,116 14,545
----------- ----------- ---------
104,187 107,150 92,065
----------- ----------- ---------
Operating Expense
Cost of services.................................................. 30,092 24,062 19,347
Selling, general and administrative............................... 67,061 53,296 41,196
Depreciation and amortization..................................... 33,777 24,692 17,178
Cost of equipment sold............................................ 9,883 14,097 14,513
----------- ----------- ---------
140,813 116,147 92,234
----------- ----------- ---------
Operating (Loss).................................................... (36,626) (8,997) (169)
----------- ----------- ---------
Investment and Other Income (Expense)
Investment (loss) in joint venture................................ (1,201) (1,151) (1,055)
Interest income................................................... 259 175 121
Other, net........................................................ 33 121 153
----------- ----------- ---------
(909) (855) (781)
----------- ----------- ---------
(Loss) Before Interest and Income Taxes............................. (37,535) (9,852) (950)
----------- ----------- ---------
Interest expense--affiliates........................................ 11,797 6,953 1,165
Capitalized interest................................................ (4,147) (1,420) --
----------- ----------- ---------
7,650 5,533 1,165
----------- ----------- ---------
(Loss) Before Income Taxes.......................................... (45,185) (15,385) (2,115)
Income tax expense (benefit)........................................ 342 325 (783)
----------- ----------- ---------
Net (Loss) to Shareholders.......................................... (45,527) (15,710) (1,332)
Net (Loss) to Minority Shareholders................................. 6,368 2,782 232
----------- ----------- ---------
Net (Loss) to Telephone and Data Systems, Inc. Shareholders......... $ (39,159) $ (12,928) $ (1,100)
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
NOTE 15--TDS GROUP EQUITY
The changes in the TDS Group equity for the periods presented is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.............................. $ 464,618 $ 628,963 $ 569,407
Telephone and Data Systems, Inc. Common and Series A Common
Shares issued and issuable................................ 125,416 (162,434) 55,424
Net income.................................................. 47,539 22,691 26,052
Dividends................................................... (26,426) (24,602) (21,920)
------------- ------------- -------------
Balance at end of period.................................... $ 611,147 $ 464,618 $ 628,963
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
V-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Telephone and Data Systems, Inc.:
We have audited, the accompanying balance sheets of the TDS Group
(representing a business unit of Telephone and Data Systems, Inc.) as of
December 31, 1996 and 1995, and the related statements of operations and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the management of Telephone and
Data Systems, Inc. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the TDS Group as of December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
December 15, 1997
V-34
<PAGE>
THE TDS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The TDS Group includes Telephone and Data Systems, Inc. and all of its
subsidiaries and their respective properties and assets other than (except with
respect to the Retained Interests): United States Cellular Corporation and its
subsidiaries (which are included in the United States Cellular Group), TDS
Telecommunications Corporation, Inc. and its subsidiaries (which are included in
the TDS Telecom Group), Aerial Communications, Inc. and its subsidiaries (which
are included in the Aerial Group) and any other assets or liabilities or
subsidiaries of Telephone and Data Systems, Inc. which have been attributed to
the United States Cellular Group, the TDS Telecom Group or the Aerial Group. The
TDS Group reflects primarily the TDS Group's Retained Interest in the United
States Cellular Group, the TDS Telecom Group and the Aerial Group, the Corporate
operations (including corporate management, intercompany financing, cash
management and intercompany income tax allocation activities) and the operations
of American Paging, Inc., an 82.0%-owned subsidiary.
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal (the "Tracking Stock Proposal") which, if approved by
shareholders and implemented by the Board, would authorize the Board to issue
three new classes of common stock designated as United States Cellular Group
Common Shares (the "Cellular Group Shares"), TDS Telecommunications Group Common
Shares (the "Telecom Group Shares") and Aerial Communications Group Common
Shares (the "Aerial Group Shares"), and change the state of incorporation of
Telephone and Data Systems, Inc. from Iowa to Delaware. While each of the new
classes of common stock would constitute common stock of Telephone and Data
Systems, Inc., each is intended to reflect the separate performance of Telephone
and Data Systems, Inc.'s cellular telephone, landline telephone and personal
communications services businesses ("Tracking Stocks"). The Cellular Group
Shares, when issued, are intended to reflect the separate performance of the
United States Cellular Group (the "Cellular Group"), which includes Telephone
and Data Systems, Inc.'s interest in United States Cellular Corporation, an
81%-owned subsidiary of Telephone and Data Systems, Inc. which operates and
invests in cellular telephone companies and properties. The Telecom Group
Shares, when issued, are intended to reflect the separate performance of the TDS
Telecommunications Group (the "Telecom Group"), which primarily includes
Telephone and Data Systems, Inc.'s interest in TDS Telecommunications
Corporation, a wholly-owned subsidiary of Telephone and Data Systems, Inc. which
operates landline telephone companies. The Aerial Group Shares, when issued, are
intended to reflect the separate performance of the Aerial Communications Group
(the "Aerial Group"), which includes Telephone and Data Systems, Inc.'s interest
in Aerial Communications, Inc., an 83%-owned subsidiary of Telephone and Data
Systems, Inc. which is developing broadband personal communications services.
Following approval by shareholders of the Tracking Stock Proposal, Telephone
and Data Systems, Inc. currently intends to a) offer and sell Telecom Group
Shares in a public offering for cash, subject to prevailing market and other
conditions (the "Telecom Public Offering"), and to allocate the net proceeds
thereof to the Telecom Group, b) issue Cellular Group Shares in exchange for all
of the Common Shares of United States Cellular Corporation which are not owned
by Telephone and Data Systems, Inc., subject to approval by the board of
directors and the shareholders of United States Cellular Corporation (the "U. S.
Cellular Merger"), c) issue Aerial Group Shares in exchange for all of the
Common Shares of Aerial Communications, Inc. which are not owned by Telephone
and Data Systems, Inc., subject to approval by the board of directors and the
shareholders of Aerial Communications, Inc. (the "Aerial Merger"), and d)
distribute one Cellular Group Share, two-thirds of a Telecom Group Share and
two-thirds of an Aerial Group Share in the form of a stock dividend with respect
to each outstanding Series A Common Share and Common Share of Telephone and Data
Systems, Inc. (the "Distribution"). It is currently expected that the
Distribution would take place in June 1998 or later, after the completion of the
Telecom Public Offering, the U. S. Cellular Merger and the Aerial Merger,
although the Board reserves the right to effect all or any part of the
Distribution at any time, or not to make the Distribution, regardless of whether
or not such other transactions have taken place.
The shares of Tracking Stock which would be issued in the Distribution would
represent an approximately 75% interest of the common equity value of Telephone
and Data Systems, Inc. in each Tracking Group (the "Outstanding Interest"). When
considering the shares of Tracking Stock which would also be issued in the
Telecom Public Offering, the U. S. Cellular Merger and the Aerial Merger, as
well as the Distribution, the Outstanding Interest would initially represent in
the aggregate an approximately 80% interest in each Tracking Group. Upon
completion of all of the Transactions as contemplated, approximately 20% of the
common shareholders' value of Telephone and Data
V-35
<PAGE>
Systems, Inc. in each Tracking Group would initially be retained as Retained
Interest in the TDS Group, along with all other interests held by Telephone and
Data Systems, Inc.
EQUITY IN NET INCOME OF THE CELLULAR GROUP, EQUITY IN NET INCOME OF THE
TELECOM GROUP AND EQUITY IN NET (LOSS) OF THE AERIAL GROUP reflects net income
to the Telephone and Data Systems, Inc. Common and Series A Common Shareholders
from the Cellular Group, the TDS Telecom Group and the Aerial Group,
respectively. See the Telephone and Data Systems, Inc. Consolidated Financial
Statements and Management's Discussion as well as the Cellular Group, Telecom
Group, and Aerial Group Financial Statements and Management's Discussions for a
discussion of the operations and results for the Cellular Group, the TDS Telecom
Group and the Aerial Group, and American Paging, Inc.
INVESTMENT AND OTHER INCOME totaled $25.9 million in the first nine months
of 1997 compared to $22.2 million in 1996.
INTEREST INCOME-AFFILIATE totaled $33.0 million in the first nine months of
1997 compared to $18.1 million in 1996. Interest Income-affiliate is related to
loans to companies within the affiliated groups. The amount of loans to
affiliated companies varies from year to year reflecting the affiliated
companies' financing needs and their ability to secure a more permanent
financing arrangement. During 1997 Aerial Communications, Inc. borrowed $330.4
million to finance investments in infrastructure and to fund operations
significantly increasing interest income-affiliate in 1997.
INTEREST EXPENSE-AFFILIATE totaled $7.4 million in the first nine months of
1997 compared to $13.8 million in 1996 relating to interest paid to affiliates
on their excess cash balances deposited with the parent.
GAIN ON SALE OF INVESTMENTS represents the gain on the sale of minority
interests in four cellular markets and a majority interest in one cable company
in the first nine months of 1997 and the sale of miscellaneous investments in
1996.
INVESTMENT INCOME reflects equity income from minority investments and has
varied as the net income from such investments has varied.
INTEREST EXPENSE-OTHER totaled $17.3 million in the first nine months of
1997 compared to $4.9 million in 1996 as a result of interest on short-term
borrowings under Telephone and Data Systems, Inc.'s bank lines of credit.
The TDS Group financial statements do not reflect interest expense totaling
$16.3 million in the first nine months of 1997 and $16.4 million in 1996 related
to certain long-term debt of Telephone and Data Systems, Inc. attributed to the
TDS Telecom Group. The long-term debt and related interest expense is reflected
on the balance sheet and income statement of the TDS Telecom Group.
The TDS Group capitalized interest costs totaling $5.0 million in the first
nine months of 1997 and $17.0 million in 1996 related to the acquisition of PCS
licenses. In the second quarter of 1997, the TDS Group stopped capitalizing
interest costs related to Broadband PCS licenses upon commencement of operations
and began amortizing these costs through charges to expense over 40 years.
NET (LOSS) OF AMERICAN PAGING, INC. reflects net (loss) to the Telephone and
Data Systems, Inc. Common and Series A Common Shareholders from American Paging,
Inc.
INCOME TAX (BENEFIT) totaled ($59.3 million) in the first nine months of
1997 as compared to ($12.7 million) in 1996. The benefit reflects primarily the
tax benefits and credits generated by Aerial Communications which Aerial
Communications could not use on a separate company basis but which Telephone and
Data Systems, Inc. could use in the consolidated federal income tax return.
Telephone and Data Systems, Inc. has entered into Tax Allocation Agreements
with United States Cellular, Aerial Communications and American Paging. The
Agreements provide that United States Cellular, Aerial Communications and
American Paging and their respective subsidiaries are included in a consolidated
federal income tax return and in state income or franchise tax returns in
certain situations with the Telephone and Data Systems, Inc. affiliated group.
United States Cellular, Aerial Communications and American Paging and their
respective subsidiaries calculate their losses and credits as if they comprised
separate affiliated groups. Under the Agreements, Telephone and Data Systems,
Inc. does not reimburse United States Cellular, Aerial Communications and
American Paging on a current basis for their respective losses and credits, if
any, used by the affiliated group. United States Cellular, Aerial Communications
and American Paging are able to carry forward their losses and credits, if any,
and use them to offset any future income tax liabilities to Telephone and Data
Systems, Inc. After all loss and credit carryforwards have either been utilized
or expired, United States Cellular, Aerial Communications and
V-36
<PAGE>
American Paging compute income taxes as defined in the agreements and pay to
Telephone and Data Systems, Inc. the required income tax due. All of the
benefits and obligations of Telephone and Data Systems, Inc. under these Tax
Allocation Agreements have been attributed to the TDS Group.
The TDS Telecom Group currently calculates income taxes on a separate
company basis. The separate companies pay Telephone and Data Systems, Inc. for
income tax liabilities and are reimbursed by Telephone and Data Systems, Inc.
for any losses or credits. The Board expects to follow a policy with respect to
the Telecom Group which is similar to the policies which are expected to be
followed for U.S. Cellular and Aerial based on the existing Tax Allocation
Agreements. Under this policy, in general, TDS Telecom would continue to join in
the filing of consolidated income tax returns with TDS and its subsidiaries
which are part of the TDS affiliated group for tax purposes. Provided that the
Telecom Group continues to have taxable income, the Telecom Group will be
required to reimburse the TDS Group for Federal income taxes paid by the TDS
affiliated group in an amount equal to the greater of the Federal income tax
liability of the Telecom Group calculated as if it were a separate affiliated
group, or the tax calculated using the average tax rate (before taking into
account tax credits) of the TDS affiliated group. In the event that the Telecom
Group incurs any tax losses which it cannot utilize, the tax benefits of such
losses would be allocated to the TDS Group, and the TDS Group would be required
to reimburse the Telecom Group at such time that it would be able to utilize
such tax benefits as a stand-alone entity.
FINANCIAL RESOURCES
The subsidiaries of Telephone and Data Systems, Inc. operate relatively
capital-intensive businesses. Rapid growth has required substantial expenditures
for construction, expansion and development. The TDS Group provides financing to
affiliates as required by the affiliates' operating plans. The TDS Group has
provided this financing primarily with short-term debt.
CASH FLOWS FROM OPERATING ACTIVITIES provided cash totaling $36.4 million in
the first nine months of 1997 and required cash totaling $34.1 million in 1996.
During 1996, certain accounts payable and income tax liabilities on the balance
sheet at the end of 1995 were paid and were the primary reasons for the cash
requirement in 1996.
CASH FLOWS FROM FINANCING ACTIVITIES required cash totaling $66.1 million in
the first nine months of 1997 and provided cash totaling $164.0 million in 1996.
Sources of cash were primarily from notes payable-other and notes
payable-affiliates in 1996 and notes payable-affiliates in 1995. Uses of cash
were amounts lent to affiliates through notes receivable-affiliates and
repurchases of common and affiliate common shares.
In December 1996, Telephone and Data Systems, Inc. authorized the repurchase
of up to three million Telephone and Data Systems, Inc. Common Shares over a
period of three years. Through September 30, 1997, Telephone and Data Systems,
Inc. purchased 1,798,100 Telephone and Data Systems, Inc. Common Shares for
$69.9 million. Telephone and Data Systems, Inc. also purchased 350,000 United
States Cellular Corporation Common Shares for $9.8 million in 1997.
CASH FLOWS FROM INVESTING ACTIVITIES provided cash totaling $34.7 million in
the first nine months of 1997 and required cash totaling $131.1 million in 1996.
Cash expenditures for property and equipment additions totaled $31.1 million in
1997 and $41.9 million in 1996 representing investments in American Paging
infrastructure and pagers and computer and software improvements for the
Corporate operations. In addition, the acquisition and development PCS licenses
required $5.0 million in 1997 and $25.8 million in 1996 relating primarily to
interest capitalized on borrowings for the purchase of licenses in 1995. In
1996, Telephone and Data Systems, Inc. acquired five telephone companies, a
majority interest in one cellular market and several cellular minority interests
for cash and Telephone and Data Systems, Inc. Common Shares. The telephone and
cellular acquisitions were attributed to the TDS Telecom Group and United States
Cellular Group, respectively.
LIQUIDITY
The TDS Group has cash and temporary investments totaling $8.0 million at
September 30, 1997. The temporary 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 TDS Group's ability
to meet its cash obligations.
Telephone and Data Systems, Inc. has access to a variety of external capital
sources. Telephone and Data Systems, Inc. had $644 million of bank lines of
credit for general corporate purposes at Septemer 30, 1997. Unused amounts of
such lines totaled $194.5 million. Telephone and Data Systems, Inc. has used
short-term debt to finance its investments in PCS, cellular telephone, and radio
paging operations, for acquisitions and for general corporate
V-37
<PAGE>
purposes. These line of credit agreements provide for borrowings at negotiated
rates up to the prime rate. Long-term debt and equity financing from time to
time have retired such short-term debt.
PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 SAFE HARBOR CAUTIONARY STATEMENT
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER SECTIONS OF THIS PROXY STATEMENT/PROSPECTUS CONTAIN
"FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995, THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL FACTS, INCLUDING STATEMENT ABOUT
THE TDS'S BELIEFS AND EXPECTATIONS ARE FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS CONTAIN POTENTIAL RISKS AND UNCERTAINTIES AND, THEREFORE, ACTUAL
RESULTS MAY DIFFER MATERIALLY. TDS UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY
ANY FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE,
BUT ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION
IN MARKETS IN WHICH THE TDS GROUP OPERATES; ADVANCES IN TELECOMMUNICATIONS
TECHNOLOGY; CHANGES IN THE TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING
AND FUTURE LITIGATION; AVAILABILITY OF FUTURE FINANCING; START-UP OF PCS
OPERATIONS; AND UNANTICIPATED CHANGES IN GROWTH IN CELLULAR CUSTOMERS,
PENETRATION RATES, CHURN RATES AND THE MIX OF PRODUCTS AND SERVICES OFFERED IN
OUR MARKETS. READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF THESE IMPORTANT
FACTORS.
V-38
<PAGE>
THE TDS GROUP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
RETAINED INTEREST IN NET INCOME OF CELLULAR GROUP................................................... $ 17,476 $ 23,917
RETAINED INTEREST IN NET INCOME OF TELECOM GROUP.................................................... 5,782 6,201
RETAINED INTEREST IN NET (LOSS) OF AERIAL GROUP..................................................... (31,893) (5,301)
---------- -----------
(8,635) 24,817
---------- -----------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest income--affiliates....................................................................... 32,963 18,093
Interest expense--affiliates...................................................................... (7,419) (13,820)
Gain (loss) on sale of investments................................................................ 10,920 3,067
Investment income................................................................................. 2,622 696
Other, net........................................................................................ (902) 2,071
Interest expense--other........................................................................... (17,318) (4,912)
Capitalized interest.............................................................................. 5,034 17,042
---------- -----------
25,900 22,237
---------- -----------
Net (loss) of American Paging, Inc.................................................................. (36,784) (26,599)
---------- -----------
Less: Intra-group interest.......................................................................... 11,618 8,403
---------- -----------
(25,166) (18,196)
---------- -----------
Income tax (benefit) expense........................................................................ (59,265) (12,742)
---------- -----------
NET INCOME.......................................................................................... 51,364 41,600
Preferred Dividend Requirement...................................................................... (1,422) (769)
---------- -----------
NET INCOME AVAILABLE TO COMMON...................................................................... $ 49,942 $ 40,831
---------- -----------
---------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
V-39
<PAGE>
THE TDS GROUP
STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................................ $ 51,364 $ 41,600
Add (Deduct) adjustments to reconcile net income to net cash provided (required) by operating
activities:
Depreciation and amortization................................................................... 31,459 35,974
Deferred taxes.................................................................................. (20,328) (2,448)
Equity in net loss (income) of Cellular, Telecom and Aerial Groups.............................. 8,635 (24,817)
Investment income............................................................................... (2,622) (696)
Gain on sale of cellular and other investments.................................................. (10,920) (3,067)
Interest attributed to Telecom Group............................................................ (16,326) (16,398)
Other noncash income............................................................................ (8,594) (5,930)
Change in accounts receivable................................................................... 316 17,302
Change in accounts payable...................................................................... (796) (33,668)
Change in unearned revenue...................................................................... (2,860) (489)
Change in prepaid taxes, taxes receivable-affiliate and accrued taxes........................... 9,486 (34,098)
Change in accrued interest...................................................................... (6,089) (7,468)
Change in other assets and liabilities.......................................................... 3,636 97
---------- -----------
36,361 (34,106)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings......................................................................... 2,880 --
Long-term debt repayments......................................................................... (722) --
Change in notes payable-affiliates................................................................ 61,462 206,860
Change in notes payable-other..................................................................... 292,727 (81,491)
Change in notes receivable-affiliates............................................................. (325,259) 48,147
Dividends received from affiliates................................................................ -- 8,065
Dividends paid.................................................................................... (20,516) (19,736)
Repurchase of Common Shares....................................................................... (69,942) --
Purchase of affiliate common stock................................................................ (9,801) --
Other financing activities........................................................................ 3,119 2,135
---------- -----------
(66,052) 163,980
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment........................................................ (31,090) (41,892)
Investments in PCS licenses....................................................................... (5,034) (25,805)
Proceeds from investment sales.................................................................... 20,999 --
Change in minority investments and other investments.............................................. (427) (9,647)
Acquisitions...................................................................................... -- (7,371)
Change in temporary investments and marketable securities......................................... 50,247 (46,335)
---------- -----------
34,695 (131,050)
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................................ 5,004 (1,176)
CASH AND CASH EQUIVALENTS
Beginning of period............................................................................... 841 7,366
---------- -----------
End of period..................................................................................... $ 5,845 $ 6,190
---------- -----------
---------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
V-40
<PAGE>
THE TDS GROUP
BALANCE SHEETS--ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................................................... $ 5,845 $ 841
Temporary investments............................................................. 2,156 57,441
Notes receivable-affiliates....................................................... 28,788 25,039
Accounts receivable
Customers....................................................................... 13,063 13,237
Other........................................................................... 2,297 3,555
Affiliates...................................................................... 10,415 6,810
Taxes receivable-affiliates..................................................... 24,898 13,425
Prepaid income taxes.............................................................. 7,375 21,532
Inventory......................................................................... 5,628 9,010
Other............................................................................. 3,168 3,641
------------------- ------------------
103,633 154,941
------------------- ------------------
INVESTMENTS
Investment in Affiliated Groups
United States Cellular Group.................................................... 317,955 297,592
TDS Telecommunicaion Group...................................................... 93,231 85,565
Aerial Communications Group..................................................... 58,756 90,472
Notes receivable-affiliates....................................................... 559,075 239,530
Investment in PCS license costs................................................... 83,291 78,369
Investment in minority interests.................................................. 28,341 26,856
Other investments................................................................. 6,708 1,680
------------------- ------------------
1,147,357 820,064
------------------- ------------------
PROPERTY, PLANT AND EQUIPMENT
Radio Paging
In service and under construction............................................... 117,421 113,000
Less accumulated depreciation................................................... 70,383 61,528
------------------- ------------------
47,038 51,472
------------------- ------------------
Other
In service and under construction............................................... 99,731 82,781
Less accumulated depreciation................................................... 55,128 48,202
------------------- ------------------
44,603 34,579
------------------- ------------------
Total Property, Plant and Equipment......................................... 91,641 86,051
------------------- ------------------
OTHER ASSETS AND DEFERRED CHARGES................................................... 14,489 18,919
------------------- ------------------
TOTAL ASSETS........................................................................ $ 1,357,120 $ 1,079,975
------------------- ------------------
------------------- ------------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
V-41
<PAGE>
THE TDS GROUP
BALANCE SHEETS--LIABILITIES AND GROUP EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of preferred shares............................................... $ 1,300 $ 1,578
Due to affiliates
Notes payable................................................................... 261,503 201,641
Accounts payable................................................................ 2,466 1,166
Accrued interest................................................................ 50 996
Notes payable..................................................................... 449,954 159,162
Accounts payable.................................................................. 4,860 5,005
Unearned revenue and deposits..................................................... 7,956 10,815
Accrued interest.................................................................. 5,607 10,750
Accrued taxes..................................................................... 1,249 653
Other current liabilities......................................................... 9,730 6,319
------------------- ------------------
744,675 398,085
------------------- ------------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability................................................. 17,161 35,769
Postretirement benefit obligations other than pensions............................ 678 626
Other............................................................................. 4,375 4,932
------------------- ------------------
22,214 41,327
------------------- ------------------
LONG-TERM DEBT...................................................................... 4,093 --
------------------- ------------------
REDEEMABLE PREFERRED SHARES, excluding current portion.............................. 279 280
------------------- ------------------
MINORITY INTEREST IN SUBSIDIARIES................................................... 248 136
------------------- ------------------
NONREDEEMABLE PREFERRED SHARES...................................................... 28,217 29,000
------------------- ------------------
TDS GROUP EQUITY.................................................................... 557,394 611,147
------------------- ------------------
TOTAL LIABILITIES AND GROUP EQUITY.................................................. $ 1,357,120 $ 1,079,975
------------------- ------------------
------------------- ------------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
V-42
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS
1. The financial statements included herein have been prepared by Telephone
and Data Systems, Inc., 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 Telephone and Data Systems,
Inc. 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 financial statements and the notes
thereto for the year ended December 31, 1996. Certain reclassifications have
been made to prior year financial statements for consistency with current year
presentation.
The accompanying unaudited financial statements contain all adjustments
(consisting of only normal recurring items) necessary to present fairly the
financial position as of September 30, 1997 and December 31, 1996, and the
results of operations and cash flows for the nine month periods ended September
30, 1997 and 1996. The results of operations for the nine month periods ended
September 30, 1997 and 1996, are not necessarily indicative of the results to be
expected for the full year.
BASIS OF PRESENTATION
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal (the "Tracking Stock Proposal") which, if approved by
shareholders and implemented by the Board, would authorize the Board to issue
three new classes of common stock designated as United States Cellular Group
Common Shares (the "Cellular Group Shares"), TDS Telecommunications Group Common
Shares (the "Telecom Group Shares") and Aerial Communications Group Common
Shares (the "Aerial Group Shares"), and change the state of incorporation of
Telephone and Data Systems, Inc. from Iowa to Delaware. While each of the new
classes of common stock would constitute common stock of Telephone and Data
Systems, Inc., each is intended to reflect the separate performance of Telephone
and Data Systems, Inc.'s cellular telephone, landline telephone and personal
communications services businesses ("Tracking Stocks"). The Cellular Group
Shares, when issued, are intended to reflect the separate performance of the
United States Cellular Group (the "Cellular Group"), which includes Telephone
and Data Systems, Inc.'s interest in United States Cellular Corporation, an
81%-owned subsidiary of Telephone and Data Systems, Inc. which operates and
invests in cellular telephone companies and properties. The Telecom Group
Shares, when issued, are intended to reflect the separate performance of the TDS
Telecommunications Group (the "Telecom Group"), which primarily includes
Telephone and Data Systems, Inc.'s interest in TDS Telecommunications
Corporation, a wholly-owned subsidiary of Telephone and Data Systems, Inc. which
operates landline telephone companies. The Aerial Group Shares, when issued, are
intended to reflect the separate performance of the Aerial Communications Group
(the "Aerial Group"), which includes Telephone and Data Systems, Inc.'s interest
in Aerial Communications, Inc., an 83%-owned subsidiary of Telephone and Data
Systems, Inc. which is developing broadband personal communications services.
The Telephone and Data Systems, Inc. Series A Common Shares and Common
Shares will continue to be outstanding and are intended to reflect the
performance of a residual group (the "TDS Group"), which includes retained
interests ("Retained Interests") in each of the United States Cellular Group,
the TDS Telecommunications Group, and the Aerial Communications Group to the
extent of the Retained Interests in the respective groups, and all other
businesses of Telephone and Data Systems, Inc. The TDS Group includes Telephone
and Data Systems, Inc. and all of its subsidiaries and their respective
properties and assets other than (except with respect to the Retained
Interests): United States Cellular and its subsidiaries (which are included in
the United States Cellular Group), TDS Telecom and its subsidiaries (which are
included in the TDS Telecommunications Group), and Aerial and its subsidiaries
(which are included in the Aerial Communications Group) and any other assets or
liabilities or subsidiaries of Telephone and Data Systems, Inc. attributed to
the United States Cellular Group, the TDS Telecommunications Group or the Aerial
Communications Group. The TDS Group reflects primarily the Retained Interests in
the Cellular Group, the Telecom Group and the Aerial Group, the Corporate
operations (including corporate management, intercompany financing, cash
management and intercompany income tax allocation activities) and the operations
of American Paging, Inc., an 82%-owned subsidiary.
Following approval by shareholders of the Tracking Stock Proposal, Telephone
and Data Systems, Inc. currently intends to a) offer and sell Telecom Group
Shares in a public offering for cash, subject to prevailing market and other
conditions (the "Telecom Public Offering"), and to allocate the net proceeds
thereof to the Telecom Group, b) issue Cellular Group Shares in exchange for all
of the Common Shares of United States Cellular
V-43
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Corporation which are not owned by Telephone and Data Systems, Inc., subject to
approval by the board of directors and the shareholders of United States
Cellular Corporation (the "U. S. Cellular Merger"), c) issue Aerial Group Shares
in exchange for all of the Common Shares of Aerial Communications, Inc. which
are not owned by Telephone and Data Systems, Inc., subject to approval by the
board of directors and the shareholders of Aerial Communications, Inc. (the
"Aerial Merger"), and d) distribute one Cellular Group Share, two-thirds of a
Telecom Group Share and two-thirds of an Aerial Group Share in the form of a
stock dividend with respect to each outstanding Series A Common Share and Common
Share of Telephone and Data Systems, Inc. (the "Distribution"). It is currently
expected that the Distribution would take place in June 1998 or later, after the
completion of the Telecom Public Offering, the U. S. Cellular Merger and the
Aerial Merger, although the Board reserves the right to effect all or any part
of the Distribution at any time, or not to make the Distribution, regardless of
whether or not such other transactions have taken place.
The shares of Tracking Stock which would be issued in the Distribution would
represent an approximately 75% interest of the common equity value of Telephone
and Data Systems, Inc. in each Tracking Group (the "Outstanding Interest"). When
considering the shares of Tracking Stock which would also be issued in the
Telecom Public Offering, the U. S. Cellular Merger and the Aerial Merger, as
well as the Distribution, the Outstanding Interest would initially represent in
the aggregate an approximately 80% interest in each Tracking Group. Upon
completion of all of the Transactions as contemplated, approximately 20% of the
common shareholders' value of Telephone and Data Systems Inc. in each Tracking
Group would initially be retained as Retained Interests in the TDS Group, along
with all other interests held by Telephone and Data Systems, Inc.
Following the Distribution, subject to the legal restrictions on the payment
of dividends, the Board currently intends to establish an annual dividend on the
Telecom Group Shares in an amount equal to $.48 per share. The Board also
currently intends to establish an annual dividend on the Common Shares and
Series A Common Shares in an amount equal to $.10 per share. (Based on the
expected distribution ratio of two-thirds of a Telecom Group Share for each
existing Common Share and Series A Common Share, the dividend on Telecom Group
shares would equate to a per share dividend of $.32 per existing Common Share
and Series A Common Share. The total of the dividend on Common Shares and Series
A Common Shares of $.10 and the equivalent dividend on Telecom Group Shares of
$.32 equals the existing current annual dividend on the existing Common Shares
and Series A Common Shares of $.42). With regard to the Cellular Group and the
Aerial Group Shares, the Board currently intends to retain future earnings, if
any, for the development of the businesses of the Cellular Group and Aerial
Group, respectively, and does not anticipate paying dividends on the Cellular
Group or the Aerial Group Shares in the foreseeable future. Future dividends on
the shares of common stock will be payable when, as and if declared by the Board
out of the lessor of (1) all funds of Telephone and Data Systems, Inc. legally
available therefor and (2) the available dividend amount with respect to the
relevant Group.
Funds of the Company legally available for the payment of dividends
("Surplus") (approximately $1,966 million as of September 30, 1997 based on the
financial statements) is an amount approximately equal to the Total Common and
Preferred Equity of the Company less the par or stated value of all shares of
common and preferred stock outstanding (204,725,000 shares as of September 30,
1997 after the Distribution). With respect to any Tracking Group, the Available
Dividend Amount (approximately $1,178 million for the Cellular Group, $280
million for the Telecom Group and $213 million for the Aerial Group as of
September 30, 1997, based on the financial statements) is an amount
approximately equal to the Outstanding Interest Fraction of such Tracking Group
(approximately 75% after the Distribution) times the respective Tracking Group
Equity less the par value of the respective outstanding Tracking Group shares.
With respect to the TDS Group, the Available Dividend Amount (approximately $557
million as of September 30, 1997) is an amount approximately equal to the
greater of a) an amount (approximately $295 million) which is approximately
equal to the Surplus of the Company less the sum of all Available Dividend
Amounts of all Tracking Groups or b) an amount (approximately $557 million)
which is approximately equal to the TDS Group Equity and Preferred Stock less
the par or stated value of all Common and Series A Common Shares and Preferred
Stock outstanding.
The financial statements of the Groups comprise all of the accounts included
in the corresponding consolidated financial statements of Telephone and Data
Systems, Inc. The separate Cellular Group, Telecom Group, Aerial Group, and TDS
Group financial statements give effect to the management and accounting policies
that would be applicable upon implementation of the Tracking Stock Proposal.
Subject to the completion of the U. S. Cellular Merger and the Aerial Merger,
Telephone and Data Systems, Inc. intends to terminate certain intercompany
V-44
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
agreements between Telephone and Data Systems, Inc. and U. S. Cellular and
Aerial, respectively. Thereafter, all of the relationships between Telephone and
Data Systems, Inc. and such subsidiaries would be determined solely by methods
that management of Telephone and Data Systems, Inc. believes to be reasonable.
Many of such policies would continue the arrangements which presently exist
between Telephone and Data Systems, Inc. and U. S. Cellular or Aerial pursuant
to the intercompany agreements, but Telephone and Data Systems, Inc. would have
no contractual obligation to continue such policies after the intercompany
agreements have been terminated. The separate Group financial statements have
been prepared on a basis that management believes to be reasonable and
appropriate and include (1) the historical financial position, results of
operations and cash flows of the businesses that comprise each of the Groups,
(2) any assets and liabilities (including contingent liabilities) which have
been attributed to any Group from any other Group, and (3) with respect to the
TDS Group, the Retained Interest in each of the Tracking Groups. The effects of
the issuance of the Tracking Stocks have not been reflected in these historical
financial statements.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, Telephone and Data
Systems, Inc. will prepare and file with the Securities and Exchange Commission,
consolidated financial statements of Telephone and Data Systems, Inc., and
financial statements of the Cellular Group, the Telecom Group, and the Aerial
Group for so long as the respective Tracking Stock is outstanding, and the TDS
Group for as long as any Tracking Stock is outstanding. Although the financial
statements of the Cellular Group, the Telecom Group, the Aerial Group, and the
TDS Group will separately report the assets, liabilities (including contingent
liabilities) and shareholders' equity of Telephone and Data Systems, Inc.
attributed to the Cellular Group, the Telecom Group, the Aerial Group, and the
TDS Group, such attribution will not affect the legal title to such assets or
responsibility for such liabilities. Holders of Cellular Group, Telecom Group,
and Aerial Group Common Shares will be, and holders of Telephone and Data
Systems, Inc. Common Shares and Series A Common Shares are, shareholders of
Telephone and Data Systems, Inc. Telephone and Data Systems, Inc. and its
subsidiaries would each continue to be responsible for their respective
liabilities.
Financial effects arising from the Cellular Group, Telecom Group, Aerial
Group or TDS Group that affect the consolidated results of operations or
financial condition of Telephone and Data Systems, Inc. could affect the results
of operations or financial condition of the Cellular Group, Telecom Group,
Aerial Group or TDS Group, or could affect the market price of any or all
classes of Common Stock. In addition, any net losses of Telephone and Data
Systems, Inc., or the Cellular Group, the Telecom Group, the Aerial Group or the
TDS Group, and dividends or distributions on, or repurchases of, any class of
Common Stock will reduce the assets of Telephone and Data Systems, Inc. legally
available for payment of dividends on any class of Common Stock. Accordingly,
Telephone and Data Systems, Inc.'s consolidated financial statements should be
read in conjunction with the Cellular Group, the Telecom Group, the Aerial Group
and the TDS Group financial information.
The management and accounting policies applicable to the preparation of the
financial statements of the TDS Group could be modified or rescinded by the
Board, in its sole discretion and without the approval of shareholders, although
there is no present intention to do so. The Board could also adopt additional
policies depending upon the circumstances. Any determination by the Board to
modify or rescind such policies, or to adopt additional policies, including any
such decision that could have disparate effects upon the holders of different
series of common stock, would be made by the Board in good faith and in the
honest belief that such decision is in the best interests of Telephone and Data
Systems, Inc. In addition, generally accepted accounting principles require that
changes in accounting policy must be preferable (in accordance with such
principles) to the policy previously in place.
2. The Financial Accounting Standards Boards issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" in March 1997
which will become effective in December 1997. Net income (loss) per share
would not change if SFAS No. 128 had been in effect as of January 1, 1996.
V-45
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. The following table summarizes interest and income taxes paid and other
noncash transactions:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Interest paid.................................................................... $ 47,043 $ 42,704
Income taxes (received) paid..................................................... (7,588) 43,501
Common Shares issued by Telephone and Data Systems, Inc. for Conversion of
preferred shares............................................................... $ 762 $ 4,545
</TABLE>
Telephone and Data Systems, Inc. has acquired operating cellular, telephone
and paging companies and certain cellular licenses since January 1, 1995. The
cellular and telephone properties were acquired for the benefit of the United
States Cellular Group and the TDS Telecom Group and were recorded as an increase
in the investment in these groups. In conjunction with these acquisitions, the
following assets were acquired and liabilities assumed, and Common and Preferred
Shares issued:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Investment in subsidiaries...................................................... $ -- $ 84,687
Notes receivable-other.......................................................... -- (5,400)
Other assets and liabilites, excluding cash and cash equivalents................ -- (5,220)
Notes payable-affiliates........................................................ -- 102,791
TDS Group Equity................................................................ -- (169,487)
---------- ------------
Decrease in cash due to acquisitions............................................ $ -- $ 7,371
---------- ------------
---------- ------------
</TABLE>
RECENT DEVELOPMENTS
RECENT FINANCIAL RESULTS
TDS Group equity income (loss) in group ownership totaled $(12.2 million)
and $(20.8 million) for the three and twelve months ended December 31, 1997,
respectively. The losses were driven primarily by large costs associated with
the launch of service in the Aerial Communications Group as well as increased
costs in the United States Cellular Group to attract new, and retain current
customers. This was compared to $2.1 million and $26.9 million for the three and
twelve months ended December 31, 1996, respectively.
As discussed earlier, TDS announced an agreement with TSR Paging, Inc. to
combine their respective paging businesses. The asset contribution agreement
provides that, subject to adjustment, the Company will have a 30% interest in
the newly formed company. For the three and twelve months ended December 31,
1997, the net (loss) attributed to the TDS Group totaled $(14.8 million) and
$(51.6 million), respectively. This was compared to $(12.6 million) and $(39.2
million) for the three and twelve months ended December 31, 1996, respectively.
Net Income for the three months ended December 31, 1997 totaled $1.1 million
compared to $4.9 million in the same period in 1996. Net income totaled $51.1
million for the twelve months ended, December 31, 1997 compared to $45.7 million
in the same period in 1996.
PROPOSED CORPORATE RESTRUCTURING
On December 29, 1997, Airmont Plaza Associates, which claims to be a holder
of common shares of U.S. Cellular, filed a putative class action complaint on
behalf of the minority shareholders of U.S. Cellular in the Court of Chancery of
the State of Delaware in New Castle County. The complaint names as defendants
TDS, U.S. Cellular and the directors of U.S. Cellular. The complaint alleges a
breach of fiduciary duties by the defendants in connection with the proposed
U.S. Cellular Merger and seeks to have the U.S. Cellular Merger enjoined or, if
it is consummated, to have it rescinded and to recover unspecified damages, fees
and expenses. On January 5, 1998,
V-46
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Richard Greenfield, who claims to be a holder of common shares of Aerial, filed
a putative class action complaint on behalf of the minority shareholders of
Aerial in the Court of Chancery of the State of Delaware in New Castle County.
The complaint names as defendants TDS, Aerial and the directors of TDS and
Aerial. The complaint alleges a breach of fiduciary duties by the defendants in
connection with the proposed Aerial Merger and seeks to have the Aerial Merger
enjoined or, if it is consummated, to have it rescinded and to recover
unspecified damages, fees and expenses. TDS intends to vigorously defend against
these lawsuits.
4. The table below details the TDS Group's (loss) resulting from American
Paging, Inc.'s results of operations for the nine month periods ended
September 30, 1997 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating Revenues
Service revenue............................................................. $ 65,112 $ 70,967
Equipment sales revenue..................................................... 6,646 8,178
---------- -----------
71,758 79,145
---------- -----------
Operating Expense
Cost of services............................................................ 20,482 19,418
Selling, general and administrative......................................... 45,703 52,327
Depreciation and amortization............................................... 23,658 26,987
Cost of equipment sold...................................................... 6,760 7,760
---------- -----------
96,603 106,492
---------- -----------
Operating (Loss).............................................................. (24,845) (27,347)
---------- -----------
Investment and Other Income (Expense)
Investment (loss) in joint venture.......................................... (459) (934)
Interest income............................................................. 94 175
Other, net.................................................................. 43 33
---------- -----------
(322) (726)
---------- -----------
(Loss) Before Interest and Income Taxes....................................... (25,167) (28,073)
Interest expense--affiliates.................................................. 11,617 8,403
Capitalized interest.......................................................... -- (4,150)
---------- -----------
11,617 4,253
---------- -----------
(Loss) Before Income Taxes.................................................... (36,784) (32,326)
Income tax (benefit).......................................................... -- (6)
---------- -----------
Net (Loss) to Shareholders.................................................... (36,784) (32,320)
Net (Loss) to Minority Shareholders........................................... -- 5,721
---------- -----------
Net (Loss) to Telephone and Data Systems, Inc. Shareholders................... $ (36,784) $ (26,599)
---------- -----------
---------- -----------
</TABLE>
V-47
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROXY STATEMENT-PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") permits the
Registrant's board of directors to indemnify any person against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with any threatened,
pending or completed action, suit or proceeding in which such person is made a
party by reason of his being or having been a director, officer, employee or
agent of the Registrant, in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). The statute provides that indemnification
pursuant to its provisions is not exclusive of other rights of indemnification
to which a person may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise.
The Registrant's Certificate of Incorporation and Bylaws provide for
indemnification of its directors and officers to the fullest extent permitted by
law.
As permitted by Sections 102 and 145 of the DGCL, the Registrant's
Certificate of Incorporation eliminates a director's personal liability for
monetary damages to the Registrant and its stockholders arising from a breach or
alleged breach of a director's fiduciary duty except for liability under Section
174 of the DGCL, for liability for any breach of the director's duty of loyalty
to the Registrant or its stockholders, for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law or for any
transaction from which the director derived an improper personal benefit.
The directors and officers of the Registrant are covered by insurance
policies indemnifying against certain liabilities, including certain liabilities
arising under the Securities Act which might be incurred by them in such
capacities and against which they cannot be indemnified by the Registrant.
The Registrant has directors' and officers' liability insurance which
provides, subject to certain policy limits, deductible amounts and exclusions,
coverage for all persons who have been, are or may in the future be, directors
or officers of the Registrant, against amounts which such persons must pay
resulting from claims against them by reason of their being such directors or
officers during the policy period for certain breaches of duty, omissions or
other acts done or wrongfully attempted or alleged.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers or persons controlling the registrant pursuant
to the foregoing provisions, or otherwise, the registrant has been informed that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1933 Act and therefore unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- ---------------------------------------------------------------------------------
<C> <S>
2 Agreement and Plan of Merger, dated as of , 1998, between Telephone
and Data Systems, Inc., a Delaware corporation, and Telephone and Data Systems,
Inc., an Iowa corporation (included herein as Exhibit A to the Proxy Statement
and Prospectus included as part of this Registration Statement).
4.1 Restated Certificate of Incorporation of Telephone and Data Systems, Inc., a
Delaware Corporation (included herein as Exhibit B to the Proxy Statement and
Prospectus included as part of this Registration Statement)
4.2 Restated By-laws of Telephone and Data Systems, Inc., a Delaware corporation
5 Opinion of Sidley & Austin
8 Tax Opinion of Sidley & Austin
9.1 Voting Trust Agreement, dated as of June 30, 1989, is hereby incorporated by
reference to an exhibit to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form S-1, No. 33-12943.
9.2 Amendment dated as of May 9, 1991 to the Voting Trust Agreement dated as of June
30, 1989, is hereby incorporated by reference to Exhibit 9.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991.
9.3 Amendment dated as of November 20, 1992, to the Voting Trust Agreement dated as
of June 30, 1989, as amended, is hereby incorporated by reference to Exhibit
9.1(c) to the Company's Annual Report on Form 10-K for the year ended December
31, 1992.
23.1 Consent of independent public accountants
23.2 Consent of Sidley & Austin (included in Exhibits 5 and 8)
24 Powers of Attorney (included on signature page of original filing of this
Registration Statement)
99.1 * Telephone and Data Systems, Inc.'s Offer Letter to the Board of Directors of
United States Cellular Corporation
99.2 * Telephone and Data Systems, Inc.'s Offer Letter to the Board of Directors of
Aerial Communications, Inc.
99.3 * Form of Proxy Cards
99.4 Consent of C.S. First Boston
99.5 Consent of Salomon Smith Barney
99.6 Consent of Kevin A. Mundt
</TABLE>
- ------------------------
* Previously filed
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful
II-2
<PAGE>
ITEM 22. UNDERTAKINGS (CONTINUED)
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant undertakes that every Proxy
Statement-Prospectus (i) that is filed pursuant to the immediately preceding
paragraph or (ii) that purports to meet the requirements of Section 10(a)(3) of
the Securities Act and is used in connection with the offering of securities
subject to Rule 415, except to the extent permitted to be filed as a Proxy
Statement-Prospectus supplement, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the bona fide
offering thereof.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Proxy
Statement-Prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective, except where
the transaction in which the securities being offered pursuant to this
registration statement would itself qualify for an exemption from Section 5 of
the Securities Act, absent the existence of other similar (prior or subsequent)
transactions.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this Registration
Statement or Amendment to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Chicago, State of Illinois on this 17th day of
February, 1998.
<TABLE>
<S> <C> <C>
TELEPHONE AND DATA SYSTEMS, INC.
By: /s/ LEROY T. CARLSON
-----------------------------------------
LeRoy T. Carlson
CHAIRMAN
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints LeRoy T.
Carlson and LeRoy T. Carlson, Jr., and each of them individually, as his true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, and to take such actions in, and file with the appropriate
applications, statements, consents and other documents as may be necessary or
expedient to register securities of the Registrant for sale, granting unto said
attorney-in-fact and agent full power and authority to do so and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all the said attorney-in-fact and agent
or any of them, or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof and the registrant hereby confers like
authority on its behalf.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement or Amendment has been signed below by the following
persons on behalf of the registrant on this 17th day of February, 1998 in the
capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ LEROY T. CARLSON
- ------------------------------ Chairman and Director
LeRoy T. Carlson
/s/ LEROY T. CARLSON, JR.* President and Director
- ------------------------------ (chief executive
LeRoy T. Carlson, Jr. officer)
Executive Vice
/s/ MURRAY L. SWANSON* President-Finance and
- ------------------------------ Director (principal
Murray L. Swanson financial officer)
/s/ LETITIA G.C. CARLSON*
- ------------------------------ Director
Letitia G.C. Carlson
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ RUDOLPH E. HORNACEK*
- ------------------------------ Director
Rudolph E. Hornacek
/s/ JAMES BARR III*
- ------------------------------ Director
James Barr III
/s/ DONALD C. NEBERGALL*
- ------------------------------ Director
Donald C. Nebergall
/s/ HERBERT S. WANDER*
- ------------------------------ Director
Herbert S. Wander
/s/ WALTER C.D. CARLSON*
- ------------------------------ Director
Walter C.D. Carlson
/s/ DONALD R. BROWN*
- ------------------------------ Director
Donald R. Brown
/s/ GEORGE W. OFF*
- ------------------------------ Director
George W. Off
/s/ MARTIN L. SALOMON*
- ------------------------------ Director
Martin L. Salomon
/s/ GREGORY J. WILKINSON* Vice President and
- ------------------------------ Controller (principal
Gregory J. Wilkinson accounting officer)
</TABLE>
<TABLE>
<S> <C> <C>
*By: /s/ LEROY T. CARLSON Attorney-in-Fact
------------------------------
LeRoy T. Carlson
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- ---------------------------------------------------------------------------------
<C> <S>
(a) Exhibits
4.2 Restated By-laws of Telephone and Data Systems, Inc., a Delaware corporation
5 Opinion of Sidley & Austin
8 Tax Opinion of Sidley & Austin
23.1 Consent of independent public accountants
23.2 Consent of Sidley & Austin (included in Exhibits 5 and 8)
99.4 Consent of C.S. First Boston
99.5 Consent of Salomon Smith Barney
99.6 Consent of Kevin A. Mundt
</TABLE>
<PAGE>
EXHIBIT 4.2
RESTATED BYLAWS
OF
TELEPHONE AND DATA SYSTEMS, INC.
(a Delaware corporation)
ARTICLE I
STOCKHOLDERS
SECTION 1.1. ANNUAL MEETING. The annual meeting of stockholders for the
election of directors and the transaction of such other business as may properly
come before such meeting shall be held on the first Wednesday of May of each
year, or on such other date, and at such time and place, within or without the
State of Delaware, as shall be determined by resolution of the Board of
Directors. If the day fixed for the annual meeting is a legal holiday, such
meeting shall be held on the next succeeding business day. If the election of
directors shall not be held on the day designated herein for the annual meeting
of stockholders, or at any adjournment thereof, the Board of Directors shall
cause such election to be held at a meeting of stockholders to be called as soon
thereafter as is convenient.
SECTION 1.2. SPECIAL MEETINGS. Special meetings of stockholders may be
called by the Board of Directors, by the Chairman or President and shall be
called by the President or the Secretary at the request in writing, stating the
purpose or purposes thereof, of holders of at least fifty percent of the voting
power of the capital stock of the Corporation issued and outstanding and
entitled to vote thereat. Special meetings of stockholders may be held at such
time and place, within or without the State of Delaware, as shall be determined
by resolution of the Board of Directors or as may be specified in the call of
any such special meeting. If not otherwise designated, the place of any special
meeting shall be the principal office of the Corporation in the State of
Illinois.
SECTION 1.3. NOTICE OF MEETINGS AND ADJOURNED MEETINGS. Written notice of
every meeting of stockholders, stating the place, date, time and purposes
thereof, shall, except when otherwise required by the Restated Certificate of
Incorporation of the Corporation, as it may be amended from time to time (the
"Restated Certificate of Incorporation"), or the laws of the State of Delaware,
be given at least 10 but not more than 60 days prior to such meeting to each
stockholder of record entitled to vote thereat, in the manner set forth in
Section 9.1 of these Bylaws, by or at the direction of the President or the
Secretary or the persons calling such meeting. Any meeting at which a quorum of
stockholders is present, in person or by proxy, may be adjourned from time to
time without notice, other than by announcement at such meeting, until its
business shall be completed. At such adjourned meeting, any business may be
transacted which might have been transacted at the original meeting. If the
adjournment is for more than 30 days, or if after the adjournment a new record
date is fixed for the adjourned meeting, written notice of the adjourned meeting
shall be given to each stockholder of record entitled to vote thereat as above
provided.
SECTION 1.4. QUORUM. Except as otherwise provided by the laws of the State
of Delaware or the Restated Certificate of Incorporation, a majority of the
voting power of shares of capital stock of the Corporation entitled to vote,
represented in person or by proxy, shall constitute a quorum at any meeting of
stockholders, notwithstanding the subsequent withdrawal of enough stockholders
to leave less than a quorum. If at any meeting a quorum shall not be present,
the chairman of such meeting shall, if approved by the affirmative vote of a
majority of the voting power of shares of capital stock of the Corporation so
represented, adjourn such meeting to another time and/or place without notice
other than announcement at such meeting. If the adjournment is for more than 30
days, or if after the adjournment a new record date
<PAGE>
is fixed for the adjourned meeting, written notice of the adjourned meeting
shall be given to each stockholder of record entitled to vote thereat as above
provided. At such adjourned meeting, if a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the original meeting, notwithstanding the subsequent withdrawal of enough
stockholders to leave less than a quorum.
SECTION 1.5. VOTING.
(a) Unless otherwise provided by the laws of the State of Delaware, the
stockholders entitled to vote at any meeting of stockholders and the number of
votes to which such stockholders are entitled shall be determined as provided in
the Restated Certificate of Incorporation. If a quorum shall be present, the
affirmative vote of a majority of the voting power of the outstanding shares
represented at the meeting and entitled to vote on the question shall be the act
of the stockholders, unless the vote of a greater number or voting by classes or
groups is required by the laws of the State of Delaware, the Restated
Certificate of Incorporation or these Bylaws.
(b) Where a separate vote by a class or group is required by the laws of the
State of Delaware, the Restated Certificate of Incorporation or by these Bylaws,
a majority of the voting power of the outstanding shares of each such class or
group present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to the vote on that matter and the
affirmative vote of a majority of the voting power of the outstanding shares of
each class or group present in person or represented by proxy at the meeting
shall be the act of each such class or group.
SECTION 1.6. PROXIES.
(a) At every meeting of stockholders, each stockholder having the right to
vote thereat shall be entitled to vote in person or by proxy. Such proxy shall
be filed with the Secretary before or at the time of the meeting. No proxy shall
be valid after eleven months from its date, unless such proxy provides for a
longer period.
(b) A stockholder may authorize another person or persons to act for such
stockholder as proxy (i) by executing a writing authorizing such person or
persons to act as such, which execution may be accomplished by such stockholder
or such stockholder's authorized officer, director, employee or agent signing
such writing or causing his or her signature to be affixed to such writing by
any reasonable means, including, but not limited to, facsimile signature, or
(ii) by transmitting or authorizing the transmission of a telegram, cablegram or
other means of electronic transmission (a "Transmission") to the person who will
be the holder of the proxy or to a proxy solicitation firm, proxy support
service organization or like agent duly authorized by the person who will be the
holder of the proxy to receive such Transmission; PROVIDED, HOWEVER, that any
such Transmission must either set forth or be submitted with information from
which it can be determined that such Transmission was authorized by such
stockholder. The inspector or inspectors appointed pursuant to Section 1.10 of
these Bylaws shall examine Transmissions to determine if they are valid. If it
is determined that a Transmission is valid, the person or persons making that
determination shall specify the information upon which such person or persons
relied. Any copy, facsimile telecommunication or other reliable reproduction of
such a writing or such a Transmission may be substituted or used in lieu of the
original writing or Transmission for any and all purposes for which the original
writing or Transmission could be used; PROVIDED, HOWEVER, that such copy,
facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or Transmission.
SECTION 1.7. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD.
(a) In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing such record date shall be
adopted by the Board of Directors, and which record date shall not be more than
60 nor less than 10 days before the date of such meeting. If no such record date
shall have been fixed by the Board of Directors,
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such record date shall be at the close of business on the day next preceding the
day on which such notice is given or, if such notice is waived, at the close of
business on the day next preceding the day on which such meeting shall be held.
A determination of stockholders of record entitled to notice of or to vote at
any meeting of stockholders shall apply to any adjournment of such meeting;
PROVIDED, HOWEVER, that the Board of Directors may fix a new record date for the
adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing such record date shall be adopted by the Board of
Directors, and which record date shall not be more than 10 days after the date
upon which such resolution shall be adopted. If no such record date shall have
been fixed by the Board of Directors, such record date shall be, if no prior
action by the Board of Directors shall be required by the laws of the State of
Delaware, the first date on which a signed written consent setting forth the
action taken or proposed to be taken shall be delivered to the Corporation at
its registered office in the State of Delaware, at its principal place of
business or to the Secretary. Delivery made to the Corporation's registered
office shall be by hand or by certified or registered mail, return receipt
requested. If no such record date shall have been fixed by the Board of
Directors and prior action by the Board of Directors shall be required by the
laws of the State of Delaware, such record date shall be at the close of
business on the day on which the Board of Directors shall adopt the resolution
taking such prior action.
(c) In order that the Corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or any allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of any capital stock, or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing such record
date shall be adopted by the Board of Directors, and which record date shall not
be more than 60 days prior to such payment, allotment or other action. If no
such record date shall have been fixed, such record date shall be at the close
of business on the day on which the Board of Directors shall adopt the
resolution relating to such payment, allotment or other action.
SECTION 1.8. STOCKHOLDER LIST. The Secretary or any other officer who has
charge of the stock ledger of the Corporation shall prepare, at least 10 days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at such meeting, arranged in alphabetical order, and showing
the address of each stockholder and the number of shares registered in the name
of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to such meeting, during ordinary business
hours, for a period of at least 10 days prior to such meeting, either at a place
within the city where such meeting is to be held, which place shall be specified
in the notice of such meeting, or, if not so specified, at the place where such
meeting is to be held. The list shall also be produced and kept at the time and
place of such meeting during the whole time thereof, and may be inspected by any
stockholder who is present. Such stock ledger shall be the only evidence as to
who are the stockholders entitled to examine such stock ledger, such list or the
books of the Corporation or to vote in person or by proxy at any meeting of
stockholders.
SECTION 1.9. VOTING OF SHARES BY CERTAIN HOLDERS. Shares of capital stock
of the Corporation standing in the name of another corporation, domestic or
foreign, and entitled to vote may be voted by such officer, agent or proxy as
the bylaws of such other corporation may prescribe or, in the absence of such
provision, as the Board of Directors of such other corporation may determine.
Shares of capital stock of the Corporation standing in the name of a
deceased person, a minor, an incompetent or a corporation declared bankrupt and
entitled to vote may be voted by an administrator, executor, guardian,
conservator or trustee, as the case may be, either in person or by proxy,
without transfer of such shares into the name of the official so voting.
A stockholder whose shares of capital stock of the Corporation are pledged
shall be entitled to vote such shares unless on the transfer books of the
Corporation the pledgor has expressly empowered the
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pledgee to vote such shares, in which case only the pledgee, or such pledgee's
proxy, may represent such shares and vote thereon.
Shares of capital stock of the Corporation belonging to the Corporation, or
to another corporation if a majority of the shares entitled to vote in the
election of directors of such other corporation shall be held by the
Corporation, shall not be voted at any meeting of stockholders and shall not be
counted in determining the total number of outstanding shares for the purpose of
determining whether a quorum is present. Nothing in this Section 1.9 shall be
construed to limit the right of the Corporation to vote shares of capital stock
of the Corporation held by it in a fiduciary capacity.
SECTION 1.10. VOTING PROCEDURES AND INSPECTORS OF ELECTIONS.
(a) The Board of Directors shall, in advance of any meeting of stockholders,
appoint one or more inspectors (individually an "Inspector," and collectively
the "Inspectors") to act at such meeting and make a written report thereof. The
Board of Directors may designate one or more persons as alternate Inspectors to
replace any Inspector who shall fail to act. If no Inspector or alternate shall
be able to act at such meeting, the person presiding at such meeting shall
appoint one or more other persons to act as Inspectors thereat. Each Inspector,
before entering upon the discharge of his or her duties, shall take and sign an
oath faithfully to execute the duties of Inspector with strict impartiality and
according to the best of his or her ability.
(b) The Inspectors shall (i) ascertain the number of shares of capital stock
of the Corporation outstanding and the voting power of each, (ii) determine the
shares of capital stock of the Corporation represented at such meeting and the
validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period a record of the disposition of any
challenges made to any determination by the Inspectors and (v) certify their
determination of the number of such shares represented at such meeting and their
count of all votes and ballots. The Inspectors may appoint or retain other
persons or entities to assist them in the performance of their duties.
(c) The date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at such meeting shall be announced
at such meeting. No ballots, proxies or votes, nor any revocations thereof or
changes thereto, shall be accepted by the Inspectors after the closing of the
polls unless the Court of Chancery of the State of Delaware upon application by
any stockholder shall determine otherwise.
(d) In determining the validity and counting of proxies and ballots, the
Inspectors shall be limited to an examination of the proxies, any envelopes
submitted with such proxies, any information provided in accordance with the
second paragraph of Section 1.6 of these Bylaws, ballots and the regular books
and records of the Corporation, except that the Inspectors may consider other
reliable information for the limited purpose of reconciling proxies and ballots
submitted by or on behalf of banks, brokers, their nominees or similar persons
which represent more votes than the holder of a proxy is authorized by a
stockholder of record to cast or more votes than such stockholder holds of
record. If the Inspectors consider other reliable information for the limited
purpose permitted herein, the Inspectors, at the time they make their
certification pursuant to paragraph (b) of this Section 1.10, shall specify the
precise information considered by them, including the person or persons from
whom they obtained such information, when the information was obtained, the
means by which such information was obtained and the basis for the Inspectors'
belief that such information is accurate and reliable.
SECTION 1.11. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Any action
required to be taken or which may be taken at any annual or special meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote if a consent or consents in writing, setting forth the action so taken,
shall be signed by persons entitled to vote capital stock of the Corporation
representing not less than the minimum number of shares that would be necessary
to authorize or take such action at a meeting at which all shares of capital
stock of the Corporation entitled to vote thereon were present and voted.
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Every written consent shall bear the date of signature of each stockholder (or
his, her or its proxy) who shall sign such consent. Prompt notice of the taking
of corporate action without a meeting of stockholders by less than unanimous
written consent shall be given to those stockholders who shall not have
consented in writing. All such written consents shall be delivered to the
Corporation at its registered office in the State of Delaware, at its principal
place of business or to the Secretary. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested. No written consent shall be effective to authorize or take
the corporate action referred to therein unless, within 60 days of the earliest
dated written consent delivered in the manner required by this Section 1.11 to
the Corporation, written consents signed by a sufficient number of persons to
authorize or take such action shall be delivered to the Corporation at its
registered office in the State of Delaware, at its principal place of business
or to the Secretary as aforesaid. All such written consents shall be filed with
the minutes of proceedings of the stockholders and actions authorized or taken
under such written consents shall have the same force and effect as those
adopted by vote of the stockholders at any annual or special meeting thereof.
SECTION 1.12. INTRODUCTION OF BUSINESS AT A MEETING OF STOCKHOLDERS. At an
annual or special meeting of stockholders, only such business shall be
conducted, and only such proposals shall be acted upon, as shall have been
properly brought before an annual or special meeting of stockholders. To be
properly brought before an annual or special meeting of stockholders, business
must be (a) in the case of a special meeting, specified in the notice of the
special meeting (or any supplement thereto) given by the Corporation, or (b) in
the case of an annual meeting, properly brought before the meeting by or at the
direction of the Board of Directors, or otherwise properly brought before the
annual meeting by a stockholder. For business to be properly brought before an
annual meeting of stockholders by a stockholder, the stockholder must have given
timely notice thereof in writing to the President or Secretary of the
Corporation. To be timely, a stockholder's notice must be received at the
principal executive offices of the Corporation not earlier than 120 calendar
days nor later than 90 calendar days in advance of the anniversary date of the
date of the Corporation's proxy statement to stockholders in connection with the
most recent preceding annual meeting of stockholders, except that if the date of
the current year's annual meeting has been changed by more than 30 calendar days
from the anniversary date of the most recent preceding annual meeting, a
stockholder proposal shall be received by the Corporation not later than the
close of business on the tenth day following the date of public notice of the
date of the current year's annual meeting; PROVIDED, HOWEVER, that,
notwithstanding the foregoing, for purposes of the annual meeting of
stockholders to be held in 1998, a stockholder's notice shall be timely if
received by the Corporation not later than the close of business on the tenth
day following the effective date of these Restated Bylaws.
A stockholder's notice shall set forth as to each matter the stockholder
proposes to bring before an annual meeting of stockholders (a) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Corporation's books, of the stockholder proposing
such business and any other stockholders known by such stockholder to be
supporting such proposal, (c) the class and number of shares of the Corporation
which are beneficially owned by such stockholder on the date of such
stockholder's notice and by any other stockholders known by such stockholder to
be supporting such proposal on the date of such stockholder's notice and (d) any
material interest of the stockholder in such proposal.
Notwithstanding anything in the Bylaws to the contrary, no business shall be
conducted at a meeting of stockholders except in accordance with the procedures
set forth in this Section 1.12. The chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that the business was not properly
brought before the meeting in accordance with the procedures prescribed by the
Bylaws, and if he should so determine, he shall so declare to the meeting and
any such business not properly brought before the meeting shall not be
considered.
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SECTION 1.13. NOMINATION OF DIRECTORS. Only persons nominated in
accordance with the procedures set forth in this section shall be eligible for
election as directors. Nominations of persons for election to the Board may be
made at a meeting of stockholders (a) by or at the direction of the Board of
Directors, or (b) by any stockholder of the Corporation entitled to vote for the
election of directors at such meeting who complies with the notice procedures
set forth in this Section 1.13. Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the President or Secretary of the Corporation. To be timely, a
stockholder's notice must be received at the principal executive offices of the
Corporation not earlier than 120 calendar days nor later than 90 calendar days
in advance of the anniversary date of the date of the Corporation's proxy
statement to stockholders in connection with the preceding year's annual meeting
of stockholders, except that if the date of the current year's annual meeting
has been changed by more than 30 calendar days from the anniversary date of the
most recent preceding annual meeting, a nomination shall be received by the
Corporation not later than the close of business on the tenth day following the
date of public notice of the date of the current year's annual meeting.
A stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director (i)
the name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of the Corporation which are beneficially owned by such person on the
date of such stockholder's notice and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including,
without limitation, such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); and (b) as to
the stockholder giving the notice (i) the name and address, as they appear on
the Corporation's books, of such stockholder and any other stockholders known by
such stockholder to be supporting such nominee and (ii) the class and number of
shares of the Corporation which are beneficially owned by such stockholder on
the date of such stockholder's notice and by any other stockholders known by
such stockholder to be supporting such nominee on the date of such stockholder's
notice.
No person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures set forth in this section.
The chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the procedures
prescribed by the Bylaws, and if he should so determine, he shall so declare to
the meeting and the defective nomination shall be disregarded.
This Section 1.13 shall not apply to the election of a director to a
directorship which may be filled by the Board of Directors under the Delaware
General Corporation Law.
ARTICLE II
DIRECTORS
SECTION 2.1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors.
SECTION 2.2. STAGGERED BOARD. The Board of Directors shall consist of
twelve members, to be divided into three classes and the number of directors of
each class shall be as equal as possible. The term of office of the second class
shall expire at the annual meeting of the stockholders in 1998; the third class
shall expire at the annual meeting of the stockholders in 1999 and the first
class shall expire at the annual meeting of the stockholders in 2000. At each
annual election, commencing at the next annual meeting of stockholders, the
successors to the class of directors whose term expires in that year shall be
elected to hold office for the term of three years to succeed those whose term
expires so that the term of
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office of one class of directors shall expire in each year. Each director
elected or appointed shall serve until his successor shall be elected and
qualify, or until his earlier death, resignation, removal or disqualification.
SECTION 2.3. RESIGNATION OR REMOVAL. Any director may resign by giving
written notice to the Board of Directors or the President. Any such resignation
shall take effect at the time of receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, acceptance of such
resignation shall not be necessary to make it effective. Directors may be
removed from office, either with or without cause, only as provided in the
Restated Certificate of Incorporation or the laws of the State of Delaware.
SECTION 2.4. VACANCIES.
(a) Except as otherwise required by the Restated Certificate of
Incorporation or the laws of the State of Delaware or these Bylaws, any vacancy
occurring in the Board of Directors, including a vacancy created by an increase
in the number of directors provided in Section 2.2 of these Bylaws, may be
filled for the remainder of the unexpired term by the affirmative vote of a
majority of the directors then in office, although less than a quorum, by a sole
remaining director or by the stockholders.
(b) Except as otherwise required by the Restated Certificate of
Incorporation, when one or more directors shall resign from the Board of
Directors, effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have the power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office for the remainder of the unexpired term of such office.
SECTION 2.5. PLACE OF MEETINGS. Meetings of the Board of Directors may be
held at such places, within or without the State of Delaware, as the Board of
Directors may from time to time determine or as may be specified in the call of
any such meeting.
SECTION 2.6. REGULAR MEETINGS. A regular annual meeting of the Board of
Directors shall be held, without call or notice, immediately after and at the
same place as the annual meeting of stockholders, or at such other time and
place as may be fixed by resolution of the Board of Directors, for the purpose
of organizing the Board of Directors, electing officers and transacting any
other business that may properly come before such meeting. If the stockholders
shall elect the directors by written consent of stockholders as permitted by
Section 1.11 of these Bylaws, a special meeting of the Board of Directors shall
be called as soon as practicable after such election for the purposes described
in the preceding sentence. Additional regular meetings of the Board of Directors
may be held without call or notice at such times as shall be fixed by resolution
of the Board of Directors.
SECTION 2.7. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chairman, the President or by a majority of the directors
then in office. Notice of each special meeting shall be mailed by the Secretary
to each director at least three days before such meeting, or be given by the
Secretary personally or by telegraph or telecopy or by electronic mail at least
24 hours before such meeting, in the manner set forth in Section 9.1 of these
Bylaws. Such notice shall set forth the date, time and place of such meeting but
need not, unless otherwise required by the laws of the State of Delaware, state
the purpose of such meeting.
SECTION 2.8. QUORUM AND VOTING. A majority of the entire Board of
Directors shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors. The act of the majority of the directors
present at any meeting at which a quorum is present shall be the act of the
Board of Directors, unless otherwise provided by the laws of the State of
Delaware, the Restated Certificate of Incorporation or these Bylaws. A majority
of the directors present at any meeting at which a quorum shall be present may
adjourn such meeting to any other date, time or place without further notice
other than announcement at such meeting. If at any meeting a quorum shall not be
present, a majority of the directors present may adjourn such meeting to any
other date, time or place upon notice to all directors pursuant to Section 2.7.
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SECTION 2.9. TELEPHONIC MEETINGS. Members of the Board of Directors or of
any committee designated by the Board of Directors may participate in a meeting
of the Board of Directors or such committee through conference telephone or
similar communications equipment by means of which all persons participating in
such meeting can hear each other, and participation in any meeting conducted
pursuant to this Section 2.9 shall constitute presence in person at such
meeting.
SECTION 2.10. COMPENSATION. Unless otherwise restricted by the laws of the
State of Delaware or the Restated Certificate of Incorporation, the Board of
Directors shall have the authority to fix the compensation of directors. The
directors shall be paid their reasonable expenses, if any, of attendance at each
meeting of the Board of Directors or a committee thereof and may be paid a fixed
sum for attendance at each such meeting and an annual retainer or salary for
services as a director or committee member. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor.
SECTION 2.11. PRESUMPTION OF ASSENT. Unless otherwise provided by the laws
of the State of Delaware, a director who is present at a meeting of the Board of
Directors or a committee thereof at which action is taken on any corporate
matter shall be presumed to have assented to the action taken unless his or her
dissent shall be entered in the minutes of such meeting or unless he or she
shall file his or her written dissent to such action with the person acting as
secretary of such meeting before the adjournment thereof or shall forward such
dissent by registered mail to the Secretary immediately after the adjournment of
such meeting. Such right to dissent shall not apply to a director who voted in
favor of such action.
SECTION 2.12. ACTION WITHOUT MEETING. Unless otherwise restricted by the
laws of the State of Delaware, the Restated Certificate of Incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors, or any committee thereof, may be taken without a meeting if
a written consent thereto is signed by all members of the Board of Directors or
of such committee, as the case may be, and such written consent is filed with
the minutes of proceedings of the Board of Directors or such committee.
SECTION 2.13. PRESIDING OFFICER. The presiding officer at any meeting of
the Board of Directors shall be the Chairman or, in his or her absence, the
President, or in his or her absence, any other director elected chairman by vote
of a majority of the directors present at such meeting.
SECTION 2.14. EXECUTIVE COMMITTEE. The Board of Directors may, in its
discretion, by resolution passed by a majority of the entire Board of Directors,
designate an Executive Committee consisting of such number of directors as the
Board of Directors shall determine. The Executive Committee shall have and may
exercise all of the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation with respect to any
matter which may require action prior to, or which in the opinion of the
Executive Committee may be inconvenient, inappropriate or undesirable to be
postponed until, the next meeting of the Board of Directors; PROVIDED, HOWEVER,
that the Executive Committee shall not have the power or authority of the Board
of Directors in reference to (a) approving or adopting, or recommending to the
stockholders any action or matter expressly required by Delaware law to be
submitted to the stockholders for approval or (b) adopting, amending or
repealing these Bylaws.
SECTION 2.15. OTHER COMMITTEES. The Board of Directors may from time to
time, in its discretion, by resolution passed by a majority of the entire Board
of Directors, designate other committees of the Board of Directors consisting of
such number of directors as the Board of Directors shall determine, which shall
have and may exercise such lawfully delegable powers and duties of the Board of
Directors as shall be conferred or authorized by such resolution. The Board of
Directors shall have the power to change at any time the members of any such
committee, to fill vacancies and to dissolve any such committee.
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SECTION 2.16. ALTERNATES. The Board of Directors may from time to time
designate from among the directors alternates to serve on any committee of the
Board of Directors to replace any absent or disqualified member at any meeting
of such committee. Whenever a quorum cannot be secured for any meeting of any
committee from among the regular members thereof and designated alternates, the
member or members, including alternates, of such committee present at such
meeting and not disqualified from voting, whether or not constituting a quorum,
may unanimously appoint another director to act at such meeting in place of any
absent or disqualified member.
SECTION 2.17. QUORUM AND MANNER OF ACTING OF COMMITTEES. A majority of the
members of any committee of the Board of Directors shall constitute a quorum for
the transaction of business at any meeting of such committee, and the act of a
majority of the members present at any meeting at which a quorum is present
shall be the act of such committee.
SECTION 2.18. COMMITTEE CHAIRMAN, BOOKS AND RECORDS, ETC. The chairman of
each committee of the Board of Directors shall be selected from among the
members of such committee by the Board of Directors.
Each committee shall keep a record of its acts and proceedings, and all
actions of each committee shall be reported to the Board of Directors at its
next meeting.
Each committee shall fix its own rules of procedure not inconsistent with
these Bylaws or the resolution of the Board of Directors designating such
committee and shall meet at such times and places and upon such call or notice
as shall be provided by such rules.
SECTION 2.19. RELIANCE UPON RECORDS. Every director, and every member of
any committee of the Board of Directors, shall, in the performance of his or her
duties, be fully protected in relying in good faith upon the records of the
Corporation and upon such information, opinions, reports or statements presented
to the Corporation by any of the Corporation's officers or employees, or
committees of the Board of Directors, or by any other person as to matters the
director or member reasonably believes are within such other person's
professional or expert competence and who has been selected with reasonable care
by or on behalf of the Corporation, including, but not limited to, such records,
information, opinions, reports or statements as to the value and amount of the
assets, liabilities and/or net profits of the Corporation, or any other facts
pertinent to the existence and amount of surplus or other funds from which
dividends might properly be declared and paid, or with which the Corporation's
capital stock might properly be purchased or redeemed.
SECTION 2.20. INTERESTED DIRECTORS. The presence of a director, who is
directly or indirectly a party in a contract or transaction with the
Corporation, or between the Corporation and any other corporation, partnership,
association or other organization in which such director is a director or
officer or has a financial interest, may be counted in determining whether a
quorum is present at any meeting of the Board of Directors or a committee
thereof at which such contract or transaction is discussed or authorized, and
such director may participate in such meeting to the extent permitted by
applicable law, including Section 144 of the General Corporation Law of the
State of Delaware.
ARTICLE III
OFFICERS
SECTION 3.1. NUMBER AND DESIGNATION. The officers of the Corporation shall
be a Chairman, a President, one or more Vice Presidents, a Secretary and a
Treasurer, and such Assistant Secretaries, Assistant Treasurers or other
officers or agents as may be elected or appointed by the Board of Directors. Any
two or more offices may be held by the same person unless the Restated
Certificate of Incorporation or these Bylaws provide otherwise.
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SECTION 3.2. ELECTION AND TERM OF OFFICE. The officers of the Corporation
shall be elected by the Board of Directors at the first meeting of the Board of
Directors held after the election of directors. If the election of officers
shall not be held at such meeting, such election shall be held as soon
thereafter as may be convenient. Vacancies may be filled or new offices created
and filled at any meeting of the Board of Directors. Each officer shall hold
office until his or her successor shall have been duly elected and shall have
qualified or until his or her earlier death, resignation, removal or
disqualification.
SECTION 3.3. REMOVAL AND RESIGNATION. Any officer or agent elected or
appointed by the Board of Directors may be removed by the Board of Directors
whenever in its judgment the best interests of the Corporation would be served
thereby, but such removal shall be without prejudice to the contract rights, if
any, of the person so removed. Any officer or agent may resign at any time by
giving written notice to the Board of Directors, to the Chairman or to the
Secretary. Any such resignation shall take effect at the time of receipt of such
notice or at any later time specified therein; and, unless otherwise specified
therein, acceptance of such resignation shall not be necessary to make it
effective.
SECTION 3.4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise may be filled by the Board
of Directors for the unexpired portion of the term.
SECTION 3.5. CHAIRMAN. The Chairman shall be the principal officer of the
Corporation. The Chairman may execute, alone or with the Secretary or any other
officer of the Corporation authorized by the Board of Directors, any deeds,
mortgages, bonds, contracts or other instruments which the Board of Directors or
a committee thereof has authorized to be executed, except in cases where the
execution thereof shall be expressly delegated by the Board of Directors or a
committee thereof or by these Bylaws to some other officer or agent of the
Corporation, or shall be required by law to be otherwise executed, and in
general he or she shall perform all duties incident to the office of Chairman
and such other duties as from time to time may be prescribed by the Board of
Directors or a committee thereof. When present, he or she shall preside at all
meetings of the stockholders and of the Board of Directors.
SECTION 3.6. PRESIDENT. The President shall be the chief executive officer
of the Corporation and shall in general supervise and control all of the
business and affairs of the Corporation. In the absence of the Chairman or in
the event of his or her inability or refusal to act as Chairman, the President
shall perform the duties of the Chairman and, when so acting, shall have all the
powers of, and be subject to all the restrictions placed upon the Chairman. He
or she may execute, alone or with the Secretary or any other officer of the
Corporation authorized by the Board of Directors, any deeds, mortgages, bonds,
contracts or other instruments which the Board of Directors or a committee
thereof has authorized to be executed, except in cases where the execution
thereof shall be expressly delegated by the Board of Directors or a committee
thereof or by these Bylaws to some other officer or agent of the Corporation, or
shall be required by law to be otherwise executed, and in general he or she
shall perform all duties incident to the office of President and such other
duties as from time to time may be prescribed by the Chairman, the Board of
Directors or a committee thereof.
SECTION 3.7. THE VICE PRESIDENTS. In the absence of the President or in
the event of his or her inability or refusal to act, the Chairman, or in the
event of his or her inability or refusal to act, the Vice President (or in the
event there shall be more than one Vice President, the Vice President determined
or elected by the Board of Directors at the time) shall perform the duties of
the President and, when so acting, shall have all the powers of and be subject
to all the restrictions upon the President. The Board of Directors may also
designate certain Vice Presidents as being in charge of designated divisions,
plants or functions of the Corporation's business and add appropriate
descriptions to their titles. In addition, any Vice President shall perform such
duties as from time to time may be assigned to him or her by the Chairman, the
President or the Board of Directors.
SECTION 3.8. THE SECRETARY. The Secretary shall (a) keep the minutes of
proceedings of the stockholders, the Board of Directors and any committee of the
Board of Directors in one or more books provided for that purpose; (b) see that
all notices are duly given in accordance with the provisions of these
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Bylaws or as required by law; (c) be custodian of the corporate records and of
the seal of the Corporation; (d) affix the seal of the Corporation or a
facsimile thereof, or cause it to be affixed, and, when so affixed, attest the
seal by his or her signature, to all Certificates for shares of capital stock of
the Corporation prior to the issue thereof and to all other documents the
execution of which on behalf of the Corporation under its seal is duly
authorized by the Board of Directors or otherwise in accordance with the
provisions of these Bylaws; (e) keep a register of the post office address of
each stockholder, director or committee member, which shall be furnished to the
Secretary by such stockholder, director or member; (f) have general charge of
the stock transfer books of the Corporation; and (g) in general perform all
duties incident to the office of Secretary and such other duties as from time to
time may be assigned to him or her by the Chairman, the President or the Board
of Directors.
SECTION 3.9. THE TREASURER. The Treasurer shall have charge and custody of
and be responsible for all funds and securities of the Corporation, receive and
give receipts for moneys due and payable to the Corporation from any source
whatsoever, deposit all such moneys in the name of the Corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with the provisions of Article IV of these Bylaws, disburse the funds of the
Corporation as ordered by the Board of Directors, the Chairman or the President
or as otherwise required in the conduct of the business of the Corporation and
render to the Chairman, President or the Board of Directors, upon request, an
accounting of all his or her transactions as Treasurer and a report on the
financial condition of the Corporation. The Treasurer shall in general perform
all the duties incident to the office of Treasurer and such other duties as from
time to time may be assigned to him or her by the Chairman, President or the
Board of Directors. If required by the Board of Directors, the Treasurer shall
give a bond (which shall be renewed regularly), in such sum and with such surety
or sureties as the Board of Directors shall determine, for the faithful
discharge of his or her duties and for the restoration to the Corporation, in
case of his or her death, resignation, retirement or removal from office, of all
books, papers, vouchers, money and other property of whatever kind in his or her
possession or under his or her control belonging to the Corporation.
SECTION 3.10. ASSISTANT TREASURERS AND SECRETARIES. In the absence of the
Secretary or the Treasurer, as the case may be, or in the event of his or her
inability or refusal to act, the Assistant Secretaries and the Assistant
Treasurers, respectively, in the order determined by the Board of Directors (or
if there shall have been no such determination, then in the order of their
election), shall perform the duties and exercise the powers of the Secretary or
the Treasurer, as the case may be. In addition, the Assistant Secretaries and
the Assistant Treasurers shall, in general, perform such duties as may be
assigned to them by the Chairman, the President, the Secretary, the Treasurer or
the Board of Directors. Each Assistant Treasurer shall, if required by the Board
of Directors, give a bond (which shall be renewed regularly), in such sum and
with such surety or sureties as the Board of Directors shall determine, for the
faithful discharge of his or her duties.
SECTION 3.11. SALARIES. The salaries of the officers and agents of the
Corporation shall be fixed from time to time by the Board of Directors or by
such officer as it shall designate for such purpose. No officer shall be
prevented from receiving such salary by reason of the fact that he or she is
also a director of the Corporation.
ARTICLE IV
CONTRACTS, LOANS, CHECKS, AND DEPOSITS
SECTION 4.1. CONTRACTS. The Board of Directors may authorize any officer
or officers, or agent or agents, to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Corporation, and such
authority may be general or confined to specific instances.
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SECTION 4.2. LOANS. No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in the name of the
Corporation unless authorized by or pursuant to a resolution adopted by the
Board of Directors. Such authority may be general or confined to specific
instances.
SECTION 4.3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
payment of money issued in the name of the Corporation shall be signed by such
officers, employees or agents of the Corporation as shall from time to time be
designated by the Board of Directors, the Chairman, the President or the
Treasurer.
SECTION 4.4. DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as shall be designated from time to
time by the Board of Directors, the Chairman, the President or the Treasurer;
and such officers may designate any type of depository arrangement (including,
but not limited to, depository arrangements resulting in net debits against the
Corporation) as may from time to time be offered or made available.
ARTICLE V
CERTIFICATES OF STOCK AND THEIR TRANSFER
SECTION 5.1. CERTIFICATES OF STOCK. Shares of capital stock of the
Corporation shall be represented by Certificates which shall be in such form as
may be determined by the Board of Directors, shall be numbered and shall be
entered on the books of the Corporation as they are issued. Such Certificates
shall indicate the holder's name and the number of shares evidenced thereby and
shall be signed by the Chairman, the President or a Vice President and by the
Secretary or an Assistant Secretary. If any stock Certificate shall be manually
signed (a) by a transfer agent or an assistant transfer agent or (b) by a
transfer clerk acting on behalf of the Corporation and a registrar, the
signature of any officer of the Corporation may be facsimile. In case any such
officer whose facsimile signature has been used on any such stock Certificate
shall cease to be such officer, whether because of death, resignation, removal
or otherwise, before such stock Certificate shall have been delivered by the
Corporation, such stock Certificate may nevertheless be delivered by the
Corporation as though the person whose facsimile signature has been used thereon
had not ceased to be such officer.
SECTION 5.2. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of
Directors in individual cases, or by general resolution or by delegation to the
transfer agent for the Corporation, may direct that a new stock Certificate or
Certificates for shares of capital stock of the Corporation be issued in place
of any stock Certificate or Certificates theretofore issued by the Corporation
claimed to have been lost, stolen or destroyed, upon the filing of an affidavit
to that effect by the person claiming such loss, theft or destruction. When
authorizing such an issuance of a new stock Certificate or Certificates, the
Board of Directors may, in its discretion and as a condition precedent to such
issuance, require the owner of such lost, stolen or destroyed stock Certificate
or Certificates to advertise the same in such manner as the Corporation shall
require and/or to give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the stock Certificate or Certificates claimed to have been lost,
stolen or destroyed.
SECTION 5.3. TRANSFERS OF STOCK. Upon surrender to the Corporation or the
transfer agent of the Corporation of a stock Certificate for shares of capital
stock of the Corporation duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer or, if the relevant stock
Certificate for shares of capital stock of the Corporation is claimed to have
been lost, stolen or destroyed, upon compliance with the provisions of Section
5.2 of these Bylaws, and upon payment of applicable taxes with respect to such
transfer, and in compliance with any restrictions on transfer applicable to such
stock Certificate or the shares represented thereby of which the Corporation
shall have
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notice and subject to such rules and regulations as the Board of Directors may
from time to time deem advisable concerning the transfer and registration of
stock Certificates for shares of capital stock of the Corporation, the
Corporation shall issue a new stock Certificate or Certificates for such shares
to the person entitled thereto, cancel the old stock Certificate and record the
transaction upon its books. Transfers of shares shall be made only on the books
of the Corporation by the registered holder thereof or by such holder's attorney
or successor duly authorized as evidenced by documents filed with the Secretary
or transfer agent of the Corporation. Whenever any transfer of shares of capital
stock of the Corporation shall be made for collateral security, and not
absolutely, it shall be so expressed in the entry of transfer if, when the stock
Certificate or Certificates representing such shares are presented to the
Corporation for transfer, both the transferor and transferee request the
Corporation to do so.
SECTION 5.4. STOCKHOLDERS OF RECORD. The Corporation shall be entitled to
treat the holder of record of any share of capital stock of the Corporation as
the holder thereof and shall not be bound to recognize any equitable or other
claim to or interest in such share on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of the State of Delaware.
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.1. FISCAL YEAR. The fiscal year of the Corporation shall be the
same as the calendar year.
SECTION 6.2. SEAL. The corporate seal of the Corporation shall have
inscribed thereon the name of the Corporation and the words "CORPORATE SEAL" and
"DELAWARE"; and it shall otherwise be in the form approved by the Board of
Directors. Such seal may be used by causing it, or a facsimile thereof, to be
impressed or affixed or otherwise reproduced.
ARTICLE VII
OFFICES
SECTION 7.1. REGISTERED OFFICE. The registered office of the Corporation
in the State of Delaware shall be located at 1209 Orange Street in the City of
Wilmington, County of New Castle, and the name of its registered agent is
Corporation Trust Company.
SECTION 7.2. OTHER OFFICES. The Corporation may have offices at such other
places, both within or without the State of Delaware, as shall be determined
from time to time by the Board of Directors or as the business of the
Corporation may require.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1. GENERAL.
(a) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation), by reason of the
fact that he or she is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such
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action, suit or proceeding if he or she acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement or conviction, or
upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a
presumption that such person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.
(b) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he or she is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection with the
defense or settlement of such action or suit if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the Corporation, except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such Court
of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in paragraphs (a) and (b) of this Section
8.1, or in defense of any claim, issue or matter therein, he or she shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection therewith.
(d) Any indemnification under paragraphs (a) and (b) of this Section 8.1
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he or she has
met the applicable standard of conduct set forth in paragraphs (a) and (b) of
this Section 8.1. Such determination shall be made (i) by the Board of Directors
by a majority vote of a quorum consisting of directors who were not parties to
such action, suit or proceeding, (ii) if such a quorum is not obtainable or,
even if obtainable, a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion or (iii) by the stockholders.
(e) Subject to compliance with the other terms and conditions of this
Section 8.1, expenses (including attorneys' fees) incurred by a director or
officer in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation pursuant to this Section 8.1. Such expenses
(including attorneys' fees) incurred by other employees and agents may be so
paid upon compliance with the terms and conditions set forth in this Section 8.1
or such other terms and conditions as the Board of Directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VIII shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office.
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(g) For purposes of this Article VIII, any reference to the "Corporation"
shall include, in addition to the resulting or surviving corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees or
agents, so that any person who is or was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provisions of this Article VIII with respect to
the resulting or surviving corporation as he or she would have with respect to
such constituent corporation if its separate existence had continued.
(h) For purposes of this Article VIII, any reference to "other enterprise"
shall include employee benefit plans; any reference to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
any reference to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he or she
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this Article
VIII.
(i) The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VIII shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such person.
(j) Notwithstanding any other provisions of this Section 8.1, the
Corporation shall not make any payments pursuant to this Section 8.1 unless the
Corporation shall have first received adequate documentation demonstrating that
such amounts for which payment is requested were actually and reasonably
incurred for the purposes permitted to be reimbursed pursuant to this Section
8.1. Such documentation may include time records, fee and disbursement records
(including hourly rates), description of the work performed, periodic litigation
status reports, the legal basis for the indemnification claim, and other
information reasonably requested by the Corporation. If a written claim has been
made for payment or reimbursement of expenses, the Corporation may require
periodic status reports from the claimant or the counsel handling the defense of
such proceeding as to the status of such proceeding, the matters presented in
the proceeding for which indemnification is sought, the names of any expert
witnesses to be retained, the projected costs for such proceeding and any other
information which is customary to obtain in order to determine whether such
expenses were actually and reasonably incurred for the purposes permitted to be
reimbursed pursuant to this Section 8.1. In the event that the party requesting
indemnification or advancement of expenses has incurred costs in multiple
proceedings, or shared legal counsel with other claimants, or circumstances
exist where some costs are permitted or required to be reimbursed and some are
not, the party submitting the request for payment shall allocate such costs and
explain in sufficient detail a reasonable basis for the allocation of costs. If
the party requesting payment fails to make an allocation when necessary, or to
provide an adequate explanation for any such allocation, the Corporation shall
determine a reasonable basis for allocation based on the written information
furnished to it. If any information relating to the allocation of expenses or
any other matter is not properly supplied, the Corporation shall not be required
to make payment until such information is fully supplied. If a claim under this
Section 8.1 is not paid in full by the Corporation within ninety days after a
written claim meeting the requirements of this Section 8.1 has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim, plus any interest
required by law to be paid. Such suit may only be filed in the Circuit Court of
Cook County, Illinois, the federal district court for the Northern District of
Illinois, the Superior Court of Delaware, New Castle County, or the federal
district court for Delaware. It shall be a defense to any such action that the
claimant has not met the requirements of this Section 8.1, including the
provisions of this paragraph (j), or the
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standards of conduct which make it permissible under the Delaware General
Corporation Law for the Corporation to pay the claimant for the amount claimed.
(k) Notwithstanding any other provisions of this Section 8.1, nothing herein
shall require the Corporation to make an advance of expenses at any time. In the
event that any written claim for advancement of expenses is submitted to the
Corporation, this Section 8.1 shall apply to such written claim for advancement
of expenses except to the extent expressly required by the General Corporation
Law of the State of Delaware or applicable law. Any undertaking shall comply
with the requirements of paragraph (l) of this Section 8.1.
(l) If any undertaking is permitted to be delivered by a person pursuant to
this Section 8.1 or the General Corporation Law of the State of Delaware, the
Corporation shall prescribe the form of undertaking. The Corporation shall be a
party to the instrument evidencing the undertaking. In the event that there is
doubt as to the collectibility of any amounts to be advanced to a claimant which
may be required to be repaid, or for other good and sufficient reason, the
Corporation may require adequate security for the undertaking.
(m) Except to the extent expressly required by the General Corporation Law
of the State of Delaware or applicable law or except as otherwise approved by
the Board of Directors, the Corporation does not intend to provide
indemnification or advancement of expenses to any person who (i) has not acted
in good faith or has acted in a manner opposed to the best interests of the
Corporation; (ii) has initiated any action, suit or proceeding against the
Corporation which was not authorized by the Board of Directors of the
Corporation; (iii) has breached any agreement with the Corporation in any
material respect; (iv) has tortiously induced any director, officer, employee,
agent, customer or supplier of the Corporation or other person or entity to
breach his, her or its contractual obligations to the Corporation; (v) has
tortiously interfered with the Corporation's customers or business
relationships; (vi) has committed, threatened or conspired to commit any acts of
dishonesty, embezzlement, misappropriation of funds, theft of trade secrets,
fraud, breach of fiduciary duty or other crime or tort against the Corporation;
or (vii) has engaged in any other unlawful or tortious conduct against the
Corporation or its interests. To the extent permitted by the General Corporation
Law of the State of Delaware and applicable law, these rules of interpretation
shall be applied in construing all provisions of this Section 8.1.
(n) Notwithstanding anything to the contrary in this Section 8.1, the
Corporation may provide indemnification to a person consistent with the
requirements of Section 145(a) and Section 145(b) of the General Corporation Law
of the State of Delaware and this Section 8.1, and the Corporation shall provide
indemnification to the extent required by Section 145(c) of the General
Corporation Law of the State of Delaware. The provisions of this Section 8.1 are
severable, and if any one or more provisions may be determined to be illegal or
otherwise unenforceable, in whole or in part, the remaining provisions and any
partially enforceable provisions, to the extent so enforceable, shall
nevertheless be binding and enforceable.
SECTION 8.2. INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted against
him or her and incurred by him or her in any such capacity, or arising out of
his or her status as such, whether or not the Corporation would have the power
to indemnify him or her against such liability under the provisions of Section
145 of the General Corporation Law of the State of Delaware.
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ARTICLE IX
NOTICES
SECTION 9.1. MANNER OF NOTICE. Except as otherwise provided by law,
whenever under the provisions of the laws of the State of Delaware, the Restated
Certificate of Incorporation or these Bylaws notice is required to be given to
any stockholder, director or member of any committee of the Board of Directors,
such notice may be given by personal delivery or by depositing it, in a sealed
envelope, in the United States mails, air mail or first class, postage prepaid,
addressed, or by delivering it to a telegraph company, charges prepaid, for
transmission, or by transmitting it via telecopier or by electronic mail via the
Internet or similar system, to such stockholder, director or member either at
the address of such stockholder, director or member as it appears on the books
of the Corporation or, in the case of such a director or member, at his or her
business address; and such notice shall be deemed to be given at the time when
it is thus personally delivered, deposited, delivered or transmitted, as the
case may be. Such requirement for notice shall also be deemed satisfied, except
in the case of stockholder meetings with respect to which written notice is
required by law, if actual notice is received orally or by other writing by the
person entitled thereto as far in advance of the event with respect to which
notice is being given as the minimum notice period required by the laws of the
State of Delaware or these Bylaws.
Whenever notice is required to be given under any provision of the laws of
the State of Delaware, the Restated Certificate of Incorporation or these Bylaws
to any stockholder to whom (a) notice of two consecutive annual meetings of
stockholders, and all notices of meetings of stockholders or of the taking of
action by stockholders by written consent without a meeting to such stockholder
during the period between such two consecutive annual meetings, or (b) all, and
at least two, payments (if sent by first class mail) of dividends or interest on
securities of the Corporation during a 12-month period, have been mailed
addressed to such stockholder at the address of such stockholder as shown on the
records of the Corporation and have been returned undeliverable, the giving of
such notice to such stockholder shall not be required. Any action or meeting
which shall be taken or held without notice to such stockholder shall have the
same force and effect as if such notice had been duly given. If any such
stockholder shall deliver to the Corporation a written notice setting forth the
then current address of such stockholder, the requirement that notice be given
to such stockholder shall be reinstated.
SECTION 9.2. WAIVER OF NOTICE. Whenever any notice is required to be given
under any provision of the laws of the State of Delaware, the Restated
Certificate of Incorporation or these Bylaws, a written waiver thereof, signed
by the person or persons entitled to such notice, whether before or after the
time stated therein, shall be deemed equivalent to such notice. Attendance by a
person at a meeting shall constitute a waiver of notice of such meeting, except
when such person attends such meeting for the express purpose of objecting, at
the beginning of such meeting, to the transaction of any business because such
meeting has not been lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of
stockholders, the Board of Directors or a committee of the Board of Directors
need be specified in any written waiver of notice unless so required by the laws
of the State of Delaware, the Restated Certificate of Incorporation or these
Bylaws.
ARTICLE X
DIVIDENDS
The Board of Directors may from time to time declare, and the Corporation
may pay, dividends, in cash, in property or in shares of capital stock of the
Corporation, on its outstanding shares of capital stock in the manner and upon
the terms and conditions provided by law and by the Restated Certificate of
Incorporation.
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ARTICLE XI
AMENDMENTS
Except to the extent otherwise provided in the Restated Certificate of
Incorporation or these Bylaws, these Bylaws shall be subject to alteration,
amendment or repeal, and new Bylaws may be adopted (a) by the affirmative vote
of the holders of not less than a majority of the voting power of all
outstanding shares of capital stock of the Corporation entitled to vote for
matters other than the election of directors or (b) by the affirmative vote of
not less than a majority of the entire Board of Directors at any meeting of the
Board of Directors at which there is a quorum present and voting.
18
<PAGE>
EXHIBIT 5
[LETTERHEAD OF SIDLEY & AUSTIN]
December 17, 1997
Telephone and Data Systems, Inc.
Suite 4000
30 North LaSalle Street
Chicago, Illinois 60602
Re: TDS Delaware, Inc. Registration Statement on Form S-4
Gentlemen:
We are counsel to Telephone and Data Systems, Inc., an Iowa corporation
("TDS"), and Telephone and Data Systems, Inc., a Delaware corporation and
wholly-owned subsidiary of TDS (the "Company"), and have represented the Company
in connection with the Form S-4 Registration Statement (the "Registration
Statement") being filed by the Company with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the registration of: (A) 326,664 shares of Preferred Shares of
the Company, par value $0.01 per share (the "New Preferred Shares"), 6,933,233
shares of Series A Common Shares of the Company, par value $0.01 per share (the
"New Series A Shares"), and 53,878,129 shares of Common Shares of the Company,
par value $0.01 per share (the "New Common Shares") to be issued pursuant to the
terms of an Agreement and Plan of Merger between TDS and the Company (the
"Merger Agreement") pursuant to which, subject to the approval of the
shareholders of TDS, (i) TDS will merge with and into the Company, with the
Company continuing as the surviving corporation, (ii) each Series A Common Share
of TDS will be converted into one Series A Common Share of the Company, (iii)
each Common Share of TDS will be converted into one Common Share of the Company
and (iv) each Preferred Share of TDS will be converted into one corresponding
Preferred Share of the Company; and (B) 40,540,908 shares of TDS
Telecommunications Group Common Shares of the Company, par value $0.01 per share
(the "Telecommunications Group Shares"), 60,811,362 shares of United States
Cellular Group Common Shares of the Company, par value $0.01 per share (the
"Cellular Group Shares") and 40,540,908 shares of Aerial Communications Group
Common Shares, par value $0.01 per share (the "Aerial Group Shares")
(collectively, the Telecommunications Group Shares, the Cellular Group Shares
and the Aerial Group Shares are referred to hereinafter as the "Tracking Stock")
to be distributed to the holders of New Series A Common Shares and New Common
Shares.
In rendering this opinion, we have examined and relied upon a copy of the
Registration Statement, the Proxy Statement-Prospectus included therein, the
form of the restated certificate of incorporation of the Company (the "Restated
Certificate of Incorporation") to be filed with the Secretary of State of
Delaware immediately prior to the effective time of the Merger, and the form of
the Merger Agreement. We have also examined and relied upon originals, or copies
of originals certified to our satisfaction, of such agreements, documents,
certificates and other statements of governmental officials and other
instruments, have examined such questions of law and have satisfied ourselves as
to such matters of fact as we have considered relevant and necessary as a basis
for this opinion. We have assumed the authenticity of all documents submitted to
us as originals, the genuineness of all signatures, the legal capacity of all
natural persons and the conformity with the original documents of any copies
thereof submitted to us for our
<PAGE>
Telephone & Data Systems, Inc.
December 17, 1997
Page 2
examination. We have also assumed the due filing of the Restated Certificate of
Incorporation with the Secretary of State of Delaware prior to the effective
time of the Merger.
Based on the foregoing, we are of the opinion that:
1. The Company is duly incorporated and validly existing under the laws
of the State of Delaware.
2. Each of the New Preferred Shares, New Series A Common Shares and New
Common Shares to be issued pursuant to the Merger Agreement and registered
pursuant to the Registration Statement have been duly authorized and will be
validly issued, fully paid and nonassessable when (i) the Registration
Statement, as finally amended, shall have become effective under the
Securities Act; and (ii) such shares shall have been duly issued as
contemplated by the Merger Agreement.
3. The shares of the Tracking Stock have been duly authorized and will
be legally issued, fully paid and nonassessable when: (i) the Registration
Statement, as finally amended, shall have become effective under the
Securities Act; (ii) the Company's Board of Directors or a duly authorized
committee thereof shall have duly adopted final resolutions authorizing the
issuance and distribution of shares of the Tracking Stock as contemplated by
the Registration Statement; (iii) such shares of the Tracking Stock shall
have been duly issued and distributed in the manner contemplated by such
resolutions and the Registration Statement; and (iv) certificates
representing shares of the Tracking Stock shall have been duly executed,
countersigned and registered and duly delivered to the holders of New Series
A Common Shares and New Common Shares in accordance with such resolutions
and the Registration Statement.
The foregoing opinions are limited to the Securities Act and the General
Corporation Law of the State of Delaware. We do not find it necessary for the
purposes of this opinion to cover, and accordingly we express no opinion as to,
the application of the securities or "Blue Sky" laws of the various states to
(i) the issuance of the New Preferred Shares, New Series A Common Shares and New
Common Shares pursuant to the Merger Agreement or (ii) the distribution of
shares of the Tracking Stock.
The Company is controlled by a voting trust. Walter C.D. Carlson, a trustee
and beneficiary of the voting trust and a director of the Company and certain
subsidiaries of the Company, Michael G. Hron, the Secretary of the Company and
certain subsidiaries of the Company, William S. DeCarlo, the Assistant Secretary
of the Company and certain subsidiaries of the Company, Stephen P. Fitzell, the
Secretary of certain subsidiaries of the Company, and Sherry S. Treston, the
Assistant Secretary of certain subsidiaries of the Company, are partners of this
Firm.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to all references to our Firm in or made a part of
the Registration Statement.
Very truly yours,
SIDLEY & AUSTIN
<PAGE>
EXHIBIT 8
[LETTERHEAD OF SIDLEY & AUSTIN]
February 17, 1998
Telephone and Data Systems, Inc.
30 North LaSalle Street
Suite 4000
Chicago, Illinois 60602
Re: Certain Federal Income Tax Consequences of Reincorporation of the
Company as a Delaware Corporation and Distribution of Tracking Stock
Ladies and Gentlemen:
We are counsel to Telephone and Data Systems, Inc., an Iowa corporation (the
"Company" or "TDS Iowa"). We have been requested by the Company to render this
opinion with respect to certain United States federal income tax matters in
connection with (i) the proposed change in TDS Iowa's state of incorporation
from Iowa to Delaware which, subject to the approval of the shareholders of TDS
Iowa, would be effected by a merger (the "Merger") of TDS Iowa into a wholly
owned subsidiary of TDS Iowa organized under the laws of Delaware (the "Company"
or "TDS Delaware") which would be the surviving corporation and (ii) the
distribution (the "Distribution") of United States Cellular Group Common Shares,
TDS Telecom Group Common Shares and Aerial Communications Group Common Shares
(collectively, the "Tracking Stock") to holders of Series A Common Shares and
Common Shares of the Company, each of which is described more fully in the
Letter to Shareholders, Notice of Special Meeting of Shareholders and Proxy
Statement and Prospectus dated as of February 17, 1998 (collectively, the "Proxy
Statement"), which is part of the Registration Statement on Form S-4 of TDS
Delaware, to which this letter is attached as an Exhibit.
References herein to the Company shall mean TDS Iowa (prior to the Merger)
and TDS Delaware (subsequent to the Merger) and references herein to "Series A
Common Shares," "Common Shares" and "Tracking Stock" shall mean shares of stock
issued by TDS Iowa (prior to the Merger) and TDS Delaware (subsequent to the
Merger). Other capitalized terms used but not defined herein shall have the
meanings ascribed to them in the Proxy Statement.
In rendering this opinion, we have examined originals or copies of (i) the
Proxy Statement, (ii) the draft Agreement and Plan of Merger, a copy of which is
attached as Exhibit A to the Proxy Statement (the "Draft Merger Agreement"),
(iii) the draft Restated Certificate of Incorporation, which will be the
Certificate of Incorporation of TDS Delaware upon the effectiveness of the
Merger, a copy of which is attached as Exhibit B to the Proxy Statement (the
"Draft Delaware Certificate"), and (iv) such other documents as in our judgment
were necessary to enable us to render the opinion expressed below.
This opinion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), regulations and rulings now in effect or proposed thereunder, current
administrative rulings and practice, and judicial precedent, all of which are
subject to change. Any such change, which may or may not be retroactive, could
alter the tax consequences to shareholders of the Company discussed in this
opinion. This opinion does not address all aspects of federal taxation that may
be relevant to particular shareholders of the Company, and it may not be
applicable to shareholders who, for federal income tax purposes, are subject to
special tax treatment, such as insurance companies, corporations subject to the
alternative minimum tax, banks, dealers in securities, tax-exempt organizations
or foreign persons or to shareholders who acquired their shares pursuant to the
exercise of employee stock options or otherwise as compensation.
<PAGE>
In rendering this opinion we have assumed, with your consent, that the
following assumptions (collectively, the "Assumptions") are true and correct as
of the date of this letter and will be true, correct and complete as of the time
of the Merger and the time of the Distribution:
(i) The Proxy Statement, the Draft Merger Agreement, and the Draft
Delaware Certificate, when executed, adopted, filed, distributed or
otherwise made effective in final form, will be identical to the documents
we have heretofore reviewed and will be binding and effective, and that the
Merger and the Distribution will be carried out in accordance therewith.
(ii) All material facts relating to the Merger and the Distribution are
as set forth in the Proxy Statement.
(iii) The representations made to us by TDS Iowa in the letter attached
hereto as Exhibit A will be true, correct and complete as of the time of the
Merger and the time of the Distribution.
Based upon our review of the documents referred to above, the Assumptions
set forth in the preceding paragraphs, assuming the shareholders of the Company
hold their Preferred Shares, Series A Common Shares and Common Shares of the
Company as capital assets within the meaning of Section 1221 of the Code, and
further assuming, except as specifically discussed below, that such shareholders
will not exercise appraisal rights, we are of the opinion that, with respect to
the Merger, for United States federal income tax purposes:
(i) The Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and TDS Iowa and TDS Delaware will each be a
party to the reorganization.
(ii) No gain or loss will be recognized by TDS Iowa or TDS Delaware as a
result of the Merger.
(iii) No gain or loss will be recognized by the shareholders of TDS Iowa
upon the conversion of their Preferred Shares, Series A Common Shares and
Common Shares of TDS Iowa into Preferred Shares, Series A Common Shares and
Common Shares of TDS Delaware, respectively, pursuant to the Merger.
(iv) The aggregate tax bases of the Preferred Shares, Series A Common
Shares and Common Shares of TDS Delaware received in exchange for Preferred
Shares, Series A Common Shares and Common Shares of TDS Iowa, respectively,
pursuant to the Merger will be the same as the aggregate tax bases of such
Preferred Shares, Series A Common Shares and Common Shares of TDS Iowa,
respectively.
(v) The holding periods for Preferred Shares, Series A Common Shares and
Common Shares of TDS Delaware issued in exchange for Preferred Shares,
Series A Common Shares and Common Shares of TDS Iowa, respectively, pursuant
to the Merger will include the holder's holding periods for such Preferred
Shares, Series A Common Shares and Common Shares of TDS Iowa, respectively.
A shareholder of TDS Iowa who exercises appraisal rights should, in general,
treat the difference between the tax basis of the Preferred Shares, Series A
Common Shares and Common Shares of TDS Iowa held by such shareholder with
respect to which such rights are exercised and the amount received through the
exercise of such rights (other than any interest awarded by a court with respect
to such rights) as capital gain or loss for federal income tax purposes
although, depending on the shareholder's particular circumstances, the amount
received through the exercise of such rights (other than any interest awarded by
a court with respect to such rights) might be treated for federal income tax
purposes as dividend income. Any interest awarded by a court to a shareholder of
TDS Iowa with respect to exercised appraisal rights generally will be includible
in such shareholder's income as ordinary income.
Based upon our review of the above-referenced documents, the Assumptions set
forth above, and assuming the shareholders of the Company hold their Series A
Common Shares and Common Shares of
2
<PAGE>
the Company as capital assets within the meaning of Section 1221 of the Code, we
are of the opinion that, with respect to the Distribution, for United States
federal income tax purposes:
(i) The Distribution will not result in income, gain or loss to the
Company.
(ii) The Distribution will not result in income, gain or loss to any
shareholder of the Company, except with respect to cash, if any, received in
lieu of fractional shares of Tracking Stock.
(iii) A shareholder's tax basis for Series A Common Shares prior to the
Distribution will be allocated after the Distribution among such
shareholder's Series A Common Shares and Tracking Stock (including
fractional shares of Tracking Stock, if any, for which cash is received)
received in the Distribution (pursuant to a deemed exchange for Series A
Common Shares) in proportion to their relative fair market values at the
time of the Distribution.
(iv) A shareholder's tax basis for Common Shares prior to the
Distribution will be allocated after the Distribution among such
shareholder's Common Shares and Tracking Stock (including fractional shares
of Tracking Stock, if any, for which cash is received) received in the
Distribution (pursuant to a deemed exchange for Common Shares) in proportion
to their relative fair market values at the time of the Distribution.
(v) A shareholder's holding period for Tracking Stock received in the
Distribution (pursuant to a deemed exchange for Series A Common Shares) will
include such shareholder's holding period for the Series A Common Shares
deemed surrendered therefor.
(vi) A shareholder's holding period for Tracking Stock received in the
Distribution (pursuant to a deemed exchange for Common Shares) will include
such shareholder's holding period for the Common Shares deemed surrendered
therefor.
(vii) A shareholder who receives cash in lieu of a fractional share of
Tracking Stock will recognize gain or loss equal to the difference, if any,
between such shareholder's basis in the fractional share (determined under
clause (iii) or (iv) above) and the amount of cash received.
(viii)None of the Tracking Stock will be "section 306 stock" within the
meaning of the Code.
The Internal Revenue Service (the "Service") announced in 1987 that it was
studying and would not issue advance rulings on the classification of an
instrument that has certain voting and liquidation rights in an issuing
corporation but the dividend rights of which are determined by reference to the
earnings of a segregated portion of the issuing corporation's assets, including
assets held by a subsidiary. In 1995 the Service withdrew such stock from its
list of matters under consideration and reiterated that it would not issue
advance rulings regarding such stock. There are no court decisions or other
authorities that bear directly on transactions similar to the Distribution. It
is possible, therefore, that the Service could assert that the Tracking Stock
represents property other than stock of the Company. If such shares were treated
as property other than stock of the Company, the Company or its subsidiaries (i)
would recognize a significant taxable gain on the Distribution of the Tracking
Stock in an amount equal to the excess of the fair market value of the
distributed property over its federal income tax basis to the Company or its
subsidiaries and (ii) the Company could lose its ability to file consolidated
federal income tax returns with U.S. Cellular, TDS Telecom and Aerial (one
consequence being that dividends paid or deemed to be paid by U.S. Cellular, TDS
Telecom or Aerial to the Company would be taxable to the Company, subject to any
applicable dividends received deduction). Furthermore, the receipt of Tracking
Stock by a shareholder of the Company might be treated as a fully taxable
dividend to such shareholder in an amount equal to the fair market value of such
stock (subject, in the case of shareholders of the Company that are
corporations, to any applicable dividends received deduction). As indicated
above, however, it is our opinion that the Service would not prevail in any such
assertion.
You have not asked for, and we do not express, any opinion concerning the
tax consequences of any transaction other than the Merger or the Distribution,
or any opinion regarding the tax consequences of
3
<PAGE>
the Merger or the Distribution, other than those expressly set forth above. No
opinion should be inferred as to the tax consequences of the Merger or the
Distribution under any state, local or foreign law, or with respect to other
issues of United States federal taxation.
This opinion is provided to you only, and without our prior consent, may not
be relied upon, used, circulated, quoted or otherwise referred to in any manner
by any person, firm, governmental authority or entity whatsoever other than
reliance thereon by you. This opinion letter is limited to the matters stated
herein, and no opinion is implied or may be inferred beyond the matters
expressly stated herein. This opinion letter shall not be construed as or deemed
to be a guaranty or insuring agreement.
This opinion is rendered as of the date hereof based on the facts in
existence on the date hereof, and we undertake no, and hereby disclaim any,
obligation to advise you of any changes or any new developments, whether
material or not material, which may be brought to our attention at a later date.
Any changes in the facts in existence on the date hereof may adversely affect
our opinion set forth herein.
We understand that, at the time the Merger or the Distribution occurs, you
may request that we reaffirm the opinion expressed in this letter. Any such
reaffirmation will be based on the facts and law in existence at that time and,
in connection therewith, we may request further representations by the Company
and others as a condition to our reaffirmation.
We hereby consent to the filing of this letter as an Exhibit to the
Registration Statement and to all references to our Firm included in or made a
part of the Registration Statement.
Very truly yours,
SIDLEY & AUSTIN
4
<PAGE>
EXHIBIT A TO TAX OPINION
[LETTERHEAD OF TELEPHONE AND DATA SYSTEMS, INC.]
February 17, 1998
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Re: Certain Representations Relating to Reincorporation of the
Company as a Delaware Corporation and Distribution of Tracking Stock
Ladies and Gentlemen:
Telephone and Data Systems, Inc., an Iowa corporation (the "Company" or "TDS
Iowa"), has requested your opinion, set forth in a letter to which this letter
will be attached as an Exhibit (the "Opinion"), with respect to certain United
States federal income tax matters in connection with (i) the proposed change in
TDS Iowa's state of incorporation from Iowa to Delaware which, subject to the
approval of the shareholders of TDS Iowa, would be effected by a merger (the
"Merger") of TDS Iowa into a wholly owned subsidiary of TDS Iowa organized under
the laws of Delaware (the "Company" or "TDS Delaware") which would be the
surviving corporation and (ii) the distribution (the "Distribution") of United
States Cellular Group Common Shares, TDS Telecom Group Common Shares and Aerial
Communications Group Common Shares (collectively, the "Tracking Stock") to
holders of Series A Common Shares and Common Shares of the Company, each of
which is described more fully in the Letter to Shareholders, Notice of Special
Meeting of Shareholders and Proxy Statement and Prospectus dated as of February
17, 1998 (collectively, the "Proxy Statement"), which is a part of the
Registration Statement on Form S-4 of TDS Delaware, to which the Opinion is
attached as an Exhibit.
References herein to the Company shall mean TDS Iowa (prior to the Merger)
and TDS Delaware (subsequent to the Merger) and references herein to "Series A
Common Shares," "Common Shares" and "Tracking Stock" shall mean shares of stock
issued by TDS Iowa (prior to the Merger) and TDS Delaware (subsequent to the
Merger). Other capitalized terms used but not defined herein shall have the
meanings ascribed to them in the Proxy Statement.
In connection with the Merger and Distribution, and recognizing that you
will rely upon this letter in rendering the Opinion, we hereby certify to you
that:
(i) The fair market value of the stock of TDS Delaware received by each
shareholder of TDS Iowa will be approximately equal to the fair market value
of the stock of TDS Iowa surrendered in the Merger. In connection with the
Merger, no shareholder of TDS Iowa will receive, directly or indirectly, any
consideration other than stock of TDS Delaware.
(ii) Immediately following consummation of the Merger, the shareholders
of TDS Iowa will own all of the outstanding TDS Delaware stock and will own
such stock solely by reason of their ownership of TDS Iowa stock immediately
prior to the Merger.
(iii) In connection with the Merger, (a) the Company has not redeemed
(and will not redeem) any stock and has not made (and will not make) any
extraordinary distribution with respect thereto, other than the
Distribution; and (b) no controlled subsidiary which would be a person that
is related to the Company within the meaning of Temp. Reg. Section
1.368-1T(e)(2)(ii) has acquired (or will acquire) any stock of the Company
from any holder thereof.
(iv) TDS Delaware has no plan or intention to issue additional shares of
its stock following the Merger or the Distribution (other than pursuant to
(a) the Distribution, (b) the issuance of Cellular Group Shares in exchange
for Common Shares of U.S. Cellular, (c) the offer and sale of Telecom Group
Shares in a public offering for cash, (d) the issuance of Aerial Group
Shares in exchange for Common Shares of Aerial, (e) the issuance of stock of
TDS pursuant to the terms of Pre-Distribution
<PAGE>
Convertible Securities in the event a holder thereof elects to convert such
instrument, (f) the issuance of stock of TDS pursuant to the terms of U.S.
Cellular LYONs in the event a holder thereof elects to convert such
instrument following the U.S. Cellular Merger and (g) the issuance of stock
of TDS pursuant to various incentive compensation plans for employees).
(v) The Company has no plan or intention to sell or otherwise dispose of
any of the assets of the Company, except for (a) dispositions made in the
ordinary course of business, (b) the divestiture of certain minority
interests in certain markets to AirTouch in exchange for stock of AirTouch
and cash, as more fully described in the Proxy Statement at page I-5 and (c)
the contribution of the assets and certain liabilities of American Paging,
Inc. in exchange for a minority interest in a limited liability company, as
more fully described in the Proxy Statement at page I-30.
(vi) The liabilities of TDS Iowa assumed by TDS Delaware in the Merger
plus the liabilities, if any, to which the transferred assets are subject
were incurred by TDS Iowa in the ordinary course of its business and are
associated with the assets transferred in the Merger.
(vii) Following the Merger, TDS Delaware will hold the stock of U.S.
Cellular, TDS Telecom and Aerial held by TDS Iowa prior to the Merger, and
each of U.S. Cellular, TDS Telecom and Aerial will continue its historic
business or use a significant portion of its historic business assets in a
business, as each such term is used in Treas. Reg. Section 1.368-1(d).
(viii) Each of the Company and each shareholder of the Company will pay
his, her or its own expenses, if any, incurred in connection with the Merger
or the Distribution.
(ix) TDS Iowa is not under the jurisdiction of a court in a title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
(x) The total fair market value of the assets of the Company will exceed
the sum of its liabilities plus (without duplication) the amount of any
liabilities to which such assets are subject.
(xi) The total adjusted tax basis of the assets of TDS Iowa transferred
to TDS Delaware in the Merger will equal or exceed the sum of the
liabilities assumed by TDS Delaware plus the amount of liabilities, if any,
to which the transferred assets are subject.
(xii) There is no intercorporate indebtedness existing between TDS
Delaware and TDS Iowa that was issued, acquired, or will be settled at a
discount.
(xiii) With respect to any stock, securities, stock options or other
contracts or plans of the Company that are convertible into Series A Common
Shares or Common Shares immediately prior to the Distribution, there will be
a full adjustment, within the meaning of Treas. Reg. Section 1.305-3(d), to
the terms of such stock, securities, stock options or other contracts or
plans of the Company after the Distribution to take into account the
Distribution and to provide that each holder's or participant's rights under
such stock, securities, stock options or other contracts or plans of the
Company to the assets and earnings and profits of the Company are
proportionate to such rights existing thereunder immediately prior to the
Distribution.
(xiv) Immediately following the consummation of each of the Merger and
the Distribution, the Company will possess the same assets and liabilities
as those possessed by the Company immediately prior to the Merger and the
Distribution, respectively, disregarding for this purpose assets used to pay
dissenters to the Merger and assets used to pay expenses incurred in
connection with the Merger or the Distribution.
(xv) Neither TDS Iowa nor TDS Delaware is an investment company as
defined in Section 368(a)(2)(F) of the Code and Treasury regulations
thereunder.
(xvi) No cash in lieu of fractional shares will be paid to shareholders
of the Company as a result of the Merger.
2
<PAGE>
(xvii) The payment of cash in lieu of fractional shares of the Company
in the Distribution is paid solely for the purpose of avoiding the expense
and inconvenience to the Company of issuing fractional shares and does not
represent separately bargained-for consideration. The total cash
consideration that will be paid in the Distribution to the shareholders of
the Company instead of issuing fractional shares of Tracking Stock will not
exceed one percent of the total consideration that will be issued in the
Distribution to the shareholders of the Company.
(xviii) None of the compensation received or to be received by any
shareholder-employee of the Company will be separate consideration for, or
allocable to, any of their shares of the Company; none of the shares of the
Company received by any shareholder-employees in the Merger or the
Distribution will be separate consideration for, or allocable to, any
employment agreement; and the compensation paid to any shareholder-employee
of the Company will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's-length
for similar services.
(xix) The Company is not currently, and during the five years preceding
the Merger will not have been, a "United States real property holding
corporation" within the meaning of Section 897(c)(2) of the Code.
The undersigned acknowledges that the Opinion assumes that each of the
statements set forth in this letter will be true, correct and complete as of the
time of the Merger and the time of the Distribution. The statements in this
letter are not intended to limit in any way the Assumptions (as defined in the
Opinion), which have been made with our consent.
The undersigned acknowledges that, in connection with any reaffirmation of
your Opinion as contemplated by the penultimate paragraph of your Opinion, you
may request a restatement of the representations made in this letter and may
request further representations.
Very truly yours,
TELEPHONE AND DATA SYSTEMS,
INC., an Iowa corporation
By: /s/ LEROY T. CARLSON, JR.
LeRoy T. Carlson, Jr.
President
3
<PAGE>
EXHIBIT 99.4
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON]
February 2, 1998
The Board of Directors of
Telephone and Data Systems, Inc.
Suite 4000
30 North LaSalle Street
Chicago, Illinois 60602
Members of the Board:
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of Telephone and Data Systems, Inc. (the "Company"), dated December
17, 1997, as an exhibit to the Proxy Statement/ Prospectus of the Company, which
forms a part of the Registration Statement on Form S-4 of the Company
(Registration No. 333-42535), and to all references to our firm and summaries of
such opinion letter included in such Registration Statement and the Proxy
Statement/Prospectus included therein.
In giving such consent, we do not admit that we come within the category of
persons whose consent is required under, and we do not admit that we are
"experts" for purposes of, the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
By:/s/ GORDON A. RICH
-----------------------------------
Gordon A. Rich
MANAGING DIRECTOR
<PAGE>
EXHIBIT 99.5
[LETTERHEAD OF SALOMON BROTHERS INC.]
February 2, 1998
The Board of Directors of
Telephone and Data Systems, Inc.
Suite 4000
30 North LaSalle Street
Chicago, Illinois 60602
Members of the Board:
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of Telephone and Data Systems, Inc. (the "Company"), dated December
17, 1997, as an exhibit to the Proxy Statement/ Prospectus of the Company, which
forms a part of the Registration Statement on Form S-4 of the Company
(Registration No. 333-42535), and to all references to our firm and summaries of
such opinion letter included in such Registration Statement and the Proxy
Statement/Prospectus included therein.
In giving such consent, we do not admit that we come within the category of
persons whose consent is required under, and we do not admit that we are
"experts" for purposes of, the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
Very truly yours,
SALOMON BROTHERS INC
SMITH BARNEY INC.
By: Salomon Brothers Inc
By:/s/ THOMAS L. JONES
-----------------------------------
MANAGING DIRECTOR
<PAGE>
EXHIBIT 99.6
CONSENT OF KEVIN A. MUNDT
In accordance with the requirements of Rule 438 promulgated by the Securities
and Exchange Commission under the Securities Act of 1933, as amended, I hereby
consent to the references to my name appearing in the Registration Statement on
Form S-4 (Registration No. 333-42535) and in the accompanying Proxy
Statement/Prospectus forming a part thereof of Telephone and Data Systems, Inc.
/s/ KEVIN A. MUNDT
--------------------------------------
Kevin A. Mundt
Date: February 4, 1998
