<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. Filed Pursuant to Rule 424(b)(3)
30 North LaSalle Street, 40th Floor Registration No. 333-42535
Chicago, Illinois 60602
312/630-1900
[LOGO]
March 24, 1998
Dear Fellow Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders of the
Company to be held on Monday, April 27, 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 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
<PAGE>
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-
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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,
[SIGNATURE] [SIGNATURE]
LeRoy T. Carlson LeRoy T. Carlson, Jr.
Chairman President and Chief Executive Officer
-iii-
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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 $0.11 per share with respect to
each of the 100 Common Shares and $0.50 per share with respect to each of
the 66 Telecom Group Shares, or an aggregate annual dividend of
approximately $44, which is the amount of the annual dividend a holder of
100 Common Shares currently receives.
-iv-
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TELEPHONE AND DATA SYSTEMS, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 27, 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 Monday, April 27, 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 March 24, 1998 to holders of record on March
16, 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,
[SIGNATURE]
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>
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PAGE
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<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
Summary Selected Consolidated and Group Financial Information........... 30
RISK FACTORS.............................................................. 32
GENERAL................................................................... 41
DIVIDENDS AND PRICE RANGES OF COMMON SHARES............................... 43
DIVIDEND POLICY........................................................... 44
SELECTED FINANCIAL INFORMATION............................................ 44
PROPOSAL 1--TRACKING STOCK PROPOSAL....................................... 50
General................................................................. 50
The Transactions........................................................ 51
Background and Reasons for the Tracking Stock Proposal and Related
Transactions; Recommendation of the Board............................. 54
Opinions of Financial Advisors.......................................... 58
Interests of Certain Persons............................................ 61
Changes to Board of Directors........................................... 62
The Company............................................................. 62
The Cellular Group...................................................... 63
The Telecom Group....................................................... 65
The Aerial Group........................................................ 68
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The TDS Group........................................................... 70
Effect of Pre-Distribution Convertible Securities and Committed
Acquisition Shares.................................................... 72
Description of Articles of Incorporation of TDS Iowa.................... 73
Description of Restated Certificate of Incorporation of TDS Delaware.... 74
Description of Terms of Tracking Stock.................................. 84
The Retained Interests.................................................. 99
Inter-Group Interests................................................... 102
Management and Allocation Policies...................................... 104
Comparison of Shareholder's Rights Under Iowa and Delaware.............. 107
Dissenting Shareholders' Rights......................................... 114
Certain Federal Income Tax Considerations............................... 115
Securities Law Consequences of the Merger............................... 118
Listing on the AMEX..................................................... 118
Stock Transfer Agent and Registrar...................................... 118
Accounting Treatment.................................................... 118
Regulatory Approvals and Consents....................................... 118
Dividend Reinvestment Plans............................................. 119
Employee Benefit Plans.................................................. 119
Certain Definitions..................................................... 119
PROPOSAL 2--AMENDMENT AND ADJUSTMENT OF EMPLOYEE STOCK PLANS.............. 127
PROPOSAL 3--APPROVAL OF 1998 LONG-TERM INCENTIVE PLAN..................... 128
BENEFICIAL OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......... 132
SHAREHOLDER PROPOSALS..................................................... 135
SOLICITATION OF PROXIES................................................... 135
EXPENSES.................................................................. 135
EXPERTS................................................................... 135
LEGAL MATTERS............................................................. 135
OTHER BUSINESS............................................................ 135
INDEX TO EXHIBITS......................................................... 136
INDEX TO ANNEXES.......................................................... 136
</TABLE>
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<TABLE>
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TELEPHONE AND DATA SYSTEMS, INC., TELEPHONE AND DATA SYSTEMS, INC.,
An Iowa Corporation A Delaware Corporation
PROXY STATEMENT PROSPECTUS
</TABLE>
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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 April
27, 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 March 24, 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 March 6, 1998 (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 32 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 MARCH 24, 1998
<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 APRIL 20, 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.
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<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
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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 Monday, April 27, 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.
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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 held by Public Holders 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 $0.11 per share and an annual
dividend on the Telecom Group Shares in an amount equal to $0.50 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 $0.33 per existing Common Share and Series A Common Share. The total of
this rate and the rate of $0.11 per Common and Series A Common Share is
equal to $0.44 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.
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CURRENT COMMON STOCK CAPITAL STRUCTURE OF THE COMPANY
[GRAPHIC]
PROPOSED COMMON STOCK CAPITAL STRUCTURE OF THE COMPANY
[GRAPHIC]
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<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 Monday, April 27, 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.
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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."
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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.
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 $0.44 per Common Share and policy of declaring an annual dividend of
Common Shares, if authorized Series A Common Share. approximately $0.11 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 $0.50 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 $0.50 per Telecom Group
Share is equivalent to approximately $0.33 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 $0.11 per share. The sum of this amount plus
the Telecom Equivalent Dividend Rate is $0.44 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 or
without cause by a majority vote 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 The Delaware By-Laws will also
meetings of shareholders. provide that the right of any group
of shareholders to call a meeting
may not be amended or eliminated
without approval by a majority of
the voting power held by the
shareholders in such voting group.
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 provides that
shareholder action may be taken
without a meeting or vote if a
written consent is signed by the
holders of outstanding shares having
at least 90% of the votes entitled
to be cast at a meeting.
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.
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 1993 through 1997. 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>
YEAR ENDED OR AT DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Operating Revenues............................................ $1,471,533 $1,179,857 $ 942,307 $ 726,036 $ 553,829
Net Income (Loss) Available to Common......................... (11,441) 126,182 101,469 57,362 31,510
Earnings Per Common Share - Basic............................. (.19) 2.09 1.77 1.08 0.67
Earnings per Common Share - Diluted........................... (.19) 2.07 1.74 1.06 .67
Dividends Per Common Share and Series A Common Share.......... .42 .40 .38 .36 .34
Total Assets.................................................. 4,971,601 4,200,969 3,469,082 2,790,127 2,259,182
Notes Payable................................................. 527,587 160,537 184,320 98,608 6,309
Long-term Debt (including current portion).................... 1,279,034 1,018,851 894,584 562,165 537,566
Redeemable Preferred Shares (including current portion)....... 1,479 1,858 15,093 25,001 27,367
Common Stockholders' Equity................................... $1,968,119 $2,032,941 $1,684,365 $1,473,038 $1,224,285
</TABLE>
SUMMARY FINANCIAL INFORMATION OF TDS GROUP
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Income...................................................... $ 52,968 $ 47,540 $ 22,691 $ 26,052 $ 30,972
Net Income Available to Common and Series A Common Shares....... 51,076 45,583 20,182 23,594 28,586
Total Assets.................................................... 1,519,829 1,079,975 1,006,728 1,038,484 802,280
Notes Payable - Affiliates...................................... 165,686 201,641 186,786 128,530 123,511
Notes Payable - Other........................................... 530,175 159,162 182,625 97,724 6,059
TDS Group Equity................................................ $ 602,471 $ 642,005 $ 509,421 $ 683,783 $ 613,607
</TABLE>
-30-
<PAGE>
SUMMARY FINANCIAL INFORMATION OF CELLULAR GROUP
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Revenues............................................ $ 876,965 $ 680,068 $ 480,316 $ 327,630 $ 210,344
Net Income (Loss)............................................. 111,539 129,929 99,742 16,393 (25,441)
Total Assets.................................................. 2,508,916 2,085,899 1,880,144 1,534,787 1,245,396
Long-term Debt (including current portion).................... 515,330 353,761 355,748 302,218 204,455
Cellular Group Equity......................................... $1,629,320 $1,476,202 $1,329,454 $1,093,967 $ 940,128
</TABLE>
SUMMARY FINANCIAL INFORMATION OF TELECOM GROUP
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Revenues.............................................. $ 444,203 $ 395,602 $ 354,841 $ 306,341 $ 268,122
Net Income...................................................... 30,388 35,694 34,155 32,654 25,134
Total Assets.................................................... 1,406,048 1,352,929 1,228,232 1,138,242 959,582
Notes Payable................................................... 28,181 25,039 15,784 15,059 12,080
Long-term Debt (including current portion)...................... 563,374 560,844 536,379 492,946 470,257
Long-term Debt-affiliated....................................... 255,302 239,538 233,176 224,742 228,540
Telecom Group Equity............................................ $ 383,759 $ 343,816 $ 265,387 $ 228,800 $ 107,298
</TABLE>
SUMMARY FINANCIAL INFORMATION OF AERIAL GROUP
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Revenues............................................. $ 55,952 $ -- $ -- $ -- $ --
Net (Loss)..................................................... (247,057) (37,921) (6,468) (1,283) (67)
Total Assets................................................... 960,648 672,827 360,444 21,320 512
Long-term Debt (Revolving Credit Agreement--TDS)............... 448,234 -- 60,238 22,659 650
Long-term Debt................................................. 196,439 103,743 -- -- --
Aerial Group Equity (Deficit).................................. $ 192,427 $ 437,785 $ 281,282 $ (1,444) $ (161)
</TABLE>
-31-
<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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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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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. At the present time, the TDS Voting Trust controls a majority of the
voting power of all shares of capital stock. See "--Control by Voting Trust."
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
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Shares at a predetermined premium. The determination by the Board to redeem
shares of a class of Tracking Stock 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
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the Cellular Group or Aerial Group. In addition, increasing overlap between the
businesses of the two Groups 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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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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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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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. The defendants have been served with the
complaint in this case but have not yet responded to the complaint. The time for
the defendants to respond has been extended. The timing for a response will be
determined based on discussions between counsel for plaintiffs and defendants,
but a response is not expected to take place for at least one or more months. On
January 30, 1998, a virtually identical complaint was also filed by John G.
Guillemont, Trustee of the John G. Guillemont Living Trust, who subsequently
withdrew as plaintiff and was substituted with Marcus Galt. None of the
defendants have been served with this complaint. It is expected that these cases
will be consolidated.
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 defendants have been served with the complaint in this case but
have not yet responded to the complaint. The time for the defendants to respond
has been extended. The timing for a response will be determined based on
discussions between counsel for plaintiffs and defendants, but a response is not
expected to take place for at least one or more months. On February 6, 1998, a
virtually identical complaint was also filed by Jess Colvin. None of the
defendants have been served with this complaint. It is expected that these cases
will be consolidated.
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.
-40-
<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 Monday, April 27, 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 March 16, 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
-41-
<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.
ALL SHAREHOLDERS ARE URGED TO SIGN, DATE AND MAIL THEIR PROXY CARDS
PROMPTLY. IF NO DIRECTION IS MADE, ALL PROXIES WILL BE VOTED FOR EACH OF THE
PROPOSALS.
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<PAGE>
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
1998
First Quarter (through March 13, 1998)...................................................... $ 48.56 $ 43.38 $ .110
</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 March 13, 1998, the closing price of the Common Shares
was $48.56 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.
-43-
<PAGE>
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 $0.11 per Common Share and Series A
Common Shares on a quarterly basis, or $0.44 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 $0.50 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 $0.33 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
$0.11 per share. The total of this rate and the Telecom Equivalent Dividend Rate
is equal to $0.44 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.
-44-
<PAGE>
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, 1997. The information for each of the five years ended December 31,
1997 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."
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating Revenues (1)........................................ $1,471,533 $1,179,857 $ 942,307 $ 726,036 $ 553,829
Operating Income (Loss)....................................... (3,702) 153,448 131,998 108,822 69,733
Other Income.................................................. 113,979 141,190 103,857 33,686 28,126
Interest Expense.............................................. 89,744 42,853 50,848 41,251 37,466
Income Taxes.................................................. 28,559 123,646 81,029 40,713 26,497
Net Income (Loss) Before
Cumulative Effect of Accounting Change...................... (9,549) 128,139 103,978 60,544 33,896
Cumulative Effect of Accounting Change (2).................... -- -- -- (723) --
Net Income (Loss)............................................. (9,549) 128,139 103,978 59,821 33,896
Net Income (Loss) Available to Common......................... $ (11,441) $ 126,182 $ 101,469 $ 57,362 $ 31,510
Weighted Average Common Shares (000s)......................... 60,211 60,464 57,456 53,295 46,995
Earnings Per Common Share--Basic:
Before Cumulative Effect of Accounting Change............... $ (.19) $ 2.09 $ 1.77 $ 1.09 $ 0.67
Net Income (Loss)........................................... $ (.19) $ 2.09 $ 1.77 $ 1.08 $ 0.67
Earnings Per Common Share--Diluted:
Before Cumulative Effect of Accounting Change............... $ (.19) $ 2.07 $ 1.74 $ 1.08 $ .67
Net Income (Loss)........................................... $ (.19) $ 2.07 $ 1.74 $ 1.06 $ .67
Dividends Per Common and Series A Common Share................ $ .42 $ .40 $ .38 $ .36 $ .34
OTHER DATA:
Capital Expenditures.......................................... $ 786,317 $ 550,204 $ 359,996 $ 319,701 $ 200,984
BALANCE SHEET DATA:
Cash and Cash Equivalents and Temporary Investments........... $ 75,567 $ 119,297 $ 80,851 $ 44,566 $ 73,385
Property, Plant and Equipment (Net)........................... 2,465,653 1,828,889 1,293,410 1,063,656 846,089
Total Assets.................................................. 4,971,601 4,200,969 3,469,082 2,790,127 2,259,182
Notes Payable................................................. 527,587 160,537 184,320 98,608 6,309
Long-term Debt (including current portion)(3)................. 1,279,034 1,018,851 894,584 562,165 537,566
Redeemable Preferred Shares (including current portion)....... 1,479 1,858 15,093 25,001 27,367
Common Stockholders' Equity................................... $1,968,119 $2,032,941 $1,684,365 $1,473,038 $1,224,285
</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.
(3) Long-term Debt does not reflect $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 February 10, 1998.
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<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, 1997. The information for each of the five years ended December 31,
1997 has been derived from the audited Financial Statements contained in Annex
II and other financial information.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING FINANCIAL DATA:
Operating Revenues(1)(2)................................... $ 876,965 $ 680,068 $ 480,316 $ 327,630 $ 210,344
Operating Income (Loss).................................... 129,543 87,366 42,755 17,385 (8,656)
Other Income............................................... 95,306 177,314 116,766 25,808 19,097
Interest Expense........................................... 29,362 23,111 27,287 21,883 33,190
Income Taxes............................................... 83,948 111,640 32,492 4,917 2,692
Net Income (Loss).......................................... $ 111,539 $ 129,929 $ 99,742 $ 16,393 $ (25,441)
OTHER DATA:
Capital Expenditures....................................... $ 318,748 $ 248,123 $ 206,182 $ 168,095 $ 90,328
BALANCE SHEET DATA:
Cash and Cash Equivalents and Temporary Investments........ $ 13,851 $ 14,377 $ 38,404 $ 5,800 $ 6,274
Property, Plant and Equipment (Net)........................ 940,253 650,754 530,027 368,181 246,414
Total Assets............................................... 2,508,916 2,085,899 1,880,144 1,534,787 1,245,396
Notes Payable.............................................. 1,302 1,375 1,375 637 --
Long-term Debt (including current portion)................. 515,330 353,761 355,748 302,218 204,455
United States Cellular Group Equity........................ $ 1,629,320 $ 1,476,202 $ 1,329,454 $ 1,093,967 $ 940,128
</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. 1993 amounts have been reclassified to conform to 1994
presentation.
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<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, 1997. The information for each of the five years ended December 31,
1997 has been derived from the audited Financial Statements contained in Annex
III and other financial information.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating Revenue............................................. $ 444,203 $ 395,602 $ 354,841 $ 306,341 $ 268,122
Operating Income.............................................. 98,613 102,708 98,240 91,605 78,585
Other Income.................................................. 17,529 20,243 20,794 15,254 10,223
Interest Expense.............................................. 63,151 61,572 60,648 50,676 47,016
Income Taxes.................................................. 22,603 25,685 24,231 22,806 16,658
Net Income Before Cumulative Effect of Accounting Change...... 30,388 35,694 34,155 33,377 25,134
Cumulative Effect of Accounting Changes (1)................... -- -- -- (723) --
Net Income.................................................... $ 30,388 $ 35,694 $ 34,155 $ 32,654 $ 25,134
OTHER DATA
Capital Expenditures.......................................... $ 151,460 $ 144,440 $ 104,372 $ 115,483 $ 80,818
BALANCE SHEET DATA
Cash and Cash Equivalents
and Temporary Investments................................... $ 206,239 $ 222,918 $ 215,979 $ 163,267 $ 159,699
PP&E--Net..................................................... 830,767 769,361 659,339 611,450 524,322
Total Assets.................................................. 1,406,048 1,352,929 1,228,232 1,138,242 959,582
Notes Payable................................................. 28,181 25,039 15,784 15,059 12,080
Long-term debt (including current portion).................... 563,374 560,844 536,379 492,946 470,257
Long-term debt--affiliated.................................... 255,302 239,538 233,176 224,742 228,540
TDS Telecommunications Group Equity........................... $ 383,759 $ 343,816 $ 265,387 $ 228,800 $ 107,298
</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.
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<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,
1997. The information for each of the five years ended December 31, 1997 has
been derived from the audited Financial Statements contained in Annex IV and
other financial information.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING FINANCIAL DATA:
Operating Revenues............................................ $ 55,952 $ -- $ -- $ -- $ --
Operating (Loss).............................................. (196,551) -- -- -- --
Investment and Other Income (Expense)......................... (21,635) (36,026) (7,513) (1,975) (63)
Interest Expense, Net......................................... 27,065 2,762 1,051 50 40
Income Tax Expense (Benefit).................................. 1,806 (867) (2,096) (742) (36)
Net (Loss).................................................... $ (247,057) $ (37,921) $ (6,468) $ (1,283) $ (67)
BALANCE SHEET DATA:
Cash and Cash Equivalents..................................... $ 5,012 $ 35,284 $ 261 $ 10 $ 4
Property, Plant and Equipment (Net)........................... 604,104 322,723 12,087 -- --
Investment in PCS Licenses (Net).............................. 297,043 304,354 305,818 20,401 --
Total Assets.................................................. 960,648 672,827 360,444 21,320 512
Long-term Debt (Revolving Credit Agreement--TDS).............. 448,234 -- 60,238 22,659 650
Long-term Debt................................................ 196,439 103,743 -- -- --
Aerial Communications Group Equity (Deficit).................. 192,427 437,785 281,282 (1,444) (161)
Capital Expenditures.......................................... $ 274,709 $ 112,940 $ 12,134 $ -- $ --
</TABLE>
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<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,
1997. The information for each of the five years ended December 31, 1997 has
been derived from the audited Financial Statements contained in Annex V and
other financial information.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Income.................................................... $ 52,968 $ 47,540 $ 22,691 $ 26,052 $ 30,972
Net Income Available to Common and Series A Common Shares..... 51,076 45,583 20,182 23,594 28,586
OTHER DATA:
Cash and Cash Equivalents and Temporary Investments........... $ 11,990 $ 43,798 $ 13,487 $ 7,194 $ 30,527
Working Capital............................................... (611,596) (256,049) (362,086) (231,858) (84,894)
Property, Plant and Equipment, net............................ 90,528 86,051 91,693 84,120 75,485
Total Assets.................................................. 1,519,829 1,079,975 1,006,728 1,038,484 802,280
Notes Payable-Affiliates...................................... 165,686 201,641 186,786 128,530 123,511
Notes Payable-Other(2)........................................ 530,175 159,162 182,625 97,724 6,059
TDS Group Equity.............................................. 602,471 642,005 509,421 683,783 613,607
Capital Expenditures.......................................... $ 41,400 $ 44,560 $ 36,905 $ 37,737 $ 29,267
</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
81.9%-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
February 10, 1998, related to the issuance of Company-Obligated Mandatorily
Redeemable Preferred Securities of a Subsidiary Trust Holding Solely Company
Subordinated Debentures.
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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
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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 particular, the Financial Advisors considered the following financial and
other quantified information to be significant in arriving at their opinions.
In their analysis for the October 31, 1997 board meeting (the "October
Analysis"), the Financial Advisors compared TDS' existing stock price to the sum
of the implied estimated values of its constituent businesses and found a public
market discount of 26% and, assuming that U.S. Cellular or Aerial trade at a
discount to their respective peers solely due to liquidity factors, and if such
liquidity factors were eliminated, a discount of 38%. The Financial Advisors
compared the enterprise value of U.S. Cellular as a multiple of population
equivalents ("POPs"), subscribers, 1997 estimated revenue, last twelve months
operating cash flow, and 1997 and 1998 estimated operating cash flow to that of
several other cellular companies (360 DEG. Communications, Air Touch
Communications, Centennial, CommNet Cellular, Palmer Wireless, Inc., PriCellular
Corporation and Vanguard Cellular) and found that, in all categories (other than
last 12 months operating cash flow) that U.S. Cellular traded at a lower
multiple than the mean and medium for the comparable companies. The Financial
Advisors compared Aerial with Omnipoint Corp. and Powertel Inc. on the basis of
adjusted license value per POP and found that Aerial traded at a discount to
Omnipoint and Powertel in this regard.
The Financial Advisors' October Analysis included a comparison of existing
tracking stocks with peer comparables, a relative liquidity analysis of U.S.
Cellular and Aerial to their industry peers, and a "value pick up" analysis (all
of which were also repeated in December 1997 (with similar results) and are
summarized below). To analyze the implied equity value of TDS Telecom, assumed
EBITDA multiples were applied to the financial forecasts of 1997 EBITDA
(earnings before interest, taxes, depreciation and amortization) for TDS Telecom
($195.8 million).
In both the October Analysis and the analysis for the December 15, 1997
board meeting (the "December Analysis"), the Financial Advisors compared nine
tracking stocks (Pittson Burlington, TCI, Pittston Minerals, US West
Communications, GM-Hughes Electronics, CMS Energy, USX-US Steel, Pittston Brinks
and USX-Marathon) with the common stock of other companies in their industry
groups on the basis of their estimated 1997 price/ earnings ratios and (for
certain industries) as a ratio of enterprise value to last 12-month EBITDA and
concluded they were neither consistently at the bottom nor consistently at the
top of their comparable groups.
In both the October Analysis and the December Analysis, the Financial
Advisors also performed a relative liquidity analysis, in which they compared
the public float of TDS, U.S. Cellular and Aerial with six cellular companies
(Air Touch Communications, 360 DEG. Communications, CommNet Cellular,
PriCellular, Vanguard Cellular and Western Wireless) and two PCS companies
(Omnipoint, Powertel) and developed an indexed liquidity formula for each
company ("ILF"). The ILF compared the percentage of market value traded daily
(1997 year to date) to the ratio of average daily stock price change (1997 year
to date) to average share price (1997 year to date) and found that (indexing TDS
as 1.0) the ILF of U.S. Cellular was 0.31 and Aerial was 0.32 compared to a mean
of 1.27 for the cellular companies (a range of 0.29-3.97) and 0.91 for the PCS
companies (0.46 and 1.35).
The Financial Advisors' December Analysis also performed a comparison of the
per share equity value of the tracking stocks to the existing TDS, U.S. Cellular
and Aerial shares and found an implied potential per share "value pick up" in
each of such shares, assuming, among other things, liquidity improvements and a
20% retained interest.
In addition to the foregoing, the Financial Advisors reviewed certain other
financial and other quantified information, including the Company's budget for
1997 and five-year forecasts. Except as discussed above, such information was
not a significant factor to the Financial Advisors in arriving at their
opinions.
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/
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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 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
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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.
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.
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<PAGE>
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 the 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 December 31, 1997, the
Company, through its subsidiaries, served approximately 3.2 million customer
units in 37 states, including 1,710,000 cellular telephones, 515,500 telephone
access lines, 125,000 PCS telephones, and 811,100 pagers. For the nine months
ended December 31, 1997, cellular telephone operations provided 60% of the
Company's consolidated revenues; telephone operations provided 30%; PCS
operations provided 4%; and paging operations provided 6% 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 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.
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
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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 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
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<PAGE>
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 defendants have been served with the
complaint in this case but have not yet responded to the complaint. The time for
the defendants to respond has been extended. The timing for a response will be
determined based on discussions between counsel for plaintiffs and defendants,
but a response is not expected to take place for at least one or more months. On
January 30, 1998, a virtually identical complaint was also filed by John G.
Guillemont, Trustee of the John G. Guillemont Living Trust, who subsequently
withdrew as plaintiff and was substituted with Marcus Galt. None of the
defendants have been served with this complaint. It is expected that these cases
will be consolidated. 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.
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.
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.
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<PAGE>
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.
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
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<PAGE>
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 $0.50 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 $0.33 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
$0.11 per share. The total of this rate and the Telecom Equivalent Dividend Rate
is equal to $0.44 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 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.
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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.
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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.
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<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 defendants have been served with the complaint in this case but
have not yet responded to the complaint. The time for the defendants to respond
has been extended. The timing for a response will be determined based on
discussions between counsel for plaintiffs and defendants, but a response is not
expected to take place for at least one or more months. On February 6, 1998, a
virtually identical complaint was also filed by Jess Colvin. None of the
defendants have been served with this complaint. It is expected that these cases
will be consolidated. 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.
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.
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<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
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<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 $0.11 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 $0.50 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 $0.33 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 $0.44
per share per annum, as compared to the current annual dividend rate on the
existing Common Shares and Series A Common Shares of $0.44 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>
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<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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<PAGE>
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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<PAGE>
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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<PAGE>
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 $0.11 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 $0.50 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 $0.33 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 $0.44
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
$0.50 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 $0.33 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 $0.11 per share. The total of this rate and the Telecom
Equivalent Dividend Rate is equal to $0.44 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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<PAGE>
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 or without cause by a vote of holders of a majority of the voting
power of 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. In addition, the Delaware Bylaws will also provide that the right
of any group of shareholders to call a meeting may not be amended or eliminated
without approval by a majority of the voting power held by the shareholders in
such voting group.
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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
provides that shareholder action may be taken without a meeting or vote if a
written consent is signed by the holders of outstanding shares having at least
90% of the votes entitled to be cast at a meeting.
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.
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
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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 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
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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."
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THE MERGER. In the opinion of Sidley & Austin, counsel to the Company, for
United States federal income tax purposes:
(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, (i) the Company or its subsidiaries 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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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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 148,876 * *
Series A Common Shares 1,008 * *
LeRoy T. Carlson, Jr.,
C. Theodore Herbert and
Michael G. Hron(4).................................... Common Shares 142,575 * *
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 470 * *
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 861,754 1.6% *
Series A Common Shares 6,424,580 92.6% 52.1%
</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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(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 and the Wireless Companies' Pension Plan. 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 55,125 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.
-133-
<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 10,988,100 20.5% 8.9%
Franklin Mutual Advisers,
Inc. (2)
51 John F. Kennedy
Parkway
Short Hills, New Jersey
07078 Common Shares 5,279,200 9.8% 4.3%
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. 11) filed with the SEC.
Includes shares held by the following affiliates: The Equitable Life
Assurance Society of the United States--4,176,200 shares; Alliance Capital
Management, L.P.--6,782,543 shares; Wood, Struthers & Winthrop Management
Corp.--28,976 shares; and Donaldson Lufkin & Jenrette Securities
Corporation--381 shares. In such Schedule 13G, Equitable reported sole
voting power with respect to 5,644,753 shares, shared voting power with
respect to 5,255,600 shares, sole dispositive power with respect to
10,987,719 shares and shared dispositive power with respect to 381 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. 4).
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.
-134-
<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 $7,000,000, 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. The costs do not include up to
$3,000,000 in contingent fees which may be payable to the Financial Advisors.
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
[SIGNATURE]
Michael G. Hron
SECRETARY
ALL SHAREHOLDERS ARE URGED TO SIGN, DATE AND MAIL THEIR PROXIES PROMPTLY.
-135-
<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, 1997... I-39
Consolidated Financial Statements for Three Years Ended December 31, 1997...... I-58
ANNEX II -- THE CELLULAR GROUP
Description of Cellular Business............................................... II-1
Management's Discussion and Analysis for Three Years Ended December 31, 1997... II-19
Financial Statements for Three Years Ended December 31, 1997................... II-30
ANNEX III -- THE TELECOM GROUP
Description of Telecom Business................................................ III-1
Management's Discussion and Analysis for Three Years Ended December 31, 1997... III-14
Financial Statements for Three Years Ended December 31, 1997................... III-22
ANNEX IV -- THE AERIAL GROUP
Description of Aerial Business................................................. IV-1
Management's Discussion and Analysis for Three Years Ended December 31, 1997... IV-10
Financial Statements for Three Years Ended December 31, 1997................... IV-16
ANNEX V -- THE TDS GROUP
Description of TDS Group....................................................... V-1
Management's Discussion and Analysis for Three Years Ended December 31, 1997... V-8
Financial Statements for Three Years Ended December 31, 1997................... V-16
</TABLE>
-136-
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, dated as of March 6, 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 6th day of
March, 1998.
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC.,
an Iowa corporation
<S> <C> <C> <C>
By: /s/ LEROY T. CARLSON
-------------------------------------------
LeRoy T. Carlson
Chairman
Attest:
By: /s/ MICHAEL G. HRON
-------------------------------------------
Michael G. Hron
Secretary
TELEPHONE AND DATA SYSTEMS, INC.
a Delaware corporation
By: /s/ LEROY T. CARLSON, JR.
-------------------------------------------
LeRoy T. Carlson, Jr.
President
Attest:
By: /s/ MICHAEL G. HRON
-------------------------------------------
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(1) $.01 par value
Preferred Shares See below 326,664(1) $.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(1)
- --------- -----------------
<S> <C>
A 1,395
B 1,955
D 646
G 1,368
H 1,188
N 3,134
</TABLE>
- ------------
(1) Based on shares outstanding as of November 30, 1997. To be revised based
on shares prior to filing.
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>
NO. OF
SERIES SHARES(1)
- --------- ---------------
<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 number of shares which shall represent 100% of the equity of the
related Tracking Group, 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
- ---------
(1) Based on shares outstanding as of November 30, 1997. To be revised based on
shares prior to filing.
B-2
<PAGE>
Common, Cellular Group Common, Telecom Group Common, Aerial Group Common,
Undesignated and Preferred Shares are:
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
B-3
<PAGE>
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 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
B-4
<PAGE>
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 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.
B-5
<PAGE>
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
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
B-6
<PAGE>
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 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
B-7
<PAGE>
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 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
B-8
<PAGE>
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 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).
B-9
<PAGE>
(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) 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
B-10
<PAGE>
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.
(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
B-11
<PAGE>
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 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
B-12
<PAGE>
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
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.
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<PAGE>
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 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
B-14
<PAGE>
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 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.
B-15
<PAGE>
(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 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.
B-16
<PAGE>
(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
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-17
<PAGE>
(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:
(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.
B-18
<PAGE>
(h) 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 ninety percent
of the voting power of the 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.
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 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.
B-19
<PAGE>
"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.
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;
B-20
<PAGE>
(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 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
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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;
(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.
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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.
"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.
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<PAGE>
"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.
"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:
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<PAGE>
(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
(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
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<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 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.
"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.
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<PAGE>
"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:
(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
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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);
(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.
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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.
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
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<PAGE>
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 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
or without 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.
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
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<PAGE>
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.
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 sections 242 and 245 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>
B-31
<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.
BI-1
<PAGE>
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.
BI-2
<PAGE>
(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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<PAGE>
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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(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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(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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
(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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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(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
BI-37
<PAGE>
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-
BI-38
<PAGE>
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.
* * * * * * * *
BI-39
<PAGE>
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").
C1-1
<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.
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
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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.
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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.
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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
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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.
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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.
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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
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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.
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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
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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
F-7
<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
F-8
<PAGE>
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.
F-9
<PAGE>
EXHIBIT G
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ---------------------------------------------------------------------------------------------------------------------- -----------
<S> <C>
Adjusted Outstanding Interest Fraction 119
Adjustment Date 120
Aerial 120
Aerial Group 120
Aerial Group Shares 5
Aerial Merger 120
Affected Tracking Group 120
Affected Tracking Stock 120
AMEX 120
Articles 73
Available Dividend Amount 120
Board 120
C.S. First Boston 58
Calculation Period 85
Cellular Business 63
Cellular Group 120
Cellular Group Shares ii
Committed Acquisition Shares 121
Committee 128
Common Share DRIP 119
Common Shares 121
Common Stock 121
Communications Act 82
Company 121
Company Earning (Loss) 121
Converted Tracking Group 94
Converted Tracking Stock 121
Convertible Securities 121
Delaware Common Shares 50
Delaware Preferred Shares 50
Delaware Series A Common Shares 50
Delaware Shares 50
Derivative Action 113
DGCL 121
Disposition 121
Disposition Conversion Percentage 23
Distribution 121
Distribution Ratio 127
Effective Time 50
Equity Market Access 58
Exchange Act 118
Existing Plans 127
Fair Market Value 82
Fair Value of Net Proceeds 121
FCC 82
Financial Advisors 58
Group 122
IBCA 122
Inter-Group Interest 122
Inter-Group Interest Fraction 122
Inter-Group Interest in Issuer Group 102
Investor Group 122
</TABLE>
G-1
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---------------------------------------------------------------------------------------------------------------------- -----------
<S> <C>
Iowa Common Shares 50
Iowa Preferred Shares 50
Iowa Series A Common Shares 50
Iowa Shares 50
ISO 128
Issuer Group 122
Issuer Group Inter-Group Interest Fraction 104
Issuer Group Outstanding Interest Fraction 104
Issuer Group Shares 102
Liquidation Unit 122
Market Capitalization 122
Market Value 122
Merger 123
Merger Agreement 123
Non-U.S. Shareholder 116
Number of Shares Issuable with Respect to Inter-Group Interest 123
Number of Shares Issuable with Respect to Retained Interest 123
Number of Shares Issuable to Third Parties 124
One-Vote Holders 84
Optional Conversion Percentage 94
Outstanding Interest 124
Outstanding Interest Fraction 124
PCS 62
PCS Business 68
Plan 128
Plan Stock 128
Pre-Distribution Convertible Securities 124
Preferred Shares 124
Proposed Common Equity 58
Proxy Statement/Prospectus 1
Public Holders 16
Qualifying Subsidiary 126
Recapitalization 58
Registration Statement 1
Related Business Transaction 125
Required Price 82
Reserved Property 91
Restated Certificate 125
Retained Interest 125
Retained Interest Available Dividend Amount 125
Retained Interest Fraction 125
Salomon Smith Barney 58
SAR 128
SEC 1
Securities Act 1
Series A Common Shares 125
Series A DRIP 119
Series A Holders 7
Service 117
Shares Issuable to Third Parties 125
Special Common Shares 50
Special Meeting 1
Subsidiary 125
Successor 90
TDS 125
TDS Delaware 125
</TABLE>
G-2
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---------------------------------------------------------------------------------------------------------------------- -----------
<S> <C>
TDS Group 125
TDS Group Dividend Rate 78
TDS Group Shares 126
TDS Iowa 125
TDS Telecom 126
TDS Voting Trust 126
Telecom Business 65
Telecom DRIP 119
Telecom Equivalent Dividend Rate 44
Telecom Group Shares 5
Telecom Public Offering 6
Telecom Group 126
Tracking Group 126
Tracking Stock 126
Tracking Stock Proposal 126
Trading Day 126
Transactions 126
Undesignated Shares 126
U. S. Cellular 126
U. S. Cellular Merger 126
Voting Percentage 84
</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 December 31, 1997, the Company served
approximately 3.2 million customer units in 37 states, including 1,710,000
cellular telephones, 515,500 telephone access lines, 125,000 PCS telephones and
811,100 pagers. For the year ended December 31, 1997, cellular operations
provided 60% of the Company's consolidated revenues; telephone operations
provided 30%; PCS operations provided 4%; and paging operations provided 6%. 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 81%-owned subsidiary, United States Cellular Corporation [AMEX: USM]. At
December 31, 1997, U.S. Cellular provided cellular telephone service to
1,710,000 customers through 134 majority-owned and managed ("consolidated")
cellular systems serving approximately 16% of the geography and approximately 9%
of the population of the United States. Since 1985, when U.S. Cellular began
providing cellular service in Knoxville, Tennessee, U.S. Cellular has expanded
its cellular networks and customer service operations to cover 143 managed
markets in 26 states as of December 31, 1997. In total, the Company operated
eight market clusters, of which four had a total population of more than two
million, and each of which had a total population of more than one million.
Overall, 86% of the Company's 26.2 million population equivalents were in
markets which were consolidated, 2% were in managed but not consolidated markets
and 12% were 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").
At December 31, 1997, TDS Telecom operated 106 telephone companies serving
515,500 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 18
telephone companies and divested one telephone company since the beginning of
1993. These net acquisitions added 89,600 access lines during this five-year
period, while internal growth added 104,200 lines.
The Company conducts substantially all of its broadband personal
communications services ("PCS") operations through its 83%-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 125,000 PCS
telephones as of December 31, 1997.
The Company conducts substantially all of its radio paging operations
through its 82%-owned subsidiary, American Paging, Inc. [AMEX: APP]. American
Paging offers radio paging and related services through its subsidiaries. Since
the beginning of 1993, the number of pagers in service increased from 322,200 to
811,100 at December 31, 1997, primarily from internal growth. American Paging
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 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
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Communications Services ("PCS") markets; (x) references to "population
equivalents" mean the population of a market, based on 1997 Claritas 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 1,710,000 customers through 134
majority-owned and managed cellular systems at December 31, 1997. Overall, U.S.
Cellular owned 26.2 million population equivalents in 192 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 operators to complete initial deployment
of PCS in portions of all of its market clusters by the end of 1998.
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 of 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 may be 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
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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, on
certain cellular systems 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 portions of several
clusters. Another digital technology, Code Division Multiple Access ("CDMA"), is
being deployed by U.S. Cellular in portions of certain clusters. 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 is continuing on an industry-wide basis; however this process is
expected to take a number of years. PCS operators have deployed TDMA, CDMA and a
third digital technology, Global Systems for Mobile Communications ("GSM"), in
the markets where they have begun operations.
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. During 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.
During the past four years, U.S. Cellular has generated operations-driven net
income and has significantly increased its operating cash flows during that
time. Management anticipates further 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 the last
four years, 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: Wisconsin/Illinois/Indiana, Iowa/Missouri,
Eastern North Carolina/South Carolina, West Virginia/Maryland/Pennsylvania/Ohio,
Virginia, Washington/Oregon/Idaho, Oregon/California, Maine/New
Hampshire/Vermont, Florida/Georgia, Oklahoma/Missouri/Kansas, Texas/Oklahoma,
Eastern Tennessee/Western North Carolina, 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.
Including acquisitions of cellular interests from TDS, U.S. Cellular has
increased its population equivalents by 17% from approximately 22.5 million at
December 31, 1992, to approximately 26.2 million at December 31, 1997.
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Markets managed by U.S. Cellular have increased from 116 markets at December 31,
1992, to 143 markets at December 31, 1997. As of December 31, 1997, 88% of U.S.
Cellular's population equivalents represented interests in markets it manages
compared to 75% 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 just 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 1997, U.S. Cellular, or TDS for the benefit
of U.S. Cellular, purchased majority interests in two markets and several
additional minority interests, representing approximately 534,000 population
equivalents. The total consideration paid for these purchases, primarily in the
form of cash and TDS Common Shares totaled $81.4 million.
During 1997, U.S. Cellular completed the divestiture of majority interests
in one market plus one market partition and minority interests in two other
markets, representing approximately 358,000 population equivalents, for an
aggregate consideration of $54.5 million in cash and receivables. 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.
Also during 1997, U.S. Cellular completed an exchange with BellSouth
Corporation ("BellSouth"). Pursuant to the exchange, U.S. Cellular received
majority interests representing approximately 4.0 million pops in exchange for
majority interests representing 2.0 million pops, minority interests
representing 1.2 million pops and a net amount of $86.7 million in cash. The
majority interests U.S. Cellular received are in 12 markets adjacent to its
Iowa/Missouri and Wisconsin/Illinois/Indiana clusters.
PENDING ACQUISITIONS. At December 31, 1997, U.S. Cellular had entered into
agreements to acquire a majority interest in one market and a minority interest
in a market in which the U.S. Cellular owns a majority interest, representing
410,000 population equivalents, for $51.3 million in cash. If the majority
interest is acquired as expected, U.S. Cellular will subsequently sell that
interest to BellSouth for cash.
PENDING DIVESTITURES. At December 31, 1997, U.S. Cellular and TDS had
entered into agreements with Airtouch Communications, Inc. ("AirTouch") to
divest minority interests in 11 markets, representing approximately 900,000
population equivalents. AirTouch will issue approximately 4.0 million shares of
its common stock and $54.2 million in cash for minority interests in nine
markets held by U.S. Cellular and approximately 1.0 million shares of its common
stock for minority interests in two markets held by TDS.
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Additionally, U.S. Cellular has entered into an agreement to sell its
minority interests in two other markets representing 176,000 population
equivalents, for $37.6 million in cash. The sales are expected to be completed
during the first half of 1998. Management anticipates that it will record
significant book gains on these divestitures when the transactions are
completed.
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.
U.S. Cellular is a majority-owned subsidiary of TDS. TDS owns 81% of the
combined total of the outstanding Common Shares and Series A Common Shares of
U.S. Cellular and controls 96% of the combined voting power of both classes of
common stock. U.S. Cellular benefits from the extensive telecommunications
industry experience of TDS, which also operates telephone and paging businesses
and is developing its PCS business.
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
do not fit well with its long-term strategies.
U.S. Cellular owned interests in cellular telephone systems in 192 markets
at December 31, 1997, representing 26.2 million population equivalents.
Including the 11 interests to be sold during 1998, U.S. Cellular owned or had
the right to acquire 181 markets, representing 25.3 million population
equivalents, at December 31, 1997. 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,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(THOUSANDS OF POPULATION EQUIVALENTS)(1)
<S> <C> <C> <C> <C> <C>
Operational Markets:
Majority-Owned and Managed.............................................. 22,778 20,389 20,104 18,829 19,086
Minority-Owned and Managed (2).......................................... 401 401 514 1,234 1,263
Markets to be Managed, Net of Markets to be Divested: (3)
To Be Majority-Owned ................................................. -- 216 273 2,220 1,035
To Be Minority-Owned (2).............................................. -- -- -- -- 6
--------- --------- --------- --------- ---------
Total Markets Managed and to be Managed............................... 23,179 21,006 20,891 22,283 21,390
Minority Interest in Markets Managed by Others.......................... 2,121 4,511 4,026 3,779 3,577
--------- --------- --------- --------- ---------
Total................................................................. 25,300 25,517 24,917 26,062 24,967
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------
(1) Based on 1997 Claritas 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 December 31, 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
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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.
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 owned or had the right to acquire
pursuant to definitive agreements as of December 31, 1997.
<TABLE>
<CAPTION>
TOTAL CURRENT
AND
ACQUIRABLE
1997 POPULATION
CLUSTER/MAJOR SERVICE AREA POPULATION EQUIVALENTS
- ------------------------------------------------------------------------------------------------ ------------- -------------
<S> <C> <C>
MIDWEST REGIONAL MARKET CLUSTER:
Wisconsin/Illinois/Indiana.................................................................... 6,080,000 5,754,000
Iowa/Missouri................................................................................. 3,424,000 3,207,000
------------- -------------
Total Midwest Regional Market Cluster....................................................... 9,504,000 8,961,000
------------- -------------
MID-ATLANTIC REGIONAL MARKET CLUSTER:
Eastern North Carolina/South Carolina......................................................... 2,379,000 2,349,000
West Virginia/Maryland/Pennsylvania/Ohio...................................................... 1,387,000 1,260,000
Virginia...................................................................................... 1,152,000 1,144,000
------------- -------------
Total Mid-Atlantic Regional Market Cluster.................................................. 4,918,000 4,753,000
------------- -------------
NORTHWEST REGIONAL MARKET CLUSTER:
Washington/Oregon/Idaho....................................................................... 1,482,000 1,266,000
Oregon/California............................................................................. 1,038,000 964,000
------------- -------------
Total Northwest Regional Market Cluster..................................................... 2,520,000 2,230,000
------------- -------------
MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER:..................................................... 1,688,000 1,631,000
------------- -------------
FLORIDA/GEORGIA MARKET CLUSTER:................................................................. 1,539,000 1,539,000
------------- -------------
TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET CLUSTER:
Oklahoma/Missouri/Kansas...................................................................... 1,420,000 879,000
Texas/Oklahoma................................................................................ 695,000 495,000
------------- -------------
Total Texas/Oklahoma/Missouri/Kansas Regional Market Cluster:............................... 2,115,000 1,374,000
------------- -------------
EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET CLUSTER:........................................ 1,623,000 1,308,000
SOUTHWESTERN TEXAS MARKET CLUSTER:.............................................................. 1,254,000 1,243,000
------------- -------------
Other Operations:............................................................................... 140,000 140,000
------------- -------------
Total Managed Markets........................................................................... 25,301,000 23,179,000
Markets Managed by Others....................................................................... 2,121,000
-------------
Total Population Equivalents.................................................................... 25,300,000
-------------
-------------
</TABLE>
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
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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, Airtouch/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.
U.S. Cellular plans to integrate the systems in the markets acquired in the
exchange with BellSouth into its internal network as quickly as possible. This
may involve changing out certain system equipment and replacing it with new
equipment which will allow for more efficient networking.
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.
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. In recent years, these funding requirements
have been met with cash generated from operations, proceeds from debt and equity
offerings and proceeds from the sales of cellular interests.
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, including 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
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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
260 stand-alone retail stores by December 31, 1997. These U.S. Cellular-owned
and operated businesses utilize rental facilities in high-traffic areas. U.S.
Cellular has implemented a uniform appearance in 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 other larger
merchandisers and grocery stores. At December 31, 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.
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 some 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 103 minutes per unit each month and generated retail revenue of
approximately $36 per month during 1997, compared to 107 minutes and $40 per
month in 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 $54 during 1997. Average
monthly service revenue per customer unit decreased approximately 15% during
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
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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.
The following table summarizes, by operating cluster, the total population,
U.S. Cellular's customer units and penetration for U.S. Cellular's
majority-owned and managed markets that were operational as of December 31,
1997.
<TABLE>
<CAPTION>
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION
- ----------------------------------------------------------------------------------- ------------- ----------- -------------
<S> <C> <C> <C>
Wisconsin/Illinois/Indiana ........................................................ 5,778,000 452,000 7.82%
Iowa/Missouri...................................................................... 3,154,000 257,000 8.15
Eastern North Carolina/South Carolina ............................................. 2,379,000 124,000 5.21
West Virginia/Maryland/Pennsylvania/Ohio .......................................... 1,138,000 69,000 6.06
Virginia .......................................................................... 1,152,000 70,000 6.08
Washington/Oregon/Idaho ........................................................... 1,380,000 102,000 7.39
Oregon/California ................................................................. 1,038,000 71,000 6.84
Maine/New Hampshire/Vermont ....................................................... 1,688,000 103,000 6.10
Florida/Georgia ................................................................... 1,539,000 115,000 7.47
Oklahoma/Missouri/Kansas .......................................................... 1,420,000 111,000 7.82
Texas/Oklahoma .................................................................... 695,000 46,000 6.62
Eastern Tennessee/Western North Carolina .......................................... 1,279,000 117,000 9.15
Southwestern Texas ................................................................ 1,254,000 56,000 4.47
Other Operations .................................................................. 140,000 17,000 12.14
------------- ----------- -----
24,034,000 1,710,000 7.11%
------------- ----------- -----
------------- ----------- -----
</TABLE>
The following table summarizes certain information about customers and
market penetration in U.S. Cellular's managed operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Majority-owned and managed markets:
Cellular markets in operation (1)........................ 134 131 137 130 116
Total population of markets in service (000s)............ 24,034 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)............................ 941,000 561,000 426,000 250,000 165,300
disconnects during period (2).......................... 304,000 198,000 137,000 90,000 55,100
at end of period (2)................................... 1,710,000 1,073,000 710,000 421,000 261,000
Market penetration at end of period (3).................. 7.11% 4.94% 3.18% 1.98% 1.35%
Consolidated revenues (4).................................. $ 876,965 $ 680,068 $ 480,316 $ 327,630 $ 210,344
Depreciation expense....................................... 97,591 74,631 57,302 39,520 25,665
Amortization expense....................................... 34,788 34,208 32,156 25,934 19,362
Operating income (loss).................................... 129,543 87,366 42,755 17,385 (8,656)
Capital expenditures....................................... 318,748 248,123 210,878 167,164 92,915
Identifiable assets........................................ $ 2,548,909 $2,116,592 $1,890,621 $1,584,142 $1,275,569
</TABLE>
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- ------------
(1) Represents the number of markets in which U.S. Cellular owned at least a 50%
interest and which it managed. 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 (Claritas in 1997).
(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.
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 U.S. Cellular. 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
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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.
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 (cellular towers of less than 10 meters
in height, building mounted antennas and cellular telephones). 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,
the remainder will be brought into compliance as required and that the cellular
telephones it sells comply with the standards.
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
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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 will enable cellular systems to determine
the precise location of persons making emergency calls. 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, will require carriers by April 1998 to be able to identify the
cell from which the call has been made, 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 roaming 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 other parts of 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.
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 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.
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.
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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 constructed
in several other cities across the United States. In 1995, an ESMR provider
initiated service in Tulsa, Oklahoma, where U.S. Cellular operates a cellular
system. 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 complete initial
deployment of PCS in portions of all of U.S. Cellular clusters by the end of
1998.
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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TELEPHONE OPERATIONS
OVERVIEW
The Company's telephone operations are conducted through TDS Telecom. TDS
Telecom provides modern, high-quality telecommunications services to rural and
suburban communities. Through its network of ILECs, TDS Telecom served
approximately 515,500 access lines as of December 31, 1997 and on this basis is
the ninth largest non-Bell local exchange telephone company in the United
States. TDS Telecom's ILEC markets are located in 28 states throughout the
United States.
The table below sets forth, as of December 31, 1997, (i) the eight largest
states of operations of TDS Telecom based on the number of access lines and (ii)
the total number of access lines operated by all of the telephone subsidiaries
of TDS Telecom.
<TABLE>
<CAPTION>
NUMBER OF ACCESS LINES
STATE AT DECEMBER 31, 1997 % OF TOTAL
- ---------------------------------------------------------------------------------------- ------------------------ -----------
<S> <C> <C>
Tennessee............................................................................... 87,910 17.1%
Wisconsin............................................................................... 86,262 16.7
Georgia................................................................................. 37,729 7.3
Minnesota............................................................................... 30,054 5.8
Indiana................................................................................. 26,977 5.2
Alabama................................................................................. 25,535 5.0
Michigan................................................................................ 23,786 4.6
Maine................................................................................... 23,055 4.5
-------- -----
Total for 8 Largest States.......................................................... 341,308 66.2
-------- -----
Other States............................................................................ 174,170 33.8
-------- -----
Total............................................................................. 515,478 100.0%
-------- -----
-------- -----
</TABLE>
TDS Telecom recently began providing telecommunications services as a
competitive local exchange carrier ("CLEC") in Madison, Wisconsin and is
developing CLEC operations in selected additional markets in Wisconsin and
Minnesota. TDS Telecom is also pursuing emerging markets such as data and
Internet services.
TDS Telecom is a wholly owned business unit of TDS, founded in 1968. TDS
Telecom's corporate headquarters are located in Madison, Wisconsin.
TELECOMMUNICATIONS SERVICES MARKET
The market for local telecommunications services has historically consisted
of firms offering traditional landline telephone service along with
complementary services and equipment in a highly regulated environment. TDS
Telecom's ILEC business has traditionally focused primarily on providing service
to rural and suburban areas. TDS Telecom's ILEC markets are geographically
dispersed throughout the United States with a significant concentration in the
Upper Midwest and the Southeast.
The ILEC business of TDS Telecom is being changed by telecommunications
reform legislation, the growth of the Internet and rapid advances in technology.
With the passage of the 1996 Act, competition in the local telecommunications
marketplace is increasing because of the removal of certain state and local
entry barriers and the introduction of ILEC facility interconnection
requirements. These changes will create challenges for TDS Telecom in its
existing ILEC business but will also create growth opportunities for TDS Telecom
in connection with its entry into CLEC markets.
BUSINESS STRATEGY
TDS Telecom has historically produced revenue growth in its ILEC markets by
providing its customers with state-of-the-art telecommunications solutions,
maintaining a high quality of on-going service and selectively acquiring
landline telephone companies. Management believes that TDS Telecom has a number
of advantages as an ILEC, including (i) a modern network substantially upgraded
to provide a variety of Advanced Calling Services, (ii) a strong local presence
and established brand name, (iii) economies of scale not available to smaller
independent operators, (iv) attractive, growing markets and (v) a favorable
regulatory environment which is likely to be less competitive than urban
markets. TDS Telecom intends to: (i) grow and protect TDS Telecom's core local
exchange business, (ii) provide service to targeted CLEC markets by leveraging
its technical and managerial expertise and
I-15
<PAGE>
telecommunications infrastructure from its ILEC's existing operations, (iii)
pursue emerging markets, such as data and Internet services, to become a leading
provider of electronically deliverable products and services in all of its
markets and (iv) enhance profitability through improved operating efficiencies.
GROW CORE ILEC BUSINESS
Management of TDS Telecom believes that the key to growing and protecting
its existing ILEC markets is to continue to build customer loyalty by providing
superior customer service, offering a full range of standardized products and
services not typically available in rural markets and rapidly developing new
data products and services. Management of TDS Telecom maintains a local presence
in each of its ILEC markets in order to provide superior customer service. With
respect to products and services, TDS Telecom offered Advanced Calling Services
to 78% of its customers at December 31, 1997. TDS Telecom increasingly markets
itself to consumers as a single telecommunications provider offering bundled
packages of advanced telecommunications services including local, long distance,
Internet and data services. These service packages will further build brand
equity in the TDS Telecom name. In addition, management of TDS Telecom believes
it can achieve cost economies through selective acquisitions designed to
increase the geographic clustering of TDS Telecom's ILEC markets.
LEVERAGE ILEC STRENGTHS INTO CLEC MARKETS
TDS Telecom is providing CLEC services in certain targeted third-tier cities
which are geographically proximate to existing TDS Telecom facilities and
service areas. Management of TDS Telecom believes that service levels have
deteriorated in certain markets due to a lack of focus by the ILECs thereby
creating an opportunity for TDS Telecom to compete effectively in those markets.
In addition, management of TDS Telecom believes that the smaller size of these
markets may discourage competition from additional CLECs. Through February 28,
1998, TDS Telecom had invested $13 million to install a digital switch and to
construct 54 miles of fiber optic cable in and around Madison, Wisconsin. TDS
Telecom initiated service as a CLEC in Madison in January 1998 and is providing
service to approximately 4,000 business access lines. In addition, TDS Telecom
commenced operations as a CLEC in secondary markets in Minnesota in January
1998, initially as a reseller, through its regional long-distance reseller,
USLink, and is providing service to approximately 3,000 business access lines in
those markets. TDS Telecom intends to initiate service in Appleton and Green
Bay, Wisconsin in mid-1998.
The geographic focus of TDS Telecom's CLEC strategy is designed to leverage
TDS Telecom's existing infrastructure to facilitate early entry into new CLEC
markets and to complement TDS Telecom's ILEC clustering strategy. TDS Telecom
believes that significant synergies exist between its ILEC and CLEC businesses.
TDS Telecom is able to utilize existing resources and business processes that
currently serve ILEC markets in developing and expanding its CLEC operations,
including administrative and financial support, marketing and new product
development support, information technology and systems, and shared network
systems support. These synergies reduce the overall time to market and cost
required for TDS Telecom to expand into its new CLEC markets.
PURSUE EMERGING DATA MARKETS
Data communications is one of the fastest growing segments of the
telecommunications services industry. In light of the growth of the use of the
Internet and rapid introduction of new telecommunications technology, TDS
Telecom intends to offer a full range of data products to its customers,
including Internet access and potentially, ATM, Frame Relay and other products,
if appropriate, in all of its markets, thereby positioning itself as a
full-service data communications service provider. Most of TDS Telecom's data
products are in the early stages of development. TDS Telecom has, however,
developed a LAN wiring business and currently provides Internet access service
to approximately 40,000 customers.
NETWORK INFRASTRUCTURE
TDS Telecom plans to provide its operating telephone companies with the most
advanced central office switching equipment that is economically feasible in
order to offer customers up-to-date services, such as advanced calling services,
high-speed data access and Internet access services. TDS Telecom plans to
provide its customers bundled service offerings and to become a single source
for their telecommunications needs as an Integrated Communications Provider
("ICP"). In furtherance of this objective, in 1997, TDS Telecom continued its
program of enhancing and expanding its service providing network. TDS Telecom
intends to meet competition by providing its customers with high-quality
telecommunications services and building its network to take full advantage of
advanced telecommunications technologies such as Signaling System 7, fiber optic
fed Digital Serving
I-16
<PAGE>
Areas, Integrated Services Digital Network and Advanced Calling Services. The
following table illustrates that TDS Telecom continues to make these advanced
features available to a large majority of its customers:
<TABLE>
<CAPTION>
% EQUIPPED LINES # EQUIPPED LINES
1997 1997
--------------------- ------------------
<S> <C> <C>
Signaling System 7................................................ 86% 478,690
Advanced Calling Services......................................... 86% 478,690
Integrated Services
Digital Network................................................. 68% 378,570
</TABLE>
As TDS Telecom upgrades and expands its network, it is also standardizing
equipment and processes to increase efficiency and has centralized the
monitoring and management of its network to reduce costs and improve service
reliability. Strategic alliances with Lucent Technologies and Siemens Telecom
Networks to modernize and standardize TDS Telecom's switching platform with the
Lucent 5ESS-2000 and Siemens EWSD switches assisted TDS Telecom in implementing
its 24 hour-a-day/7 day-per-week Network Management Center. The Network
Management Center continuously monitors the network in an effort to proactively
identify and correct network faults prior to any customer impact. By the end of
1998, the Network Management Center is expected to be proactively monitoring
100% of TDS Telecom's network.
TDS Telecom's total 1998 capital budget is $140 million compared to actual
capital expenditures of $151.5 million in 1997 and $144.4 million in 1996.
Financing for the 1998 capital additions will be primarily provided by
internally generated funds and supplemented by federal long-term financing.
ILEC TELEPHONE MARKETS
TDS Telecom's goal is to be a leading provider of electronically deliverable
products in its ILEC markets. According to published sources, TDS Telecom is
currently the ninth largest non-Bell local exchange telephone company in the
United States, based on the number of telephone access lines served. At December
31, 1997, the telephone subsidiaries of TDS Telecom served approximately 515,500
access lines in 28 states. TDS Telecom currently operates over 378 central
office and remote switching centers in its telephone operating areas.
Substantially all of TDS Telecom's access lines are served by digital switching
technology, which, in conjunction with other technologies, allows TDS Telecom to
offer additional premium services to its customers, including call forwarding,
conference calling, caller identification, selective call ringing and call
waiting.
As one of the major independent telephone companies in the United States,
TDS Telecom's ILECs provide both local telephone service and access to the long
distance network for customers in their respective service areas. The ILECs also
provide directory advertising through a contract with another company and
billing and collection services to inter-exchange carriers ("IXCs"). TDS Telecom
provides centralized administrative and support services to field operations
from its corporate offices in Madison, Wisconsin.
The following table summarizes certain information regarding TDS Telecom's
telephone operations:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Telephone Operations
Access lines(1)....................................... 515,500 484,500 425,900 392,500 356,200
% Residential......................................... 78.3% 79.9% 80.6% 81.3% 82.0%
% Business (nonresidential)........................... 21.7% 20.1% 19.4% 18.7% 18.0%
Total Revenues........................................ $ 444,203 $ 395,602 $ 354,841 $ 306,341 $ 268,122
% Local service....................................... 27.7% 27.9% 26.8% 26.8% 26.9%
% Network access and long-distance.................... 53.1% 53.9% 55.1% 56.9% 59.3%
% Miscellaneous and other............................. 19.2% 18.2% 18.1% 16.3% 13.8%
Depreciation and amortization expense................. $ 98,066 $ 88,459 $ 77,354 $ 68,878 $ 59,562
Operating income...................................... 98,613 102,708 98,240 91,606 78,585
Construction expenditures............................. 151,460 144,440 104,372 115,483 80,818
Total identifiable assets............................. $ 1,221,463 $ 1,181,084 $ 1,058,241 $ 984,563 $ 829,489
</TABLE>
- ---------
(1) An "access line" is a single or multi-party circuit between the customer's
establishment and the central switching office.
I-17
<PAGE>
RETAIL MARKETS
TDS Telecom's existing ILEC business consists of two major customer focused
organizations addressing the retail and wholesale marketplace for its services.
The Retail Markets Group focuses on TDS Telecom's retail customers and is
comprised of TDS Telecom's 106 operating companies. The Retail Markets Group
serves a mix of rural and suburban customers, with a significant geographic
concentration in the Upper Midwest and Southeast. Approximately 78% of TDS
Telecom's retail customers are residential and approximately 22% are businesses,
most of which are of the small business or small office/home office segments.
The Retail Markets Group has identified three primary goals to grow and protect
its existing ILEC business: (i) build customer loyalty, (ii) develop revenue
growth, and (iii) implement cost control. Management of TDS Telecom believes it
can achieve these goals by offering bundled services to its customers, by
building brand equity in the TDS Telecom brand name, and by providing superior
customer service to its retail customers. In addition, TDS Telecom will continue
to standardize operations, improve cost controls and selectively invest in
network facilities in order to enhance efficiency and reduce costs.
BUNDLED SERVICE OFFERINGS. Management of TDS Telecom believes that its
consumer and business customers have a strong preference to purchase all of
their telecommunications services from a single provider. TDS Telecom believes
that by offering a full complement of telecommunications services and bundling
those services in customer-friendly packages it can build customer loyalty and
reduce customer churn. Implementing a full-service strategy requires TDS Telecom
to combine the services of its network with the products and services of
carefully selected strategic partners. TDS Telecom plans to pursue such
relationships to develop the long distance, video, and wireless components of
its product mix.
BRAND EQUITY. In 1996, TDS Telecom adopted the TDS Telecom name as a
unified brand name across its ILEC markets to build its brand image. Prior to
1996, the local identity of each operating company enjoyed a higher profile than
TDS Telecom. TDS Telecom has subsequently implemented a customer awareness
campaign to build brand awareness of the TDS Telecom name. For example, all
bills now contain the TDS Telecom name and all customer checks are made payable
to TDS Telecom. The change in branding has been reinforced by a comprehensive
media campaign that includes television, radio, newspaper, bill inserts and
direct mail advertising. Management of TDS Telecom believes that branding will
increase the loyalty of its customers and also reduce expenses through more cost
effective marketing.
CUSTOMER SERVICE. TDS Telecom maintains a local business office in each of
its ILEC markets to ensure high levels of customer service. Management believes
that its community-based business offices offering full-service, face-to-face
customer service are a fundamental competitive advantage for TDS Telecom. To
further TDS Telecom's goal of enhancing service to its customers, TDS Telecom is
implementing a VBO initiative. The VBO builds on TDS Telecom's current community
oriented customer service by linking business offices through technology,
standardizing processes, expanding hours of operations, and providing management
information on operations and service quality. VBO technology will be deployed
across TDS Telecom's business offices to enable multiple local business offices
to perform customer sales and service functions as if they were one "virtual"
office in the eyes of the customer. Unlike traditional call centers where
service representatives and technology are centrally located, the VBO
environment distributes call center technology to the individual business
offices enabling customer service representatives to remain in their local
communities.
WHOLESALE MARKETS
The Wholesale Markets Group focuses on TDS Telecom's wholesale customers and
has traditionally provided a majority of TDS Telecom's revenues. TDS Telecom
receives much of its ILEC revenue from the sale of traditional wholesale
services, such as access charges and billing and collections services. As a
result, TDS Telecom continues to provide a high level of service to traditional
wholesale customers such as AT&T, MCI, Sprint and the RBOCs.
TDS Telecom intends to grow its wholesale business by pursuing opportunities
created by the 1996 Act. TDS Telecom plans to expand into new wholesale groups
by targeting two groups of customers. First, TDS Telecom will provide new
entrants to markets, such as CLECs and PCS carriers, with access to the public
network, as well as dedicated services. Second, TDS Telecom will supply existing
businesses such as cable television providers, electric utilities and long
distance resellers with network services needed to complement their existing
assets. TDS Telecom also intends to pursue other wholesale opportunities, such
as network management and Internet access, as demand for those services
increases.
I-18
<PAGE>
The primary source of TDS Telecom's wholesale business revenues are 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 on the capital allocated to such
services. Access revenues account for approximately 57% of the revenue generated
by TDS Telecom's ILEC subsidiaries.
TDS Telecom's ILECs participate in the National Exchange Carrier Association
("NECA") interstate common line and traffic sensitive tariffs for all but one
portion of one ILEC's interstate access. 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 access rates and other matters relating to
interstate telephone service. On May 16, 1997, the FCC released an order on
access reform. This order applies primarily to price cap local exchange carriers
("LECs"). However, non-price cap companies, such as TDS Telecom, were also
affected in certain areas by this order. The FCC is expected to release an order
on access charge reform for non-price cap companies in mid-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 interstate services 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 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 up in the new
federal and state universal service mechanisms, the Telecom Group may seek rate
increases in local service rates to offset any reductions in interstate
revenues.
Where applicable and subject to state regulatory approval, TDS Telecom's
ILEC subsidiaries utilize intrastate access tariffs and participate in
intrastate revenue pools. However, many intrastate toll revenue pooling
arrangements, historically 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. Some states are utilizing a state high cost
fund to offset access charge reductions. Given the many regulatory issues still
unresolved, TDS Telecom cannot predict the cumulative nature or extent of
impacts from federal and state regulatory reform.
TELEPHONE ACQUISITIONS
TDS and TDS Telecom continually review attractive opportunities to acquire
operating telephone companies. Since January 1, 1993, TDS has acquired 17
telephone companies serving a total of 89,600 access lines for an aggregate
consideration totaling $188.0 million, all of which were attributed to TDS
Telecom. During the past five years, TDS acquired one telephone company in 1997
serving 3,200 access lines, five telephone companies in 1996 serving an
aggregate of 33,100 access lines, four telephone companies in 1995 serving an
aggregate of 13,500 access lines, three telephone companies in 1994 serving an
aggregate of 19,700 access lines and four telephone companies in 1993 serving an
aggregate of 20,100 access lines. Recently, TDS Telecom has modified its
acquisition strategy to focus on geographic clustering of telephone companies to
achieve cost economies and to complement TDS Telecom's growth strategy.
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 companies 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 finance; accounting and treasury
services; marketing; customer service; traffic; network management; engineering
and construction; customer billing; rate administration; credit and collection;
and the development of administrative and procedural practices.
I-19
<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"), each of
which is an agency 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 (6.01% for a 35-year note at December 31, 1997).
Substantially all of TDS Telecom's telephone plant is pledged under, or is
otherwise 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 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 entire amount
above 40% net worth to total assets can be distributed. The majority of TDS
Telecom's telephone subsidiaries exceed this percentage.
At December 31, 1997, TDS Telecom's operating telephone companies had
unadvanced loan commitments under the RUS, RTB and FFB loan programs aggregating
approximately $112.0 million, at a weighted average annual interest rate of
5.71%, to finance specific construction activities in 1998 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 government
loan programs will continue to be available or that these applications will be
accepted or what the terms or interest rates of any future loan commitments will
be.
FEDERAL AND STATE SUPPORT MECHANISMS
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 ILEC subsidiaries provide telephone
service in rural areas and all of them offer service to low-income customers.
The 1996 Act codified universal service goals and support; 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 an 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 ILECs will continue to receive support based on
their actual costs through December 31, 2000. After December 31, 2000, rural
ILECs will transition to the use of proxy cost models over an additional
three-year period. To date, management of TDS Telecom believes that no proxy
cost models have proven to provide sufficient and predictable revenue support
for the provision of universal service by rural ILECs. The FCC has not adopted
any proxy cost model for rural ILECs. Both petitions for review and judicial
appeals of portions of the FCC's universal service rules and policies remain
pending, and Congress legislated a requirement for the FCC to report on its
implementation of universal service in its appropriations legislation.
The FCC's order also mandated that all telecommunications providers
contribute to the universal service fund beginning January 1, 1998. However, the
order allows ILECs 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 ILEC 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 decreases, TDS Telecom's ILEC subsidiaries
may pursue local service rate increases to recover the difference.
I-20
<PAGE>
Historically, 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 could affect TDS's and TDS Telecom's acquisition and
investment strategy.
CLEC TELEPHONE MARKETS
The 1996 Act facilitates entry of TDS Telecom into new markets by requiring
non-exempted ILECs (e.g., RBOCs, GTE and other-ILECs, based on state regulators'
determinations) to provide reasonable and non-discriminatory interconnection
services and access to unbundled network elements to any CLEC that seeks to
enter the markets in which the ILEC already offers services. TDS Telecom,
through TDS METROCOM, a wholly-owned subsidiary of TDS Telecom, has targeted
certain third-tier cities, geographically proximate to existing TDS Telecom
facilities and service areas, for facilities-based entry as a CLEC. Management
of TDS Telecom believes that the size of the target markets will sustain one or
two facilities-based competitors in addition to the ILEC. While additional
competitors may enter such markets as resellers, TDS Telecom believes
facility-based CLECs will have a long-run cost advantage, establish a barrier to
entry and enable an alternative wholesale strategy for growth. To this end, TDS
Telecom plans to build fiber-ring, switching and other network facilities in its
targeted CLEC markets. TDS Telecom plans to follow a "clustering" approach to
building its CLECs which will allow it to seek regional long distance traffic,
share service and repair resources, and realize marketing efficiencies. As in
its ILEC markets, TDS Telecom intends to become an ICP in its CLEC markets. TDS
Telecom will provide local, long-distance, Internet access and other services
through its own facilities and via resale. TDS Telecom also intends to resell
mobile services in many markets.
TDS Telecom's first CLEC in Madison, Wisconsin became operational in January
1998. The Madison CLEC is a facilities-based, full-service alternative to
Madison's existing ILECs, Ameritech and Mid-Plains Telephone Companies,
providing both voice and data services to commercial and consumer accounts, as
well as wholesale services to IXCs and other carriers. While TDS Telecom is
beginning its CLEC venture in its Madison and Minnesota markets, it plans to
expand operations to Appleton and Green Bay, Wisconsin. As of December 31, 1997,
TDS Telecom has invested $12 million in constructing its facilities in the
Madison market and plans to invest $18 million during 1998.
The CLEC strategy will place primary emphasis on small and medium-sized
commercial and wholesale customers such as IXCs, Internet Service Providers
("ISPs") and cellular, paging and PCS companies. TDS Telecom expects to pursue
consumer markets approximately six months after the CLEC enters the commercial
market. Wholesale customers purchase transmission capacity and access services
from CLECs. These services will be available to wholesale customers shortly
after network completion. TDS Telecom believes that these customers are
generally more sophisticated and are more likely to switch providers to obtain
network reliability, redundancy and more flexible pricing. Medium-sized
commercial prospects are characterized by above-average access line-to-employee
ratios, heavier utilization of data services, and a focus on using
telecommunications for business improvement rather than by concerns for cost
reduction. These companies are generally growth-oriented and may be underserved
by the ILEC or major IXCs. TDS Telecom will pursue a personal selling approach
for its primary target markets. This approach builds on customer preference for
integrated communication services and the customer's perception that the quality
of the product is in the personalized service.
While the CLEC is positioning itself as a high-quality provider, it expects
price competition from the ILECs as they attempt to retain and regain their
customers. The CLEC will seek to maintain an efficient cost structure to ensure
it can match price-based initiatives from competitors. TDS Telecom expects to be
more flexible in responding to customer needs than its ILEC competitors. To
effectively compete in this new environment, TDS Telecom will enhance its
efforts at product development to provide high-quality, cutting-edge services to
its customers.
DATA INITIATIVES
In 1997, TDS Telecom continued to expand its investments into data
communications in order to offer a full suite of data products in its CLEC and
many of its ILEC markets. TDS Telecom believes the targeted third-tier markets
present a significant opportunity to market data services as the major carriers
serving these locations have typically underinvested in these markets despite
the growing demand. Switched data communications represent one of the fastest
growing segments of the telecommunications services market. Computer
proliferation, connectivity via local and wide area networks, the Internet and
the emergence of multimedia applications are all driving demand. As a result,
the domestic network infrastructure is strained at both the local and national
levels. TDS Telecom's CLEC initiative will add local capacity in its selected
cities designed to capture this growth.
I-21
<PAGE>
TDS Telecom has developed a LAN wiring business as part of its data services
business. The LAN wiring business provides in-building wiring services to its
customers. TDS Telecom assists its customers in designing and constructing
specialized wiring networks for their business needs. Customers of the LAN
wiring business include traditional in-market business customers of TDS Telecom
and also non-traditional business customers located in ILEC markets not
currently served by TDS Telecom. At December 31, 1997, TDS DATACOM, TDS
Telecom's LAN wiring entity, operated in 14 markets and generated approximately
$6.6 million in revenue for the year then ended.
In furtherance of TDS Telecom's strategy to position itself as a
full-service, networking service provider, it plans to make high-speed Digital
Subscriber Loop ("xDSL") based services available to customers in many of its
ILEC markets. TDS Telecom believes xDSL technology will form the foundation for
new, high-speed data services and applications and is currently conducting
trials of xDSL modems manufactured by several vendors. This technology will be
employed to offer high-speed Internet access as well as high-speed LAN
connectivity. In addition, TDS Telecom plans to develop Frame Relay and ATM
services in select markets. TDSNET, TDS Telecom's ISP, is expanding its existing
business offerings to include web hosting services and customized web content
development. TDSNET expanded its operation in 1997 by adding an additional 13
operating markets to bring its total operating markets to 49. It served
approximately 30,000 customers and generated approximately $4 million in revenue
for the year then ended.
SALES AND MARKETING
TDS Telecom seeks to leverage its networks through sales and marketing
activities targeted at two separate customer groups: retail and wholesale.
Retail customers are composed primarily of residential customers, businesses,
government and institutional telecommunications users. Wholesale customers
consist of IXCs and information service providers such as commercial data
processing service providers and ISPs.
RETAIL MARKETS
COMMERCIAL MARKETS. Businesses account for approximately 22% of TDS
Telecom's access lines. TDS Telecom focuses its business customer marketing on
information-intensive industries such as financial services, health services,
realty, hotels and motels, education and government. TDS Telecom uses its direct
sales force, targeted mailings, and telemarketing to sell products and services
to the commercial markets, which are segmented into tiers based on size and
strategic importance. Different sales and distribution channels are employed for
each segment. Specific account executives focus on the most profitable
commercial customers by staying in contact with them on a regular basis. In
1996, TDS Telecom adopted a more aggressive compensation plan for its account
executives targeted at revenue and customer satisfaction results.
CONSUMER MARKETS. TDS Telecom's promotional and sales strategy with respect
to its residential customers consists of two major initiatives: building brand
equity by creating awareness of the TDS Telecom brand name; and using direct
marketing to sell specific products and product groupings. Approximately 78% of
TDS Telecom's total access lines are residential. The nature of TDS Telecom's
residential markets has historically made direct marketing more effective than
mass media such as radio and television. In addressing its consumer markets, TDS
Telecom has made extensive and aggressive use of direct mail. TDS Telecom has
been more selective in the use of telemarketing as a means of generating
awareness, qualified leads, and sales. Increasingly, uniform branding has made
the use of mass media more attractive, and TDS Telecom is beginning to
increasingly incorporate these elements into its marketing program.
In nearly all of its markets, TDS Telecom offers a complete family of custom
calling services, including call waiting, call forwarding, three-way calling,
and speed dialing. In 1997, TDS Telecom sold 27,700 residential second lines, an
increase of 46% over 1996. The Telecom Group recently launched its Advanced
Calling Services family, which is centered around Caller ID service. In 1997,
the Advanced Calling Services family of services were available to 78% of the
lines in service compared to 66% in 1996. In 1997, penetration of Caller ID
increased from 13% in 1996 to 16% of lines equipped and aggregate penetration of
ACS increased from 25% in 1996 to 30% of lines equipped.
WHOLESALE MARKETS
Access charges, billing and collection services and other traditional
wholesale offerings generated $253 million, or approximately 61 percent, of TDS
Telecom's ILEC subsidiaries revenue for the year ended December 31, 1997. TDS
Telecom seeks to establish close working relationships with the IXCs. TDS
Telecom is working to establish systems to support "electronic bonding" of its
operations with those of the IXCs. Electronic bonding provides seamless
integration of TDS Telecom's and the IXCs' networks, enabling the IXCs to access
service, billing
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and other data directly from TDS Telecom's network. It will also permit the IXCs
to enter access service requests electronically using the integrated network.
The initial phase of establishing these systems has taken place with the
establishment of a dedicated customer service team to provide a single point of
contact for the IXCs. During 1998 and beyond, automated systems solutions will
be implemented to fully support electronic bonding.
TDS Telecom sees significant potential in leveraging its infrastructure to
provide new wholesale offerings to non-traditional customers. TDS Telecom has
targeted high growth industry sectors such as CLECs, independent telephone
companies, cable television companies, electric utilities and other
telecommunications service providers for purchase of its wholesale offerings.
Additionally, existing cellular wireless carriers are expanding their services
in and near TDS Telecom's territories and new PCS wireless carriers are, or soon
will be, offering service.
COMPETITION
ILEC MARKETS
The 1996 Act was intended to promote competition in the telecommunications
industry as a national policy and continue the process of deregulation. The 1996
Act requires ILECs to provide reasonable and non-discriminatory interconnection
services and access to unbundled network elements to any CLEC that seeks to
enter the markets in which the ILEC already offers services. The 1996 Act also
allows CLECs to co-locate network equipment on the ILEC's premises and prevents
ILECs and CLECs from unduly restricting each other from use of facilities or
information that would allow other organizations to effectively compete with
them.
All 106 telephone company subsidiaries of TDS Telecom are currently exempt
from many of the interconnection provisions of the 1996 Act. According to the
1996 Act, a rural telephone company (which currently includes all 106 TDS
Telecom ILECs) is exempt from the ILEC interconnection requirements until (i)
such company has received a bona fide request for interconnection, resale of
services, or network elements, and (ii) the state commission determines that
such request is not unduly economically burdensome, is technically feasible, and
is consistent with the universal service provisions of the 1996 Act. The party
making a bona fide request must submit a notice of its request to the
appropriate state commission which must then conduct an inquiry to determine
whether to terminate the exemption. Within 120 days after a state commission
receives notice of the request, it must determine if it will terminate the
exemption. Upon termination of the exemption, the state commission must
establish an implementation schedule for compliance with the request.
Accordingly, the length of TDS Telecom's rural exemptions will vary based on the
decisions of the various state commissions. Some TDS Telecom ILECs have already
had requests filed by potential competitors seeking to terminate their
exemptions and TDS Telecom believes there will eventually be open entry into
nearly every aspect of the telephone industry, including local service, and,
switched and special access services.
TDS Telecom expects competition in the local telephone and access services
businesses to be increased substantially as a result of the entrance of new
competitors and the development of new technologies, products and services.
Increased competition is expected from competitive access providers, IXCs,
out-of-territory RBOCs and independent telephone companies, niche entrepreneurs,
cable and utility companies, and wireless and satellite providers. To meet this
increasing competition, TDS Telecom's strategy is to build customer loyalty by
providing superior customer service, offering a full range of standardized
products and services bundled in response to customer preferences and to rapidly
develop new data products and services.
TDS Telecom believes that the wireless companies pose the most significant
threat in the long run to the local exchange industry. Although traditional
analog cellular radio service cannot match the features or the clarity of
communications provided via wireline networks, and as a result of high error
rates and speed limitations is not currently suitable for data transmission,
advances in digital PCS technology may permit wireless companies to eventually
match the functionality and clarity of wireline communication and still allow
customers the mobility of traditional wireless service. As the emerging PCS
companies compete directly with established cellular radio companies, flat rate
pricing alternatives may drive wireless rates towards or below wireline rates.
In order to minimize the impact of wireless competition, TDS Telecom is pursuing
wholesale service agreements with wireless companies to provide services to them
and expects to provide wireless services through resale in many of its markets.
CLEC MARKETS
In Madison and in each city in which TDS Telecom expands as a CLEC, TDS
Telecom faces, and expects to continue to face, significant competition from the
ILECs which currently dominate their local telecommunications markets. TDS
Telecom will compete with the ILECs on the basis of price, reliability,
state-of-the-art technology,
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product offerings, route diversity, ease of ordering and customer service.
However, the ILECs have long-standing relationships with their customers, have
the potential to subsidize competitive services from monopoly service revenues,
and benefit from favorable state and federal regulations. TDS Telecom expects
its CLECs to provide a full range of local telecommunications services in order
to compete effectively with the ILECs.
Although the ILECs generally are subject to greater pricing and regulatory
constraints than CLECs, ILECs are achieving increased pricing flexibility for
their services as a result of, among other things, the 1996 Act. Existing
competition for private line, special access and local exchange services is
based primarily on quality, capacity and reliability of network facilities,
customer service, response to customer needs, service features and price, and is
not based on any proprietary technology. As a result of the technology used in
its networks, TDS Telecom may have cost and service quality advantages over some
currently available ILEC networks. In addition, TDS Telecom believes that, in
general, it will provide more attention and responsiveness to its customers than
its ILEC competitors.
TDS Telecom may face competition from other CLECs and other potential
competitors in certain of the cities in which TDS Telecom plans to offers its
services. Many of TDS Telecom's existing and potential competitors have
financial, personnel and other resources significantly greater than those of TDS
Telecom. However, TDS Telecom believes that its strategy of targeting third tier
cities, its capital, technical and management resources and its orientation
toward IXCs and other commercial telecommunications users will enable it to
achieve its strategic objectives. CLECs' ability to compete depends in part on
federal and state rules covering pricing and terms for ILECs' services provided
by unbundled network elements and resale, as well as ILECs' operation support
systems.
In addition to the ILECs and other CLECs, potential competitors capable of
offering private line, special access and local exchange services include long
distance carriers, cable television companies, electric utilities, microwave
carriers, wireless telephone system operators, and private networks built by
large end users. Previous impediments to certain utility companies entering
telecommunications markets under the Public Utility Holding Company Act of 1935
were removed by the 1996 Act.
REGULATION
The intrastate, local and access services of TDS Telecom's ILEC 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, are 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, public safety,
and welfare, continued service quality and consumer rights. While a state may
not impose requirements that effectively function as barriers to entry, and the
FCC must pre-empt challenged state requirements if they impose such barriers to
entry, a state 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, ILECs 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 use only those elements they choose for providing their
services; (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. Rural telephone
companies are exempted from these obligations until they receive a bona fide
request for interconnection, resale of services or network elements and the
applicable state commission determines that termination of the exemption is not
unduly economically burdensome, is technically feasible and is consistent with
universal service.
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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 Telecom 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 pay phone 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, all of TDS Telecom's ILEC subsidiaries qualify
as rural telephone companies. Therefore, they enjoy an exemption from the ILEC
interconnection requirements until they receive a bona fide request for
interconnection from, and the state commission lifts the exemption. TDS Telecom
has received two requests for interconnection, one of which has been withdrawn,
and the other of which is currently pending. 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 TDS Telecom telephone companies' ability to obtain regulatory
relief from stricter interconnection requirements for incumbent telephone
companies has been accepted for review by the U.S. Supreme Court. 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 resulting from the 1996 Act. TDS Telecom is preparing for
competition even though such changes will often require changes in state
regulation or state regulatory approvals. 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 urge that any telecommunications reform measures treat
rural areas fairly and continue to provide sufficient contributions to high cost
rural service areas to keep TDS Telecom ILECs' rates affordable. The ongoing
changes in public policy and introduction of competition may negatively affect
the earnings of the operating subsidiaries, and TDS Telecom is not able to
predict the extent of any such negative impact.
While the majority of TDS Telecom's ILEC 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 ILECs. Price regulation, the
most common form of alternative regulations, focuses on the price of
telecommunications services rather than rules based on authorized costs and
rates of return. TDS Telecom's ILEC subsidiaries in Alabama, Arkansas, Michigan
and Pennsylvania are currently operating in a price-regulated environment,
whereby the commissions in those states are no longer reviewing earnings
annually. For several years, the RBOCs and some of the nation's larger ILECs
have operated under an FCC "price cap" plan, modified in 1997, where earnings
can be increased through productivity improvements.
For 1998, TDS Telecom's telephone subsidiaries neither elected federal price
caps nor an alternative FCC plan, which was designed for smaller LECs. Instead,
the operating subsidiaries plan to continue to abide by traditional
rate-of-return regulation for interstate purposes, unless those regulatory terms
are changed. 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 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 rate-of-return regulated LECs, on their own or through NECA,
charge IXCs for local distribution of their interstate calls. Some of the
reforms already adopted for price cap regulated LECs, if expanded to cover the
TDS Telecom LECs, could reduce interstate cost recovery, and could prompt the
LECs to seek state commission approval of increased local rates.
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. NECA's most recent access charges were approved effective
January 1, 1998.
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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.
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 (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 Systems for Mobile Communications ("GSM") technology.
Aerial has commenced service in each of its markets and served 125,000 PCS
telephones at December 31, 1997. At December 31, 1997, Aerial had expanded its
system coverage to 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
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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 airtime usage
rates, which usually are higher than standard airtime 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, 17 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.
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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 December 31, 1997, Aerial had 125,000 customers. Service revenues
and equipment sales revenues totaled $32.3 million and $23.6 million,
respectively, for the year ended December 31, 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
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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
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.
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<PAGE>
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 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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<PAGE>
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 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.
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<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.
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 for its investment in the new company.
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<PAGE>
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
landline 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 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 airtime costs and equipment
size. Narrowband 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>
YEAR ENDED OR AT DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ----------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Pagers in service.......................................... 811,100 777,400 784,500 652,800 460,900
Total revenues............................................. $ 94,413 $ 104,187 $ 107,150 $ 92,065 $ 75,363
Depreciation and amortization expense...................... 32,040 33,777 24,692 17,178 13,392
Operating (loss)........................................... (35,307) (36,626) (8,997) (169) (721)
Capital expenditures....................................... 18,624 32,517 26,527 28,966 21,454
Identifiable assets........................................ $ 135,840 $ 153,374 $ 159,170 $ 146,107 $ 74,923
</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 value 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.
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<PAGE>
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 half 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 as the network is expanded to cover these areas.
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 one-way wireless
messaging services. American Paging's Minnesota, Oklahoma, Texas and Washington,
D.C. 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 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 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, D.C.
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
half 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.
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<PAGE>
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. 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 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
airtime 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.
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<PAGE>
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 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
I-36
<PAGE>
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.
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 announced 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 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.
I-37
<PAGE>
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.
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 December 31, 1997,
approximately 9,685 persons were employed by the Company, approximately 155 of
whom are represented by unions.
I-38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Telephone and Data Systems, Inc. ("TDS" or the "Company") provides
high-quality telecommunications services to approximately 3.2 million cellular
telephone, telephone, personal communications services ("PCS") 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 primary businesses: United States Cellular Corporation ("U.S.
Cellular"), an 81%-owned subsidiary, TDS Telecommunications Corporation ("TDS
Telecom"), a wholly owned subsidiary, Aerial Communications, Inc. ("Aerial"), an
83%-owned subsidiary, and American Paging, Inc. ("American Paging"), an
82%-owned subsidiary. See "Proposed Corporate Restructuring" and "Combination of
American Paging and TSR Paging."
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.
1997 OVERVIEW
TDS reported a net loss available to common and earnings per share--diluted
of $11.4 million, or $.19 per share, in 1997 compared to net income available to
common of $126.2 million, or $2.07 per share, in 1996 and $101.5 million, or
$1.74 per share, in 1995. Net income available to common from U.S. Cellular and
TDS Telecom increased 45% in 1997 and 23% in 1996. The excellent growth at U.S.
Cellular and steady growth at TDS Telecom in 1997 was overshadowed by large
start-up losses at Aerial due to the costs associated with the launch of service
in all six PCS markets. Net income included significant gains on the sale of
cellular interests and other investments in 1996 and 1995.
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 (loss) available to common and earnings per share--diluted.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
NET INCOME (LOSS) AVAILABLE TO COMMON
U.S. Cellular and TDS Telecom........................................... $ 135.1 $ 93.4 $ 75.7
Aerial.................................................................. (129.4) (15.3) (6.7)
American Paging......................................................... (33.0) (16.4) (8.1)
Gains................................................................... 15.9 64.5 40.6
--------- --------- ---------
$ (11.4) $ 126.2 $ 101.5
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE--DILUTED
U.S. Cellular and TDS Telecom........................................... $ 2.25 $ 1.54 $ 1.30
Aerial.................................................................. (2.15) (.25) (.11)
American Paging......................................................... (.55) (.27) (.14)
Gains................................................................... .26 1.05 .69
--------- --------- ---------
$ (.19) $ 2.07 $ 1.74
--------- --------- ---------
--------- --------- ---------
</TABLE>
U.S. Cellular continued its outstanding growth during 1997. Customer units
increased by 637,000 units, or 59% (442,000 units, or 41%, excluding customers
added through acquisitions), to 1.7 million customer units, following a 363,000
unit, or 51%, increase in 1996. The increase in customer units drove a 29%
increase in revenues, a 33% increase in cash flow and a 48% increase in
operating income. Capital expenditures to add cell sites, expand coverage and
add capacity totaled $318.7 million and expenditures for acquisitions totaled
$128.8 million.
TDS Telecom continued to provide steady growth in revenues and cash flow.
Telephone access lines increased 6% resulting in a 12% increase in operating
revenues and a 3% increase in cash flow. Operating income decreased 4% as TDS
Telecom incurred additional expenses related to the development and marketing of
its new business ventures, an Internet access provider, a structured wiring
business and a competitive local exchange company ("CLEC"). TDS Telecom's
investment in outside plant facilities and new digital switches to maintain and
enhance the quality of service and offer new revenue opportunities totaled
$151.5 million.
I-39
<PAGE>
Aerial launched service in all of its markets prior to the end of the second
quarter. A total of 125,000 net customers were added by the end of 1997. Service
was launched across its markets with approximately 600 cell sites in place,
which provided wide-area metropolitan coverage in its Major Trading Areas
("MTAs"). By the end of 1997, it had 1,044 cell sites in service and had
extended coverage to approximately 80% of the population in its MTAs.
Aerial's operating results reflect the high cost of launching service.
Revenues totaled $56.0 million, operating cash flow, a negative $157.5 million
and operating loss totaled $196.6 million. Aerial's investment in property and
equipment, including network design and equipment, site acquisition and
information systems totaled $274.7 million in 1997.
RESULTS OF OPERATIONS
OPERATING REVENUES increased 25% ($291.7 million) during 1997 and 25%
($237.5 million) during 1996 primarily as a result of growth at U.S. Cellular
and TDS Telecom in 1997 and 1996 as well as the start-up of PCS operations at
Aerial in 1997.
U.S. Cellular revenues increased $196.9 million in 1997 and $199.8 million
in 1996 on 59% and 51% increases in customer units and 13% and 31% increases in
inbound roaming revenues, respectively. TDS Telecom revenues increased $48.6
million in 1997 and $40.8 million in 1996 as a result of recovery of increased
costs of providing long-distance services, internal access line growth,
acquisitions and increased network usage. Aerial revenues totaled $56.0 million
since start-up of operations in mid-1997. American Paging revenues decreased
$9.8 million in 1997 and $3.0 million in 1996 reflecting competitive pricing
declines.
U.S. Cellular contributed 60% of consolidated revenue in 1997, up from 51%
in 1995 reflecting revenue growth rates substantially higher than the other
business units. TDS Telecom and American Paging contributed 30% and 6% of
consolidated revenue in 1997 and 38% and 11% in 1995, respectively. Aerial
contributed 4% of consolidated revenue in 1997.
OPERATING EXPENSES rose 44% ($448.8 million) in 1997 and 27% ($216.1
million) in 1996. The increase in expenses includes Aerial's expenses subsequent
to the launch of service in 1997 as well as added expenses from the growth in
operations at U.S. Cellular and TDS Telecom in 1997 and 1996.
PCS operating expenses totaled $252.5 million in 1997 reflecting the costs
of operating Aerial's network, marketing, selling and advertising and promotion
expenses, cost of equipment sold, customer service expenses as well as general
and administrative expenses. U.S. Cellular operating expenses increased $154.7
million during 1997 and $155.1 million during 1996 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. TDS Telecom operating
expenses increased $52.7 million during 1997 and $36.3 million during 1996 due
to growth in internal operations, the development and start-up of new business
ventures and the effects of acquisitions. American Paging operating expenses
decreased $11.1 million in 1997 and increased $24.7 million in 1996.
OPERATING INCOME declined to a negative $3.7 million in 1997 from $153.4
million in 1996 reflecting strong growth at U.S. Cellular offset by Aeriel's
costs of launching service. Operating income increased to $153.4 million in 1996
from $132.0 million in 1995 reflecting growth in operations at U.S. Cellular,
offset somewhat by increased losses at American Paging. U.S. Cellular's
operating income increased 48% ($42.2 million) in 1997 and 104% ($44.6 million)
in 1996 reflecting the increase in customers and revenues. U.S. Cellular's
operating margin has increased steadily to 14.8% in 1997 from 12.8% in 1996 and
8.9% in 1995. TDS Telecom's operating income decreased $4.1 million in 1997 and
increased $4.5 million in 1996. The decrease in TDS Telecom's operating income
was primarily due to operating losses from new business ventures. TDS Telecom's
operating margin continued its decline to 22.2% in 1997 from 26.0% in 1996 and
27.7% in 1995 due primarily to the development of new business ventures which
have lower margins than traditional telephone operations as well as earnings
pressures on telephone operations from regulatory agencies and long-distance
providers. Aerial's operating loss
I-40
<PAGE>
totaled $196.6 million in 1997, reflecting the costs associated with launching
service in all six markets. American Paging's operating loss decreased $1.3
million in 1997 and increased $27.6 million in 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
------------ ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Income (Loss)
U.S. Cellular................................................... $ 129,543 $ 87,366 $ 42,755
TDS Telecom..................................................... 98,613 102,708 98,240
Aerial.......................................................... (196,551) -- --
American Paging................................................. (35,307) (36,626) (8,997)
------------ ----------- -----------
$ (3,702) $ 153,448 $ 131,998
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
Management expects Aerial to generate significant losses in 1998 as it
continues to build its customer base. Upon completion of a December 1997
agreement between TDS and TSR Paging, Inc. to combine their respective paging
businesses, TDS will follow the equity method of accounting for its 30% interest
in the new combined company and will report these results as a component of
Investment and Other Income. This combination is expected to be completed in the
first half of 1998. See "Combination of American Paging and TSR Paging."
INVESTMENT AND OTHER INCOME (EXPENSE) totaled $114.0 million in 1997, $141.2
million in 1996 and $103.9 million in 1995. Investment and other income
(expense) includes interest and dividend income, cellular investment income,
gain on sale of cellular interests and other investments, PCS development costs
and minority share of 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 42% ($22.8 million) in 1997 and 35% ($14.1
million) in 1996. Cellular investment income is net of amortization of license
costs relating to these minority interests. Cellular investment income is
expected to decrease in 1998 as a result of the transfer of certain minority
interests to BellSouth Corporation ("BellSouth") in the fourth quarter of 1997
and the pending transfer of certain other minority interests to AirTouch
Communications, Inc. in 1998. See "Financial Resources--Acquisitions, Trades and
Sales."
GAIN ON SALE OF CELLULAR INTERESTS AND OTHER INVESTMENTS totaled $41.4
million in 1997, $138.7 million in 1996 and $86.6 million in 1995. 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 $21.6 million in 1997, $43.9 million in 1996
and $7.8 million in 1995. Expenses incurred by Aerial prior to the launch of
operations in March 1997 to recruit an experienced management team, develop and
execute a business plan, raise capital and design and construct its PCS networks
were recorded in Other Income (Expense). Revenues and expenses incurred
subsequent to the launch of service have been included as a component of
operating income.
MINORITY SHARE OF INCOME includes the minority shareholders' share of U.S.
Cellular's, Aerial's and American Paging's net income or loss, the minority
partners' share of U.S. Cellular's operating markets net income or loss and
other minority shareholders' and partners' share of subsidiaries' net income or
loss. The change in 1997 is primarily
I-41
<PAGE>
related to the increased losses of Aerial allocated to its minority
shareholders. Minority shareholders of American Paging are not allocated losses
in 1997 as American Paging's shareholders' equity is negative.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Minority Share of (Income) Loss
U.S. Cellular
Minority Shareholders' Share.................................... $ (21,264) $ (25,179) $ (19,046)
Minority Partners' Share........................................ (12,298) (13,743) (7,902)
---------- ---------- ----------
(33,562) (38,922) (26,948)
Aerial.......................................................... 43,038 4,944 --
American Paging................................................. -- 6,368 2,781
Telephone Subsidiaries and Other................................ (2,663) 920 (1,691)
---------- ---------- ----------
$ 6,813 $ (26,690) $ (25,858)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
INTEREST EXPENSE increased 113% ($48.4 million) in 1997 and decreased 16%
($8.0 million) in 1996. Interest expense increased in 1997 due to increased
interest expense from larger short-term debt balances ($19.6 million), a smaller
amount of capitalized interest ($16.6 million), additional interest expense from
U.S. Cellular's sale of debt in 1997 and Aerial's zero coupon notes issued in
late 1996 ($11.7 million). Interest expense decreased in 1996 because of
increased capitalized interest ($14.4 million) which offset additional interest
from U.S. Cellular's sale of convertible debt in 1995 ($6.0 million).
TDS and Aerial capitalized interest totaling $11.0 million in 1997, $27.6
million in 1996 and $13.2 million in 1995 on expenditures for PCS licenses and
construction costs. The Company stops capitalizing interest on qualifying assets
when those assets are placed in service.
MINORITY INTEREST IN INCOME OF SUBSIDIARY TRUST totaled $1.5 million in
1997. In November 1997, TDS Capital I, a subsidiary trust (the "Trust") of TDS,
issued 6,000,000 of its 8.5% Company-Obligated Mandatorily Redeemable Preferred
Securities (the "Preferred Securities") at $25 per Preferred Security. The sole
asset of TDS Capital I is $154.6 million principal amount of TDS's 8.5%
Subordinated Debentures due December 31, 2037.
INCOME TAX EXPENSE decreased $95.1 million in 1997 to $28.6 million and
increased $42.6 million to $123.6 million in 1996, reflecting primarily the
changes in pretax income.
NET INCOME (LOSS) AVAILABLE TO COMMON was ($11.4 million) in 1997, $126.2
million in 1996 and $101.5 million in 1995. EARNINGS PER COMMON SHARE--DILUTED
was ($.19) in 1997, $2.07 in 1996 and $1.74 in 1995.
I-42
<PAGE>
CELLULAR TELEPHONE OPERATIONS
TDS provides cellular telephone service through U.S. Cellular. Results of
operations include 1,710,000 customer units at the end of 1997 compared to
1,073,000 customer units at the end of 1996 and 710,000 customer units at the
end of 1995.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER
CUSTOMER AMOUNTS)
<S> <C> <C> <C>
Operating Revenues
Local retail................................................... $ 568,578 $ 414,815 $ 277,439
Inbound roaming................................................ 217,499 193,278 148,020
Long-distance and Other........................................ 90,888 71,975 54,857
----------- ----------- -----------
876,965 680,068 480,316
----------- ----------- -----------
Operating Expenses
System operations.............................................. 153,137 117,368 70,442
Marketing and selling.......................................... 175,117 127,689 92,180
Cost of equipment sold......................................... 82,302 74,024 54,948
General and administrative..................................... 204,487 164,782 130,533
Depreciation................................................... 97,591 74,631 57,302
Amortization................................................... 34,788 34,208 32,156
----------- ----------- -----------
747,422 592,702 437,561
----------- ----------- -----------
Operating Income................................................. $ 129,543 $ 87,366 $ 42,755
----------- ----------- -----------
----------- ----------- -----------
Consolidated Markets:
Customers...................................................... 1,710,000 1,073,000 710,000
Markets........................................................ 134 131 137
Market penetration............................................. 7.11% 4.94% 3.18%
Cell sites in service.......................................... 1,748 1,328 1,116
Average monthly service revenue per customer................... $ 54.18 $ 63.69 $ 70.64
Churn rate per month........................................... 1.9% 1.9% 2.1%
Marketing cost per gross customer addition..................... $ 313 $ 327 $ 335
Employees...................................................... 4,600 3,800 3,175
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
OPERATING REVENUES increased 29% ($196.9 million) in 1997 and 42% ($199.8
million) in 1996. The revenue increases in 1997 and 1996 were driven by the 59%
(41% excluding customers added through acquisitions) and 51% growth in customer
units and the 13% and 31% growth in inbound roaming revenues, respectively.
Customer units grew by 637,000 units in 1997 as compared to 363,000 units in
1996. The units added in 1997 include 195,000 units from acquisitions, primarily
related to the exchange with BellSouth which occurred at the end of October
1997. Average monthly service revenue per customer was $54.18 in 1997, $63.69 in
1996 and $70.64 in 1995. 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. Management anticipates that average monthly service
revenue per customer will continue to decrease as local retail and inbound
roaming revenue per minute of use decline.
LOCAL RETAIL REVENUE (charges to U.S. Cellular's customers for local system
usage) increased 37% ($153.8 million) in 1997 and 50% ($137.4 million) in 1996
due primarily to the growth in customers. Average monthly local retail revenue
per customer was $36.11 in 1997, $39.87 in 1996 and $42.19 in 1995. Local
minutes of use averaged 103 per month in 1997, 107 per month in 1996 and 95 per
month in 1995. Average revenue per minute was $.35 in 1997, $.37 in 1996 and
$.44 in 1995. U.S. Cellular's 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 incentive 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. The industry trend of declining average
monthly retail revenue per customer is believed to be related to the 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.
I-43
<PAGE>
INBOUND ROAMING REVENUE (charges to customers of other systems who use U.S.
Cellular's cellular systems when roaming) increased 13% ($24.2 million) in 1997
and 31% ($45.3 million) in 1996 due to increased minutes of use offset somewhat
by negotiated reductions in roaming rates. Minutes of use increased 27% in 1997
and 38% in 1996. Average revenue per minute of use was $.83 in 1997, $.92 in
1996 and $.99 in 1995. Average monthly inbound roaming revenue per U.S. Cellular
customer was $13.81, $18.58 and $22.51 in 1997, 1996 and 1995, respectively. The
decrease is the result of U.S. Cellular's customer base growing at a faster rate
than roaming revenue and negotiated reductions in roaming rates.
LONG-DISTANCE AND OTHER REVENUE, including equipment sales, increased 26%
($18.9 million) in 1997 and 31% ($17.1 million) in 1996 primarily due to
increased long-distance revenue from the growth in the volume of long-distance
calls billed by U.S. Cellular.
OPERATING EXPENSES increased 26% ($154.7 million) in 1997 and 35% ($155.1
million) in 1996. The increase in operating expenses is primarily due to the
costs to expand the customer base ($55.7 million in 1997 and $54.6 million in
1996); increased administrative expenses ($39.7 million in 1997 and $34.2
million in 1996); the cost of providing service to the expanding customer base
($35.8 million in 1997 and $46.9 million in 1996); and additional depreciation
on the increased investment in cell sites and equipment ($23.0 million in 1997
and $17.3 million in 1996).
MARKETING AND SELLING EXPENSES (salaries, commissions and expenses of field
sales and retail personnel and offices; agent expenses; advertising and public
relations expenses) increased 37% ($47.4 million) in 1997 and 39% ($35.5
million) in 1996 due to the increase in customer activations. Gross customer
activations (excluding acquisitions) rose 33% in 1997 to 746,000 from 563,000 in
1996. The 1996 gross customer activations increased 44% to 563,000 from 392,000
in 1995. U.S. Cellular incurred significant increases in advertising costs to
promote the United States Cellular-Registered Trademark- brand name and to add
new customers. Cost of equipment sold increased 11% ($8.3 million) in 1997 and
35% ($19.1 million) in 1996 reflecting the increase in units sold offset
somewhat by falling manufacturer equipment prices per unit. Cost per gross
customer addition (marketing and selling expenses and cost of equipment sold
less equipment revenues, divided by gross customer additions) totaled $313 in
1997, $327 in 1996 and $335 in 1995.
GENERAL AND ADMINISTRATIVE EXPENSES (costs of local business offices and
corporate expenses) increased 24% ($39.7 million) in 1997 and 26% ($34.2
million) in 1996. 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. Employee-related expenses increased $19.4 million in 1997
and $15.6 million in 1996, primarily due to an increase in the number of
administrative employees in each year. Also, bad debt expense increased $8.0
million in 1997 and $5.0 million in 1996, primarily due to the increased
penetration of the consumer market.
SYSTEM OPERATIONS EXPENSES increased 30% ($35.8 million) in 1997 and 67%
($46.9 million) in 1996 as a result of increases in customer usage expenses and
costs associated with operating the increased number of cell sites.
Customer usage expenses (charges from other service providers for landline
connection, toll and roaming costs incurred by customers' use of systems other
than their local systems) grew 32% ($24.3 million) in 1997 and 116% ($40.4
million) in 1996. The increase was due primarily to roaming usage and increased
minutes of use. 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 these
customers a local rate which is usually lower than the roaming rate. The
increase in 1996 also relates to increases in fraud-related costs. These
fraud-related costs totaled $6.5 million in 1997, $18.0 million in 1996 and $4.1
million in 1995. 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 27% ($11.5 million) in 1997
and 18% ($6.5 million) in 1996 reflecting the 32% and 19% increase in the number
of cell sites, respectively. The number of cell sites operated increased to
1,748 in 1997 from 1,328 in 1996 and 1,116 in 1995.
Operating cash flow increased 33% to $261.9 million in 1997 compared to a
48% increase to $196.2 million in 1996. 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 construction activities.
I-44
<PAGE>
DEPRECIATION EXPENSE increased 31% ($23.0 million) in 1997 and 30% ($17.3
million) in 1996, reflecting increases in average fixed asset balances of 35%
and 34%, respectively.
OPERATING INCOME was $129.5 million in 1997 compared to $87.4 million in
1996 and $42.8 million in 1995. Operating margins improved to 14.8% in 1997 from
12.8% in 1996 and 8.9% in 1995. 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 the past eighteen months. U.S. Cellular expects
PCS operators to complete initial deployment of PCS in portions of all its
market clusters by the end of 1998. U.S. Cellular's management continues to
monitor 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 total customer growth to date has not been material.
I-45
<PAGE>
TELEPHONE OPERATIONS
TDS provides landline telephone service through TDS Telecom. TDS Telecom
served 515,500 access lines at the end of 1997 compared to 484,500 access lines
at the end of 1996 and 425,900 access lines at the end of 1995 ("telephone
operations"). TDS Telecom also owns a long-distance provider, an Internet access
provider, a structured wiring business and a competitive local exchange company
("other services").
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ----------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER CUSTOMER AMOUNTS)
<S> <C> <C> <C>
Operating Revenues
Telephone Revenues
Local Service................................................... $ 122,826 $ 110,501 $ 95,184
Network Access and Long Distance................................ 235,725 213,113 195,575
Miscellaneous................................................... 53,829 48,299 41,528
----------- ----------- ---------
Total Telephone Revenues...................................... 412,380 371,913 332,287
Other Services.................................................... 33,516 24,747 23,764
Intercompany Revenues............................................. (1,693) (1,058) (1,210)
----------- ----------- ---------
Total Operating Revenues...................................... 444,203 395,602 354,841
----------- ----------- ---------
Operating Expenses
Telephone Expenses
Network Operations.............................................. 80,487 67,521 54,964
Depreciation and Amortization................................... 95,278 85,575 74,758
Customer Operations............................................. 65,167 53,764 46,818
Corporate Operations............................................ 68,454 62,276 58,998
----------- ----------- ---------
Total Telephone Expenses...................................... 309,386 269,136 235,538
Other Services.................................................... 37,897 24,816 22,273
Intercompany Expenses............................................. (1,693) (1,058) (1,210)
----------- ----------- ---------
Total Operating Expenses...................................... 345,590 292,894 256,601
----------- ----------- ---------
Operating Income.................................................... $ 98,613 $ 102,708 $ 98,240
----------- ----------- ---------
----------- ----------- ---------
Companies........................................................... 106 105 100
Access lines........................................................ 515,500 484,500 425,900
Growth in access lines from prior year-end:
Acquisitions...................................................... 3,200 33,100 13,500
Internal growth................................................... 27,800 25,500 19,900
Telephone plant in service per access line.......................... $ 2,488 $ 2,461 $ 2,356
Average monthly revenue per access line............................. $ 68.78 $ 67.10 $ 66.82
Employees........................................................... 2,350 2,160 1,925
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
OPERATING REVENUES totaled $444.2 million in 1997, up 12% ($48.6 million)
from 1996 and totaled $395.6 million in 1996, up 11% ($40.8 million) from 1995.
The increases were due to the growth in telephone revenues and other services
revenues.
Operating revenues from telephone operations increased 11% ($40.5 million)
in 1997 and 12% ($39.6 million) in 1996. Acquisitions increased telephone
revenues $8.1 million in 1997 and $18.8 million in 1996. Recovery of increased
costs of providing long-distance services resulted in increases in revenue of
$12.1 million in 1997 and $8.1 million in 1996. Internal growth and increases in
the sales of custom-calling features increased revenue by $8.7 million in 1997
and $8.0 million in 1996. Increased sales of customer premise equipment,
including digital broadcast satellites, increased revenues by $6.1 million in
1997 and $2.2 million in 1996. Increased network usage resulted in revenue
increases of $5.7 million in 1997 and $4.5 million in 1996. Average monthly
revenue per access line was $68.78 in 1997, $67.10 in 1996 and $66.82 in 1995.
Operating revenues from other services increased 35% ($8.8 million) in 1997
and 4% ($1.0 million) in 1996. The increase in 1997 is primarily due to
increases in the structured wiring business ($6.0 million) and the Internet
business ($2.8 million).
I-46
<PAGE>
OPERATING EXPENSES totaled $345.6 million in 1997, up 18% ($52.7 million)
from 1996 and totaled $292.9 million in 1996, up 14% ($36.3 million) from 1995.
The increases were due to the growth in telephone expenses and additional other
services expenses.
Operating expenses from telephone operations increased 15% ($40.3 million)
in 1997 and 14% ($33.6 million) in 1996. The effects of acquisitions increased
expenses 2% ($6.2 million) in 1997 and 6% ($14.6 million) in 1996. Depreciation
and amortization expenses increased 11% ($9.7 million) in 1997 and 14% ($10.8
million) in 1996 due primarily to increased investment in plant and equipment.
Cost of goods sold for customer premise equipment, including digital broadcast
satellite, increased operating expenses by $5.2 million in 1997. Increased
marketing and advertising campaigns increased expenses by $4.7 million in 1997.
Increased investment in systems and systems support in 1997 resulted in an $8.4
million increase in expenses. The development of a centralized network
management center to provide more effective network monitoring and maintenance
increased expenses by $1.8 million in 1997 and $3.4 million in 1996. The costs
to explore new business increased expenses by $3.2 million in 1996. The
remaining increase in each year was due primarily to growth in internal
operations.
Operating expenses from other services increased 53% ($13.1 million) in 1997
and 11% ($2.5 million) in 1996. The increase in 1997 is primarily due to
increases in the structured wiring business ($7.6 million) and the Internet
business ($3.2 million) as well as costs related to the start-up of the CLEC
business.
OPERATING CASH FLOW increased 3% to $196.7 million in 1997 compared to an
increase of 9% to $191.2 million in 1996 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 decreased 4% ($4.1 million) in 1997 and increased 5% ($4.5
million) in 1996. Operating income from telephone operations increased $200,000
to $103.0 million in 1997 from $102.8 million in 1996 and increased $6.0 million
in 1996 from $96.7 million in 1995. The effects of acquisitions increased
operating income 2% ($1.9 million) in 1997 and 4% ($4.2 million) in 1996. The
telephone operating margin was 25.0% in 1997, 27.6% in 1996 and 29.1% in 1995.
The reduction in operating margin was caused by earnings pressures from
regulatory agencies and long-distance providers and expenses incurred in the
development of new business ventures. Operating loss from other services was
$4.4 million in 1997 and $100,000 in 1996 as compared to an operating income of
$1.5 million in 1995, reflecting the expenses associated with the start-up of
the Internet business in late 1995, the structured wiring business in mid-1996
and the CLEC business in 1997.
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
telecommunications plant would be immaterial, as would be the write-off of
regulatory assets and liabilities.
BROADBAND PERSONAL COMMUNICATIONS SERVICES
TDS manages its broadband personal communications services business through
Aerial. Aerial's licenses include the Major Trading Areas ("MTAs") of
Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and
Columbus. The preparation of each of its markets for initial service launch and
the development of its PCS business was Aerial's center of attention in 1997.
Aerial launched service in the first of its six markets on March 27, 1997 and
completed the launch of its last market in June. Across all six markets, Aerial
launched service with approximately 600 cell sites in service. At the end of
1997, Aerial served 125,000 customers and had 1,044 cell sites in service.
Operating results reflect the revenues and expenses of Aerial since the
initiation of service on March 27, 1997, when Aerial ceased to be a development
stage enterprise. Expenses for the periods prior to March 27 are reported
I-47
<PAGE>
as PCS Development Expenses included in the "Investment and Other Income
(Expense)" section of the Income Statement.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
------------------------------------
1997 1996 1995
------------ ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER CUSTOMER AMOUNTS)
<S> <C> <C> <C>
Operating Revenues................................................. $ 55,952 $ -- $ --
------------ ---------- ----------
Operating Expenses
Systems Operations............................................... 30,655 -- --
Marketing and selling............................................ 45,974 -- --
Cost of equipment sold........................................... 71,454 -- --
General and administrative....................................... 44,467 -- --
Customer service................................................. 20,882 -- --
Depreciation and amortization.................................... 39,071 -- --
------------ ---------- ----------
252,503 --
------------ ---------- ----------
Operating (loss)................................................... $ (196,551) $ -- $ --
------------ ---------- ----------
------------ ---------- ----------
Customers.......................................................... 125,000 -- --
Market penetration................................................. .45% -- --
Cell sites in service.............................................. 1,044 -- --
Average monthly service revenue per customer....................... $ 73.56 -- --
Churn rate per month............................................... 4.5% -- --
Employees.......................................................... 1,414 424 50
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
OPERATING REVENUES totaled $56.0 million in 1997. Service revenues
consisting of charges for access, airtime and value-added services provided to
Aerial's customers who use its network and charges for long-distance calls made
on its systems totaled $32.3 million. The average monthly service revenue per
customer was $73.56 in 1997. Equipment sales revenues consisting of units sold
to retailers, independent agents and customers totaled $23.6 million. The
average revenue per unit sold was $124.
OPERATING EXPENSES totaled $252.5 million in 1997 reflecting the costs of
operating Aerial's network, marketing, selling and advertising and promotion
expenses, cost of equipment sold, customer service expenses as well as general
and administrative expenses. SYSTEMS OPERATIONS expenses totaled $30.7 million
reflecting the costs of operating Aerial's network, primarily cell site
expenses, landline interconnection and toll charges and employee costs.
MARKETING AND SELLING EXPENSES totaled $46.0 million reflecting an aggressive
advertising campaign that accompanied the launch of service and continued
throughout 1997. Marketing and selling expenses primarily consist of salaries
and benefits of sales and marketing personnel, sales commissions, the cost of
promotions and the cost of print, radio and television advertising. COST OF
EQUIPMENT SOLD totaled $71.5 million reflecting the cost of equipment sold to
customers and independent retailers and agents. The average cost per unit sold
was $374. GENERAL AND ADMINISTRATIVE EXPENSES totaled $44.5 million reflecting
the expenses associated with the management and operating teams as well as
overhead expenses. CUSTOMER SERVICE EXPENSES totaled $20.9 million primarily for
customer service activity at Aerial's national operations center to support the
PCS markets. DEPRECIATION AND AMORTIZATION totaled $39.1 million.
OPERATING LOSS totaled $196.6 million in 1997. Management expects Aerial to
generate significant losses in 1998 as it continues to build its customer base.
RADIO PAGING OPERATIONS
TDS manages its radio paging business through American Paging. American
Paging provided wireless messaging communications through its digital radio
transmission systems to 811,100 pagers at the end of 1997 compared to 777,400
pagers at the end of 1996 and 784,500 pagers at the end of 1995.
COMBINATION OF AMERICAN PAGING AND TSR PAGING
In December 1997, TDS announced an agreement with TSR Paging, Inc. ("TSR")
to combine their respective paging businesses. On February 10, 1998 the board of
directors of American Paging approved a merger agreement providing for the
acquisition by TDS of all the issued and outstanding shares of American Paging
not owned by TDS
I-48
<PAGE>
for cash in an amount equal to $2.50 per share, approximately $9.1 million in
total. Upon consummation of the merger, TDS will contribute substantially all of
the assets and certain, limited liabilities of American Paging, and TSR will
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 the new company. TDS will not have any funding requirements once
the combination is completed.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C>
Operating revenue............................................. $ 94,413 $ 104,187 $ 107,150
----------- ----------- -----------
Costs and expenses
Cost of services............................................ 27,822 26,712 22,294
Selling, general and administrative......................... 62,089 70,441 55,064
Cost of goods sold.......................................... 7,769 9,883 14,097
Depreciation and amortization............................... 32,040 33,777 24,692
----------- ----------- -----------
129,720 140,813 116,147
----------- ----------- -----------
Operating (Loss).............................................. $ (35,307) $ (36,626) $ (8,997)
----------- ----------- -----------
----------- ----------- -----------
Pagers in service............................................. 811,100 777,400 784,500
Average monthly revenue per unit.............................. $ 9.17 $ 9.88 $ 10.57
Transmitters in service....................................... 1,049 1,048 1,018
Churn rate per month.......................................... 2.6% 3.1% 2.5%
Employees..................................................... 621 837 717
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
OPERATING REVENUES decreased 9% ($9.8 million) in 1997, primarily due to
competitive pricing declines. Operating revenues decreased 3% ($3.0 million) in
1996 primarily as a result of a 27% ($3.8 million) decline in equipment sales.
Average monthly revenue per unit declined 7% to $9.17 in 1997 and 7% to $9.88 in
1996.
OPERATING EXPENSES decreased 8% ($11.1 million) in 1997 and increased 21%
($24.7 million) in 1996 reflecting the effects of restructuring charges. In
1996, American Paging recorded restructuring expenses of $9.3 million related to
subleasing office space, employee severance, outplacement services and
consulting services ($4.0 million) and write-offs of certain assets ($5.3
million) compared to $2.9 million of restructuring charges in 1995. American
Paging experienced significant employee turnover as a result of the
restructuring in 1996 which resulted in increased costs to recruit and train new
employees. Also, in 1996, the cost of service increased primarily due to the
increase in third-party reseller expense related to the increase in nationwide
units in service and the costs to increase system capacity.
OPERATING LOSS was $35.3 million in 1997, $36.6 million in 1996 and $9.0
million in 1995. Upon the completion of the merger with TSR, TDS will adopt the
equity method of accounting for this investment.
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 acquisition
programs to exceed internally generated cash flow. Accordingly, in recent years,
TDS and its principal subsidiaries have obtained substantial funds from external
sources to acquire PCS licenses, to finance PCS construction, start-up and
development costs and to fund acquisitions. Although the increasing internal
cash flow from U.S. Cellular and the steady internal cash flow from TDS Telecom
have reduced the need for external financing, Aerial's development and
construction activities have required substantial additional funds from external
sources.
I-49
<PAGE>
CASH FLOWS FROM OPERATING ACTIVITIES. TDS is generating substantial internal
funds from the rapid growth in customer units and revenues at U.S. Cellular and
steady growth at TDS Telecom. The launch of PCS operations, however, required
substantial funds, thereby reducing cash flows from operating activities in
1997. Cash flows from operating activities totaled $206.5 million in 1997,
$295.0 million in 1996 and $210.9 million in 1995.
Aerial's market launch activities also substantially reduced operating cash
flow in 1997. Operating cash flow (operating income plus depreciation and
amortization) decreased 23% to $297.9 million in 1997 from $384.5 million in
1996 and $323.5 million in 1995. Aerial's operations reduced operating cash flow
by $157.5 million in 1997. U.S. Cellular's operating cash flow increased 33%
($65.7 million) to $261.9 million in 1997, and 48% ($64.0 million) to $196.2
million in 1996 while TDS Telecom's operating cash flow increased 3% ($5.5
million) to $196.7 million in 1997, and 9% ($15.6 million) to $191.2 million in
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 $91.3 million in 1997, $89.5 million in 1996, and
$112.6 million in 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating cash flow
U.S. Cellular.................................................. $ 261,922 $ 196,205 $ 132,213
TDS Telecom.................................................... 196,679 191,167 175,595
Aerial......................................................... (157,480) -- --
American Paging................................................ (3,267) (2,849) 15,695
------------ ----------- ------------
297,854 384,523 323,503
Other operating activities..................................... (91,347) (89,529) (112,627)
------------ ----------- ------------
$ 206,507 $ 294,994 $ 210,876
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
CASH FLOWS FROM FINANCING ACTIVITIES. TDS's long-term strategy is to
maintain a strong yet flexible financial foundation. Consolidated equity capital
(common equity, preferred stock, trust originated preferred securities and
minority interest) was 59% of total capitalization at December 31, 1997,
compared to 68% and 66% at December 31, 1996 and 1995, respectively. The reduced
equity capital percentage to total capitalization in 1997 is primarily a result
of increases in long-term debt at U.S. Cellular and Aerial and the increase in
TDS's short-term debt. TDS targets a ratio of equity to total capital in the
range of 55% to 65%.
Cash flows from financing activities totaled $547.6 million in 1997, $124.9
million in 1996 and $369.5 million in 1995. TDS has required significant funds
from external sources to finance PCS construction, start-up and development
activities in 1997 and 1996 and the purchase of the PCS licenses in 1995. TDS
has used short-term debt to finance these PCS expenditures, as well as to
finance its radio paging operations, for acquisitions and for general corporate
purposes.
TDS takes advantage of attractive opportunities to retire short-term debt
with proceeds from long-term debt and equity financing, including sales of debt
and equity securities by subsidiaries. Proceeds from the issuance of long-term
debt and equity securities totaled $392.0 million, $195.3 million and $260.7
million in 1997, 1996 and 1995, respectively. Proceeds from the sales of
non-strategic cellular and other investments from time to time in 1997, 1996 and
1995 have also been used to retire short-term debt. TDS has cash management
arrangements with its subsidiaries under which the subsidiaries may from time to
time deposit excess cash with TDS for investment under TDS's cash management
program. Deposits made under the arrangements are available to the subsidiaries
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.
In 1997, TDS received net proceeds of $144.8 million on the sale of 8.5%
Trust Originated Preferred Securities-SM-. U.S. Cellular received $247.0 million
on the sale of 10-year 7.25% notes and used the proceeds to repay existing
balances on the vendor financing arrangements, to finance the cash requirements
for the BellSouth exchange and for general corporate purposes. In 1996, Aerial
received $195.3 million in an initial public offering of Common Shares. In 1995,
U.S. Cellular received $221.5 million from the sale of 20-year 6% zero coupon
convertible debt and TDS sold $39.2 million of Medium-Term Notes.
- ---------
- -SM-"Trust Originated Preferred Securities" is a service mark of Merrill Lynch &
Co. Inc.
I-50
<PAGE>
Aerial, TDS Telecom and U.S. Cellular 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. The $100 million proceeds of 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 under a $200
million Credit Agreement between Aerial and Nokia ("Nokia Credit Agreement").
TDS Telecom telephone subsidiaries borrowed $15.0 million in 1997, $12.2 million
in 1996 and $12.0 million in 1995 under the Rural Utility Service and the Rural
Telephone Bank long-term federal government loan programs to finance their
telephone construction programs. U.S. Cellular financed cellular system
equipment and construction costs totaling $59.5 million in 1995 under vendor
financing arrangements.
In 1997, TDS purchased 1.8 million TDS Common Shares for $69.9 million. In
December 1996, TDS authorized the repurchase of up to 3.0 million TDS Common
Shares over a period of three years. A total of 1.0 million shares were
subsequently reissued, primarily for acquisitions. TDS has paid dividends of
$.42, $.40 and $.38 per Common and Series A Common Share in 1997, 1996 and 1995,
respectively. Aggregate dividends paid on Common and Preferred Shares, excluding
dividends reinvested, totaled $27.2 million in 1997, $26.2 million in 1996 and
$24.0 million in 1995.
CASH FLOWS FROM INVESTING ACTIVITIES. TDS makes substantial investments each
year to acquire, construct, operate and maintain modern high-quality
communications networks and facilities 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. In addition, the Company has
made substantial investments to enter the PCS business.
Cash flows from investing activities totaled $760.7 million in 1997, $417.4
million in 1996 and $550.0 million in 1995 primarily for capital expenditures,
the purchase of PCS licenses and acquisitions. Cash expenditures for capital
additions totaled $786.3 million in 1997, $550.2 million in 1996 and $360.0
million in 1995. The acquisition of broadband and narrowband PCS licenses
required $326.0 million in 1995. Cash used for acquisitions, excluding cash
acquired, totaled $129.0 million in 1997, $31.0 million in 1996 and $53.8
million in 1995. The sale of non-strategic cellular assets and other investments
provided net proceeds of $84.2 million in 1997, $221.5 million in 1996 and
$197.6 million in 1995. Distributions from partnerships totaled $56.4 million in
1997, $25.5 million in 1996 and $9.1 million in 1995.
I-51
<PAGE>
CAPITAL EXPENDITURES
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. The following table summarizes the
Company's investments in its communications networks and related facilities
during the past three years.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
---------------------------------------
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Cellular
Cell sites and equipment....................................... $ 238,797 $ 133,832 $ 150,340
Switching equipment............................................ 5,457 5,713 13,002
Systems development............................................ 40,949 28,753 10,148
Other.......................................................... 33,545 79,825 37,388
------------- ----------- -----------
318,748 248,123 210,878
------------- ----------- -----------
TDS Telecom
Central office................................................. 52,479 47,208 38,697
Outside plant.................................................. 60,974 53,130 55,569
Systems development............................................ 9,127 20,497 7,137
Other.......................................................... 28,880 23,605 2,969
------------- ----------- -----------
151,460 144,440 104,372
------------- ----------- -----------
Aerial
Cell sites and equipment....................................... 291,922 150,386 --
Switching equipment............................................ 38,428 53,170 --
Systems development............................................ 55,553 26,277 --
Other.......................................................... 1,815 12,436 8,521
Prepaid network infrastructure................................. (70,300) 70,300 --
------------- ----------- -----------
317,418 312,569 8,521
Less noncash items............................................. (42,709) (199,630) --
------------- ----------- -----------
274,709 112,939 8,521
------------- ----------- -----------
American Paging.................................................. 18,624 32,517 26,527
------------- ----------- -----------
Other.......................................................... 22,776 12,185 9,698
------------- ----------- -----------
$ 786,317 $ 550,204 $ 359,996
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
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 331 cell sites in 1997, 242 in 1996 and 292 in 1995. TDS Telecom's
capital additions include expenditures for switch modernization and outside
plant facilities to maintain and enhance the quality of service and offer new
revenue opportunities. TDS Telecom installed 32 digital switches in 1997, 35 in
1996 and 39 in 1995. Aerial has completed the construction of the five planned
switching centers, the central Network Operations Center and has over 1,000 cell
sites in service.
The Company's expected 1998 property, plant and equipment additions reflect
the Company's construction and expansion programs and are anticipated to
aggregate approximately $545 million. In addition, Aerial's working capital and
operating expenses will require an estimated $175 million.
- The cellular capital additions budget totals approximately $330 million,
including about $240 million for new cell sites and about $90 million for
various information systems initiatives.
- The telephone capital additions budget totals approximately $140 million,
including about $50 million for new digital switches and other switching
facilities and $35 million for improvements to outside plant facilities.
- The PCS capital additions budget totals approximately $75 million,
including $20 million for cell sites, $25 million for switching equipment
and $15 million for systems development. In addition, Aerial's working
capital and operating expenses will require an estimated $175 million.
I-52
<PAGE>
ACQUISITIONS, TRADES AND SALES
TDS continually reviews attractive opportunities for the acquisition of
additional telecommunications companies which add value to the organization. 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.
Cash expenditures (excluding cash acquired) for acquisitions totaled $129.0
million in 1997, $31.0 million in 1996 and $53.8 million in 1995. TDS completed
an exchange with BellSouth in 1997, completed the acquisition of controlling
interests in two cellular markets and one telephone company in 1997, two
cellular markets and five telephone companies in 1996 and eleven cellular
markets and five telephone companies in 1995 and increased its ownership of
certain cellular interests during the last three years for an aggregate
consideration (consisting of cash, TDS Common Shares, TDS Preferred Shares, and
U.S. Cellular Common Shares) totaling $174.7 million, $144.1 million and $194.4
million, respectively.
In October 1997, U.S. Cellular completed an exchange with BellSouth.
Pursuant to the exchange, U.S. Cellular received majority interests representing
approximately 4.0 million pops in exchange for majority interests representing
2.0 million pops, minority interests representing 1.2 million pops and a net
amount of $86.7 million in cash. The majority interests U.S. Cellular received
are in 12 markets adjacent to its Iowa/Missouri and Wisconsin/Illinois/ Indiana
clusters.
In December 1997, U.S. Cellular announced that AirTouch will acquire
noncontrolling interests in 11 markets owned by U.S. Cellular and TDS. AirTouch
will issue approximately 5,000,000 shares of its common stock and pay
approximately $54.2 million in cash to U.S. Cellular and TDS in exchange for
these interests. Management expects that it will record a significant pretax
gain upon the completion of the sales transactions. The sales are expected to be
completed in the first half of 1998.
LIQUIDITY
The Company anticipates that the aggregate resources required for 1998 will
include approximately $545 million for capital spending, consisting of $330
million for cellular capital additions, $140 million for telephone capital
additions and $75 million for PCS capital additions. In addition, Aerial's
working capital and operating expenses will require an estimated $175 million.
U.S. Cellular plans to finance its construction program primarily with
internally generated cash supplemented by short-term financing. U.S. Cellular's
operating cash flow totaled $261.9 million in 1997 (approximately 82% of 1997
capital expenditures) up 33% ($65.7 million) from 1996. U.S. Cellular also
received $52.4 million in distributions from minority partnership interests and
$61.1 million from the proceeds of investment sales to supplement operating cash
flow. At December 31, 1997, U.S. Cellular had $500 million of bank lines of
credit for general corporate purposes, 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 $196.7 million in 1997 (approximately 130%
of 1997 capital expenditures) up 3% ($5.5 million) from 1996. At December 31,
1997, TDS Telecom telephone subsidiaries had $112.0 million in unadvanced loan
funds from federal government programs to finance the telephone construction
program. These loan commitments have a weighted average annual interest rate of
5.71%.
Aerial plans to finance its construction expenditures and working capital
requirements with borrowings under the TDS lines of credit and vendor financing.
Aerial issued 10-year 8.05% zero coupon notes for $100 million in February 1998
to finance digital radio channel and switching infrastructure equipment. The
$100 million proceeds from the sale were paid to Nokia in satisfaction of all
outstanding obligations and certain future obligations of Aerial under the Nokia
Credit Agreement.
TDS and its subsidiaries had cash and temporary investments totaling $75.6
million and longer-term investments totaling $32.6 million at December 31, 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.
I-53
<PAGE>
TDS had $644 million of bank lines of credit for general corporate purposes
at December 31, 1997 of which $118 million was unused. These line of credit
agreements provide for borrowings at negotiated rates up to the prime rate.
In February 1998, TDS received net proceeds of $145 million on the sale of
6.0 million 8.04% Trust Originated Preferred Securities at $25 per Preferred
Security. The net proceeds were used to repay certain short-term indebtedness.
Subject to the approval of the Tracking Stock Proposal by shareholders, the
Company intends to, among other things, offer and sell Telecom Group Shares in a
public offering for cash, and allocate the net proceeds 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, subject to prevailing market conditions
and other factors. Management estimates proceeds of approximately $150 million
from the offering which the Telecom Group would use to repay obligations to TDS,
and which TDS would use to repay certain short-term indebtedness.
Management believes that TDS's internal cash flows and funds available from
cash and cash equivalents, lines of credit, and longer-term financing
commitments provide sufficient financial flexibility. However, the timing and
amounts of capital expenditures and acquisitions as well as working capital
requirements and amounts needed for general corporate purposes may vary
throughout the year. 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.
TDS has assessed, 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. If management's steps are not
successful in making the systems Year 2000 compliant, it could have a material
adverse effect on results of operations.
PROPOSED CORPORATE RESTRUCTURING
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal which, if approved by shareholders and implemented by the
Board, would authorize the Board to issue three new classes of common stock and
change the state of incorporation of TDS from Iowa to Delaware (the "Tracking
Stock Proposal"). The three new classes of stock are intended to separately
reflect the performance of TDS's cellular telephone, landline telephone and
personal communications services businesses ("Tracking Stocks").
The Tracking Stocks are intended to result in greater market recognition of
the value (individually and collectively) of TDS and of TDS's three principal
business groups ("Tracking Groups"), thereby enhancing shareholder value over
the long term, while at the same time enabling TDS's businesses to preserve the
benefits of being part of a consolidated enterprise. The Tracking Stock Proposal
is expected to:
- provide TDS with greater flexibility in raising capital and making
acquisitions, using equity securities specifically related to the Tracking
Groups;
- enable TDS to more effectively tailor employee benefit plans to provide
incentives to employees of the Tracking Groups;
- provide shareholders with the opportunity to invest in separate securities
that specifically reflect the underlying businesses, depending upon their
investment objectives;
I-54
<PAGE>
- permit shareholders to continue to invest in all of the TDS businesses
through the Common Shares and the Series A Common Shares.
Pursuant to the Tracking Stock Proposal each issued Preferred Share, Common
Share and Series A Common Share of TDS would be converted into a new Preferred
Share, Common Share and Series A Common Share, respectively, of the new TDS
Delaware Corporation. In addition, the Tracking Stock Proposal would 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 TDS's interest in
United States Cellular Corporation, a subsidiary of TDS 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 primarily consists
of TDS's interest in TDS Telecommunications Corporation, a subsidiary of TDS
operating landline telephone companies ("TDS Telecom"). The Aerial Group Shares,
when issued, are intended to reflect the separate performance of the Aerial
Communications Group (the "Aerial Group"), which consists of TDS's interest in
Aerial Communications, Inc., a subsidiary of TDS providing broadband personal
communications services ("Aerial").
Subject to the approval of the Tracking Stock Proposal by shareholders, TDS
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,
- issue Cellular Group Shares in exchange 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, (the "U.S. Cellular
Merger"),
- issue Aerial Group Shares in exchange 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 (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
TDS (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, although the Board reserves the right to effect
all or any part of the Distribution at any time after the approval of the
Tracking Stock Proposal, 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 in 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 TDS.
The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the Cellular Group,
the Telecom Group, and the Aerial Group to the extent of the Retained Interest
in the respective groups, and to reflect the performance of the other assets and
businesses attributed to the TDS Group.
Following the Distribution, subject to the legal and contractual
restrictions on the payment of dividends, the Board currently intends to
establish an annual dividend on the TDS Common Shares and Series A Common Shares
in an amount equal to $.11 per share. The Board also currently intends to
establish an annual dividend on the Telecom Group Shares in an amount equal to
$.50 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
$.33 per existing Common Share and Series A Common Share. The total of the
dividend on TDS Common Shares and Series A Common Shares of $.11 and the
equivalent dividend on Telecom Group Shares of $.33 equals the existing current
annual dividend on the existing Common Shares and Series A Common Shares of
$.44.) 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
I-55
<PAGE>
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 lesser of (1) all funds of TDS legally available
therefor and (2) the available dividend amount with respect to the relevant
Group.
Funds of TDS legally available for the payment of dividends ("Surplus")
(approximately $1,966 million as of December 31, 1997, based on the financial
statements) is an amount approximately equal to the Total Common and Preferred
Equity of TDS less the par or stated value of all shares of common and preferred
stock outstanding (204,922,000 shares as of December 31, 1997 after the
Distribution). With respect to any Tracking Group, the Available Dividend Amount
(approximately $1,222 million for the Cellular Group, $287 million for the
Telecom Group and $144 million for the Aerial Group as of December 31, 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 $602 million as of December
31, 1997) is an amount approximately equal to the greater of a) an amount
(approximately $313 million) which is approximately equal to the Surplus of TDS
less the sum of all Available Dividend Amounts of all Tracking Groups or b) an
amount (approximately $602 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.
Subject to the completion of the U.S. Cellular Merger and the Aerial Merger,
TDS intends to terminate certain intercompany agreements between TDS and U.S.
Cellular and Aerial, respectively. Thereafter, some or all of the policies
between TDS and such subsidiaries would be determined solely by methods that
management of TDS believes to be reasonable. Many of such policies would
continue the arrangements which presently exist between TDS 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.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, TDS will prepare
and file with the Securities and Exchange Commission consolidated financial
statements of TDS 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 TDS 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 the Cellular Group, the Telecom Group, and the
Aerial Group Common Shares will be, and holders of TDS Common Shares and Series
A Common Shares will continue to be, shareholders of TDS. TDS and its
subsidiaries will each continue to be responsible for their respective
liabilities.
LEGAL PROCEEDINGS. On December 29, 1997, a party, 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 defendants have been served with the
complaint in this case but have not yet responded to the complaint. The time for
the defendants to respond has been extended. The timing for a response will be
determined based on discussions between counsel for plaintiffs and defendants,
but a response is not expected to take place for at least one or more months. On
January 30, 1998, a virtually identical complaint has been filed by an
individual. None of the defendants have been served with this complaint. It is
expected that these cases will be consolidated.
On January 5, 1998, an individual 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
defendants have been served with the complaint in this case but have not yet
responded to the complaint. The time for the defendants to respond has been
extended. The timing for a response will be determined based on discussions
between counsel for plaintiffs and defendants, but a response is not expected to
take place for at least one or more
I-56
<PAGE>
months. On February 6, 1998, a virtually identical complaint has been filed by a
second individual. None of the defendants have been served with this complaint.
It is expected that these cases will be consolidated.
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.
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 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-57
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
OPERATING REVENUES
Cellular...................................................................... $ 876,965 $ 680,068 $ 480,316
Telephone..................................................................... 444,203 395,602 354,841
PCS........................................................................... 55,952 -- --
Radio paging.................................................................. 94,413 104,187 107,150
------------- ------------- -------------
1,471,533 1,179,857 942,307
------------- ------------- -------------
OPERATING EXPENSES
Cellular...................................................................... 747,422 592,702 437,561
Telephone..................................................................... 345,590 292,894 256,601
PCS........................................................................... 252,503 -- --
Radio paging.................................................................. 129,720 140,813 116,147
------------- ------------- -------------
1,475,235 1,026,409 810,309
------------- ------------- -------------
OPERATING INCOME (LOSS)......................................................... (3,702) 153,448 131,998
------------- ------------- -------------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest and dividend income.................................................. 13,660 15,569 13,024
Cellular investment income, net of license cost amortization.................. 77,620 54,799 40,666
Gain on sale of cellular interests and other investments...................... 41,438 138,735 86,625
PCS development costs......................................................... (21,614) (43,950) (7,829)
Other (expense) income, net................................................... (3,938) 2,727 (2,771)
Minority share of loss (income)............................................... 6,813 (26,690) (25,858)
------------- ------------- -------------
113,979 141,190 103,857
------------- ------------- -------------
INCOME BEFORE INTEREST AND INCOME TAXES......................................... 110,277 294,638 235,855
Interest expense................................................................ 89,744 42,853 50,848
Minority interest in income of subsidiary trust................................. 1,523 -- --
------------- ------------- -------------
INCOME BEFORE INCOME TAXES...................................................... 19,010 251,785 185,007
Income tax expense.............................................................. 28,559 123,646 81,029
------------- ------------- -------------
NET INCOME (LOSS)............................................................... (9,549) 128,139 103,978
Preferred Dividend Requirement.................................................. (1,892) (1,957) (2,509)
------------- ------------- -------------
NET INCOME (LOSS) AVAILABLE TO COMMON........................................... $ (11,441) $ 126,182 $ 101,469
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARES (000S)........................................... 60,211 60,464 57,456
EARNINGS PER COMMON SHARE--BASIC................................................ $ (.19) $ 2.09 $ 1.77
------------- ------------- -------------
------------- ------------- -------------
EARNINGS PER COMMON SHARE--DILUTED.............................................. $ (.19) $ 2.07 $ 1.74
------------- ------------- -------------
------------- ------------- -------------
DIVIDENDS PER COMMON AND SERIES A COMMON SHARE.................................. $ .42 $ .40 $ .38
------------- ------------- -------------
------------- ------------- -------------
Pro forma (unaudited): (Note 1)
Net income Attributable to Common Stocks
United States Cellular Group Shares........................................... $ 67,706 $ 78,562 $ 60,522
TDS Telecommunications Group Shares........................................... 22,791 26,770 25,616
Aerial Communications Group Shares............................................ (153,014) (24,733) (4,851)
TDS Common and Series A Common Shares......................................... $ 51,076 $ 45,583 $ 20,182
Weighted Average Common Shares Outstanding
United States Cellular Group Shares........................................... 60,211 60,464 57,456
TDS Telecommunications Group Shares........................................... 40,141 40,309 38,304
Aerial Communications Group Shares............................................ 40,141 40,309 38,304
TDS Common and Series A Common Shares......................................... 60,211 60,464 57,456
Earnings per Common Share
United States Cellular Group Shares........................................... $ 1.12 $ 1.30 $ 1.05
TDS Telecommunications Group Shares........................................... 0.57 0.66 0.67
Aerial Communications Group Shares............................................ (3.81) (0.61) (0.13)
TDS Common and Series A Common Shares......................................... $ 0.85 $ 0.75 $ 0.35
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
I-58
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................................. $ (9,549) $ 128,139 $ 103,978
Add (Deduct) adjustments to reconcile net income (loss) to net cash provided by
operating activities
Depreciation and amortization................................................... 301,556 231,075 191,504
Deferred taxes.................................................................. 17,236 75,015 19,603
Investment income............................................................... (83,395) (57,947) (43,188)
Minority share of income (loss)................................................. (6,813) 26,690 25,858
Gain on sale of cellular interests and other investments........................ (41,438) (138,735) (86,625)
Noncash interest expense........................................................ 24,289 17,042 12,761
Other noncash expense........................................................... 16,561 24,022 16,946
Change in accounts receivable................................................... (41,900) (28,687) (33,346)
Change in materials and supplies................................................ (25,827) (2,395) (2,999)
Change in accounts payable...................................................... 32,498 23,531 (11,630)
Change in accrued taxes......................................................... 7,612 (8,249) 6,252
Change in other assets and liabilities.......................................... 15,677 5,493 11,762
------------ ------------ ------------
206,507 294,994 210,876
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings....................................................... 260,099 15,846 334,323
Repayment of long-term debt..................................................... (121,958) (34,200) (30,734)
Change in notes payable......................................................... 368,858 (27,133) 80,351
Trust preferred securities...................................................... 144,788 -- --
Dividends paid.................................................................. (27,193) (26,231) (23,972)
Proceeds from the issuance of subsidiaries' stock............................... -- 195,265 --
Repurchase of Common Shares..................................................... (69,942) -- --
Other financing activities...................................................... (7,064) 1,349 9,506
------------ ------------ ------------
547,588 124,896 369,474
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................................................ (786,317) (550,204) (359,996)
Investments in cellular investment entities and license costs................... (20,084) (23,134) (25,025)
Distributions from investments.................................................. 56,413 25,453 9,062
Investments in PCS licenses..................................................... (5,034) (26,548) (326,035)
Proceeds from investment sales.................................................. 84,230 221,542 197,558
Acquisitions, net of cash acquired.............................................. (128,979) (31,019) (53,770)
Change in temporary investments and marketable securities....................... 36,422 (30,797) 11,871
Other investing activities...................................................... 2,629 (2,666) (3,632)
------------ ------------ ------------
(760,720) (417,373) (549,967)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.............................. (6,625) 2,517 30,383
CASH AND CASH EQUIVALENTS
Beginning of period............................................................. 57,633 55,116 24,733
------------ ------------ ------------
End of period................................................................... $ 51,008 $ 57,633 $ 55,116
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
I-59
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................................................................ $ 51,008 $ 57,633
Temporary investments............................................................................ 24,559 61,664
Construction funds............................................................................... 775 1,405
Accounts receivable
Due from customers, less allowance of $15,102 and $6,090, respectively......................... 148,811 97,093
Other, principally connecting companies........................................................ 98,487 84,119
Materials and supplies, at average cost.......................................................... 55,127 29,125
Other............................................................................................ 29,517 15,031
------------ ------------
408,284 346,070
------------ ------------
INVESTMENTS
Cellular license costs, net of amortization...................................................... 1,190,917 1,088,409
Cellular minority interests...................................................................... 138,367 206,390
Broadband PCS license acquisition costs, net of amortization..................................... 319,918 322,420
Franchise and other costs in excess of the underlying book value of subsidiaries, net of
amortization.................................................................................... 180,669 181,845
Other investments................................................................................ 142,713 144,840
------------ ------------
1,972,584 1,943,904
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Cellular
In service and under construction................................................................ 1,212,575 846,005
Less accumulated depreciation.................................................................... 272,322 195,251
------------ ------------
940,253 650,754
------------ ------------
Telephone
In service and under construction, substantially at original cost................................ 1,420,890 1,293,779
Less accumulated depreciation.................................................................... 590,123 524,418
------------ ------------
830,767 769,361
------------ ------------
PCS
In service and under construction................................................................ 642,122 324,703
Less accumulated depreciation.................................................................... 38,018 1,980
------------ ------------
604,104 322,723
------------ ------------
Radio Paging
In service and under construction................................................................ 118,275 113,000
Less accumulated depreciation.................................................................... 75,045 61,528
------------ ------------
43,230 51,472
------------ ------------
Other
In service and under construction................................................................ 96,809 82,781
Less accumulated depreciation.................................................................... 49,510 48,202
------------ ------------
47,299 34,579
------------ ------------
2,465,653 1,828,889
------------ ------------
OTHER ASSETS AND DEFERRED CHARGES................................................................ 125,080 82,106
------------ ------------
$ 4,971,601 $ 4,200,969
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
I-60
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and preferred shares........................................... $ 16,115 $ 38,197
Notes payable.................................................................................... 527,587 160,537
Accounts payable................................................................................. 239,783 205,427
Advance billings and customer deposits........................................................... 33,640 32,434
Accrued interest................................................................................. 18,284 11,777
Accrued taxes.................................................................................... 6,961 3,194
Accrued compensation............................................................................. 23,386 10,279
PCS microwave relocation costs................................................................... 7,354 17,046
Other............................................................................................ 32,775 30,376
------------ ------------
905,885 509,267
------------ ------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability................................................................ 202,680 183,792
Postretirement benefits obligation other than pensions........................................... 11,364 11,451
Other............................................................................................ 21,602 19,663
------------ ------------
235,646 214,906
------------ ------------
LONG-TERM DEBT, excluding current portion........................................................ 1,264,218 982,232
------------ ------------
REDEEMABLE PREFERRED SHARES, excluding current portion........................................... 180 280
------------ ------------
MINORITY INTEREST in subsidiaries................................................................ 416,566 432,343
------------ ------------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY
COMPANY SUBORDINATED DEBENTURES (a)............................................................. 150,000 --
------------ ------------
NONREDEEMABLE PREFERRED SHARES................................................................... 30,987 29,000
------------ ------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share; authorized 100,000,000 shares; issued and outstanding
54,443,260 and 54,237,180 shares, respectively.................................................. 54,443 54,237
Series A Common Shares, par value $1 per share; authorized 25,000,000 shares; issued and
outstanding 6,936,277 and 6,916,546 shares, respectively........................................ 6,936 6,917
Common Shares issuable, 10,480 and 30,977 shares, respectively................................... 499 1,461
Capital in excess of par value................................................................... 1,664,432 1,661,093
Treasury Shares, at cost, 794,576 shares......................................................... (30,682) --
Retained earnings................................................................................ 272,491 309,233
------------ ------------
1,968,119 2,032,941
------------ ------------
$ 4,971,601 $ 4,200,969
------------ ------------
------------ ------------
</TABLE>
- ---------
(a) As described in Note 9, the sole asset of TDS Capital I is $154.6 million
principal amount of 8.5% subordinated debentures due 2037 from TDS.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
I-61
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A COMMON CAPITAL IN
COMMON COMMON SHARES EXCESS OF TREASURY RETAINED
SHARES SHARES ISSUABLE PAR VALUE SHARES EARNINGS
--------- ----------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE, DECEMBER 31, 1994.......................... $ 47,938 $ 6,887 $ 1,995 $ 1,288,453 $ -- $ 127,765
Net Income.......................................... -- -- -- -- -- 103,978
Dividends
Common and Series A Common Shares................. -- -- -- -- -- (21,910)
Preferred Shares.................................. -- -- -- -- -- (2,507)
Acquisitions........................................ 2,948 -- -- 125,231 -- --
Dividend reinvestment, incentive and benefit
plans.............................................. 186 18 -- 6,994 -- --
Conversion of Preferred Shares...................... 43 -- -- (2,962) -- --
Conversion of Series A Common Shares................ 12 (12) -- -- -- --
Shares issued pursuant to acquisition agreements.... 10 -- (499) 489 -- --
Other............................................... -- -- -- (692) -- --
--------- ----------- --------- ------------ ---------- -----------
BALANCE, DECEMBER 31, 1995.......................... 51,137 6,893 1,496 1,417,513 -- 207,326
Net Income.......................................... -- -- -- -- -- 128,139
Dividends
Common and Series A Common Shares................. -- -- -- -- -- (24,274)
Preferred Shares.................................. -- -- -- -- -- (1,958)
Acquisitions........................................ 2,635 -- 464 110,648 -- --
Dividend reinvestment, incentive and benefit
plans.............................................. 100 27 -- 4,487 -- --
Conversion of Preferred Shares...................... 352 -- -- 4,422 -- --
Conversion of Series A Common Shares................ 3 (3) -- -- -- --
Shares issued pursuant to acquisition agreements.... 10 -- (499) 489 -- --
Gain on sale of subsidiary stock.................... -- -- -- 114,056 -- --
Other............................................... -- -- -- 9,478 -- --
--------- ----------- --------- ------------ ---------- -----------
BALANCE, DECEMBER 31, 1996.......................... 54,237 6,917 1,461 1,661,093 -- 309,233
Net (Loss).......................................... -- -- -- -- -- (9,549)
Dividends
Common and Series A Common Shares................. -- -- -- -- -- (25,300)
Preferred Shares.................................. -- -- -- -- -- (1,893)
Acquisitions........................................ -- -- -- 3,601 39,084 --
Repurchase Common Shares............................ -- -- -- -- (69,942) --
Dividend reinvestment, incentive and benefit
plans.............................................. 122 19 -- 4,707 176 --
Conversion of Preferred Shares...................... 68 -- -- 1,419 -- --
Shares issued pursuant to acquisition agreements.... 16 -- (723) 707 -- --
Other............................................... -- -- (239) (7,095) -- --
--------- ----------- --------- ------------ ---------- -----------
BALANCE, DECEMBER 31, 1997.......................... $ 54,443 $ 6,936 $ 499 $ 1,664,432 $ (30,682) $ 272,491
--------- ----------- --------- ------------ ---------- -----------
--------- ----------- --------- ------------ ---------- -----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
I-62
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--PROPOSED CORPORATE RESTRUCTURING
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal which, if approved by shareholders and implemented by the
Board, would authorize the Board to issue three new classes of common stock and
change the state of incorporation of the Company from Iowa to Delaware (the
"Tracking Stock Proposal"). The three new classes of stock are intended to
separately reflect the performance of the Company's cellular telephone, landline
telephone and personal communications services businesses ("Tracking Stocks").
The Tracking Stocks are intended to result in greater market recognition of
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. The Tracking Stock Proposal is expected to:
- provide the Company with greater flexibility in raising capital and making
acquisitions, using equity securities specifically related to the Tracking
Groups,
- enable the Company to more effectively tailor employee benefit plans to
provide incentives to employees of the Tracking Groups,
- provide shareholders with the opportunity to invest in separate securities
that specifically reflect the underlying businesses, depending upon their
investment objectives, and
- permit shareholders to continue to invest in all of the TDS businesses
through the Common Shares and the Series A Common Shares.
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
United States Cellular Corporation, a subsidiary of the Company. The Telecom
Group Shares, when issued, are intended to reflect the separate performance of
the Telecom Group, which primarily consists of the Company's interest in TDS
Telecommunications Corporation, a subsidiary of the Company. 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., a subsidiary of the Company.
Subject to approval of the Tracking Stock Proposal by shareholders, 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,
- 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
the board of directors and the shareholders of U.S. Cellular (the "U.S.
Cellular Merger"),
- 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 the
board of directors and the shareholders of 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.
The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the Cellular Group,
the Telecom Group and the Aerial Group to the extent of the Retained Interest in
the respective groups, and to reflect the performance of the other assets and
businesses attributed to the TDS Group.
For additional information regarding the Tracking Stock Proposal, see
"Proposed Corporate Restructuring" in Management's Discussion and Analysis of
Results of Operations and Financial Condition.
I-63
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--PROPOSED CORPORATE RESTRUCTURING (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 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.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Telephone and Data Systems, Inc. ("TDS" or "the Company") is a diversified
telecommunications company which, at December 31, 1997, provided high-quality
telecommunications services to approximately 3.2 million cellular telephone,
telephone, personal communications services ("PCS") and radio paging customers
in 37 states and the District of Columbia. The Company conducts substantially
all of its cellular telephone operations through its currently 81.1%-owned
subsidiary, United States Cellular Corporation, its telephone operations through
its currently wholly owned subsidiary, TDS Telecommunications Corporation, its
PCS operations through its currently 82.5%-owned subsidiary, Aerial
Communicatons, Inc., and its radio paging operations through its currently
81.9%-owned subsidiary, American Paging, Inc. ("American Paging"). See Note
14--Business Segment Information for summary financial information on each
business segment.
The Company has an agreement with a nonaffiliated third party to contribute
assets and certain liabilities of American Paging to a newly formed company. See
Note 5--Acquisitions, Exchanges and Divestitures.
BASIS OF PRESENTATION
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, TDS
intends to terminate certain intercompany agreements between the Company and
U.S. Cellular and Aerial, respectively. Thereafter, some or all of the
relationships between the Company and such subsidiaries would be determined
solely by methods that management of TDS believes to be reasonable. Many of such
policies would continue the arrangements which presently exist between TDS 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.
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.
Financial effects arising from the Cellular Group, the Telecom Group, the
Aerial Group or the TDS Group that affect the consolidated results of operations
or financial condition of the Company could affect the results of operations or
financial condition of the Cellular Group, the Telecom Group, the Aerial Group
or the TDS Group, or could affect the market price of any or all classes of
Common Stock. In addition, any net losses of the Company 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 TDS legally available for payment of dividends
I-64
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on any class of Common Stock. Accordingly, TDS'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.
Following the Distribution, subject to the legal and contractual
restrictions on the payment of dividends, the Board currently intends to
establish an annual dividend on the TDS Common Shares and Series A Common Shares
in an amount equal to $.11 per share. The Board also currently intends to
establish an annual dividend on the Telecom Group Shares in an amount equal to
$.50 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
$.33 per existing Common Share and Series A Common Share. The total of the
dividend on TDS Common Shares and Series A Common Shares of $.11 and the
equivalent dividend on Telecom Group Shares of $.33 equals the existing current
annual dividend on the existing Common Shares and Series A Common Shares of
$.44.) 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. Future dividends on the shares of common stock
will be payable when, as and if declared by the Board out of the lesser of (1)
all funds of TDS legally available therefor and (2) the available dividend
amount with respect to the relevant Group.
Funds of TDS legally available for the payment of dividends ("Surplus")
(approximately $1,966 million as of December 31, 1997, based on the financial
statements) is an amount approximately equal to the Total Common and Preferred
Equity of TDS less the par or stated value of all shares of common and preferred
stock outstanding (204,922,000 shares as of December 31, 1997 after the
Distribution). With respect to any Tracking Group, the Available Dividend Amount
(approximately $1,222 million for the Cellular Group, $287 million for the
Telecom Group and $144 million for the Aerial Group as of December 31, 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 $602 million as of December
31, 1997) is an amount approximately equal to the greater of a) an amount
(approximately $313 million) which is approximately equal to the Surplus of TDS
less the sum of all Available Dividend Amounts of all Tracking Groups or b) an
amount (approximately $602 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 Shares outstanding.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, TDS will prepare
and file with the Securities and Exchange Commission consolidated financial
statements of TDS 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 TDS 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 the Cellular Group, the Telecom Group and the
Aerial Group Common Shares will be, and holders of TDS Common Shares and Series
A Common Shares will continue to be, shareholders of TDS. TDS and its
subsidiaries will each continue to be responsible for their respective
liabilities.
I-65
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The accounting policies of TDS conform to generally accepted accounting
principles. The consolidated financial statements include the accounts of TDS,
its majority-owned subsidiaries since acquisition and the cellular partnerships
in which TDS has a majority general partnership interest. All material
intercompany items have been eliminated. Investments in entities in which the
Company does not have a controlling interest are generally accounted for using
the equity method.
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.
Certain amounts reported in prior years have been reclassified to conform to
current period presentation.
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. Those
investments with original maturities of more than 12 months are classified as
marketable securities and are stated at amortized cost.
The carrying amounts of Cash and Cash Equivalents and Temporary Investments
approximate fair value due to the short-term nature of these investments.
INVESTMENTS
Cellular license 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 and all direct and incremental costs relating to acquiring the
licenses. These costs are capitalized and amortized through charges to expense
over 40 years upon commencement of operations. Amortization amounted to $29.8
million, $28.5 million and $27.8 million in 1997, 1996 and 1995, respectively.
Accumulated amortization of cellular license costs was $129.6 million and $112.2
million at December 31, 1997 and 1996, respectively. Included in cellular
license costs is approximately $281 million and $322 million at December 31,
1997 and 1996, respectively, of goodwill related to various acquisitions
structured to be tax-free.
Cellular minority interests consist of 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 where the Company's
ownership interest equals or exceeds 3% ($135.5 million and $196.0 million at
December 31, 1997 and 1996, respectively). Income and losses from these entities
are reflected in the consolidated income statements on a pretax basis. At
December 31, 1997, the cumulative share of income from minority cellular
investments accounted for under the equity method was $263.3 million, of which
$121.9 million was undistributed. The cost method of accounting is followed for
certain minority interests where the Company's ownership interest is less than
3% ($2.8 million and $10.4 million at December 31, 1997 and 1996, respectively).
Broadband PCS license costs consist of costs incurred in acquiring PCS
licenses ($284.9 million) and capitalized interest ($39.7 million). These costs
are amortized over 40 years upon commencement of operations. Amortization
amounted to $4.7 million in 1997. Accumulated amortization of Broadband PCS
license costs was $4.7 million at December 31, 1997.
I-66
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Franchise and other costs include the costs in excess of the underlying book
value of acquired telephone companies. Costs aggregating $209.1 million and
$205.1 million at December 31, 1997 and 1996, respectively, relating to
acquisitions since November 1, 1970, are being amortized on a straight-line
basis over a 40-year period. Amortization amounted to $5.2 million, $4.9 million
and $4.4 million in 1997, 1996 and 1995, respectively. Accumulated amortization
of excess cost was $34.9 million and $29.6 million at December 31, 1997 and
1996, respectively. Costs in excess of the underlying book value relating to
acquisitions initiated before November 1, 1970, aggregating $6.5 million, are
not being amortized. Included in franchise and other costs is approximately $135
million and $143 million at December 31, 1997 and 1996, respectively, of
goodwill related to various acquisitions structured to be tax-free.
Other investments consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Narrowband PCS license costs........................................................................ $ 60,304 $ 60,304
Minority investments................................................................................ 25,073 23,633
Long-term notes receivable.......................................................................... 10,691 14,974
Rural Telephone Bank Stock, at cost................................................................. 7,175 6,639
Marketable equity securities........................................................................ 1,621 2,673
Marketable non-equity securities.................................................................... 31,024 29,735
Other............................................................................................... 6,825 6,882
----------- -----------
$ 142,713 $ 144,840
----------- -----------
----------- -----------
</TABLE>
At December 31, 1997, the cumulative share of income from minority
investments accounted for under the equity method was $6.3 million, of which
$3.9 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.
Information regarding the Company's marketable non-equity securities is
summarized below.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Held-to-Maturity
U.S. Treasury and other U.S. government corporations and agencies
Aggregate Fair Value
Current.......................................................................................... $ 10,025 $ 46,622
Noncurrent....................................................................................... 31,921 29,882
Amortized Cost Basis
Current.......................................................................................... 10,529 46,603
Noncurrent....................................................................................... 31,024 29,735
Gross Unrealized Holding Gains..................................................................... 393 174
Gross Unrealized Holding Losses.................................................................... $ -- $ 8
</TABLE>
The noncurrent investments have contractual maturities of more than one to
five years at December 31, 1997 and 1996. No sales or transfers of securities
classified as held-to-maturity occurred during 1997 and 1996.
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
I-67
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
intangibles for impairment whenever events or changes in circumstances indicate
that the book value of a long-lived asset is not 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.
REVENUE RECOGNITION
TDS's revenues are recognized when earned. TDS's telephone subsidiaries
participate in revenue pools with other telephone companies for interstate
revenue and for certain intrastate revenue. Such pools are funded by toll
revenue and/or access charges within state jurisdiction and by access charges in
the interstate market. Revenues earned through the various pooling processes are
initially recorded based on the Company's estimates.
ADVERTISING COSTS
The Company expenses advertising costs as incurred.
EARNINGS PER COMMON SHARE
The Company adopted SFAS No. 128, "Earnings per Share," effective December
31, 1997. Earnings per Common Share amounts for 1996 and 1995 have been restated
to conform to current period presentation. The effect of this accounting change
was to increase Earnings per Common Share--Basic by $.01 and $.03 in 1996 and
1995, respectively. The adoption of SFAS No. 128 had no effect on Earnings per
Common Share--Diluted.
The amounts used in computing Earnings per Common Share and the effect on
income and the weighted average number of Common and Series A Common Shares of
dilutive potential common stock are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ----------- -----------
(DOLLARS AND SHARES IN THOUSANDS)
<S> <C> <C> <C>
Net Income (Loss)...................................................................... $ (9,549) $ 128,139 $ 103,978
Less: Preferred Dividends.............................................................. (1,892) (1,957) (2,509)
---------- ----------- -----------
Net Income (Loss) Available to Common used in Earnings per Share-- Basic............... (11,441) 126,182 101,469
Reduction in preferred dividends if Preferred Shares converted into Common Shares...... -- 671 998
Minority Income Adjustment............................................................. (100) (152) (271)
---------- ----------- -----------
Net Income (Loss) Available to Common used in Earnings per Share-- Diluted............. $ (11,541) $ 126,701 $ 102,196
---------- ----------- -----------
---------- ----------- -----------
Weighted Average Number of Common Shares used in Earnings per Share--Basic............. 60,211 60,464 57,456
Effect of Dilutive Securities:
Common Shares outstanding if Preferred Shares converted.............................. -- 543 1,033
Stock Options and Stock Appreciation Rights.......................................... -- 165 159
Common Shares issuable............................................................... -- 28 33
---------- ----------- -----------
Weighted Average Number of Common Shares used in Earnings per Share--Diluted........... 60,211 61,200 58,681
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
For 1997, Preferred Shares convertible into 917,000 Common Shares, 130,000
stock options and stock appreciation rights and 15,000 Common Shares issuable in
the future were not included in computing diluted Earnings per Common Share
because their effects were antidilutive. For 1996 and 1995, Preferred Shares
convertible into 428,000 and 477,000 Common Shares, respectively, were not
included in computing diluted Earnings per Common Share because their effects
were antidilutive.
I-68
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The minority income adjustment reflects the additional minority share of
U.S. Cellular's income computed as if all of U.S. Cellular's issuable securities
were outstanding.
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,
---------------------------------
1997 1996 1995
--------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest paid............................................................................ $ 70,741 $ 52,835 $ 49,475
Income taxes paid........................................................................ 10,743 67,967 60,515
Common Shares issued for conversion of Preferred Shares.................................. 1,487 4,602 948
Increase in PCS network equipment and prepaid infrastructure costs through the issuance
of long-term debt and interim financing................................................ 84,335 100,000 --
Additions to property, plant and equipment financed through accounts payable and accrued
expenses............................................................................... $ 46,104 $ 87,109 $ 3,943
</TABLE>
TDS has acquired operating telephone companies, certain cellular licenses
and operating companies and certain other assets since January 1, 1995. 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,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Property, plant and equipment.......................................................... $ 120,365 $ 55,692 $ 56,132
Cellular licenses...................................................................... 137,409 95,447 129,510
(Decrease) increase in investment in cellular minority interests....................... (89,205) (3,641) 977
Franchise and other costs.............................................................. 2,452 17,679 25,657
Long-term debt......................................................................... (4,857) (22,979) (9,254)
Deferred credits....................................................................... 1,104 (6,205) (538)
Other assets and liabilities, excluding cash and cash equivalents...................... 7,396 8,188 (8,084)
Common Shares issued and issuable...................................................... (42,685) (113,128) (127,836)
Preferred Shares issued................................................................ (3,000) -- --
U.S. Cellular Common Shares issued and issuable........................................ -- (34) (12,794)
----------- ----------- -----------
Decrease in cash due to acquisitions................................................... $ 128,979 $ 31,019 $ 53,770
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
I-69
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES
TDS files a consolidated federal income tax return. Income tax provisions
charged to net income are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................................................ $ 4,533 $ 31,356 $ 44,690
State.............................................................................. 6,790 17,275 16,736
Deferred:
Federal............................................................................ 13,302 67,040 19,253
State.............................................................................. 4,453 10,072 2,386
Amortization of deferred investment tax credits...................................... (519) (2,097) (2,036)
---------- ------------ ------------
Total income tax expense............................................................. $ 28,559 $ 123,646 $ 81,029
---------- ------------ ------------
---------- ------------ ------------
</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.
A reconciliation of income tax expense and the amount computed by applying
the statutory federal income tax rate (35%) to income before income taxes is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal income tax rate........................................................ $ 6,653 $ 88,125 $ 64,752
State income taxes, net of federal benefit............................................... 6,958 17,358 12,067
Amortization of license acquisition costs and costs in excess of book value.............. 5,276 4,280 4,440
Dividend exclusion and other permanent items............................................. 752 377 (250)
Amortization of deferred investment tax credits.......................................... (519) (2,014) (1,850)
Effects of corporations not included in consolidated federal tax return.................. 1,409 2,351 2,035
Sale of cellular interests............................................................... 5,549 12,337 --
Rate difference of federal net operating loss............................................ 1,246 -- --
Regulatory adjustment.................................................................... 101 624 595
Deferred investment tax credit........................................................... 399 365 197
Other differences, net................................................................... 735 (157) (957)
---------- ----------- ---------
Income tax expense....................................................................... $ 28,559 $ 123,646 $ 81,029
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
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.
The Company's current net deferred tax assets totaled $3.7 million and $2.7
million as of December 31, 1997 and 1996, respectively. The net current deferred
tax asset primarily represents the deferred tax effects of unearned revenues.
I-70
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES (CONTINUED)
The temporary differences that gave rise to the noncurrent deferred tax
assets and liabilities as of December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred Tax Asset:
Net operating loss carryforwards.................................................................. $ 55,363 $ 17,055
Taxes on acquisitions............................................................................. 54,134 --
Alternative minimum tax credit carryforward....................................................... 21,205 10,433
Postretirement benefits........................................................................... 4,819 4,819
Amortization of deferred charges.................................................................. 1,614 10,990
Other............................................................................................. 3,511 4,069
----------- -----------
140,646 47,366
Less valuation allowance............................................................................ (29,001) (16,891)
----------- -----------
Net Deferred Tax Asset............................................................................ 111,645 30,475
----------- -----------
Deferred Tax Liability:
Property, plant and equipment..................................................................... 134,672 86,056
Investment in equity securities................................................................... 64,603 40,540
Licenses.......................................................................................... 55,756 38,656
Partnership investments........................................................................... 25,687 26,965
Capitalized interest.............................................................................. 18,721 17,810
Other............................................................................................. 14,886 4,240
----------- -----------
Total Deferred Tax Liability........................................................................ 314,325 214,267
----------- -----------
Net Deferred Income Tax Liability................................................................. $ 202,680 $ 183,792
----------- -----------
----------- -----------
</TABLE>
At December 31, 1997, TDS had $21.2 million of federal alternative minimum
tax credit carryforward available to offset regular income tax payable in future
years. TDS had $60.5 million of federal net operating loss carryforward
(generating a $19.9 million deferred tax asset) at December 31, 1997, expiring
in 2012 which is available to offset future consolidated taxable income. In
addition, TDS had $496.7 million of state net operating loss carryforward
(generating a $35.5 million deferred tax asset) at December 31, 1997, expiring
between 1997 and 2012 which is available to offset future taxable income
primarily of the individual subsidiaries which generated the loss. 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.
NOTE 4--PROPERTY PLANT AND EQUIPMENT
CELLULAR
Cellular property, plant and equipment is stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets. The provision for depreciation as a percentage of depreciable property,
plant and equipment was 10.3%, 10.4% and 10.0% in 1997, 1996 and 1995,
respectively.
I-71
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--PROPERTY PLANT AND EQUIPMENT (CONTINUED)
Cellular property, plant and equipment in service and under construction
consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating plant and equipment..................................................................... $ 923,480 $ 641,600
Buildings and leasehold improvements.............................................................. 136,023 86,533
Office furniture, equipment and vehicles.......................................................... 89,987 71,674
Land.............................................................................................. 63,085 46,198
------------- -----------
$ 1,212,575 $ 846,005
------------- -----------
------------- -----------
</TABLE>
TELEPHONE
Telephone property, plant and equipment 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 $686,000, $825,000 and $682,000
in 1997, 1996 and 1995, respectively. The composite weighted average rates were
5.5%, 7.3% and 9.3% in 1997, 1996 and 1995, respectively. The amount of such
allowance has varied principally as a result of changes in the level of
construction work in process and in the cost of capital.
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.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Composite depreciation rates, as applied to the
average cost of depreciable property were 7.4%, 7.2% and 7.1% in 1997, 1996 and
1995, respectively.
Telephone property, plant and equipment in service and under construction
consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and buildings.............................................................................. $ 67,203 $ 67,181
Central office equipment........................................................................ 399,016 372,008
Cable and wire.................................................................................. 719,945 639,537
Furniture and office equipment.................................................................. 112,921 77,046
Vehicles and other equipment.................................................................... 42,632 39,928
Plant under construction........................................................................ 52,677 59,213
Non-regulated investments and other............................................................. 26,496 38,866
------------- -------------
$ 1,420,890 $ 1,293,779
------------- -------------
------------- -------------
</TABLE>
The Company's telephone operations follow accounting for regulated
enterprises prescribed by SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation." Management periodically reviews the criteria for applying
these provisions to determine whether continuing application of SFAS No. 71 is
appropriate. Management 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.
I-72
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--PROPERTY PLANT AND EQUIPMENT (CONTINUED)
PCS
PCS property, plant and equipment is stated at original cost. Depreciation
is provided using the straight-line method over the estimated useful lives of
the assets. The provision for depreciation as a percentage of depreciable
property, plant and equipment was 10.9%, 20.2% and 2.2% in 1997, 1996 and 1995,
respectively.
PCS property, plant and equipment in service and under construction consists
of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Network............................................................................................. $ 514,525 $ --
Information systems................................................................................. 83,950 15,951
Office equipment.................................................................................... 15,800 3,180
Leasehold improvements and other.................................................................... 8,466 1,442
Work in process..................................................................................... 19,381 233,830
Prepaid network infrastructure costs................................................................ -- 70,300
----------- -----------
$ 642,122 $ 324,703
----------- -----------
----------- -----------
</TABLE>
Work in process includes expenditures for the design, construction and
testing of the Company's PCS networks as well as the cost to relocate dedicated
private microwave links currently operating in the Company's spectrum in its PCS
markets. Work in process also includes the costs associated with developing
information systems. The Company capitalized interest on certain of its work in
process expenditures totaling $6.0 million and $1.2 million in 1997 and 1996,
respectively. When assets are placed in service, the Company transfers the
assets to the appropriate property and equipment category.
Prepaid network infrastructure costs include the excess of the proceeds from
the sale of notes over the Company's current obligations (i.e. financed
purchases under a Credit Agreement with Nokia Telecomunications, Inc.) to Nokia.
The Company paid Nokia for a portion of 1997 equipment purchases by reducing the
amount of the prepaid balance by the cost of the equipment purchased. Nokia paid
the Company monthly interest on the unused portion of the note proceeds.
RADIO PAGING
Radio Paging property, plant and equipment is stated at original cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. The provision for depreciation as a percentage of
depreciable property, plant and equipment was 24.6%, 27.9% and 22.1% in 1997,
1996 and 1995, respectively.
Radio Paging property, plant and equipment in service and under construction
consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Subscriber devices.................................................................................. $ 41,059 $ 39,714
Terminals and transmitters.......................................................................... 48,181 44,251
Computer equipment.................................................................................. 16,402 16,595
Furniture and fixtures.............................................................................. 10,515 10,314
Other............................................................................................... 2,118 2,126
----------- -----------
$ 118,275 $ 113,000
----------- -----------
----------- -----------
</TABLE>
I-73
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--PROPERTY PLANT AND EQUIPMENT (CONTINUED)
OTHER
Other property, plant and equipment is stated at original cost. Depreciation
is provided using the straight-line method over the estimated useful lives of
assets. The provision for depreciation as a percentage of depreciable property,
plant and equipment was 12.3%, 15.9% and 10.0% in 1997, 1996 and 1995,
respectively.
Other property, plant and equipment in service and under construction
consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Computer equipment..................................................................................... $ 54,062 $ 42,682
Furniture and fixtures................................................................................. 18,710 15,772
Cable, printing and other equipment.................................................................... 12,138 11,737
Work in progress....................................................................................... 11,899 5,055
Capital leases......................................................................................... -- 7,535
--------- ---------
$ 96,809 $ 82,781
--------- ---------
--------- ---------
</TABLE>
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.
NOTE 5--ACQUISITIONS, EXCHANGES AND DIVESTITURES
During 1997, 1996 and 1995, TDS and its subsidiaries completed the following
business combinations:
<TABLE>
<CAPTION>
CONSIDERATION
-----------------------------
TDS AND USM
COMMON STOCK,
AND TDS
CASH PREFERRED SHARES
----------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Acquisitions During 1997
Cellular interests........................................................................... $ 128,828 $ 32,486
Telephone interests.......................................................................... 151 13,200
Acquisitions During 1996
Cellular interests........................................................................... $ 13,596 $ 42,499
Telephone interests.......................................................................... 17,423 70,663
Acquisitions During 1995
Cellular interests........................................................................... $ 41,885 $ 94,542
Telephone interests.......................................................................... 250 46,087
Paging interests............................................................................. 5,656 --
----------- --------
</TABLE>
Assuming that these acquisitions had taken place on January 1, 1996,
unaudited pro forma results of operations from continuing operations would have
been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Operating Revenues.............................................................................. $ 1,576,361 $ 1,277,309
Net Income...................................................................................... 11,680 142,078
Earnings per Common Share--Basic................................................................ .19 2.29
Earnings per Common Share--Diluted.............................................................. $ .19 $ 2.27
------------- -------------
</TABLE>
I-74
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--ACQUISITIONS, EXCHANGES AND DIVESTITURES (CONTINUED)
EXCHANGE OF MARKETS WITH BELLSOUTH
In October 1997, U.S. Cellular completed an exchange with BellSouth
Corporation. Pursuant to the exchange, U.S. Cellular received majority interests
representing approximately 4.0 million population equivalents in exchange for
majority interests representing 2.0 million population equivalents, minority
interests representing 1.2 million population equivalents and a net amount of
$86.7 million in cash. The majority interests U.S. Cellular received are in 12
markets adjacent to its Iowa/Missouri and Wisconsin/Illinois/Indiana clusters.
SALES OF CELLULAR AND OTHER INVESTMENTS
The $41.4 million gain in 1997 reflects the sales of non-strategic cellular
and other investments. U.S. Cellular sold its majority interests in one market
and one market partition, minority interests in two other markets and received
cash from the settlement of a legal matter. These sales, along with the sales of
certain other investments by TDS, generated net cash proceeds of $84.2 million.
The $138.7 million gain in 1996 reflects the sales of non-strategic cellular
and other investments. U.S. Cellular 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. Aerial 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. U.S. Cellular 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.
PENDING SALES OF MINORITY INTERESTS
In December 1997, the Company announced that AirTouch Communications, Inc.
("AirTouch") will acquire interests owned by U.S. Cellular and TDS in cellular
systems in 11 markets. AirTouch will issue approximately 5,000,000 shares of its
common stock and pay approximately $54.2 million in cash to U.S. Cellular and
TDS in exchange for these interests, which represent approximately 900,000
population equivalents. U.S. Cellular has also entered into an agreement to sell
its minority interests in two other markets for $37.6 million in cash.
Management expects that it will record a significant pretax gain upon the
completion of the sales transaction. The sales are expected to be completed in
the first half of 1998.
AMERICAN PAGING MERGER
In December 1997, the Company announced an agreement with TSR Paging, Inc.
("TSR") to combine their respective paging businesses. On February 10, 1998, the
board of directors of American Paging approved a merger agreement providing for
the acquisition by TDS of all of the issued and outstanding shares of American
Paging not owned by TDS for cash in an amount equal to $2.50 per share,
approximately $9.1 million in total. Upon consummation of the merger, TDS will
contribute substantially all of the assets and certain, limited liabilities of
American Paging, and TSR will 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 the new company. TDS will not
have any funding requirements once the combination is completed.
I-75
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--ACQUISITIONS, EXCHANGES AND DIVESTITURES (CONTINUED)
The following table summarizes the assets and liabilities which TDS would
contribute to the new company.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Current assets
Cash.................................................................................................. $ 3,058
Temporary investments................................................................................. 61
Accounts receivable................................................................................... 9,051
Inventory............................................................................................. 6,851
Other................................................................................................. 1,076
Property, plant and equipment, net...................................................................... 41,762
Narrowband PCS license.................................................................................. 60,901
Other investments....................................................................................... 429
Deferred assets......................................................................................... 10,959
Current liabilities
Accounts payable...................................................................................... (942)
Advance billings and customer deposits................................................................ (6,827)
Accrued taxes......................................................................................... (42)
----------
$ 126,337
----------
----------
</TABLE>
NOTE 6--NOTES PAYABLE
TDS has used short-term debt to finance its investments in PCS and radio
paging operations, for acquisitions and for general corporate purposes.
Long-term debt and equity financing from time to time, including sales of debt
and equity securities by subsidiaries, have reduced such short-term debt.
Proceeds from the issuance of long-term debt and equity securities retired
$241.4 million, $131.2 million and $131.4 million of short-term debt in 1997,
1996 and 1995, respectively. Proceeds from the sales of non-strategic cellular
and other investments from time to time in 1997, 1996 and 1995 have also been
used to retire short-term debt.
TDS had $644.2 million of bank lines of credit for general corporate
purposes at December 31, 1997, all of which were committed. Unused amounts of
such lines totaled $117.9 million, all of which were committed. These line of
credit agreements provide for borrowings at negotiated rates up to the prime
rate.
U.S. Cellular had $500.0 million of bank lines of credit for general
corporate purposes as of December 31, 1997, all of which were unused. These line
of credit agreements provide for borrowings at the London InterBank Offered Rate
("LIBOR") plus 26.5 basis points, due quarterly.
The carrying amount of short-term debt approximates fair value due to the
short-term nature of these instruments.
Information concerning notes payable is shown in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at end of period......................................................... $ 527,587 $ 160,537 $ 184,320
Weighted average interest rate at end of period.................................. 6.3% 6.0% 6.3%
Maximum amount outstanding during the period..................................... $ 587,683 $ 204,140 $ 184,320
Average amount outstanding during the period (1)................................. $ 407,965 $ 112,341 $ 139,671
Weighted average interest rate during the period (1)............................. 6.1% 5.8% 6.4%
----------- ----------- -----------
</TABLE>
- ---------
(1) The average was computed based on month-end balances.
I-76
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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, 9% to 14%, due through 2003..................... 2,440 3,175
------------- -------------
Total Parent................................................................................ 241,640 242,375
------------- -------------
Subsidiaries
RUS, RTB and FFB Mortgage Notes, due through 2031, various rates averaging 5.5% in 1997, 5.4%
in 1996 and 5.4% in 1995.................................................................... 313,012 308,371
------------- -------------
6% zero coupon convertible redeemable debentures, maturing in 2015............................ 745,000 745,000
Unamortized discount.......................................................................... (479,670) (494,893)
------------- -------------
265,330 250,107
------------- -------------
7.25% notes, maturing in 2007................................................................. 250,000 --
------------- -------------
Vendor financing, approximating 90-day Commercial Paper Rate plus 1.4% due through 2002....... -- 103,654
------------- -------------
8.34% zero coupon notes, maturing in 2006..................................................... 226,245 226,245
Unamortized discount.......................................................................... (114,161) (122,502)
------------- -------------
112,084 103,743
------------- -------------
Interim vendor financing...................................................................... 84,355 --
------------- -------------
Other long-term notes, 0% to 12.6%, due through 2009.......................................... 12,613 10,601
------------- -------------
Total Subsidiaries.......................................................................... 1,037,394 776,476
------------- -------------
Total long-term debt............................................................................ 1,279,034 1,018,851
------------- -------------
Less current portion.......................................................................... 14,816 36,619
------------- -------------
Total long-term debt............................................................................ $ 1,264,218 $ 982,232
------------- -------------
------------- -------------
</TABLE>
The Medium-Term Notes ("MTNs") carry original maturities of 12 to 30 years,
maturing at various times from 2003 to 2025. The MTNs may be redeemed by the
Company at par value beginning in 1999.
The RUS, RTB and FFB 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.
U.S. Cellular 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. The unsecured notes are due in 2015
and there is no periodic payment of interest. The notes are convertible at any
time into 9.475 U.S. Cellular Common Shares per $1,000 of notes. Beginning in
2000, U.S. Cellular may redeem, or the holder may call, the notes at the issue
price plus accrued interest.
U.S. Cellular sold $250 million principal amount of 7.25% unsecured senior
notes in 1997 with proceeds to the Company of $247.0 million. The notes are due
2007 and interest is payable semi-annually. Beginning 2004, U.S. Cellular may
redeem the notes at principal amount plus accrued interest. U.S. Cellular used a
portion of the net proceeds to repay the outstanding vendor financing balance.
I-77
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LONG-TERM DEBT (CONTINUED)
U.S. Cellular had financing arrangements with an equipment vendor for
cellular system equipment and construction costs. The borrowings were
collateralized by a secured interest in some or all of the assets of U.S.
Cellular's operating subsidiaries. Borrowings had 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).
Aerial sold $226 million principal amount at maturity of 10-year zero coupon
8.34% yield to maturity debt in 1996 at an issue price of $100 million. The
unsecured notes are due in 2006 and there is no periodic payment of interest.
The proceeds were paid to Aerial's equipment vendor in satisfaction of all then
outstanding and future obligations up to $100 million. The notes are fully and
unconditionally guaranteed by TDS. The notes are subject to optional redemption
beginning in 2001 at redemption prices which reflect original issue discount
accrued since issuance.
The annual requirements for principal payments on long-term debt are
approximately $14.8 million, $15.8 million, $15.6 million, $15.3 million and
$15.2 million for the years 1998 through 2002, respectively.
The carrying value and estimated fair value of the Company's Long-term Debt
were approximately equal at December 31, 1997 and 1996, respectively. The fair
value of the Company's long-term debt was estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
NOTE 8--MINORITY INTEREST IN SUBSIDIARIES
The following table summarizes the minority shareholders' and partners'
interests in the equity of consolidated subsidiaries.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Cellular
U.S. Cellular shareholders'....................................................................... $ 305,478 $ 285,835
U.S. Cellular subsidiaries' partners'............................................................. 53,908 48,715
----------- -----------
359,386 334,550
Aerial shareholders'................................................................................ 33,692 75,897
TDS Telecom telephone subsidiaries'................................................................. 23,293 21,810
Other............................................................................................... 195 86
----------- -----------
$ 416,566 $ 432,343
----------- -----------
----------- -----------
</TABLE>
SALE OF STOCK BY SUBSIDIARIES
Aerial issued 12.3 million Common Shares in 1996 in an initial public
offering (at a price of $17 per share). The initial public offering reduced
TDS's ownership percentage from 100% to 82.8%. The Aerial Common Share offering
was recorded at a fair market value which was more than TDS's book value
investment in Aerial. TDS adjusted its book value investment as a result of this
issue and increased capital in excess of par value $114.1 million in 1996.
NOTE 9-- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES
In November 1997, TDS Capital I, a subsidiary trust (the "Trust") of TDS,
issued 6,000,000 of its 8.5% Company-Obligated Mandatorily Redeemable Preferred
Securities (the "Preferred Securities") at $25 per Preferred Security. Net
proceeds from the issuance totaled $144.8 million and were used to retire
short-term debt.
The sole asset of TDS Capital I is $154.6 million principal amount of TDS's
8.5% Subordinated Debentures due December 31, 2037. There is a full and
unconditional guarantee by TDS of the Trust's obligations under the
I-78
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9-- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES
(CONTINUED)
Preferred Securities issued by the Trust. However, TDS's obligations are
subordinate and junior in right of payment to certain other indebtedness of TDS.
TDS has the right to defer payments of interest on the Subordinated Debentures
by extending the interest payment period, at any time, for up to 20 consecutive
quarters. If interest payments on the Subordinated Debentures are so deferred,
distributions on the Preferred Securities will also be deferred. During any
deferral, distributions will continue to accrue with interest thereon. In
addition, during any such deferral, TDS may not declare or pay any dividend or
other distribution on, or redeem or purchase, any of its common stock.
The Subordinated Debentures are redeemable by TDS, in whole or in part, from
time to time, on or after November 18, 2002, or, in whole but not in part, at
any time in the event of certain income tax circumstances. If the Subordinated
Debentures are redeemed, the Trust must redeem Preferred Securities on a pro
rata basis having an aggregate liquidation amount equal to the aggregate
principal amount of the Subordinated Debentures so redeemed. In the event of the
dissolution, winding up or termination of the Trust, the holders of Preferred
Securities will be entitled to receive, for each Preferred Security, a
liquidation amount of $25 plus accrued and unpaid distributions thereon to the
date of payment, unless, in connection with the dissolution, winding up or
termination, Subordinated Debentures are distributed to the holders of the
preferred securities.
NOTE 10--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, 1997, 14,794 shares of
Redeemable Preferred Shares were outstanding, redeemable at $100 per share.
The annual requirements for redemption of Redeemable Preferred Shares are
$1,299,100, $103,000 and $77,300 for the years 1998 through 2000, respectively.
I-79
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--PREFERRED SHARES (CONTINUED)
The following is a schedule of the Redeemable Preferred Shares' activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period................................................................ $ 1,858 $ 15,093 $ 25,001
Add:
Stock dividends........................................................................... -- 113 546
Less:
Redemption of preferred................................................................... (359) (9,456) (9,608)
Conversion of preferred................................................................... -- (3,872) --
Expiration of redemption feature.......................................................... (20) (20) (839)
Change in redemption feature.............................................................. -- -- (7)
--------- --------- ---------
1,479 1,858 15,093
Less current portion........................................................................ 1,299 1,578 13,506
--------- --------- ---------
Balance, end of period...................................................................... $ 180 $ 280 $ 1,587
--------- --------- ---------
--------- --------- ---------
</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, 1997, 309,873 shares of Nonredeemable 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, 1997, certain series of Preferred Shares are convertible into TDS Common
Shares. (See Note 11--Convertible Preferred Shares)
The following is a schedule of the Nonredeemable Preferred Shares activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period............................................................... $ 29,000 $ 29,710 $ 29,819
Add:
Acquisition.............................................................................. 3,000 -- --
Reclassification from Redeemable Preferred Shares........................................ 20 20 839
Less:
Conversion of preferred.................................................................. (1,031) (730) (948)
Redemption of preferred.................................................................. (2) -- --
--------- --------- ---------
Balance, end of period..................................................................... $ 30,987 $ 29,000 $ 29,710
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 11--COMMON STOCK
COMMON STOCK ACQUISITIONS
During 1997, 1996 and 1995, TDS issued 998,783, 2,634,408 and 2,947,777
Common Shares, respectively, for the acquisition of cellular and telephone
interests. The 1997 Common Shares issued for acquisitions are reissued Treasury
Shares. (See Common Share Repurchase Program)
COMMON SHARES ISSUABLE
A certain acquisition agreement requires TDS to deliver 10,480 Common Shares
in 1998.
I-80
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMON STOCK (CONTINUED)
DIVIDEND REINVESTMENT, INCENTIVE AND COMPENSATION 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,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Common Shares
Tax-deferred savings plan................................................................ 32,354 36,269 40,624
Dividend reinvestment plan............................................................... 25,273 28,827 105,001
Stock-based compensation plans........................................................... 64,367 35,273 40,025
--------- --------- ---------
121,994 100,369 185,650
--------- --------- ---------
--------- --------- ---------
Series A Common Shares
Dividend reinvestment plan............................................................... 19,731 26,445 17,855
--------- --------- ---------
--------- --------- ---------
</TABLE>
TAX-DEFERRED SAVINGS PLAN. TDS had reserved 78,558 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, U.S.Cellular Common Shares, Aerial Common Shares, American Paging
Common Shares or five nonaffiliated funds.
DIVIDEND REINVESTMENT PLANS. TDS had reserved 460,742 Common Shares for
issue under the Automatic Dividend Reinvestment and Stock Purchase Plan and
172,523 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 had reserved 1,291,107 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 to officers and employees. The options are exercisable
over a specified period not in excess of ten years. The options expire from 1998
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 $91,000, $263,000 and $408,000 in 1997, 1996 and 1995, respectively.
Had compensation cost for all plans been determined consistent with SFAS
I-81
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMON STOCK (CONTINUED)
No. 123, the Company's net income (loss) and earnings per share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Income (Loss)
As Reported......................................................................... $ (9,549) $ 128,139 $ 103,978
Pro Forma........................................................................... (13,506) 126,495 103,316
Earnings per Common Share-Basic
As Reported......................................................................... (.19) 2.09 1.77
Pro Forma........................................................................... (.26) 2.06 1.75
Earnings per Common Share-Diluted
As Reported......................................................................... (.19) 2.07 1.74
Pro Forma........................................................................... $ (.26) $ 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.
A summary of the status of the Company's stock option plans at December 31,
1997, 1996 and 1995 and changes during the years ended is presented in the table
and narrative below:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE
SHARES OPTION PRICES FAIR VALUES
--------- ------------- -----------
<S> <C> <C> <C>
Stock Options:
Outstanding January 1, 1995 (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
Granted.............................................................................. 68,137 $ 43.90 $ 10.61
Exercised............................................................................ (43,824) $ 19.51
Cancelled............................................................................ (41,243) $ 40.78
---------
Outstanding December 31, 1997 (492,917 exercisable).................................... 574,508 $ 35.87
--------- -------------
--------- -------------
</TABLE>
STOCK OPTIONS. The fair value of each option grant was estimated on the date
of the grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995,
respectively: risk-free interest rates of 6.1%, 5.6% and 6.6%; expected dividend
yields of 1.0%, 1.0% and 1.0%; expected lives of 5.0 years, 5.1 years and 6.9
years and expected volatility of 19.2%, 20.5% and 25.0%.
STOCK APPRECIATION RIGHTS allowed 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 expired March 1997. The fair value of each stock
appreciation right grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: risk-free
interest rates of 4.9%, 5.2% and 5.5%; expected dividend
I-82
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMON STOCK (CONTINUED)
yields of 1.0%, 1.0% and 1.0%; expected lives of 0.1 year, 0.2 year and 0.7
year; and expected volatility of 20.5%, 18.4% and 20.2%.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Outstanding beginning of period............................................................. 10,070 16,034 12,096
Granted................................................................................... 630 5,923 8,174
Exercised................................................................................. (10,700) (11,887) (4,236)
--------- --------- ---------
Outstanding end of period................................................................... -- 10,070 16,034
--------- --------- ---------
--------- --------- ---------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. TDS had reserved 159,816 Common Shares for
sale to the employees of TDS and its subsidiaries. The fair value of the
employees' purchase rights was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants rights in 1997 and 1996, respectively: risk-free
interest rate of 5.6% and 5.6%; expected dividend yield of 1.0% and 1.0%;
expected lives of 1.2 years and 0.5 year; and expected volatility of 16.9% and
15.3%.
CONVERTIBLE PREFERRED SHARES
TDS convertible Preferred Shares are convertible into 932,011 Common Shares.
(See Note 10--Nonredeemable Preferred Shares) TDS issued 56,365, 347,707 and
40,734 Common Shares in 1997, 1996 and 1995, respectively, for TDS preferred
shares converted and 11,345 and 3,781 Common Shares in 1997 and 1996,
respectively, for 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 6,936,277 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 other 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.
Through December 31, 1997, the Company purchased 1,798,100 Common Shares for
$69.9 million. The Company reissued 1,003,524 Common Shares primarily for
acquisitions.
NOTE 12--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 U.S. Cellular and Aerial 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.
I-83
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--EMPLOYEE BENEFIT PLANS (CONTINUED)
Total pension costs were $5.3 million, $4.6 million and $4.6 million in
1997, 1996 and 1995, respectively.
OTHER POSTRETIREMENT BENEFITS
The Company sponsors two defined benefit postretirement plans that cover
most of the employees of TDS, TDS Telecom 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 $1.9 million, $2.2 million
and $3.1 million in 1997, 1996 and 1995, 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, 1997:
<TABLE>
<CAPTION>
LIFE
INSURANCE HEALTH CARE
PLAN PLAN TOTAL
------------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees........................................................................... $ 2,002 $ 5,196 $ 7,198
Fully eligible active plan participants............................................ 588 2,427 3,015
Other active plan participants..................................................... 1,111 10,015 11,126
------------- ----------- ---------
3,701 17,638 21,339
Plan assets at fair value............................................................ 1,635 12,969 14,604
------------- ----------- ---------
Accumulated postretirement benefit obligation in excess of plan assets............... 2,066 4,669 6,735
Unrecognized prior service cost...................................................... (290) (1,801) (2,091)
Unrecognized net gain from past experience different from that assumed and from
changes in assumptions............................................................. (34) 6,754 6,720
------------- ----------- ---------
Accrued postretirement benefit cost at December 31, 1997............................. $ 1,742 $ 9,622 $ 11,364
------------- ----------- ---------
------------- ----------- ---------
</TABLE>
Net postretirement cost for 1997, 1996 and 1995 includes the following
components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost................................................................................... $ 875 $ 796 $ 588
Interest cost on accumulated postretirement benefit obligation................................. 1,346 1,125 1,082
Actual return on plan assets................................................................... (632) (753) (656)
Net amortization and deferral.................................................................. (344) 99 204
--------- --------- ---------
Net postretirement cost........................................................................ $ 1,245 $ 1,267 $ 1,218
--------- --------- ---------
--------- --------- ---------
</TABLE>
For measurement purposes, a 9.6% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1997; the rate was assumed
to decrease over six years to 6.1% and to remain at 6.1% thereafter. The assumed
rate of return on plan assets was 8.0%. 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,
1997, by $3.5 million and the aggregate of the service and interest cost
components of postretirement expense for the year then ended by $506,000.
I-84
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--EMPLOYEE BENEFIT PLANS (CONTINUED)
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0%.
NOTE 13--COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
The primary purpose of TDS's construction and expansion program is to
provide for normal growth, to upgrade communications 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 $330 million for 1998, including about $240 million for new
cell sites and about $90 million for various information systems initiatives.
The telephone capital additions budget totals approximately $140 million for
1998, including about $50 million for new digital switches and other switching
facilities and $35 million for improvements to outside plant facilities. The PCS
capital additions budget totals approximately $75 million for 1998, including
$20 million for cell sites, $25 million for switching equipment and $15 million
for systems development.
PENDING ACQUISITIONS
At December 31, 1997, TDS and U.S. Cellular have entered into definitive
agreements to acquire a majority interest in one cellular market, the remaining
minority interest in one cellular market already controlled by U.S. Cellular and
one telephone company for an aggregate consideration of approximately $62.0
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 1997, 1996 and 1995, rent expense for
noncancelable, long-term leases was $36.9 million, $20.9 million and $13.6
million, respectively, and rent expense under cancelable, short-term leases was
$8.7 million, $7.6 million and $7.5 million, respectively. At December 31, 1997,
the aggregate minimum rental commitments under noncancelable, long-term
operating leases were as follows:
<TABLE>
<CAPTION>
MINIMUM FUTURE
RENTAL PAYMENTS
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
1998................................................................................ $ 38,594
1999................................................................................ 34,476
2000................................................................................ 30,490
2001................................................................................ 28,367
2002................................................................................ 18,960
Thereafter.......................................................................... $ 96,578
--------
</TABLE>
LEGAL PROCEEDINGS
The Company 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 Company.
On December 29, 1997, a party 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 defendents 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. A virtually identical complaint has been filed by an
individual. None of the defendants have been served with this complaint.
I-85
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--COMMITMENTS AND CONTINGENCIES (CONTINUED)
On January 5, 1998, an individual, 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. A virtually identical complaint has been filed by a second individual.
None of the defendants have been served with this complaint.
The Company intends to vigorously defend against these lawsuits.
I-86
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--BUSINESS SEGMENT INFORMATION
TDS's businesses are classified into four principal segments: Cellular,
Telephone, PCS and Radio Paging operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN MILIONS)
<S> <C> <C> <C>
Revenues
Cellular..................................................................................... $ 877 $ 680 $ 480
Telephone.................................................................................... 444 396 355
PCS.......................................................................................... 56 -- --
Paging....................................................................................... 95 104 107
--------- --------- ---------
Total...................................................................................... $ 1,472 $ 1,180 $ 942
--------- --------- ---------
--------- --------- ---------
Operating Income (Loss)
Cellular..................................................................................... $ 130 $ 87 $ 43
Telephone.................................................................................... 99 103 98
PCS.......................................................................................... (197) -- --
Paging....................................................................................... (36) (37) (9)
--------- --------- ---------
Total...................................................................................... $ (4) $ 153 $ 132
--------- --------- ---------
--------- --------- ---------
Depreciation and Amortization Expense
Cellular..................................................................................... $ 132 $ 109 $ 90
Telephone.................................................................................... 98 88 77
PCS.......................................................................................... 39 -- --
Paging....................................................................................... 33 34 25
--------- --------- ---------
Total...................................................................................... $ 302 $ 231 $ 192
--------- --------- ---------
--------- --------- ---------
Identifiable Assets
Cellular..................................................................................... $ 2,549 $ 2,117 $ 1,891
Telephone.................................................................................... 1,221 1,181 1,058
PCS.......................................................................................... 961 638 318
Paging....................................................................................... 136 153 159
Parent and Other............................................................................. 105 112 43
--------- --------- ---------
Total...................................................................................... $ 4,972 $ 4,201 $ 3,469
--------- --------- ---------
--------- --------- ---------
Capital Expenditures
Cellular..................................................................................... $ 319 $ 248 $ 211
Telephone.................................................................................... 151 144 104
PCS.......................................................................................... 275 113 9
Paging....................................................................................... 19 33 27
Parent and Other............................................................................. 22 12 9
--------- --------- ---------
Total...................................................................................... $ 786 $ 550 $ 360
--------- --------- ---------
--------- --------- ---------
</TABLE>
I-87
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--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,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Assets
Current assets......................................................................................... $ 425 $ 325
Due from affiliates.................................................................................... 3 6
Property and other..................................................................................... 1,159 1,122
--------- ---------
$ 1,587 $ 1,453
--------- ---------
--------- ---------
Liabilities and Equity
Current liabilities.................................................................................... $ 287 $ 278
Due to affiliates...................................................................................... 38 21
Deferred credits....................................................................................... 9 3
Long-term debt......................................................................................... 70 42
Partners' capital and stockholders' equity............................................................. 1,183 1,109
--------- ---------
$ 1,587 $ 1,453
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN MILIONS)
<S> <C> <C> <C>
Results of Operations
Revenues.................................................................................... $ 1,740 $ 1,395 $ 1,174
Costs and expenses.......................................................................... (1,256) (958) (808)
Other income................................................................................ 5 7 8
Interest expense............................................................................ (10) (6) (6)
Income taxes................................................................................ (6) (3) (5)
Extraordinary item.......................................................................... -- (2) --
--------- --------- ---------
Net income.................................................................................. $ 473 $ 433 $ 363
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 16--SUBSEQUENT EVENTS
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES
In February 1998, TDS Capital II, a subsidiary trust of TDS, issued
6,000,000 of its 8.04% Company-Obligated Manditorily Redeemable Preferred
Securities at $25 per Preferred Security. Net proceeds from the issuance totaled
$145 million and were used to retire short-term debt. The sole asset of TDS
Capital II is $154.6 million principal amount of TDS's 8.04% Subordinated
Debentures due March 31, 2038 or such date to which the maturity is extended by
TDS, but in no event later than March 31, 2047. The Subordinated Debentures are
redeemable by TDS, in whole or in part, from time to time, on or after March 31,
2003, or, in whole but not in part, at any time in the event of certain income
tax circumstances. All other terms and conditions are identical to those of TDS
Capital I. (See Note 9--Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Company Subordinated Debentures)
AERIAL 8.05% ZERO COUPON NOTES
Aerial sold $100 million principal amount at maturity of 10-year zero coupon
8.05% yield to maturity debt in February 1998 at an issue price of $100 million.
The unsecured notes are due in 2008 and there is no periodic payment of
interest. The proceeds were paid to Aerial's equipment vendor in satisfaction of
all then outstanding obligations and future obligations up to $100 million. The
notes are fully and unconditionally guaranteed by TDS. The notes are subject to
optional redemption beginning in 2003 at redemption prices which reflect
original issue discount accrued since issuance. These notes will replace the
$84.4 million of Interim vendor financing. (See Note 7--Long-Term Debt)
I-88
<PAGE>
CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Operating Revenues....................................................... $ 314,735 $ 356,344 $ 388,122 $ 412,332
Operating Income (Loss).................................................. 41,941 7,354 (3,990) (49,007)
Gain on Sale of Cellular and Other Investments........................... -- 10,598 13,767 17,073
Net Income (Loss)........................................................ 9,617 6,821 9,019 (35,006)
Net Income (Loss) Available to Common.................................... 9,136 6,351 8,549 (35,476)
From Operations........................................................ 9,136 2,344 106 (38,940)
From Gains............................................................. $ -- $ 4,007 $ 8,443 $ 3,464
Weighted Average Common Shares (000s).................................... 61,184 60,051 59,511 60,099
Earnings per Common Share-Basic.......................................... $ .15 $ .11 $ .14 $ (.59)
Earnings per Common Share-Diluted........................................ .15 .11 .14 (.59)
From Operations........................................................ .15 .04 -- (.65)
From Gains............................................................. $ -- $ .07 $ .14 $ .06
1996
Operating Revenues....................................................... $ 259,063 $ 293,701 $ 308,548 $ 318,545
Operating Income......................................................... 30,957 49,081 41,263 32,147
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........................................... 33,190 59,201 22,185 11,606
From Operations........................................................ 12,882 18,720 19,256 10,852
From Gains............................................................. $ 20,308 $ 40,481 $ 2,929 $ 754
Weighted Average Common Shares (000s).................................... 59,035 60,610 61,084 61,127
Earnings per Common Share-Basic.......................................... $ .56 $ .98 $ .36 $ .19
Earnings per Common Share-Diluted........................................ .56 .97 .36 .19
From Operations........................................................ .22 .31 .32 .18
From Gains............................................................. $ .34 $ .66 $ .04 $ .01
</TABLE>
Note: Certain 1996 amounts were reclassified for current period presentation.
Net Income Available to Common for 1997 and 1996 included significant gains from
the sales of cellular and other investments. The table above summarizes the
effect of the gains on Net Income (Loss) Available to Common and Earnings per
Common Share--Diluted.
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.
Aerial began commercial service in 1997 which resulted in Aerial's revenue and
expenses being included in operating income. The significant decrease in
Operating Income (Loss) and Net Income (Loss) beginning in the second quarter of
1997 is primarily a result of the commencement of PCS operations.
I-89
<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,
1997 and 1996, and the related consolidated statements of operations, common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 28, 1998 (except with respect to the matters discussed in Note 5,
"American Paging Merger"; and in Note 16, as to which the date is February 18,
1998)
I-90
<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.
The Cellular Group serves 1,710,000 customers through 134 majority-owned and
managed cellular systems at December 31, 1997. Overall, U.S. Cellular owned 26.2
million population equivalents in 192 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 the Cellular Group's
markets, and the Cellular Group expects PCS operators to complete initial
deployment of PCS in portions of all of its market clusters by the end of 1998.
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 of the Cellular Group
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 may be 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 the Cellular Group, 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, on
certain cellular systems 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 the Cellular Group's operations in portions of
several clusters. Another digital technology, Code Division Multiple Access
("CDMA"), is being deployed by the Cellular Group in portions of certain
clusters. 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 is continuing on an industry-wide basis; however this
process is expected to
II-1
<PAGE>
take a number of years. PCS operators have deployed TDMA, CDMA and a third
digital technology, Global Systems for Mobile Communications ("GSM"), in the
markets where they have begun operations.
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, the Cellular Group had principally
been in a start-up phase. During that time, the Cellular Group'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. The Cellular Group
experienced operating losses and net losses from its inception until 1993.
During the past four years, the Cellular Group has generated operations-driven
net income and has significantly increased its operating cash flows during that
time. Management anticipates further growth in cellular units in service and
revenues as the Cellular Group 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, the Cellular Group anticipates that the
seasonality of revenue streams and operating expenses may cause the Cellular
Group's operating income to vary from quarter to quarter.
While the Cellular Group produced operating income and net income during the
last four years, changes in any of several factors may reduce the Cellular
Group's growth in operating income and net income over the next few years. These
factors include: (i) the growth rate in the Cellular Group'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.
The Cellular Group 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: Wisconsin/Illinois/Indiana, Iowa/Missouri,
Eastern North Carolina/ South Carolina, West
Virginia/Maryland/Pennsylvania/Ohio, Virginia, Washington/Oregon/Idaho,
Oregon/California, Maine/New Hampshire/Vermont, Florida/Georgia,
Oklahoma/Missouri/Kansas, Texas/Oklahoma, Eastern Tennessee/Western North
Carolina, and Southwestern Texas. See "The Cellular Group's Cellular Interests."
The Cellular Group has acquired its cellular interests through the wire line
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, the Cellular Group has expanded
its size, particularly in contiguous or adjacent markets, through acquisitions
which have been aimed at strengthening the Cellular Group'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.
Including acquisitions of cellular interests from TDS, the Cellular Group
has increased its population equivalents by 17% from approximately 22.5 million
at December 31, 1992, to approximately 26.2 million at December 31, 1997.
Markets managed by the Cellular Group have increased from 116 markets at
December 31, 1992, to 143 markets at December 31, 1997. As of December 31, 1997,
88% of the Cellular Group's population equivalents represented interests in
markets it manages compared to 75% at December 31, 1992.
Recently, the pace of acquisitions has slowed as industry-wide consolidation
has reduced the number of markets available for acquisition. The Cellular
Group's population equivalents grew at a compound annual rate of just 3% over
the last five years due to the increased number of exchange and divestiture
transactions in the past few years.
The Cellular Group may continue to make opportunistic acquisitions or
exchanges in markets that further strengthen its market clusters and in other
attractive markets. The Cellular Group also seeks to acquire minority
II-2
<PAGE>
interests in markets where it already owns the majority interest. There can be
no assurance that the Cellular Group, 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 regulatory approvals, where required, will be received.
The Cellular Group 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.
The Cellular Group, 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
the Cellular Group. At that time, the Cellular Group reimbursed TDS for the
value of TDS securities issued in such transactions, generally by issuing U.S.
Cellular Common Shares to TDS or by increasing the balance due TDS under the
Cellular Group'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, the Cellular Group 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 the Cellular Group's clusters.
COMPLETED ACQUISITIONS. During 1997, the Cellular Group or TDS for the
benefit of the Cellular Group purchased majority interests in two markets and
several additional minority interests, representing approximately 534,000
population equivalents. The total consideration paid for these purchases,
primarily in the form of cash (including cash borrowed under the Revolving
Credit Agreement with TDS) and U.S. Cellular Common Shares issued to TDS to
reimburse TDS for the value of TDS Common Shares issued to third parties,
totaled $81.4 million.
During 1997, the Cellular Group completed the divestiture of majority
interests in one market plus one market partition and minority interests in two
other markets, representing approximately 358,000 population equivalents, for an
aggregate consideration of $54.5 million in cash and receivables. The two
minority interests involved interests the Cellular Group had previously acquired
from TDS pursuant to an agreement between the two companies signed in June 1996.
Also during 1997, the Cellular Group completed an exchange with BellSouth
Corporation ("BellSouth"). Pursuant to the exchange, the Cellular Group received
majority interests, representing approximately 4.0 million pops in exchange for
majority interests representing 2.0 million pops, minority interests
representing 1.2 million pops and a net amount of $86.7 million in cash. The
majority interests the Cellular Group received are in 12 markets adjacent to its
Iowa/Missouri and Wisconsin/Illinois/Indiana clusters.
PENDING ACQUISITIONS. At December 31, 1997, the Cellular Group had entered
into agreements to acquire a majority interest in one market and a minority
interest in a market in which the Cellular Group owns a majority interest,
representing 410,000 population equivalents, for $51.3 million in cash. If the
majority interest is acquired as expected, the Cellular Group will subsequently
sell that interest to BellSouth for cash.
PENDING DIVESTITURES. At December 31, 1997, the Cellular Group had entered
into agreements with Airtouch Communications, Inc. ("AirTouch") to divest
minority interests in nine markets, representing approximately 759,000
population equivalents. In exchange, the agreements provided that the Cellular
Group will receive approximately 4.0 million shares of AirTouch stock and cash
totaling approximately $54.2 million. In addition, the Cellular Group will
receive approximately $27.0 million in cash from TDS pursuant to a contract
right termination agreement entered into between the Cellular Group and TDS.
This agreement is related to two interests which are to be sold directly by TDS
to AirTouch and which were to be acquired by the Cellular Group as part of the
June 1996 agreement between the Cellular Group and TDS. The contract right
termination agreement will enable the Cellular Group to receive cash equal to
the value of the gain the Cellular Group would have realized had it purchased
the interests from TDS and sold them to AirTouch under terms similar to those in
the agreement between TDS and AirTouch.
Additionally, the Cellular Group has entered into an agreement to sell its
minority interests in two other markets, representing 176,000 population
equivalents, for $37.6 million in cash. The sales are expected to be completed
II-3
<PAGE>
during the first half of 1998. The Cellular Group anticipates that it will
record significant book gains on these divestitures when the transactions are
completed.
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.
CELLULAR INTERESTS AND CLUSTERS
The Cellular Group 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 the Cellular Group 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 the Cellular Group 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 the
Cellular Group's per customer cost of service. The extent to which the Cellular
Group benefits from these revenue enhancements and economies of operation is
dependent on market conditions, population size of each cluster and engineering
considerations.
The Cellular Group may continue to make opportunistic acquisitions and
exchanges which will complement its established market clusters. From time to
time, the Cellular Group may also consider exchanging or selling its interests
in markets which do not fit well with its long-term strategies.
The Cellular Group owned interests in cellular telephone systems in 192
markets at December 31, 1997, representing 26.2 million population equivalents.
Including the 11 interests to be sold during 1998, the Cellular Group owned or
had the right to acquire 181 markets, representing 25.3 million population
equivalents, at December 31, 1997. The following table summarizes the growth in
the Cellular Group's population equivalents in recent years and the development
status of these population equivalents.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
-------------- --------- --------- --------- ---------
(THOUSANDS OF POPULATION EQUIVALENTS)(1)
<S> <C> <C> <C> <C> <C>
Operational Markets:
Majority-Owned and Managed........................................ 22,778 20,389 20,104 18,829 19,086
Minority-Owned and Managed (2).................................... 401 401 514 1,234 1,263
Markets to be Managed, Net of Markets to be Divested: (3)
To Be Majority-Owned ........................................... -- 216 273 2,220 1,035
To Be Minority-Owned (2)........................................ -- -- -- -- 6
------- --------- --------- --------- ---------
Total Markets Managed and to be Managed........................... 23,179 21,006 20,891 22,283 21,390
Minority Interest in Markets Managed by Others...................... 2,121 4,511 4,026 3,779 3,577
------- --------- --------- --------- ---------
Total............................................................. 25,300 25,517 24,917 26,062 24,967
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
</TABLE>
- ------------
(1) Based on 1997 Claritas estimates for all years.
(2) Includes markets where the Cellular Group 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 the Cellular Group's cellular interests,
including those it owned or had the right to acquire as of December 31, 1997.
The table presented therein lists clusters of markets that the Cellular Group
manages or anticipates managing. The Cellular Group's market clusters show the
areas in which the Cellular Group 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 the Cellular
Group'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.
II-4
<PAGE>
THE CELLULAR GROUP'S CELLULAR INTERESTS
The table below sets forth certain information with respect to the interests
in cellular markets which the Cellular Group and TDS owned or had the right to
acquire pursuant to definitive agreements as of December 31, 1997.
<TABLE>
<CAPTION>
TOTAL CURRENT
PERCENTAGE AND
CURRENT CHANGE PURSUANT ACQUIRABLE
1997 PERCENTAGE TO DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS
- ------------------------------------------------------- ------------- ----------- --------------- --------- -------------
<S> <C> <C> <C> <C> <C>
MARKETS MANAGED BY THE COMPANY:
MIDWEST REGIONAL MARKET CLUSTER:
WISCONSIN/ILLINOIS/INDIANA:
Milwaukee, WI...................................... 1,460,000 100.00% 100.00% 1,460,000
Columbia (WI 9).................................... 386,000 100.00 100.00 386,000
Madison, WI........................................ 398,000 92.50 92.50 368,000
Peoria, IL......................................... 347,000 100.00 100.00 347,000
Appleton, WI....................................... 344,000 100.00 100.00 344,000
Jo Daviess (IL 1).................................. 318,000 100.00 100.00 318,000
Rockford, IL....................................... 304,000 100.00 100.00 304,000
Wood (WI 7)........................................ 290,000 100.00 100.00 290,000
Vernon (WI 8)...................................... 236,000 100.00 100.00 236,000
Adams (IL 4) * (2)................................. 214,000 100.00 100.00 214,000
Green Bay, WI...................................... 215,000 99.01 99.01 213,000
Mercer (IL 3)...................................... 202,000 100.00 100.00 202,000
Racine, WI......................................... 186,000 89.64 89.64 167,000
Kenosha, WI........................................ 143,000 99.09 99.09 142,000
Janesville-Beloit, WI.............................. 152,000 80.54 12.00% 92.54 141,000
Door (WI 10)....................................... 130,000 100.00 100.00 130,000
La Crosse, WI...................................... 103,000 95.11 95.11 98,000
Sheboygan, WI...................................... 110,000 86.66 86.66 96,000
Wausau, WI *....................................... 122,000 71.76 71.76 88,000
Trempealeau (WI 6) (2)............................. 83,000 100.00 100.00 83,000
Miami (IN 4) *..................................... 179,000 28.57 28.57 51,000
Warren (IN 5) *.................................... 123,000 33.33 33.33 41,000
Alton, IL.......................................... 21,000 100.00 100.00 21,000
Pierce (WI 5) (2).................................. 14,000 100.00 100.00 14,000
------------- -------------
6,080,000 5,754,000
------------- -------------
IOWA/MISSOURI:
Des Moines, IA..................................... 431,000 100.00 100.00 431,000
Davenport, IA-IL................................... 358,000 97.37 97.37 349,000
Humboldt (IA 10)................................... 180,000 100.00 100.00 180,000
Cedar Rapids, IA................................... 181,000 96.00 96.00 174,000
Iowa (IA 6)........................................ 156,000 100.00 100.00 156,000
Muscatine (IA 4)................................... 155,000 100.00 100.00 155,000
Waterloo-Cedar Falls, IA........................... 146,000 93.03 93.03 136,000
Columbia, MO *..................................... 127,000 100.00 100.00 127,000
Stone (MO 15)...................................... 118,000 100.00 100.00 118,000
Hardin (IA 11)..................................... 113,000 100.00 100.00 113,000
Jackson (IA 5)..................................... 109,000 100.00 100.00 109,000
Kossuth (IA 14).................................... 107,000 100.00 100.00 107,000
Lyon (IA 16)....................................... 103,000 100.00 100.00 103,000
Iowa City, IA...................................... 102,000 100.00 100.00 102,000
Laclede (MO 16).................................... 100,000 100.00 100.00 100,000
Washington (MO 13)................................. 94,000 100.00 100.00 94,000
Callaway (MO 6) *.................................. 85,000 100.00 100.00 85,000
Dubuque, IA........................................ 88,000 95.90 95.90 84,000
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
TOTAL CURRENT
PERCENTAGE AND
CURRENT CHANGE PURSUANT ACQUIRABLE
1997 PERCENTAGE TO DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS
- ------------------------------------------------------- ------------- ----------- --------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Mitchell (IA 13)................................... 67,000 100.00% 100.00% 67,000
Mills (IA 1)....................................... 62,000 100.00 100.00 62,000
Schuyler (MO 3).................................... 56,000 100.00 100.00 56,000
Shannon (MO 17).................................... 56,000 100.00 100.00 56,000
Audubon (IA 7)..................................... 55,000 100.00 100.00 55,000
Linn (MO 5) (2).................................... 55,000 100.00 100.00 55,000
Union (IA 2)....................................... 50,000 100.00 100.00 50,000
Monroe (IA 3)...................................... 91,000 49.00 49.00 44,000
Winneshiek (IA 12)................................. 116,000 24.50 24.50 28,000
Ida (IA 9) *....................................... 63,000 16.67 16.67 11,000
------------- -------------
3,424,000 3,207,000
------------- -------------
TOTAL MIDWEST REGIONAL MARKET CLUSTER 9,504,000 8,961,000
------------- -------------
------------- -------------
MID-ATLANTIC REGIONAL MARKET CLUSTER:
EASTERN NORTH CAROLINA/SOUTH CAROLINA:
Harnett (NC 10).................................... 294,000 100.00 100.00 294,000
Northampton (NC 8)................................. 292,000 100.00 100.00 292,000
Rockingham (NC 7).................................. 291,000 100.00 100.00 291,000
Greene (NC 13)..................................... 246,000 100.00 100.00 246,000
Greenville (NC 14)................................. 242,000 100.00 100.00 242,000
Hoke (NC 11)....................................... 226,000 100.00 100.00 226,000
Chesterfield (SC 4)................................ 213,000 100.00 100.00 213,000
Ashe (NC 3)........................................ 162,000 100.00 100.00 162,000
Chatham (NC 6)..................................... 162,000 81.16 81.16 132,000
Sampson (NC 12).................................... 132,000 100.00 100.00 132,000
Camden (NC 9)...................................... 119,000 100.00 100.00 119,000
------------- -------------
2,379,000 2,349,000
WEST VIRGINIA/MARYLAND/PENNSYLVANIA/OHIO:
Monongalia (WV 3) *................................ 269,000 100.00 100.00 269,000
Raleigh (WV 7) *................................... 256,000 100.00 100.00 256,000
Grant (WV 4) *..................................... 174,000 100.00 100.00 174,000
Tucker (WV 5) *.................................... 132,000 100.00 100.00 132,000
Hagerstown, MD *................................... 128,000 100.00 100.00 128,000
Ross (OH 9) *...................................... 249,000 49.00 49.00 122,000
Cumberland, MD *................................... 100,000 100.00 100.00 100,000
Bedford (PA 10) * (2).............................. 49,000 100.00 100.00 49,000
Garrett (MD 1) *................................... 30,000 100.00 100.00 30,000
------------- -------------
1,387,000 1,260,000
VIRGINIA:
Roanoke, VA........................................ 234,000 100.00 100.00 234,000
Giles (VA 3)....................................... 201,000 100.00 100.00 201,000
Bedford (VA 4)..................................... 176,000 100.00 100.00 176,000
Lynchburg, VA...................................... 160,000 100.00 100.00 160,000
Charlottesville, VA................................ 146,000 94.44 94.44 138,000
Buckingham (VA 7).................................. 91,000 100.00 100.00 91,000
Tazewell (VA 2) (2)................................ 83,000 100.00 100.00 83,000
Bath (VA 5)........................................ 61,000 100.00 100.00 61,000
------------- -------------
1,152,000 1,144,000
------------- -------------
TOTAL MID-ATLANTIC REGIONAL MARKET CLUSTER 4,918,000 4,753,000
------------- -------------
------------- -------------
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
TOTAL CURRENT
PERCENTAGE AND
CURRENT CHANGE PURSUANT ACQUIRABLE
1997 PERCENTAGE TO DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS
- ------------------------------------------------------- ------------- ----------- --------------- --------- -------------
<S> <C> <C> <C> <C> <C>
NORTHWEST REGIONAL MARKET CLUSTER:
WASHINGTON/OREGON/IDAHO:
Clark (ID 6)....................................... 294,000 100.00% 100.00% 294,000
Pacific (WA 6) *................................... 184,000 100.00 100.00 184,000
Richland-Kennewick-Pasco, WA *..................... 183,000 100.00 100.00 183,000
Butte (ID 5)....................................... 160,000 100.00 100.00 160,000
Yakima, WA *....................................... 219,000 54.55 58.54 128,000
Okanogan (WA 4).................................... 118,000 100.00 100.00 118,000
Umatilla (OR 3) *.................................. 151,000 60.42 60.42 91,000
Kittitas (WA 5) * (2).............................. 71,000 83.50 85.20 61,000
Hood River (OR 2) *................................ 74,000 45.10 45.10 34,000
Skamania (WA 7) *.................................. 28,000 45.10 45.10 13,000
------------- -------------
1,482,000 1,266,000
OREGON/CALIFORNIA:
Coos (OR 5)........................................ 260,000 100.00 100.00 260,000
Del Norte (CA 1)................................... 209,000 100.00 100.00 209,000
Medford, OR *...................................... 171,000 100.00 100.00 171,000
Mendocino (CA 9)................................... 139,000 100.00 100.00 139,000
Crook (OR 6) *..................................... 196,000 62.50 62.50 122,000
Modoc (CA 2)....................................... 63,000 100.00 100.00 63,000
------------- -------------
1,038,000 964,000
TOTAL NORTHWEST REGIONAL MARKET CLUSTER 2,520,000 2,230,000
------------- -------------
------------- -------------
MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER:
Manchester-Nashua, NH.............................. 357,000 92.49 92.49 330,000
Coos (NH 1) *...................................... 224,000 100.00 100.00 224,000
Kennebec (ME 3).................................... 221,000 100.00 100.00 221,000
Carroll (NH 2)..................................... 216,000 100.00 100.00 216,000
Somerset (ME 2).................................... 148,000 100.00 100.00 148,000
Bangor, ME......................................... 145,000 91.47 91.47 132,000
Addison (VT 2) * (2)............................... 107,000 100.00 100.00 107,000
Washington (ME 4) *................................ 86,000 100.00 100.00 86,000
Lewiston-Auburn, ME................................ 101,000 82.67 82.67 84,000
Oxford (ME 1)...................................... 83,000 100.00 100.00 83,000
TOTAL MAINE/NEW HAMPSHIRE/ VERMONT MARKET CLUSTER 1,688,000 1,631,000
------------- -------------
------------- -------------
FLORIDA/GEORGIA MARKET CLUSTER:
Fort Pierce, FL * (3).............................. 291,000 49.00 51.00% 100.00 291,000
Tallahassee, FL.................................... 280,000 100.00 100.00 280,000
Worth (GA 14)...................................... 253,000 100.00 100.00 253,000
Gainesville, FL.................................... 222,000 100.00 100.00 222,000
Toombs (GA 11)..................................... 155,000 100.00 100.00 155,000
Walton (FL 10)..................................... 119,000 100.00 100.00 119,000
Putnam (FL 5) (2).................................. 70,000 100.00 100.00 70,000
Dixie (FL 6)....................................... 57,000 100.00 100.00 57,000
Jefferson (FL 8) (2)............................... 49,000 100.00 100.00 49,000
Calhoun (FL 9)..................................... 43,000 100.00 100.00 43,000
------------- -------------
TOTAL FLORIDA/GEORGIA MARKET CLUSTER 1,539,000 1,539,000
------------- -------------
------------- -------------
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
TOTAL CURRENT
PERCENTAGE AND
CURRENT CHANGE PURSUANT ACQUIRABLE
1997 PERCENTAGE TO DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS
- ------------------------------------------------------- ------------- ----------- --------------- --------- -------------
<S> <C> <C> <C> <C> <C>
TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET CLUSTER:
OKLAHOMA/MISSOURI/KANSAS:
Tulsa, OK *........................................ 798,000 55.06% 55.06% 440,000
Joplin, MO *....................................... 147,000 100.00 100.00 147,000
Seminole (OK 6).................................... 219,000 55.06 55.06 120,000
Elk (KS 15) *...................................... 154,000 75.00 75.00 116,000
Nowata (OK 4) * (2)................................ 102,000 55.06 55.06 56,000
------------- -------------
1,420,000 879,000
------------- -------------
TEXAS/OKLAHOMA:
Garvin (OK 9)...................................... 203,000 100.00 100.00 203,000
Haskell (OK 10).................................... 83,000 100.00 100.00 83,000
Wichita Falls, TX *................................ 140,000 51.65 51.65 72,000
Lawton, OK *....................................... 111,000 51.65 51.65 57,000
Jackson (OK 8) *................................... 97,000 51.65 51.65 50,000
Hardeman (TX 5) * (2).............................. 38,000 51.65 51.65 19,000
Briscoe (TX 4) * (2)............................... 13,000 51.65 51.65 6,000
Beckham (OK 7) * (2)............................... 10,000 51.65 51.65 5,000
------------- -------------
695,000 495,000
------------- -------------
TOTAL TEXAS/OKLAHOMA/MISSOURI/ KANSAS REGIONAL
MARKET CLUSTER 2,115,000 1,374,000
------------- -------------
------------- -------------
EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET
CLUSTER:
Knoxville, TN *.................................... 556,000 96.03 96.03 534,000
Asheville, NC *.................................... 212,000 100.00 100.00 212,000
Henderson (NC 4) * (2)............................. 194,000 100.00 100.00 194,000
Bledsoe (TN 7) * (2)............................... 151,000 96.03 96.03 145,000
Hamblen (TN 4) * (2)............................... 135,000 100.00 100.00 135,000
Macon (TN 3) *..................................... 344,000 16.67 16.67 57,000
Yancey (NC 2) * (2)................................ 31,000 100.00 100.00 31,000
------------- -------------
TOTAL EASTERN TENNESSEE/ WESTERN NORTH CAROLINA
MARKET CLUSTER 1,623,000 1,308,000
------------- -------------
------------- -------------
SOUTHWESTERN TEXAS MARKET CLUSTER:
Corpus Christi, TX................................. 388,000 100.00 100.00 388,000
Atascosa (TX 19)................................... 231,000 100.00 100.00 231,000
Edwards (TX 18).................................... 223,000 100.00 100.00 223,000
Laredo, TX......................................... 182,000 93.74 93.74 171,000
Wilson (TX 20)..................................... 148,000 100.00 100.00 148,000
Victoria, TX....................................... 82,000 100.00 100.00 82,000
------------- -------------
TOTAL SOUTHWESTERN TEXAS MARKET CLUSTER 1,254,000 1,243,000
------------- -------------
------------- -------------
OTHER OPERATIONS:
Hawaii (HI 3)...................................... 140,000 100.00 100.00 140,000
------------- -------------
Total Managed Markets.......................... 25,301,000 23,179,000
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
TOTAL CURRENT
PERCENTAGE AND
CURRENT CHANGE PURSUANT ACQUIRABLE
1997 PERCENTAGE TO DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS
- ------------------------------------------------------- ------------- ----------- --------------- --------- -------------
<S> <C> <C> <C> <C> <C>
------------- -------------
------------- -------------
MARKETS MANAGED BY OTHERS:
Los Angeles/Oxnard, CA *........................... 15,645,000 5.50% 5.50% 861,000
Oklahoma City, OK *................................ 1,003,000 14.60 14.60 146,000
Portland, ME *..................................... 288,000 49.00 49.00 141,000
McAllen, TX........................................ 509,000 26.20 26.20 133,000
Portsmouth-Dover-Rochester, NH-ME *................ 280,000 40.00 40.00 112,000
Others (Fewer than 100,000 population equivalents
each)............................................ 728,000
-------------
Total Population Equivalents of Markets Managed
by Others...................................... 2,121,000
-------------
Total Population Equivalents..................... 25,300,000
-------------
-------------
</TABLE>
- ---------
* Designates wireline market.
(1) Interests under these agreements are expected to be acquired at the time
specified therein, following the satisfaction of customary closing
conditions.
(2) These markets have been partitioned into more than one licensed area. The
1997 population, percentage ownership and number of population equivalents
shown are for the licensed areas within the markets in which the Cellular
Group owns an interest.
(3) The Cellular Group owns 80% of the entity which owns and operates this
market but has only a 49% interest in the earnings and profits. Pursuant to
a definitive agreement, the Cellular Group has rights to acquire the
remaining 20% of the equity and 51% of the earnings and profits of this
entity.
SYSTEM DESIGN AND CONSTRUCTION. The Cellular Group 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 the Cellular Group personnel or independent
engineering firms. The Cellular Group'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, the Cellular Group has selected high capacity digital cellular
switching systems that are capable of serving multiple markets through a single
MTSO. The Cellular Group's cellular systems are designed to facilitate the
installation of equipment which will permit microwave interconnection between
the MTSO and the cell site. The Cellular Group has implemented such microwave
interconnection in most of the cellular systems it manages. In other systems in
which the Cellular Group 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.
The Cellular Group expanded its internal network in 1996 to encompass all of
its managed markets. This network provides automatic call delivery for the
Cellular Group'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, Airtouch/US West, Ameritech, BellSouth, Centennial
Cellular Corp., Southwestern Bell, AT&T Wireless Communications, Vanguard
Cellular Systems and others. Additionally, the Cellular Group 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.
II-9
<PAGE>
The Cellular Group plans to integrate the systems in the markets acquired in
the exchange with BellSouth into its internal network as quickly as possible.
This may involve changing out certain system equipment and replacing it with new
equipment which will allow for more efficient networking.
During 1997, the Cellular Group 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.
The Cellular Group believes that currently available technologies will allow
sufficient capacity on the Cellular Group'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. The Cellular
Group, 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, the Cellular Group 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 the Cellular
Group owns an interest have historically been financed through capital
contributions or intercompany loans from the Cellular Group to the entities
owning the systems, and through certain vendor financing. In recent years, these
funding requirements have been met with cash generated from operations, proceeds
from debt and equity offerings and proceeds from the sales of cellular
interests.
MARKETING
The Cellular Group'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
the Cellular Group'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. The Cellular Group's
distribution channels include direct sales personnel, agents and retail service
centers in the vast majority of its markets. In late 1996, the Cellular Group
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 Cellular Group-owned and managed locations
are designed to market cellular service to the consumer segment in a familiar
setting.
The Cellular Group manages each cluster of markets from an administrative
office with a local staff, including 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. The Cellular Group 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.
The Cellular Group continues to expand its relationships with agents,
dealers and non-Cellular Group retailers to obtain customers. Agents and dealers
are independent business people who obtain customers for U.S. Cellular on a
commission basis. The Cellular Group's agents are generally in the business of
selling cellular telephones, cellular service packages and other related
products. The Cellular Group's dealers include car stereo companies and other
companies whose customers are also potential cellular customers. The
non-Cellular Group retailers include car dealers, major appliance dealers,
office supply dealers and mass merchants.
The Cellular Group opened its first retail locations in late 1993, expanding
to 260 stand-alone retail stores by December 31, 1997. These Cellular
Group-owned and operated businesses utilize rental facilities in high-traffic
areas. The Cellular Group has implemented a uniform appearance in 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
II-10
<PAGE>
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 the Cellular Group has traditionally
provided. During 1996, the Cellular Group further expanded its retail presence
by opening smaller retail kiosks within other larger merchandisers and grocery
stores. At December 31, 1997, the Cellular Group had opened over 140 "stores
within a store," primarily in Wal-Mart locations.
In addition to its own retail centers, the Cellular Group actively pursues
national retail accounts, as agents for the Cellular Group, 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 the Cellular Group's markets. Upon the sale of a cellular telephone
by one of these national distributors, the Cellular Group receives, often
exclusively within the territories served, the resulting cellular customer.
The Cellular Group 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, the Cellular Group 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 the Cellular
Group. The Cellular Group attempts to select the advertising and promotion media
that are most appealing to the targeted groups of potential customers in each
local market. The Cellular Group utilizes local advertising media and public
relations activities and establishes programs to enhance public awareness of the
Cellular Group, 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, the Cellular Group is
providing cellular service to consumers and to customers who use their cellular
telephones for security purposes. Although some of the Cellular Group'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.
The Cellular Group'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 the Cellular Group's consolidated systems used their cellular
systems approximately 103 minutes per unit each month and generated retail
revenue of approximately $36 per month during 1997, compared to 107 minutes and
$40 per month in 1996. Revenue generated by roamers, together with local retail,
toll and other revenues, brought the Cellular Group's total average monthly
service revenue per customer unit in consolidated markets to $54 during 1997.
Average monthly service revenue per customer unit decreased approximately 15%
during 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. The
Cellular Group 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. The Cellular Group 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 the Cellular Group's increasing number of customers;
therefore, the Cellular Group expects total revenues to continue to grow for the
next few years.
In addition to revenue from local retail customers, the Cellular Group
generates revenue from roaming customers and other services. The Cellular
Group'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. The Cellular
Group 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 the Cellular
Group's systems in the other carriers' systems. Also, a customer of a
participating system roaming (i.e. traveling) in a Cellular Group market where
this arrangement is in effect is able to make and receive calls on the Cellular
Group's system. The charge for this service is typically at premium rates and is
billed by the Cellular Group to the customer's home system, which then bills the
customer. The Cellular Group has entered into agreements with other cellular
carriers to transfer roaming usage at agreed-
II-11
<PAGE>
upon rates. In some instances, based on competitive factors, the Cellular Group
may charge a lower amount to its customers than the amount actually charged to
the Cellular Group by another cellular carrier for roaming.
The following table summarizes, by operating cluster, the total population,
the Cellular Group's customer units and penetration for the Cellular Group's
majority-owned and managed markets that were operational as of December 31,
1997.
<TABLE>
<CAPTION>
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION
- ----------------------------------------------------------------------------------- ------------- ----------- -------------
<S> <C> <C> <C>
Wisconsin/Illinois/Indiana ........................................................ 5,778,000 452,000 7.82%
Iowa/Missouri...................................................................... 3,154,000 257,000 8.15
Eastern North Carolina/South Carolina ............................................. 2,379,000 124,000 5.21
West Virginia/Maryland/Pennsylvania/Ohio .......................................... 1,138,000 69,000 6.06
Virginia .......................................................................... 1,152,000 70,000 6.08
Washington/Oregon/Idaho ........................................................... 1,380,000 102,000 7.39
Oregon/California ................................................................. 1,038,000 71,000 6.84
Maine/New Hampshire/Vermont ....................................................... 1,688,000 103,000 6.10
Florida/Georgia ................................................................... 1,539,000 115,000 7.47
Oklahoma/Missouri/Kansas .......................................................... 1,420,000 111,000 7.82
Texas/Oklahoma .................................................................... 695,000 46,000 6.62
Eastern Tennessee/Western North Carolina .......................................... 1,279,000 117,000 9.15
Southwestern Texas ................................................................ 1,254,000 56,000 4.47
Other Operations .................................................................. 140,000 17,000 12.14
------------- ----------- -----
24,034,000 1,710,000 7.11%
------------- ----------- -----
------------- ----------- -----
</TABLE>
The following table summarizes certain information about customers and
market penetration in the Cellular Group's managed operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Majority-owned and managed markets:
Cellular markets in operation (1)........................ 134 131 137 130 116
Total population of markets in service (000s)............ 24,034 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)............................ 941,000 561,000 426,000 250,000 165,300
disconnects during period (2).......................... 304,000 198,000 137,000 90,000 55,100
at end of period (2)................................... 1,710,000 1,073,000 710,000 421,000 261,000
Market penetration at end of period (3).................. 7.11% 4.94% 3.18% 1.98% 1.35%
Consolidated revenues (4).................................. $ 876,965 $ 680,068 $ 480,316 $ 327,630 $ 210,344
Depreciation expense....................................... 97,591 74,631 57,302 39,520 25,665
Amortization expense....................................... 34,788 34,208 32,156 25,934 19,362
Operating income (loss).................................... 129,543 87,366 42,755 17,385 (8,656)
Capital expenditures....................................... 318,748 248,123 210,878 167,164 92,915
Identifiable assets........................................ $ 2,548,909 $2,116,592 $1,890,621 $1,584,142 $1,275,569
</TABLE>
- ------------
(1) Represents the number of markets in which the Cellular Group owned at least
a 50% interest and which it managed. The revenues and expenses of these
cellular markets are included in the Cellular Group'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 (Claritas in 1997).
(4) Consolidated revenues for 1997 reflect the Cellular Group'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.
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. The Cellular Group offers a full range of vehicle-
II-12
<PAGE>
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.
The Cellular Group negotiates volume discounts from its cellular telephone
suppliers. The Cellular Group 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 the Cellular Group. The Cellular Group also
cooperates with cellular equipment manufacturers in local advertising and
promotion of cellular equipment.
The Cellular Group 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 the Cellular Group to
improve its service by promptly assisting customers who experience equipment
problems. Additionally, the Cellular Group maintains a repair facility in Tulsa,
Oklahoma, which handles more complex service and repair issues.
CELLULAR SERVICES. The Cellular Group's customers are able to choose from a
variety of packaged pricing plans which are designed to fit different calling
patterns. The Cellular Group 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. The Cellular
Group'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 the Cellular Group include wide-area call
delivery, call forwarding, call waiting, three-way calling and no-answer
transfer. The Cellular Group 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 the Cellular Group are subject to
FCC and state regulation. The cellular telephone licenses held by the Cellular
Group 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 Cellular Group.
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.
II-13
<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. The Cellular Group 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.
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 (cellular towers of less than 10 meters
in height, building mounted antennas and cellular telephones). 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. The Cellular Group believes that
the great majority of its existing facilities already comply with the
requirements, the remainder will be brought into compliance as required and that
the cellular telephones it sells comply with the standards.
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.
The Cellular Group's Tulsa and Knoxville licenses were renewed in 1995, and
the Cellular Group's Des Moines, Iowa; Peoria, Illinois; and Roanoke, Virginia
licenses were renewed in 1996. In September 1997, the Cellular Group 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, the
Cellular Group assigned its Evansville and Owensboro licenses to a subsidiary of
BellSouth Cellular Corporation as part of the larger Cellular Group-BellSouth
transaction. As part of the same transaction, BellSouth assigned its Appleton,
Wisconsin; Rockford, Illinois; Green Bay, Wisconsin and Janesville, Wisconsin
licenses to the Cellular Group. Unopposed grantable renewal applications are
pending for those licenses as well. The Cellular Group expects all of those
license renewal applications to be granted shortly.
The Cellular Group 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, the Cellular Group 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 the Cellular Group'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 the Cellular
Group and others. The Cellular Group's strategy with respect to system
construction in its markets has been and will be to build cells covering areas
within such markets that the Cellular Group 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 will enable cellular systems to determine
the precise location of persons making emergency calls. The new rules will
require cellular carriers to work with local public
II-14
<PAGE>
safety officials to process 911 calls, including those made from mobile
telephones not registered with the cellular system, will require carriers by
April 1998 to be able to identify the cell from which the call has been made,
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 roaming 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 other parts of 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.
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
II-15
<PAGE>
"high cost" areas. the Cellular Group 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 the Cellular Group'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 the Cellular Group. There can be no assurance that the Cellular Group 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. The Cellular Group
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.
STATE AND LOCAL REGULATION. The Cellular Group 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 currently considering
whether to take action to pre-empt moratoria imposed by certain localities on
the construction of wireless towers. the Cellular Group has supported such FCC
action.
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.
The Cellular Group 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. The Cellular Group is unable to predict the scope,
pace or financial impact of policy changes which could be adopted in these
proceedings.
COMPETITION
The Cellular Group'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 the Cellular Group has an interest have financial resources
which are substantially greater than those of the Cellular Group and its
partners in such markets.
II-16
<PAGE>
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. The Cellular Group 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
constructed in several other cities across the United States. In 1995, an ESMR
provider initiated service in Tulsa, Oklahoma, where the Cellular Group operates
a cellular system. 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 the Cellular Group 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. The Cellular Group expects PCS operators to
complete initial deployment of PCS in portions of all of the Cellular Group
clusters by the end of 1998.
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.
II-17
<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 TDS Common Shares and
Series A Common Shares are, shareholders of TDS. TDS 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 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 TDS legally available
for payment of dividends on all classes of Common Stock. Accordingly, TDS's
consolidated financial statements should be read in conjunction with the United
States Cellular Group's financial information.
II-18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
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.
RESULTS OF OPERATIONS
The Cellular Group owned either majority or minority cellular interests in
192 markets at December 31, 1997, representing 26,179,000 population equivalents
("pops"). The Cellular Group included the operations of 134 majority-owned and
managed cellular markets, representing 22.6 million pops, in consolidated
operations ("consolidated markets") as of December 31, 1997. Minority interests
in 51 markets, representing 3.5 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
the Cellular Group's consolidated operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- --------------- -------------
<S> <C> <C> <C>
Total market population (in thousands) (1)............... 24,034 21,712 22,309
Customers................................................ 1,710,000 1,073,000 710,000
Market penetration....................................... 7.11% 4.94% 3.18%
Markets in operation..................................... 134 131 137
Cell sites in service.................................... 1,748 1,328 1,116
Average monthly revenue per customer..................... $ 54.18 $ 63.69(2) $ 70.64(2)
Churn rate per month..................................... 1.9% 1.9% 2.1%
Marketing cost per net customer addition................. $ 528 $ 505(2) $ 515(2)
</TABLE>
- ---------
(1) Calculated using the respective Donnelley Marketing Service estimates for
each year (Claritas for 1997).
(2) Recomputed to show the effect of change in current year presentation of
certain revenues and expenses.
The Cellular Group's operating income for 1997 and 1996, which includes 100%
of the revenues and expenses of its consolidated markets plus its corporate
office operations, primarily reflects improvement in the Cellular Group's
overall operations compared to 1996 and 1995. The improvements resulted from
growth in the Cellular Group's customer base and revenues in each year, coupled
with increasing economies of scale in both years. Operating revenues, driven by
increases in customers served, rose $196.9 million, or 29%, in 1997 and $199.8
million, or 42%, in 1996. Operating expenses rose $154.7 million, or 26%, in
1997 and $155.1 million, or 35%, in 1996. Operating cash flow (operating income
before minority share plus depreciation and amortization expense) increased
$65.7 million, or 33%, in 1997 and $64.0 million, or 48%, in 1996.
Beginning on January 1, 1997, the Cellular Group 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, the Cellular
Group 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. Operating income
and net income are not affected by this change.
Investment and other income decreased $83.5 million, or 44%, to $107.6
million in 1997, due primarily to the decrease of $102.4 million in gains on the
sales of cellular interests. Investment and other income increased $66.4
million, or 53%, in 1996, due primarily to the increase of $49.2 million in
gains on the sales of cellular interests. Interest expense increased $6.3
million, or 27%, in 1997 and decreased $4.2 million, or 15%, in 1996. Income tax
expense decreased $27.7 million to $83.9 million in 1997, as improved operating
results were more than offset by decreased gains on the sales of cellular
interests. Income tax expense increased $79.1 million in 1996, primarily due to
the increase in gains on the sales of cellular interests.
II-19
<PAGE>
Net income totaled $111.5 million in 1997, a decrease of $18.4 million, or
14%, from 1996, and totaled $129.9 million in 1996, an increase of $30.2
million, or 30%, over 1995. In all three 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>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income before after-tax effects of gains........................ $ 95,302 $ 62,504 $ 43,918
Add: After-tax effects of gains..................................... 16,237 67,425 55,824
----------- ----------- ---------
Net income as reported.............................................. $ 111,539 $ 129,929 $ 99,742
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
OPERATING REVENUES
OPERATING REVENUES totaled $877.0 million in 1997, up $196.9 million, or
29%, over 1996. Operating revenues totaled $680.1 million in 1996, up $199.8
million, or 42%, over 1995. As explained previously, operating revenues for 1996
and 1995 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 the Cellular Group's local retail customers who
use the local systems operated by the Cellular Group ("local retail"); (ii)
charges to customers of other systems who use the Cellular Group's cellular
systems when roaming ("inbound roaming"); and (iii) charges for long-distance
calls made on the Cellular Group's systems. Service revenues totaled $853.0
million in 1997, up $190.3 million, or 29%, over 1996. Service revenues totaled
$662.7 million in 1996, up $198.1 million, or 43%, over 1995. The increases in
both years were primarily due to the growing number of local retail customers
and the growth in inbound roaming revenue. The reclassification of customer bill
credits reduced service revenues from what would have been reported by $49.0
million, or 5%, in 1997, and from what was reported by $27.8 million, or 4%, in
1996 and $12.1 million, or 3%, in 1995.
Average monthly service revenue per customer totaled $54.18 in 1997, $63.69
in 1996 and $70.64 in 1995, representing declines of 15% in 1997 and 10% in
1996. The decrease in average monthly service revenue per customer in both years
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 when compared to the growth in the Cellular
Group's customer base. The reclassification of customer bill credits reduced
average monthly service revenue per customer from what would have been reported
by $3.11, or 5%, in 1997, and from what was reported by $2.67, or 4%, in 1996
and $1.84, or 3%, in 1995.
Competitive pressures and the Cellular Group's increasing use of pricing and
other incentive programs that encourage weekend and off-peak usage at reduced
rates, in order to stimulate overall usage, plus increasing amounts of bill
credits given to new and current customers as incentives to become or remain the
Cellular Group's customers, resulted in a decrease in average local retail
revenue per minute of use during both 1997 and 1996. The Cellular Group's
average inbound roaming revenue per minute of use also decreased during both
1997 and 1996, in line with the ongoing trend toward reduced per minute prices
for roaming negotiated between the Cellular Group and other cellular operators.
Also, the Cellular Group 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. Inbound roaming minutes of use have been growing
at a slower rate than the Cellular Group's customer base (27% and 31% growth in
inbound roaming minutes in 1997 and 1996, respectively, compared to 59% and 51%
growth in the Cellular Group's customer base).
LOCAL RETAIL REVENUE increased $153.8 million, or 37%, in 1997 and $137.4
million, or 50%, in 1996. Growth in the Cellular Group's customer base was the
primary reason for the increases in local revenue in both years. The number of
customers increased 59% to 1,710,000 at December 31, 1997, and increased 51% to
1,073,000 at December 31, 1996. The Cellular Group added 442,000 net new
customers from its marketing channels in 1997 compared to 365,000 in 1996.
Management anticipates that the growth rate in the Cellular Group's customer
base will be lower in the future, primarily as a result of an increase in the
number of competitors in its markets. The reclassification of customer bill
credits reduced local retail revenue from what would have been reported by $49.0
million, or 8%, in 1997, and from what was reported by $27.8 million, or 6%, in
1996 and $12.1 million, or 4%, in 1995.
Average monthly local retail revenue per customer declined to $36.11 in 1997
from $39.87 in 1996 and $42.19 in 1995. Monthly local retail minutes of use per
customer decreased less than 4% to 103 in 1997, and increased 13%
II-20
<PAGE>
to 107 in 1996. Average revenue per minute of use decreased in both years as a
result of the pricing and other incentive programs stated previously. Average
local retail revenue per minute totaled $.35 in 1997 compared to $.37 in 1996
and $.44 in 1995. The decrease in average monthly local retail revenue per
customer 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 the increasing level of competition for
wireless services and the Cellular Group's and the industry's continued
penetration of the consumer market, which tends to include fewer peak business
hour-usage customers. The reclassification of customer bill credits reduced
average monthly local retail revenue per customer from what would have been
reported by $3.11, or 8%, in 1997, and from what was reported by $2.67, or 6%,
in 1996 and $1.84, or 4%, in 1995.
INBOUND ROAMING REVENUE increased $24.2 million, or 13%, in 1997 and $45.3
million, or 31%, in 1996. Both the 1997 and 1996 increases were attributable to
the respective 27% and 38% increases in the number of minutes used by customers
from other wireless systems when roaming in the Cellular Group's service areas.
Also contributing were the increased number of cell sites within the Cellular
Group'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 $.83 in 1997, $.92 in 1996
and $.99 in 1995. Monthly inbound roaming revenue per Cellular Group customer
averaged $13.81 in 1997, $18.58 in 1996 and $22.51 in 1995. The decreases in
monthly inbound roaming revenue per Cellular Group customer are related to both
the decreases in inbound roaming revenue per minute and the faster increases in
the Cellular Group's customer base as compared to the growth in inbound roaming
minutes of use.
LONG-DISTANCE REVENUE increased $12.0 million, or 23%, in 1997 and $17.3
million, or 49%, in 1996 as the volume of long-distance calls billed by the
Cellular Group increased. Monthly long-distance revenue per customer averaged
$4.10 in 1997, $5.05 in 1996 and $5.36 in 1995. 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 the Cellular Group's customer base.
EQUIPMENT SALES REVENUES increased $6.6 million, or 38%, in 1997 and $1.6
million, or 10%, in 1996. Equipment sales reflect the sale of 587,000, 449,000
and 296,000 cellular telephone units in 1997, 1996 and 1995, respectively, plus
installation and accessories revenue. The average revenue per unit was $41 in
1997, $39 in 1996 and $53 in 1995. The average revenue per unit in all years is
significantly less than the Cellular Group's cost per unit, which partially
reflects the Cellular Group'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, the Cellular Group 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 general decline
in average equipment sales revenue per unit over the last several years.
OPERATING EXPENSES
OPERATING EXPENSES totaled $747.4 million in 1997, up $154.7 million, or
26%, over 1996. Operating expenses totaled $592.7 million in 1996, up $155.1
million, or 35%, over 1995. As explained previously, operating expenses for 1996
and 1995 have been reclassified to conform to current period presentation of
customer incentive program credits. The reclassification of customer bill
credits reduced operating expenses from what would have been reported by $49.0
million, or 6%, in 1997, and from what was reported by $27.8 million, or 4%, in
1996 and $12.1 million, or 3%, in 1995.
SYSTEM OPERATIONS EXPENSES increased $35.8 million, or 30%, in 1997 and
$46.9 million, or 67%, in 1996. These increases were primarily due to increases
in customer usage expenses and costs associated with serving the Cellular
Group's increased number of customers, which include the costs of roaming fraud,
and the growing number of cell sites within the Cellular Group's systems. In
1997, the Cellular Group significantly reduced its expenses related to roaming
fraud, resulting in a decline in the percentage increase in total system
operations expenses during the year. In total, system operations costs are
expected to continue to increase as the number of customers using and the number
of cell sites within the Cellular Group's systems grows.
Customer usage expenses represent charges from other telecommunications
service providers for the Cellular Group's customers' use of their facilities as
well as for the Cellular Group'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 the Cellular Group when its
customers use systems other than their local systems ("outbound
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roaming"). These expenses are offset somewhat by amounts the Cellular Group
bills to its customers for outbound roaming.
Customer usage expenses increased $24.3 million, or 32%, in 1997 and $40.4
million, or 116%, in 1996. The increase in 1997 is primarily due to the increase
in net outbound roaming expense, which has resulted from the Cellular Group
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. The Cellular Group pays roaming rates to the
other carriers for calls the Cellular Group's 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 the Cellular Group's systems, partially offset
by the reduction in costs related to fraudulent use of the Cellular Group's
customers' cellular telephone numbers. The increase in 1996 is due to both an
increase in net outbound roaming expense and an increase in fraud-related costs.
These fraud-related costs totaled $6.5 million in 1997, $18.0 million in 1996
and $4.1 million in 1995. The Cellular Group continues to implement procedures
in its markets to combat this fraud, which is primarily related to roaming
usage. Customer usage expenses represented 12% of service revenues in 1997, 11%
in 1996 and 7% in 1995.
Maintenance, utility and cell site expenses increased $11.5 million, or 27%,
in 1997, and $6.5 million, or 18%, in 1996. The increases primarily reflect an
increase in the number of cell sites in the Cellular Group's systems each year,
to 1,748 in 1997 from 1,328 in 1996 and 1,116 in 1995. Monthly maintenance,
utility and cell site expenses totaled $2,900, $2,866 and $3,107 per average
cell site in 1997, 1996 and 1995, respectively.
MARKETING AND SELLING EXPENSES increased $47.4 million, or 37%, in 1997 and
$35.5 million, or 39%, in 1996. 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
1997 increase was primarily due to a 33% rise in the number of gross customer
activations (excluding acquisitions and divestitures), to 746,000 in 1997 from
563,000 in 1996. Also in 1997, the Cellular Group increased its advertising
expenses, particularly brand advertising, to promote the United States
Cellular-Registered Trademark- brand. The 1996 increase was primarily due to a
44% rise in the number of gross customer activations (excluding acquisitions and
divestitures), to 563,000 in 1996 from 392,000 in 1995. Cost per gross customer
activation, including losses on equipment sales, decreased to $313 in 1997 from
$327 in 1996 and $335 in 1995. While cost per gross customer activation in total
decreased in 1997 and 1996, the percentage of cost per gross customer activation
attributable to marketing and selling expenses increased to 75% in 1997 from 69%
in 1996 and 70% in 1995. The percentage increase from 1996 to 1997 is primarily
due to the additional advertising expenses coupled with decreased losses on
equipment sales due to lower per unit manufacturer equipment prices. The
reclassification of customer bill credits reduced cost per gross addition from
what would have been reported by $52, or 14%, in 1997, and from what was
reported by $40, or 11%, in 1996 and $26, or 7%, in 1995; in total, the
reclassification reduced marketing and selling expenses from what would have
been reported by $38.6 million, or 18%, in 1997, and from what was reported by
$22.3 million, or 15%, in 1996 and $10.2 million, or 10%, in 1995.
COST OF EQUIPMENT SOLD increased $8.3 million, or 11%, in 1997 and $19.1
million, or 35%, in 1996. The increase reflects the growth in unit sales related
to the rise in gross customer activations made through the Cellular Group's
direct and retail distribution channels, offset somewhat by falling manufacturer
prices per unit. The average cost to the Cellular Group of a telephone unit
sold, including accessories and installation, was $140 in 1997, $165 in 1996 and
$186 in 1995.
GENERAL AND ADMINISTRATIVE EXPENSES increased $39.7 million, or 24%, in 1997
and $34.2 million, or 26%, in 1996. These expenses include the costs of
operating the Cellular Group'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 the
Cellular Group's business. Employee-related expenses increased $19.4 million, or
26%, in 1997 and $15.6 million, or 27%, in 1996, primarily due to increases in
the number of administrative employees in each year. Also, bad debt expense
increased $8.0 million, or 46%, in 1997 and $5.0 million, or 40%, in 1996,
primarily due to the Cellular Group's increased penetration of the consumer
market. The Cellular Group is using an ongoing clustering strategy to combine
local and customer service operations wherever feasible in order to gain
operational efficiencies and reduce its per unit administrative expenses.
Monthly general and administrative expenses per customer decreased to $12.99 in
1997 from $15.84 in 1996 and $19.85 in 1995. The reclassification of customer
bill credits reduced general and administrative expenses from what would have
been reported by $10.4 million, or 5%, in 1997, and from what was reported by
$5.5 million, or 2%, in 1996 and $1.9 million, or 1%, in 1995.
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<PAGE>
Operating cash flow increased $65.7 million, or 33%, to $261.9 million in
1997 and increased $64.0 million, or 48%, to $196.2 million in 1996. 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 30.7% in 1997, 29.6% in 1996 and
28.5% in 1995; had the reclassification of customer bill credits not been made,
operating cash flow margins would have been 29.0% in 1997, 28.4% in 1996 and
27.7% in 1995.
DEPRECIATION EXPENSE increased $23.0 million, or 31%, in 1997 and $17.3
million, or 30%, in 1996. The increase reflects rising average fixed asset
balances, which increased 35% in 1997 and 34% in 1996. Increased fixed asset
balances primarily result from the increase in cell sites built to improve
coverage and capacity in the Cellular Group's markets.
OPERATING INCOME BEFORE MINORITY SHARE
OPERATING INCOME before minority share totaled $129.5 million in 1997, $87.4
million in 1996 and $42.8 million in 1995. The operating income margin (as a
percent of service revenues) was 15.2% in 1997, 13.2% in 1996 and 9.2% in 1995;
had the reclassification of customer bill credits not been made, operating
income margins would have been 14.4% in 1997, 12.7% in 1996 and 9.0% in 1995.
The improvement in operating income and operating income margin reflects
increased revenues resulting from growth in the number of customers served by
the Cellular Group's systems and the effect of improved operational efficiencies
on total operating expenses.
The Cellular Group expects service revenues to continue to grow during 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 and as the Cellular Group further penetrates the consumer market.
Additionally, the Cellular Group expects expenses to increase during 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 the Cellular Group's markets over the past eighteen months. The
Cellular Group expects PCS operators to complete initial deployment of PCS in
portions of all of the Cellular Group's clusters by the end of 1998. The
Cellular Group has increased its advertising, particularly brand advertising, in
1997 to promote the United States Cellular-Registered Trademark- brand and
distinguish the Cellular Group's service from other wireless communications
providers. The Cellular Group's management continues to monitor other wireless
communications providers' strategies to determine what effects additional
competition will have on the Cellular Group's future strategies and results.
While the effects of additional wireless competition have slowed customer growth
in certain of the Cellular Group's markets, the overall effect on the Cellular
Group's total customer growth to date has not been material.
INVESTMENT AND OTHER INCOME
INVESTMENT AND OTHER INCOME totaled $107.6 million in 1997, $191.1 million
in 1996 and $124.7 million in 1995. GAIN ON SALE OF CELLULAR INTERESTS totaled
$30.3 million in 1997, reflecting gains recorded on the sales of the Cellular
Group's majority interests in one market and one market partition and minority
interests in two other markets, and on cash received from the settlement of a
legal matter. Gain on sale of cellular interests totaled $132.7 million in 1996,
reflecting gains recorded on the sales of the Cellular Group's majority
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. Gain on sale of
cellular interests totaled $83.5 million in 1995, reflecting gains recorded on
the sales of majority interests in six markets and minority interests in six
markets, on cash received in an exchange of markets with another cellular
operator and on the sale of certain marketable equity securities.
INVESTMENT INCOME was $77.1 million in 1997 compared to $51.5 million in
1996 and $39.8 million in 1995. Investment income primarily represents the
Cellular Group'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 1996 and 1997, future investment income will be negatively
impacted by the completion of the exchange transaction with BellSouth
Corporation ("BellSouth") and the divestitures of certain minority interests to
AirTouch Communications ("AirTouch"). See "Financial Resources and
Liquidity--Acquisitions, Divestitures and Exchanges" for further discussions of
these transactions.
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<PAGE>
INTEREST AND INCOME TAXES
INTEREST EXPENSE totaled $29.4 million in 1997 compared to $23.1 million in
1996 and $27.3 million in 1995. Interest expense in 1997 is primarily related to
Liquid Yield Option Notes ("LYONs") ($15.2 million); the Cellular Group's 7.25%
notes (the "Notes") issued during the third quarter of 1997 ($6.3 million);
borrowings under vendor financing agreements ($4.5 million); and borrowings
under the Revolving Credit Agreement with TDS ($1.9 million). Interest expense
in 1996 is primarily related to LYONs ($14.4 million) and borrowings under
vendor financing agreements ($8.0 million). Interest expense in 1995 is
primarily related to borrowings under the Revolving Credit Agreement with TDS
($10.4 million), borrowings under vendor financing agreements ($9.2 million) and
LYONs ($7.4 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. Borrowings under the Revolving Credit
Agreement with TDS were also outstanding from January 1995 through June 1995, at
which time all outstanding amounts were repaid with a portion of the proceeds
from the LYONs offering.
INCOME TAX EXPENSE was $83.9 million in 1997, $111.6 million in 1996 and
$32.5 million in 1995. In 1997, $14.1 million of income tax expense related to
the gains on sales of cellular interests compared to $65.3 million in 1996 and
$27.7 million in 1995. The effective tax rates were 43% in 1997, 46% in 1996 and
25% in 1995. The fluctuation in each year's effective tax rate is primarily due
to the different amounts of gains on sales of cellular interests in each year;
these gains are generally taxed at a higher rate than income from operations,
due to the lower tax basis of certain interests which were originally acquired
in transactions structured to be tax-deferred. In 1997, 1996 and 1995, state
income taxes and gains on sales of cellular interests increased the effective
rate above the statutory federal income tax rate. In 1995, this effect was
offset by the effect of the valuation allowance on the deferred tax asset, which
decreased the effective rate below the statutory rate.
TDS and the Cellular Group are parties to a Tax Allocation Agreement,
pursuant to which the Cellular Group is included in a consolidated federal
income tax return with other members of the TDS consolidated group. For
financial reporting purposes, the Cellular Group computes federal income taxes
as if it were filing a separate return as its own affiliated group and was not
included in the TDS consolidated tax return.
NET INCOME
NET INCOME totaled $111.5 million in 1997, $129.9 million in 1996 and $99.7
million in 1995. Net income in all three years included gains on the sales of
cellular interests.
FINANCIAL RESOURCES AND LIQUIDITY
The Cellular Group operates a capital and marketing-intensive business. In
recent years, the Cellular Group 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. The Cellular Group 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 $222.1 million in 1997, $137.5
million in 1996 and $115.9 million in 1995. Operating cash flow provided $261.9
million in 1997, $196.2 million in 1996 and $132.2 million in 1995. 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 $39.8 million in 1997, $58.7 million in 1996 and $16.3
million in 1995.
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<PAGE>
Cash flows from financing activities provided $135.9 million in 1997,
required $11.2 million in 1996 and provided $19.3 million in 1995. In August
1997, the Notes offering provided $243.1 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 $10.5
million while repayments of debt under the vendor financing agreements required
$21.5 million. In 1995, the sale of LYONs provided cash totaling $221.5 million
and borrowings under 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.
Cash flows from investing activities required $358.5 million in 1997, $150.3
million in 1996 and $102.6 million in 1995. The Cellular Group received net cash
proceeds totaling $61.1 million in 1997, $213.0 million in 1996 and $151.1
million in 1995 related to the sales and exchanges of cellular interests. Cash
distributions from cellular entities in which the Cellular Group has an interest
provided $52.4 million in 1997, $23.5 million in 1996 and $8.7 million in 1995.
Cash required for property, plant and equipment and system development
expenditures totaled $318.7 million in 1997, financed primarily with internally
generated cash and the proceeds from the Notes offering, $248.1 million in 1996,
financed primarily with internally generated funds and proceeds from the sales
of cellular interests, and $206.2 million in 1995, financed primarily with
internally generated funds and proceeds from the LYONs offering. These
expenditures primarily represent the construction of 331, 242 and 292 cell
sites, respectively, plus other plant additions and costs related to the
development of the Cellular Group's office systems. Acquisitions required $128.8
million in 1997, $116.4 million in 1996 and $29.3 million in 1995.
Anticipated capital requirements for 1998 primarily reflect the Cellular
Group's construction and system expansion program. The Cellular Group's
construction and system expansion budget for 1998 is approximately $330 million,
primarily for new cell sites to expand and enhance the Cellular Group's coverage
in its service areas and for the enhancement of the Cellular Group's office
systems.
ACQUISITIONS, DIVESTITURES AND EXCHANGES
The Cellular Group assesses its cellular holdings on an ongoing basis in
order to maximize the benefits derived from clustering its markets. As the
Cellular Group's clusters have grown, the Cellular Group's focus has shifted
toward exchanges and divestitures of managed and investment interests. Over the
past few years, the Cellular Group has completed exchanges of controlling
interests in its less strategic markets for controlling interests in markets
which better complement its clusters. The Cellular Group has also completed
outright sales of other less strategic markets. The proceeds from these sales
have been used to further the Cellular Group's growth.
In 1997, the Cellular Group, or TDS for the benefit of the Cellular Group,
purchased majority interests in two markets and several minority interests,
representing approximately 534,000 pops. The total consideration paid for these
purchases, primarily in the form of cash (including cash borrowed under the
Revolving Credit Agreement with TDS) and U.S. Cellular Common Shares issued to
TDS to reimburse TDS for the value of TDS Common Shares issued to third parties,
totaled $81.4 million.
Also in 1997, the Cellular Group completed an exchange with BellSouth.
Pursuant to the exchange, the Cellular Group received majority interests
representing approximately 4.0 million pops in exchange for majority interests
representing 2.0 million pops, minority interests representing 1.2 million pops
and a net amount of $86.7 million in cash. The majority interests the Cellular
Group received are in 12 markets adjacent to its Iowa/Missouri and
Wisconsin/Illinois/Indiana clusters.
In 1996, the Cellular Group purchased majority interests in two markets and
several minority interests, representing 1.0 million 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 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
the Cellular Group acquired from TDS for $102.8 million in cash, pursuant to an
agreement entered into in June 1996.
In 1995, the Cellular Group purchased majority interests in 11 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. The Cellular Group also acquired majority
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interests in 12 markets, representing 2.0 million pops, as a result of six
separate exchange transactions completed during 1995.
In 1997, the Cellular Group sold majority interests in one market plus one
market partition and minority interests in two other markets, representing
358,000 pops, for an aggregate consideration of $54.5 million in cash and
receivables. The two minority interests involved interests the Cellular Group
had previously acquired from TDS pursuant to the June 1996 agreement between the
two companies. In the aggregate, the Cellular Group recorded a substantial book
gain on the divestitures of the interests acquired from TDS.
In 1996, the Cellular Group sold majority interests in eight markets and one
market partition, plus minority interests in two other markets, representing 1.2
million pops, and divested a majority interest in another market through an
exchange with another cellular operator. The Cellular Group received cash
consideration totaling $187.8 million from these sales and from the exchange.
The Cellular Group 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 the Cellular Group with cash
totaling $218.1 million in 1996.
In 1995, the Cellular Group sold majority interests in six markets and
minority interests in six markets, representing 1.1 million pops. The Cellular
Group received consideration of cash and receivables totaling $128.2 million
from these sales. The Cellular Group also divested majority interests in 10
markets plus three market partitions, representing 2.1 million pops, as a result
of the exchange transactions completed during 1995.
At December 31, 1997, the Cellular Group had entered into agreements to
acquire a majority interest in one market and a minority interest in a market in
which the Cellular Group owns a majority interest, representing 410,000 pops,
for $51.3 million in cash. If the majority interest is acquired as expected, the
Cellular Group will subsequently sell that interest to BellSouth for cash.
Also at December 31, 1997, the Cellular Group had entered into agreements
with AirTouch to divest minority interests in nine markets, representing
approximately 759,000 pops. In exchange, the agreements provided that the
Cellular Group will receive approximately 4.0 million shares of AirTouch stock
and cash totaling $54.2 million. In addition, the Cellular Group will receive
approximately $27.0 million in cash from TDS pursuant to a contract right
termination agreement entered into between the Cellular Group and TDS. This
agreement is related to two interests which are to be sold directly by TDS to
AirTouch and which were to be acquired by the Cellular Group as part of the June
1996 agreement between the Cellular Group and TDS. The contract right
termination agreement will enable the Cellular Group to receive cash equal to
the value of the gain the Cellular Group would have realized had it purchased
the interests from TDS and sold them to AirTouch under terms similar to those in
the agreement between TDS and AirTouch.
Additionally, the Cellular Group has entered into an agreement to sell its
minority interests in two other markets, representing 176,000 pops, for $37.6
million in cash. The Cellular Group expects these pending transactions to be
completed during the first half of 1998. The Cellular Group anticipates that it
will record significant book gains on these divestitures when the transactions
are completed.
LIQUIDITY
The Cellular Group anticipates that the aggregate resources required for
1998 will include approximately $330 million for capital spending and
approximately $51 million to complete pending acquisitions. The Cellular Group
is generating substantial cash from its operations and anticipates financing its
capital spending for 1998 primarily with internally generated cash. The Cellular
Group had $14 million of cash and cash equivalents at December 31, 1997 and
expects to receive approximately $119 million from pending divestitures and the
contract right termination agreement during 1998.
Additionally, in August 1997 U.S. Cellular established a $500 million
revolving credit facility with a group of banks. This seven-year facility
replaces the Cellular Group's Revolving Credit Agreement with TDS. No borrowings
have been made under the new credit facility through December 31, 1997.
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 transactions.
Management believes that the nature of the interest rate bases related to
the Cellular Group's current and potential future debt financing sources do not
subject the Cellular Group to material market risk exposures.
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Management believes that the Cellular Group's operating cash flows and
sources of external financing, including the above-referenced revolving credit
facility and shelf registration, provide substantial financial flexibility for
the Cellular Group to meet both its short and long-term needs. The Cellular
Group also currently has access to public and private capital markets to help
meet its long-term financing needs. The Cellular Group anticipates issuing debt
and equity securities only when capital requirements (including acquisitions),
financial market conditions and other factors warrant.
The Cellular Group has assessed, and continues to assess, the impact of the
Year 2000 on its reporting systems and operations (the "Year 2000 Issue"), 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
will always be "19." Unless corrected, this shortcut is expected to cause
problems beginning on January 1, 2000. On that date, some computer programs may
recognize the date as January 1, 1900. This may cause systems to incorrectly
process critical financial and operational information, or stop processing
altogether. Additionally, computer applications may be affected before January
1, 2000, if calculations into the year 2000 are involved. The costs to date of
addressing the Year 2000 Issue have not been material to the Cellular Group's
results of operations or financial condition, and management believes that the
costs to be incurred in the future will not be material to future results or
financial condition. If management's steps are not successful in making the
systems Year 2000 compliant, it could have a material adverse effect on results
of operations.
PROPOSED TDS CORPORATE RESTRUCTURING
In December 1997, U.S. Cellular received a proposal from TDS to acquire all
of the issued and outstanding Common Shares of U.S. Cellular not already owned
by TDS. The offer was made in connection with, and is subject to TDS shareholder
approval of and the effectiveness of, TDS's proposed corporate restructuring.
The Board of Directors of TDS (the "TDS Board") has adopted a proposal which, if
approved by TDS shareholders and implemented by the TDS Board, would authorize
the TDS Board to issue three new classes of common stock and change the state of
incorporation of TDS from Iowa to Delaware (the "Tracking Stock Proposal"). The
three new classes of stock are intended to separately reflect the performance of
TDS's cellular telephone, landline telephone and personal communications
services businesses ("Tracking Stocks").
Under the Tracking Stock Proposal, one of the three new classes of common
stock created by TDS would be designated as United States Cellular Group Common
Shares (the "Cellular 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 TDS's interest in United States
Cellular Corporation.
Subject to the approval of the Tracking Stock Proposal by TDS shareholders,
TDS intends to, among other things, issue Cellular Group Shares in exchange for
all of the Common Shares of U.S. Cellular which are not currently owned by TDS,
subject to approval by U.S. Cellular's board of directors and shareholders.
In January 1998, U.S. Cellular's board of directors created a special
committee of the Board (the "Special Committee") to review the proposal from
TDS. The Special Committee, consisting of one independent director of U.S.
Cellular, has engaged a financial advisor and legal advisor to assist in
reviewing the proposal. The Special Committee will consider how U.S. Cellular
should respond to the TDS proposal, take the steps it deems appropriate to
respond to the TDS proposal and, at such time as it considers it appropriate,
report its recommendations to U.S. Cellular's Board of Directors.
Subsequent to TDS shareholder approval of the Tracking Stock Proposal, TDS
intends to terminate certain intercompany agreements between TDS and U.S.
Cellular. Thereafter, some or all of the policies between TDS and U.S. Cellular
would be determined solely by methods that TDS management believes to be
reasonable. Many of such policies would continue the arrangements which
presently exist between TDS and U.S. Cellular pursuant to the intercompany
agreements, but TDS would have no contractual obligation to continue such
policies after the intercompany agreements have been terminated. The TDS Board
currently intends to retain future earnings, if any, for the development of the
business of the Cellular Group and does not anticipate paying dividends on the
Cellular Group Shares into the foreseeable future.
LEGAL PROCEEDINGS.
On December 29, 1997, a party, 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 compliant names as defendants TDS, U.S. Cellular, and
the directors of U.S.
II-27
<PAGE>
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
defendants have been served with the complaint in this case but have not yet
responded to the complaint. The time for the defendants to respond has been
extended. The timing for a response will be determined based on discussions
between counsel for plaintiffs and defendants, but a response is not expected to
take place for at least one or more months. A virtually identical complaint has
been filed by an individual. None of the defendants have been served with this
complaint. It is expected that these cases will be consolidated. 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.
II-28
<PAGE>
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 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 CELLULAR 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
THE CELLULAR GROUP'S MARKETS. READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF
THESE IMPORTANT FACTORS.
II-29
<PAGE>
THE UNITED STATES CELLULAR GROUP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING REVENUES
Service.............................................................................. $ 852,991 $ 662,681 $ 464,555
Equipment sales...................................................................... 23,974 17,387 15,761
----------- ----------- -----------
Total Operating Revenues....................................................... 876,965 680,068 480,316
----------- ----------- -----------
OPERATING EXPENSES
System operations.................................................................... 153,137 117,368 70,442
Marketing and selling................................................................ 175,117 127,689 92,180
Cost of equipment sold............................................................... 82,302 74,023 54,948
General and administrative........................................................... 204,487 164,783 130,533
Depreciation......................................................................... 97,591 74,631 57,302
Amortization of intangibles.......................................................... 34,788 34,208 32,156
----------- ----------- -----------
Total Operating Expenses....................................................... 747,422 592,702 437,561
----------- ----------- -----------
OPERATING INCOME BEFORE MINORITY SHARE................................................. 129,543 87,366 42,755
Minority share of operating income..................................................... (12,298) (13,743) (7,902)
----------- ----------- -----------
OPERATING INCOME....................................................................... 117,245 73,623 34,853
----------- ----------- -----------
INVESTMENT AND OTHER INCOME
Investment income.................................................................... 77,121 51,518 39,833
Amortization of licenses related to investments...................................... (2,084) (1,391) (1,089)
Interest income...................................................................... 5,863 10,093 5,008
Other (expense), net................................................................. (3,614) (1,881) (2,578)
Gain on sale of cellular and other investments....................................... 30,318 132,718 83,494
----------- ----------- -----------
Total Investment and Other Income.............................................. 107,604 191,057 124,668
----------- ----------- -----------
INCOME BEFORE INTEREST AND INCOME TAXES................................................ 224,849 264,680 159,521
----------- ----------- -----------
INTEREST EXPENSE
Interest expense--other.............................................................. 27,414 23,111 16,881
Interest expense--affiliate.......................................................... 1,948 -- 10,406
----------- ----------- -----------
Total Interest Expense......................................................... 29,362 23,111 27,287
----------- ----------- -----------
INCOME BEFORE INCOME TAXES............................................................. 195,487 241,569 132,234
Income tax expense..................................................................... 83,948 111,640 32,492
----------- ----------- -----------
NET INCOME............................................................................. 111,539 129,929 99,742
Net Income to Minority Shareholders of U.S. Cellular................................... (21,264) (25,179) (19,046)
----------- ----------- -----------
Net Income to TDS...................................................................... $ 90,275 $ 104,750 $ 80,696
----------- ----------- -----------
----------- ----------- -----------
Pro forma (Unaudited): (See Note 1 and 2)
Net Income Attributable to the TDS Group through Retained Interest..................... $ 22,569 $ 26,188 $ 20,174
Net Income Attributable to the United States Cellular Group Common Shares.............. $ 67,706 $ 78,562 $ 60,522
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
II-30
<PAGE>
THE UNITED STATES CELLULAR GROUP
BALANCE SHEETS--ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents
General funds............................................................................... $ 13,851 $ 802
Affiliated cash equivalents................................................................. -- 13,575
------------- -------------
13,851 14,377
Temporary investments......................................................................... 218 --
Accounts receivable
Customers, less allowance of $5,259 and $4,199, respectively................................ 81,387 58,034
Roaming..................................................................................... 30,689 29,742
Affiliates.................................................................................. 170 607
Other....................................................................................... 17,536 7,568
Inventory..................................................................................... 11,836 11,893
Prepaid expenses.............................................................................. 15,714 2,622
Other current assets.......................................................................... 3,963 3,776
------------- -------------
175,364 128,619
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction............................................................. 1,212,575 846,005
Less accumulated depreciation................................................................. 272,322 195,251
------------- -------------
940,253 650,754
------------- -------------
INVESTMENTS
Licenses, net of accumulated amortization of $127,783 and $110,727, respectively.............. 1,150,924 1,044,141
Cellular entities............................................................................. 128,810 186,791
Notes and interest receivable................................................................. 10,673 14,943
Marketable non-equity securities.............................................................. 870 --
------------- -------------
1,291,277 1,245,875
------------- -------------
DEFERRED CHARGES
System development costs, net of accumulated amortization of $18,117 and $11,089,
respectively................................................................................ 78,306 44,319
Other, net of accumulated amortization of $4,639 and $5,276, respectively..................... 23,716 16,332
------------- -------------
102,022 60,651
------------- -------------
TOTAL ASSETS............................................................................ $ 2,508,916 $ 2,085,899
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
II-31
<PAGE>
THE UNITED STATES CELLULAR GROUP
BALANCE SHEETS--LIABILITIES AND GROUP EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt............................................................. $ -- $ 23,065
Notes payable................................................................................. 1,302 1,375
Accounts payable
Affiliates.................................................................................. 2,466 2,729
Other....................................................................................... 101,263 66,638
Accrued taxes................................................................................. 41,606 18,781
Accrued interest.............................................................................. 6,534 204
Accrued compensation.......................................................................... 9,112 3,231
Customer deposits and deferred revenues....................................................... 21,019 16,410
Other current liabilities..................................................................... 20,934 14,021
------------- -------------
204,236 146,454
------------- -------------
LONG-TERM DEBT
6% zero coupon convertible debentures......................................................... 265,330 250,107
7.25% unsecured notes......................................................................... 250,000 --
Vendor financing, excluding current portion................................................... -- 80,589
------------- -------------
515,330 330,696
------------- -------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability............................................................. 100,725 78,833
Other......................................................................................... 5,397 2,444
------------- -------------
106,122 81,277
------------- -------------
MINORITY INTEREST............................................................................... 53,908 51,270
------------- -------------
UNITED STATES CELLULAR GROUP EQUITY............................................................. 1,629,320 1,476,202
------------- -------------
TOTAL LIABILITIES AND GROUP EQUITY...................................................... $ 2,508,916 $ 2,085,899
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
II-32
<PAGE>
THE UNITED STATES CELLULAR GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................ $ 111,539 $ 129,929 $ 99,742
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization................................................. 132,379 108,839 89,458
Investment income............................................................. (77,121) (51,518) (39,833)
Gain on sale of cellular and other investments................................ (30,318) (132,718) (83,494)
Minority share of operating income............................................ 12,298 13,743 7,902
Other noncash expense......................................................... 18,786 19,260 30,597
Change in accounts receivable................................................. (10,038) (16,706) (27,878)
Change in accounts payable.................................................... (1,646) 12,709 (1,819)
Change in accrued taxes....................................................... 26,297 (10,185) 27,127
Change in deferred taxes...................................................... 24,077 63,137 8,660
Change in accrued interest.................................................... 6,413 204 (4,309)
Change in unearned revenue.................................................... 5,083 5,254 5,265
Change in other assets and liabilities........................................ 4,388 (4,439) 4,516
------------ ------------ ------------
222,137 137,509 115,934
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of 7.25% unsecured notes................................................. 243,053 -- --
Vendor financing borrowings....................................................... -- 3,922 59,460
Repayment of vendor financing..................................................... (103,827) (21,519) (13,353)
Issuance of convertible debentures................................................ -- -- 221,466
Borrowings from Revolving Credit Agreement--TDS................................... 70,444 -- --
Repayment of Revolving Credit Agreement--TDS...................................... (70,444) -- (251,230)
Common Shares issued.............................................................. 2,503 10,483 1,563
Capital (distributions) contributions (to)/from minority partners................. (5,849) (4,099) 1,411
------------ ------------ ------------
135,880 (11,213) 19,317
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.............................................................. (277,799) (219,370) (200,554)
System development costs.......................................................... (40,949) (28,753) (5,628)
Investments in and advances to investment entities................................ (20,084) (22,256) (26,966)
Distributions from investment entities............................................ 52,365 23,464 8,679
Proceeds from sales of cellular and other investments............................. 61,145 212,979 151,137
Acquisitions, excluding cash acquired............................................. (128,828) (116,387) (29,315)
Other investments................................................................. (3,305) -- --
Change in temporary investments and marketable non-equity securities.............. (1,088) -- --
------------ ------------ ------------
(358,543) (150,323) (102,647)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................ (526) (24,027) 32,604
CASH AND CASH EQUIVALENTS--
Beginning of period............................................................... 14,377 38,404 5,800
------------ ------------ ------------
End of period..................................................................... $ 13,851 $ 14,377 $ 38,404
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
II-33
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS
The United States Cellular Group ("Cellular Group") consists solely of
United States Cellular Corporation and its subsidiaries ("U.S. Cellular"),
currently an 81.1%-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. PROPOSED TDS CORPORATE RESTRUCTURING
In December 1997, U.S. Cellular received a proposal from TDS to acquire all
of the issued and outstanding Common Shares of U.S. Cellular not already owned
by TDS. The offer was made in connection with, and is subject to, TDS
shareholder approval of and the effectiveness of, TDS's proposed corporate
restructuring. The Board of Directors of TDS (the "TDS Board") has adopted a
proposal which, if approved by TDS shareholders and implemented by the TDS
Board, would authorize the TDS Board to issue three new classes of common stock
and change the state of incorporation of TDS from Iowa to Delaware (the
"Tracking Stock Proposal"). The three new classes of stock are intended to
separately reflect the performance of TDS's cellular telephone, landline
telephone and personal communications services businesses ("Tracking Stocks").
Under the Tracking Stock Proposal, one of the three new classes of common
stock created by TDS would be designated as United States Cellular Group Common
Shares (the "Cellular 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 TDS's interest in United States
Cellular Corporation.
Subject to the approval of the Tracking Stock Proposal by TDS shareholders,
TDS intends to, among other things, issue Cellular Group Shares in exchange for
all of the Common Shares of U.S. Cellular which are not currently owned by TDS,
subject to approval by U.S. Cellular's board of directors and shareholders (the
"Merger").
In January 1998, U.S. Cellular's board of directors created a special
committee of the Board (the "Special Committee") to review the proposal from
TDS. The Special Committee, consisting of one independent director of U.S.
Cellular, has engaged a financial advisor and legal advisor to assist in
reviewing the proposal. The Special Committee will consider how U.S. Cellular
should respond to the TDS proposal, take the steps it deems appropriate to
respond to the TDS proposal and, at such time as it considers it appropriate,
report its recommendations to U.S. Cellular's Board of Directors.
Subsequent to TDS shareholder approval of the Tracking Stock Proposal, TDS
intends to terminate certain intercompany agreements between TDS and U.S.
Cellular. Thereafter, some or all of the policies between TDS and U.S. Cellular
would be determined solely by methods that TDS management believes to be
reasonable. Many of such policies would continue the arrangements which
presently exist between TDS and U.S. Cellular pursuant to the intercompany
agreements, but TDS would have no contractual obligation to continue such
policies after the intercompany agreements have been terminated. The TDS Board
currently intends to retain future earnings, if any, 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Cellular Group 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"). The Cellular Group owns interests
in 192 cellular markets, representing approximately 26.2 million pops, as of
December 31, 1997. The Cellular Group's 134 majority-owned and managed markets,
primarily mid-sized and rural markets, covered 24 states and served 1,710,000
customers as of December 31, 1997. The Cellular Group's Midwest Regional Market
Cluster, which includes markets in Iowa, Wisconsin, Illinois and Missouri,
served 709,000 customers at December 31, 1997, which represents approximately
41% of the Cellular Group's total customers served as of that date.
II-34
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
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 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, TDS intends to terminate certain intercompany agreements
between TDS and U.S. Cellular. Thereafter, some or all of the relationships
between TDS and U.S. Cellular would be determined solely by methods that
management of TDS believes to be reasonable. Many of such policies would
continue the arrangements which presently exist between TDS and U.S. Cellular
pursuant to the intercompany agreements, but TDS 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.
Financial effects arising from the Cellular Group, the Telecom Group, the
Aerial Group or the TDS Group that affect the consolidated results of operations
or financial condition of TDS could affect the results of operations or
financial condition of the Cellular Group, the Telecom Group, the Aerial Group
or the TDS Group, or could affect the market price of any or all classes of
Common Stock. In addition, any net losses of TDS 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 TDS
legally available for payment of dividends on any class of Common Stock.
Accordingly, TDS's consolidated financial statements should be read in
conjunction with the Cellular 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.
Funds of TDS legally available for the payment of dividends ("Surplus")
(approximately $1,966 million as of December 31, 1997, based on the financial
statements) is an amount approximately equal to the Total Common and Preferred
Equity of TDS less the par or stated value of all shares of common and preferred
stock outstanding (204,922,000 shares as of December 31, 1997 after the
Distribution). With respect to any Tracking Group, the Available Dividend Amount
(approximately $1,222 million for the Cellular Group as of December 31, 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. The TDS Board currently
intends to retain future earnings, if any, for the development of the business
of the Cellular Group and does not anticipate paying dividends on the Cellular
Group Shares into the foreseeable future.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, TDS will prepare
and file with the Securities and Exchange Commission consolidated financial
statements of TDS 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'
II-35
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
equity of TDS 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 the Cellular
Group, the Telecom Group and the Aerial Group Common Shares will be, and holders
of TDS Common Shares and Series A Common Shares will continue to be,
shareholders of TDS. TDS and its subsidiaries will each continue to be
responsible for their respective liabilities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Cellular
Group, its majority-owned subsidiaries and partnerships in which the Cellular
Group has a majority partnership interest. All material intercompany accounts
and transactions have been eliminated. Investments in entities in which the
Cellular Group does not have a majority interest are generally accounted for
using the equity method.
The preparation of consolidated 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 any differences will not be material.
Certain amounts reported in prior years have been reclassified to conform to
current period presentation.
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. Those
investments with original maturities of more than 12 months are classified as
marketable securities and are stated at amortized cost.
The carrying amounts of Cash and Cash Equivalents and Temporary Investments
approximate their fair value due to the short-term nature of these investments.
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 the Cellular Group's cellular systems, by affiliated entities and by other
partners for capital contributions and distributions.
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. The Cellular Group also has an outstanding loan to the
operators of another cellular company in which the Cellular Group 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.
DEFERRED CHARGES
Deferred system development costs 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.
Other deferred charges primarily represent legal and other charges incurred
relating to the preparation of the agreements related to the Cellular Group's
various borrowing instruments, and are amortized over the respective financing
periods of each instrument (seven to 20 years).
II-36
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Cellular Group 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 Cellular Group 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 a long-lived asset is
not 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 Celluar Group's
financial position or results of operations.
REVENUES
Revenues from operations primarily consist of charges to customers for
monthly access, cellular airtime, data usage, vertical services, roaming
charges, long-distance charges and equipment sales. 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 the Cellular Group'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
The Cellular Group expenses advertising costs as incurred. Advertising costs
totaled $41.4 million, $24.4 million and $14.1 million for the years ended
December 31, 1997, 1996 and 1995, 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 the Cellular Group and its subsidiaries. Under this plan, pension
benefits and costs are calculated separately for each participant and are funded
currently. Pension costs were $1.0 million, $1.5 million and $1.2 million in
1997, 1996 and 1995, respectively.
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.
II-37
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL CASH FLOW DISCLOSURES
The Cellular Group acquired certain cellular licenses and other cellular
interests during 1997, 1996 and 1995. In conjunction with these acquisitions,
the following assets were acquired, liabilities assumed and Common Shares
issued:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Property, plant and equipment, net................................................... $ 112,696 $ 7,069 $ 29,622
Cellular licenses.................................................................... 130,336 90,341 138,600
(Decrease) increase in equity-method investments in cellular interests............... (90,332) 13,971 (5,921)
Accounts receivable.................................................................. 26,032 1,332 1,760
Revolving Credit Agreement--TDS...................................................... -- -- (15,493)
Accounts payable..................................................................... (31,117) (1,081) (5,051)
Other assets and liabilities, excluding cash acquired................................ 13,699 1,493 (998)
Common Shares issued and issuable.................................................... (32,486) 3,262 (113,204)
------------ ------------ ----------
Decrease in cash due to acquisitions................................................. $ 128,828 $ 116,387 $ 29,315
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
Following are supplemental cash flow disclosures regarding interest and
income taxes paid and certain noncash transactions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest paid........................................................................ $ 6,816 $ 7,001 $ 4,112
Income taxes paid.................................................................... 40,316 64,402 3,035
Noncash interest expense............................................................. 15,379 16,110 23,175
Accrued interest converted into debt under the Revolving Credit Agreement............ -- -- 14,432
Additions to Property, Plant and Equipment financed through Accounts Payable--
Other............................................................................... 5,778 (4,679) 1,929
Common Shares issued by U.S. Cellular for redemption of U.S. Cellular Preferred Stock
and TDS Preferred Shares............................................................ $ 36 $ 18,450 $ 22,236
------------ ------------ ----------
</TABLE>
3. INCOME TAXES
The Cellular Group is included in a consolidated federal income tax return
with other members of the TDS consolidated group.
TDS and the Cellular Group are parties to a Tax Allocation Agreement (the
"Agreement"). The Agreement provides that the Cellular Group and its
subsidiaries be included with the TDS affiliated group in a consolidated federal
income tax return and in state income or franchise tax returns in certain
situations. The Cellular Group and its subsidiaries calculate their losses and
credits as if they comprised a separate affiliated group. Under the Agreement,
the Cellular Group is able to carry forward its losses and credits and use them
to offset any future income tax liabilities to TDS.
Subject to the completion of the Merger, TDS intends to terminate certain
intercompany agreements between TDS and U.S. Cellular. See Note 1 -- Proposed
TDS Corporate Restructuring for a discussion of the proposed merger.
II-38
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES (CONTINUED)
Income tax provisions charged to net income are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes
Current............................................................................ $ 46,357 $ 35,613 $ 14,882
Deferred........................................................................... 22,109 54,509 8,468
State income taxes
Current............................................................................ 13,514 12,890 8,306
Deferred........................................................................... 1,968 8,628 836
------------ ------------ ----------
Total income tax expense............................................................. $ 83,948 $ 111,640 $ 32,492
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
The statutory federal income tax rate is reconciled to the Cellular Group's
effective income tax rate below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Statutory federal income tax rate..................................................................... 35.0% 35.0%
State income taxes, net of federal benefit............................................................ 5.1 5.7
Amortization of license costs......................................................................... 1.7 1.1
Effects of corporations not included in consolidated federal income tax return........................ .4 .8
Effects of valuation allowance on deferred tax asset.................................................. (.1) (1.2)
Gains on sales........................................................................................ .8 4.8
--- ---
Effective income tax rate............................................................................. 42.9% 46.2%
--- ---
--- ---
<CAPTION>
1995
---------
<S> <C>
Statutory federal income tax rate..................................................................... 35.0%
State income taxes, net of federal benefit............................................................ 4.4
Amortization of license costs......................................................................... 2.2
Effects of corporations not included in consolidated federal income tax return........................ 1.1
Effects of valuation allowance on deferred tax asset.................................................. (18.1)
Gains on sales........................................................................................ --
---------
Effective income tax rate............................................................................. 24.6%
---------
---------
</TABLE>
Deferred income taxes are provided for the temporary differences between the
amount of the Cellular Group's assets and liabilities for financial reporting
purposes and their tax basis.
The Cellular Group had current deferred tax assets totaling $2.5 million and
$2.4 million at December 31, 1997 and 1996, respectively, resulting primarily
from the allowance for customer receivables.
II-39
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES (CONTINUED)
The temporary differences that gave rise to the noncurrent deferred tax
assets and liabilities as of December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred Tax Asset
Net operating loss carryforward................................................................. $ 14,725 $ 14,121
Taxes on acquisitions........................................................................... 56,384 --
Alternative minimum tax credit carryforward..................................................... 7,121 24,545
Stock appreciation rights....................................................................... 386 299
Other........................................................................................... 233 --
------------ ------------
78,849 38,965
Less valuation allowance.......................................................................... 10,233 13,150
------------ ------------
Total Deferred Tax Asset........................................................................ 68,616 25,815
------------ ------------
Deferred Tax Liability
Equity investments.............................................................................. 65,956 41,482
Property, plant and equipment................................................................... 52,668 23,402
Licenses........................................................................................ 40,624 24,759
Partnership investments......................................................................... 10,093 15,005
------------ ------------
Total Deferred Tax Liability...................................................................... 169,341 104,648
------------ ------------
Net Deferred Tax Liability...................................................................... $ 100,725 $ 78,833
------------ ------------
------------ ------------
</TABLE>
The amount of state net operating loss carryforward (generating a $12.2
million deferred tax asset) available to offset future taxable income, primarily
of the individual subsidiaries which generated the loss, aggregated
approximately $221 million at December 31, 1997 and expires between 1998 and
2012. 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. At December
31, 1997, the Cellular Group had $7.1 million of federal alternative minimum tax
credit carryforward available to offset regular income tax payable in future
years.
The Cellular Group has certain subsidiaries which are not included in the
federal consolidated income tax return, but file separate tax returns. These
subsidiaries had a federal net operating loss carryforward (generating a $2.5
million deferred tax asset) available to offset future taxable income
aggregating approximately $7.2 million at December 31, 1997 which expires
between 2004 and 2012.
4. 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 assets.
The provision for depreciation as a percentage of depreciable property, plant
and equipment was 10.3% , 10.4% and 10.0% in 1997, 1996 and 1995, respectively.
Property, plant and equipment in service and under construction consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating plant and equipment................................................................. $ 923,480 $ 641,600
Buildings and leasehold improvements.......................................................... 136,023 86,533
Office furniture, equipment and vehicles...................................................... 89,987 71,674
Land.......................................................................................... 63,085 46,198
-------------- --------------
$ 1,212,575 $ 846,005
-------------- --------------
-------------- --------------
</TABLE>
II-40
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS, EXCHANGES AND DIVESTITURES
The Cellular Group has acquired cellular interests for cash, promissory
notes and U.S. Cellular and TDS Common Shares. The Cellular Group has also
divested cellular interests for cash and notes receivable and has completed
exchanges of cellular interests with other cellular companies.
COMPLETED ACQUISITIONS
During 1997, the Cellular Group completed the acquisition of majority
interests in two markets and several minority interests, representing
approximately 534,000 pops, for a total consideration of $81.4 million as shown
in the following table:
<TABLE>
<CAPTION>
CONSIDERATION
-------------
(MILLIONS)
<S> <C>
1.0 million U.S. Cellular Common Shares to TDS (1)............................................................. $ 32.5
Increase in Revolving Credit Agreement with TDS................................................................ 39.0
Cash........................................................................................................... 9.9
------
Total........................................................................................................ $ 81.4
------
------
</TABLE>
- ---------
(1) Issued to reimburse TDS for TDS securities issued to third parties in
connection with the acquisitions.
During 1996, the Cellular Group completed the acquisition of majority
interests in two markets and several minority interests, representing
approximately 1.0 million pops, for a total consideration of $158.9 million as
shown in the following table:
<TABLE>
<CAPTION>
CONSIDERATION
-------------
(MILLIONS)
<S> <C>
1.3 million U.S. Cellular Common Shares to TDS (1)............................................................. $ 42.4
Common Shares issued to third parties.......................................................................... .1
Cash........................................................................................................... 116.4
-------------
Total........................................................................................................ $ 158.9
-------------
-------------
</TABLE>
- ---------
(1) Issued to reimburse TDS for TDS securities issued and cash paid to third
parties in connection with the acquisitions.
EXCHANGE OF MARKETS WITH BELLSOUTH
In October 1997, the Cellular Group completed an exchange with BellSouth
Corporation. Pursuant to the exchange, the Cellular Group received majority
interests representing approximately 4.0 million pops in exchange for majority
interests representing 2.0 million pops, minority interests representing 1.2
million pops and a net amount of $86.7 million in cash. The majority interests
the Cellular Group received are in 12 markets adjacent to its Iowa/Missouri and
Wisconsin/Illinois/Indiana clusters.
PURCHASE OF MINORITY INTERESTS BY THE COMPANY FROM TDS
Included in the interests the Cellular Group acquired in 1996 were minority
interests in 13 markets, representing 598,000 pops, for $102.8 million in cash
paid to TDS. 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 transactions, these acquisitions were recorded at TDS's book value of the
interests.
II-41
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS, EXCHANGES AND DIVESTITURES (CONTINUED)
Assuming that the 1997 and 1996 acquisitions discussed above, which were
accounted for as purchases, had taken place on January 1, 1996, unaudited pro
forma results of operations would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Service Revenues.................................................................................. $ 947,520 $ 742,913
Equipment Sales................................................................................... 31,262 24,612
Interest Expense (including cost to finance acquisitions)......................................... 30,412 26,623
Net Income........................................................................................ $ 139,107 $ 147,413
------------ ------------
</TABLE>
DIVESTITURES OF CELLULAR AND OTHER INVESTMENTS
Gain on sale of cellular and other investments in 1997 primarily reflects
gains recorded on the sales of the Cellular Group's majority interest in one
market and minority interests in two markets and on cash received from the
settlement of a legal matter.
Gain on sale of cellular and other investments in 1996 primarily reflects
gains recorded on the sales of the Cellular Group's majority interests in eight
markets and minority interests 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.
Gain on sale of cellular and other investments in 1995 primarily reflects
gains recorded on the sales of the Cellular Group's majority interests in six
markets and minority interests in six markets, on cash proceeds received in an
exchange of cellular markets and on the sale of marketable equity securities for
cash.
PENDING ACQUISITIONS
At December 31, 1997, the Cellular Group had entered into agreements with
third parties to acquire a majority interest in one market and a minority
interest in a market in which the Cellular Group owns a majority interest,
representing 410,000 pops, for $51.3 million in cash. These transactions are
expected to be completed during 1998.
PENDING SALES OF MINORITY INTERESTS
In December 1997, the Cellular Group entered into agreements with AirTouch
Communications, Inc. ("AirTouch") to divest minority interests in nine markets,
representing 759,000 pops. In exchange, the agreements provided that the
Cellular Group will receive approximately 4.0 million shares of AirTouch stock
and cash totaling $54.2 million. In addition, the Cellular Group will receive
approximately $27.0 million in cash from TDS pursuant to a contract right
termination agreement entered into between the Cellular Group and TDS. This
agreement is related to two interests which are to be sold directly by TDS to
AirTouch and which were to be acquired by the Cellular Group as part of the June
1996 agreement between U.S. Cellular and TDS. The contract right termination
agreement will enable the Cellular Group to receive cash equal to the value of
the gain the Cellular Group would have realized had it purchased the interests
from TDS and sold them to AirTouch under terms similar to those in the agreement
between TDS and AirTouch.
Additionally, the Cellular Group has entered into an agreement to sell its
minority interests in two other markets, representing 176,000 pops, for $37.6
million cash. The Cellular Group expects these pending sales transactions to be
completed during the first half of 1998. The Cellular Group anticipates that it
will record significant book gains on these divestitures when the transactions
are completed.
6. 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
II-42
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT IN LICENSES (CONTINUED)
service. These costs include amounts paid to license applicants and owners of
interests in cellular entities awarded licenses and all direct and incremental
costs relating to acquiring the licenses. These costs are capitalized and
amortized through charges to expense over 40 years, upon commencement of
operations. Costs applicable to unsuccessful license applications and
acquisitions are charged to expense. Investment in licenses at December 31, 1997
and 1996, include approximately $281 million and $322 million, respectively, of
goodwill related to various acquisitions structured to be tax-free.
7. REVOLVING CREDIT FACILITY
In August 1997, the Cellular Group established a $500 million revolving
credit facility with a group of banks ("Revolving Credit Facility"). This
seven-year facility replaces the Cellular Group's Revolving Credit Agreement
with TDS as its primary short-term borrowing facility. As of December 31, 1997,
no borrowings were outstanding under the Revolving Credit Facility.
The terms of the Revolving Credit Facility provide for borrowings with
interest, at the London InterBank Offered Rate plus 26.5 basis points (for a
rate of 6.2% at December 31, 1997), due quarterly. No principal under the
Revolving Credit Facility is due until August 29, 2004, on which date the
Revolving Credit Facility terminates and all unpaid principal and accrued
interest thereon are due and payable.
8. 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, 1997 and 1996, U.S. Cellular's senior indebtedness
totaled $260.0 million and $113.7 million, respectively. Each LYON is
convertible at the option of the holder at any time at a conversion rate of
9.475 U.S. Cellular Common Shares per LYON. Upon conversion, U.S. Cellular may
elect to deliver U.S. Cellular Common Shares or cash equal to the market value
of the U.S. Cellular 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.
During 1997, 25 LYONs were converted for approximately $7,600 in cash.
The carrying values at December 31, 1997 of U.S. Cellular's 6% Zero Coupon
Convertible Debentures, $265.3 million and $250.1 million, respectively, are
greater than their fair values, estimated to be $255.6 million and $248.4
million, respectively. The fair values were estimated using discounted cash flow
analysis. The increase in estimated fair value in 1997 was due to a change in
the incremental borrowing rate.
9. 7.25% UNSECURED NOTES
During 1997, U.S. Cellular sold $250 million principal amount of 7.25% notes
("Notes"), priced to yield 7.33% to maturity. The Notes were sold under U.S.
Cellular's $400 million shelf registration. The Notes are unsecured and become
due on August 15, 2007. Interest on the Notes is payable on February 15 and
August 15 of each year. 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, at a
redemption price equal to 100% of the principal amount of the Notes to be
redeemed, plus accrued interest thereon, if any, to the date of redemption.
The carrying value at December 31, 1997 of U.S. Cellular's 7.25% unsecured
notes, $250 million, is less than its fair value, estimated to be $252.9
million. The fair value was estimated using discounted cash flow analysis.
10. VENDOR FINANCING
The Cellular Group repaid approximately $90.1 million principal amount of
borrowings, representing all amounts outstanding under its long-term vendor
financing agreements, with the proceeds of its 7.25% unsecured
II-43
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. VENDOR FINANCING (CONTINUED)
notes offering in August 1997. See Note 9--7.25% Unsecured Notes for a
discussion of the notes offering. Scheduled repayments of borrowings under the
vendor financing agreements in 1997, all made prior to the final repayment,
totaled $13.7 million.
The carrying value at December 31, 1996 of the Cellular Group's current and
long-term vendor financing, $103.7 million, was approximately equal to its
estimated fair value.
Vendor financing at December 31, 1996 included $101.1 million (including
deferred interest) under a 1994 agreement and $2.6 million assumed pursuant to a
1993 acquisition. The current portion of outstanding vendor financing borrowings
was $23.1 million at December 31, 1996.
11. 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,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.................................................. $ 1,476,202 $ 1,329,454 $ 1,093,967
Net income...................................................................... 111,539 129,929 99,742
Issuance of Common Shares....................................................... 35,015 16,825 137,116
Other........................................................................... 6,564 (6) (1,371)
------------- ------------- -------------
Balance at end of period........................................................ $ 1,629,320 $ 1,476,202 $ 1,329,454
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
U.S. Cellular has 54,232,486 Common Shares and 33,005,877 Series A Common
Shares issued and outstanding as of December 31, 1997. 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 Note 1--Proposed TDS Corporate Restructuring.
EMPLOYEE BENEFIT PLANS
The following table summarizes Common Shares issued for the employee benefit
plans described below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Tax-Deferred Savings Plan........................................................... 42,400 23,302 26,357
Employee stock options, stock appreciation rights and awards........................ 65,029 16,380 10,713
Employee Stock Purchase Plan........................................................ 10,134 22,366 25,000
------------ ------------ ------------
117,563 62,048 62,070
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
TAX-DEFERRED SAVINGS PLAN. The Cellular Group had reserved 139,168 U.S.
Cellular 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 U.S. Cellular Common Shares, TDS Common Shares, American
Paging, Inc. (an 81.9%-owned subsidiary of TDS) Common Shares, Aerial
Communications, Inc. (an 82.5%-owned subsidiary of TDS) Common Shares or five
other nonaffiliated funds.
STOCK-BASED COMPENSATION PLANS. The Cellular Group 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 SAR prices
and the year-end market price of the
II-44
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. UNITED STATES CELLULAR GROUP EQUITY (CONTINUED)
U.S. Cellular Common Shares, aggregated $285,000, ($224,000) and $168,000 in
1997, 1996 and 1995, respectively. Had compensation cost for all plans been
determined consistent with SFAS No. 123, the Cellular Group's net income would
have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Income:
As Reported........................................................................ $ 111,539 $ 129,929 $ 99,742
Pro Forma.......................................................................... $ 110,317 $ 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 summary of the status of the Cellular Group's stock option plans at
December 31, 1997, 1996 and 1995 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, 1995 (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
Granted.............................................................................. 250,393 $ 13.41 $ 18.77
Exercised............................................................................ (68,563) $ 17.56
Cancelled............................................................................ (18,594) $ 26.85
Outstanding December 31, 1997 (293,418 exercisable).................................. 554,283 $ 24.23
</TABLE>
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN. The Cellular Group had
reserved 748,596 U.S. Cellular Common Shares for options granted and to be
granted to key employees. The Cellular Group has established a Stock Option plan
as of November 9, 1994 that provides for the grant of stock options to officers
and employees. 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, 293,418 stock options were outstanding at December 31, 1997, at a weighted
average price of $30.76 per share. The fair value of each option grant was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants in 1997 and 1996,
respectively: risk-free interest rates of 6.3% and 5.9%; expected dividend
yields of zero for both years; expected lives of 4.8 years and 4.0 years and
expected volatility of 20.8% and 22.7%.
Stock Appreciation Rights (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 U.S. Cellular Common Shares on the exercise date. At
December 31, 1997, 38,050 U.S. Cellular 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 1997 and 1996, 3,950 and 300 Common Share SARs were exercised,
respectively. No SARs were exercised in 1995. There were no SARs granted in 1997
or 1996.
EMPLOYEE STOCK PURCHASE PLAN. The Cellular Group had 115,498 U.S. Cellular
Common Shares reserved under the 1997 Employee Stock Purchase Plan ("1997
ESPP"). During 1996, the 1997 ESPP was approved, which
II-45
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. UNITED STATES CELLULAR GROUP EQUITY (CONTINUED)
became effective January 1, 1997. The fair value of the employees' purchase
rights was estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants rights in
1997: risk-free interest rate of 5.7%; expected dividend yield of zero; expected
life of .7 years; and expected volatility of 17.6%.
SERIES A COMMON SHARES
Series A Common Shares are convertible on a share-for-share basis into
Common Shares and each share is entitled to ten votes per share, compared to one
vote for each Common Share. As of December 31, 1997, all of U.S. Cellular's
outstanding Series A Common Shares were held by TDS.
12. RELATED PARTIES
The Cellular Group 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 the Cellular
Group and on allocations of common expenses. Such allocations are based on the
relationship of the Cellular 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 and that all expenses and costs applicable to the Cellular Group are
reflected in the accompanying financial statements on a basis which is
representative of what they would have been if the Cellular Group operated on a
stand-alone basis. Billings to the Cellular Group from TDS totaled $36.2
million, $28.1 million and $26.1 million in 1997, 1996 and 1995, respectively.
The Cellular Group has a Cash Management Agreement with TDS under which the
Cellular Group 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 the Cellular Group 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 from such deposits was $1.3 million, $4.8 million
and $701,000 in 1997, 1996 and 1995, respectively.
Subject to the completion of the Merger, TDS intends to terminate certain
intercompany agreements between TDS and U.S. Cellular. See Note 1 -- Proposed
TDS Corporate Restructuring for a discussion of the proposed merger.
All markets managed by the Cellular Group are billed for services they
receive from the Cellular Group. 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 the Cellular Group. 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.
See Note 5-- Acquisitions, Exchanges and Divestitures, Purchase of Minority
Interests by the Cellular Group from TDS for a discussion of a purchase of
minority interests by the Cellular Group from TDS.
13. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
The partnerships and corporations in which the Cellular Group is a partner
or shareholder are in various stages of development. The Cellular Group expects
to spend approximately $330 million during 1998, including about $240 million
for new cell sites to expand and enhance the Cellular Group's coverage in its
service areas and about $90 million for the enhancement of the Cellular Group's
office systems. Under the terms of certain partnership and shareholder
agreements, the Cellular Group may be committed to funding other partners' or
shareholders' portions
II-46
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
of construction and other costs, if sufficient financing is not available to the
individual entities. The Cellular Group does not expect such individual
financing shortfalls to be material.
From time to time the Cellular Group may acquire attractive markets to
maximize its clustering strategy. See Note 5-- Acquisitions, Exchanges and
Divestitures for a discussion of pending acquisitions and divestitures.
LEASE COMMITMENTS
The Cellular Group 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, 1997 are as
follows:
<TABLE>
<CAPTION>
MINIMUM
FUTURE RENTALS
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
1998 $ 14,436
1999 11,127
2000 8,099
2001 7,515
2002 4,864
Thereafter $ 36,475
--------
</TABLE>
Rent expense totaled $17.2 million, $12.4 million and $9.8 million in 1997,
1996 and 1995, respectively.
LEGAL PROCEEDINGS
The Cellular Group is involved in a number of 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 Cellular Group.
On December 29, 1997, a party, 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 Merger enjoined or, if it is
consummated, to have it rescinded and to recover unspecified damages, fees and
expenses. A virtually identical complaint has been filed by an individual. None
of the defendents have been served with this complaint. The Cellular Group
intends to vigorously defend against these lawsuits.
14. INVESTMENTS IN CELLULAR ENTITIES
Investments in cellular entities consist of amounts invested in cellular
entities in which the Cellular Group 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,
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Equity method investments:
Capital contributions, loans and advances.................................................... $ 66,182 $ 93,209
Cumulative share of income................................................................... 177,798 172,974
Cumulative share of distributions............................................................ (117,174) (88,862)
------------ ------------
126,806 177,321
Cost method investments:
Capital contributions, net of partnership distributions...................................... 2,004 9,470
------------ ------------
Total investment in nonconsolidated entities................................................... $ 128,810 $ 186,791
------------ ------------
------------ ------------
</TABLE>
II-47
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. INVESTMENTS IN CELLULAR ENTITIES (CONTINUED)
As of December 31, 1997, the Cellular Group followed the equity method of
accounting for minority interests in 51 markets where the Cellular Group's
ownership interest is 3% or greater. This method recognizes, on a current basis,
the Cellular Group'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, 1997, the Cellular Group follows the cost method of
accounting for its investments in seven markets where the Cellular Group's
ownership interest is less than 3%. It is not practicable to estimate the fair
value of the Cellular Group'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 $2.0 million and $9.5 million
carrying amounts at December 31, 1997, and 1996, respectively, represent
primarily the original amounts invested, which management believes are not
impaired.
The following summarizes the unaudited balance sheets and results of
operations of the cellular system entities in which the Cellular Group's
investments are accounted for by the equity method:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets
Current..................................................................................... $ 361,561 $ 249,077
Due from affiliates......................................................................... 2,724 6,165
Property and other.......................................................................... 1,050,755 1,000,537
-------------- --------------
$ 1,415,040 $ 1,255,779
-------------- --------------
-------------- --------------
Liabilities and Partners' capital
Current liabilities......................................................................... $ 249,587 $ 226,606
Due to affiliates........................................................................... 38,429 20,614
Deferred credits............................................................................ 6,604 791
Long-term debt.............................................................................. 27,195 16,144
Partners' capital........................................................................... 1,093,225 991,624
-------------- --------------
$ 1,415,040 $ 1,255,779
-------------- --------------
-------------- --------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Results of Operations
Revenues...................................................................... $ 1,652,683 $ 1,269,835 $ 1,078,413
Costs and expenses............................................................ 1,178,970 859,026 730,873
Other (expense) income........................................................ (7,292) 832 1,418
-------------- -------------- --------------
Net income.................................................................... $ 466,421 $ 411,641 $ 348,958
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
II-48
<PAGE>
THE UNITED STATES CELLULAR GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
- ----------------------------------------------------------------------
Revenues.............................................................. $ 184,584 $ 217,579 $ 231,959 $ 242,843
Operating Income Before Minority Share................................ 23,445 42,154 44,912 19,032
Normal Gain on Sale of Cellular and Other Investments................. -- 8,237 5,208 16,873
Net Income............................................................ 18,468 31,692 36,222 25,157
From Operations..................................................... 18,468 28,781 32,014 16,039
From Gains.......................................................... $ -- $ 2,911 $ 4,208 $ 9,118
1996
- ----------------------------------------------------------------------
Revenues.............................................................. $ 143,642 $ 169,470 $ 180,219 $ 186,737
Operating Income Before Minority Share................................ 11,822 30,021 33,094 12,429
Gain on Sale of Cellular and Other Investments........................ 38,691 86,305 7,797 (75)
Net Income............................................................ 29,387 63,055 26,140 11,347
From Operations..................................................... 8,547 19,694 23,899 10,364
From Gains.......................................................... $ 20,840 $ 43,361 $ 2,241 $ 983
</TABLE>
Note: Certain 1996 amounts were reclassified for current year presentation.
Net income for 1997 and 1996 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 the Cellular Group 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-49
<PAGE>
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, 1997 and 1996, and the related statements of operations and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the management of Telephone and
Data Sytems, 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, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 28, 1998
II-50
<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 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 of any of its subsidiaries may in the future acquire for
the Telecom Group, as determined by the Board of Directors of TDS.
OVERVIEW
The Telecom Group provides modern, high-quality telecommunications services
to rural and suburban communities. Through its network of ILECs, The Telecom
Group served approximately 515,500 access lines as of December 31, 1997 and on
this basis is the ninth largest non-Bell local exchange telephone company in the
United States. The Telecom Group ILEC markets are located in 28 states
throughout the United States.
The table below sets forth, as of December 31, 1997, (i) the eight largest
states of operations of the Telecom Group based on the number of access lines
and (ii) the total number of access lines operated by all of the telephone
subsidiaries of the Telecom Group.
<TABLE>
<CAPTION>
NUMBER OF ACCESS LINES
STATE AT DECEMBER 31, 1997 % OF TOTAL
- ---------------------------------------------------------------------------------------- ------------------------ -----------
<S> <C> <C>
Tennessee............................................................................... 87,910 17.1%
Wisconsin............................................................................... 86,262 16.7
Georgia................................................................................. 37,729 7.3
Minnesota............................................................................... 30,054 5.8
Indiana................................................................................. 26,977 5.2
Alabama................................................................................. 25,535 5.0
Michigan................................................................................ 23,786 4.6
Maine................................................................................... 23,055 4.5
-------- -----
Total for 8 Largest States.......................................................... 341,308 66.2
-------- -----
Other States............................................................................ 174,170 33.8
-------- -----
Total............................................................................. 515,478 100.0%
-------- -----
-------- -----
</TABLE>
The Telecom Group recently began providing telecommunications services as a
competitive local exchange carrier ("CLEC") in Madison, Wisconsin and is
developing CLEC operations in selected additional markets in Wisconsin and
Minnesota. The Telecom Group is also pursuing emerging markets such as data and
Internet services.
TDS Telecom is a business unit of TDS, founded in 1968. The Telecom Group
primarily consists of TDS Telecom, a wholly-owned subsidiary of TDS, and may
include such other businesses, assets and liabilities of TDS as the Board may in
the future determine to attribute to the Telecom Group. TDS Telecom's corporate
headquarters are located in Madison, Wisconsin.
TELECOMMUNICATIONS SERVICES MARKET
The market for local telecommunications services has historically consisted
of firms offering traditional landline telephone service along with
complementary services and equipment in a highly regulated environment. The
Telecom Group's ILEC business has traditionally focused primarily on providing
service to rural and suburban areas. The Telecom Group's ILEC markets are
geographically dispersed throughout the United States with a significant
concentration in the Upper Midwest and the Southeast.
The ILEC business of The Telecom Group is being changed by
telecommunications reform legislation, the growth of the Internet and rapid
advances in technology. With the passage of the 1996 Act, competition in the
local telecommunications marketplace is increasing because of the removal of
certain state and local entry barriers and the introduction of ILEC facility
interconnection requirements. These changes will create challenges for the
Telecom
III-1
<PAGE>
Group in its existing ILEC business but will also create growth opportunities
for the Telecom Group in connection with its entry into CLEC markets.
BUSINESS STRATEGY
The Telecom Group has historically produced revenue growth in its ILEC
markets by providing its customers with state-of-the-art telecommunications
solutions, maintaining a high quality of on-going service and selectively
acquiring landline telephone companies. Management believes that the Telecom
Group has a number of advantages as an ILEC, including (i) a modern network
substantially upgraded to provide a variety of Advanced Calling Services, (ii) a
strong local presence and established brand name, (iii) economies of scale not
available to smaller independent operators, (iv) attractive, growing markets and
(v) a favorable regulatory environment which is likely to be less competitive
than urban markets. The Telecom Group intends to: (i) grow and protect the
Telecom Group's core local exchange business, (ii) provide service to targeted
CLEC markets by leveraging its technical and managerial expertise and
telecommunications infrastructure from its ILEC's existing operations, (iii)
pursue emerging markets, such as data and Internet services, to become a leading
provider of electronically deliverable products and services in all of its
markets and (iv) enhance profitability through improved operating efficiencies.
GROW CORE ILEC BUSINESS
Management of the Telecom Group believes that the key to growing and
protecting its existing ILEC markets is to continue to build customer loyalty by
providing superior customer service, offering a full range of standardized
products and services not typically available in rural markets and rapidly
developing new data products and services. Management of the Telecom Group
maintains a local presence in each of its ILEC markets in order to provide
superior customer service. With respect to products and services, the Telecom
Group offered Advanced Calling Services to 78% of its customers at December 31,
1997. The Telecom Group increasingly markets itself to consumers as a single
telecommunications provider offering bundled packages of advanced
telecommunications services including local, long distance, Internet and data
services. These service packages will further build brand equity in the TDS
Telecom name. In addition, management of the Telecom Group believes it can
achieve cost economies through selective acquisitions designed to increase the
geographic clustering of the Telecom Group's ILEC markets.
LEVERAGE ILEC STRENGTHS INTO CLEC MARKETS
The Telecom Group is providing CLEC services in certain targeted third-tier
cities which are geographically proximate to existing Telecom Group facilities
and service areas. Management of the Telecom Group believes that service levels
have deteriorated in certain markets due to a lack of focus by the ILECs thereby
creating an opportunity for the Telecom Group to compete effectively in those
markets. In addition, management of the Telecom Group believes that the smaller
size of these markets may discourage competition from additional CLECs. Through
February 28, 1998, the Telecom Group had invested $13 million to install a
digital switch and to construct 54 miles of fiber optic cable in and around
Madison, Wisconsin. The Telecom Group initiated service as a CLEC in Madison in
January 1998 and is providing service to approximately 4,000 business access
lines. In addition, the Telecom Group commenced operations as a CLEC in
secondary markets in Minnesota in January 1998, initially as a reseller, through
its regional long-distance reseller, USLink, and is providing service to
approximately 3,000 business access lines in those markets. The Telecom Group
intends to initiate service in Appleton and Green Bay, Wisconsin in mid-1998.
The geographic focus of the Telecom Group's CLEC strategy is designed to
leverage TDS Telecom's existing infrastructure to facilitate early entry into
new CLEC markets and to complement the Telecom Group's ILEC clustering strategy.
The Telecom Group believes that significant synergies exist between its ILEC and
CLEC businesses. The Telecom Group is able to utilize existing resources and
business processes that currently serve ILEC markets in developing and expanding
its CLEC operations, including administrative and financial support, marketing
and new product development support, information technology and systems, and
shared network systems support. These synergies reduce the overall time to
market and cost required for the Telecom Group to expand into its new CLEC
markets.
PURSUE EMERGING DATA MARKETS
Data communications is one of the fastest growing segments of the
telecommunications services industry. In light of the growth of the use of the
Internet and rapid introduction of new telecommunications technology, the
Telecom Group intends to offer a full range of data products to its customers,
including Internet access and
III-2
<PAGE>
potentially, ATM, Frame Relay and other products, if appropriate, in all of its
markets, thereby positioning itself as a full-service data communications
service provider. Most of the Telecom Group's data products are in the early
stages of development. The Telecom Group has, however, developed a LAN wiring
business and currently provides Internet access service to approximately 40,000
customers.
NETWORK INFRASTRUCTURE
The Telecom Group plans to provide its operating telephone companies with
the most advanced central office switching equipment that is economically
feasible in order to offer customers up-to-date services, such as advanced
calling services, high-speed data access and Internet access services. The
Telecom Group plans to provide its customers bundled service offerings and to
become a single source for their telecommunications needs as an Integrated
Communications Provider ("ICP"). In furtherance of this objective, in 1997, the
Telecom Group continued its program of enhancing and expanding its service
providing network. The Telecom Group intends to meet competition by providing
its customers with high-quality telecommunications services and building its
network to take full advantage of advanced telecommunications technologies such
as Signaling System 7, fiber optic fed Digital Serving Areas, Integrated
Services Digital Network and Advanced Calling Services. The following table
illustrates that the Telecom Group continues to make these advanced features
available to a large majority of its customers:
<TABLE>
<CAPTION>
% EQUIPPED LINES # EQUIPPED LINES
1997 1997
------------------- ------------------
<S> <C> <C>
Signaling System 7................................................ 86% 478,690
Advanced Calling Services......................................... 86% 478,690
Integrated Services Digital Network............................... 68% 378,570
</TABLE>
As the Telecom Group upgrades and expands its network, it is also
standardizing equipment and processes to increase efficiency and has centralized
the monitoring and management of its network to reduce costs and improve service
reliability. Strategic alliances with Lucent Technologies and Siemens Telecom
Networks to modernize and standardize the Telecom Group's switching platform
with the Lucent 5ESS-2000 and Siemens EWSD switches assisted TDS Telecom in
implementing its 24 hour-a-day/7 day-per-week Network Management Center. The
Network Management Center continuously monitors the network in an effort to
proactively identify and correct network faults prior to any customer impact. By
the end of 1998, the Network Management Center is expected to be proactively
monitoring 100% of the Telecom Group's network.
The Telecom Group's total 1998 capital budget is $140 million compared to
actual capital expenditures of $151.5 million in 1997 and $144.4 million in
1996. Financing for the 1998 capital additions will be primarily provided by
internally generated funds and supplemented by federal long-term financing.
ILEC TELEPHONE MARKETS
The Telecom Group's goal is to be a leading provider of electronically
deliverable products in its ILEC markets. According to published sources, the
Telecom Group is currently the ninth largest non-Bell local exchange telephone
company in the United States, based on the number of telephone access lines
served. At December 31, 1997, the telephone subsidiaries of the Telecom Group
served approximately 515,500 access lines in 28 states. The Telecom Group
currently operates over 378 central office and remote switching centers in its
telephone operating areas. Substantially all of the Telecom Group's access lines
are served by digital switching technology, which, in conjunction with other
technologies, allows the Telecom Group to offer additional premium services to
its customers, including call forwarding, conference calling, caller
identification, selective call ringing and call waiting.
As one of the major independent telephone companies in the United States,
the Telecom Group's ILECs provide both local telephone service and access to the
long distance network for customers in their respective service areas. The ILECs
also provide directory advertising through a contract with another company and
billing and collection services to inter-exchange carriers ("IXCs"). The Telecom
Group provides centralized administrative and support services to field
operations from its corporate offices in Madison, Wisconsin.
III-3
<PAGE>
The following table summarizes certain information regarding the Telecom
Group's telephone operations:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Telephone Operations
Access lines(1)..................................... 515,500 484,500 425,900 392,500 356,200
% Residential....................................... 78.3% 79.9% 80.6% 81.3% 82.0%
% Business (nonresidential)......................... 21.7% 20.1% 19.4% 18.7% 18.0%
Total Revenues...................................... $ 444,203 $ 395,602 $ 354,841 $ 306,341 $ 268,122
% Local service..................................... 27.7% 27.9% 26.8% 26.8% 26.9%
% Network access and long-distance.................. 53.1% 53.9% 55.1% 56.9% 59.3%
% Miscellaneous and other........................... 19.2% 18.2% 18.1% 16.3% 13.8%
Depreciation and amortization expense............... 98,066 $ 88,459 $ 77,354 $ 68,878 $ 59,562
Operating income.................................... 98,613 102,708 98,240 91,606 78,585
Construction expenditures........................... 151,460 144,440 104,372 115,483 80,818
Total identifiable assets........................... $ 1,221,463 $ 1,181,084 $ 1,058,241 $ 984,563 $ 829,489
</TABLE>
- ---------
(1) An "access line" is a single or multi-party circuit between the customer's
establishment and the central switching office.
RETAIL MARKETS
The Telecom Group's existing ILEC business consists of two major customer
focused organizations addressing the retail and wholesale marketplace for its
services. The Retail Markets Group focuses on the Telecom Group's retail
customers and is comprised of the Telecom Group's 106 operating companies. The
Retail Markets Group serves a mix of rural and suburban customers, with a
significant geographic concentration in the Upper Midwest and Southeast.
Approximately 78% of the Telecom Group's retail customers are residential and
approximately 22% are businesses, most of which are of the small business or
small office/home office segments. The Retail Markets Group has identified three
primary goals to grow and protect its existing ILEC business: (i) build customer
loyalty, (ii) develop revenue growth, and (iii) implement cost control.
Management of the Telecom Group believes it can achieve these goals by offering
bundled services to its customers, by building brand equity in the TDS Telecom
brand name, and by providing superior customer service to its retail customers.
In addition, the Telecom Group will continue to standardize operations, improve
cost controls and selectively invest in network facilities in order to enhance
efficiency and reduce costs.
BUNDLED SERVICE OFFERINGS. Management of the Telecom Group believes that
its consumer and business customers have a strong preference to purchase all of
their telecommunications services from a single provider. The Telecom Group
believes that by offering a full complement of telecommunications services and
bundling those services in customer-friendly packages it can build customer
loyalty and reduce customer churn. Implementing a full-service strategy requires
the Telecom Group to combine the services of its network with the products and
services of carefully selected strategic partners. The Telecom Group plans to
pursue such relationships to develop the long distance, video, and wireless
components of its product mix.
BRAND EQUITY. In 1996, the Telecom Group adopted the TDS Telecom name as a
unified brand name across its ILEC markets to build its brand image. Prior to
1996, the local identity of each operating company enjoyed a higher profile than
TDS Telecom. The Telecom Group has subsequently implemented a customer awareness
campaign to build brand awareness of the TDS Telecom name. For example, all
bills now contain the TDS Telecom name and all customer checks are made payable
to TDS Telecom. The change in branding has been reinforced by a comprehensive
media campaign that includes television, radio, newspaper, bill inserts and
direct mail advertising. Management of the Telecom Group believes that branding
will increase the loyalty of its customers and also reduce expenses through more
cost effective marketing.
CUSTOMER SERVICE. The Telecom Group maintains a local business office in
each of its ILEC markets to ensure high levels of customer service. Management
believes that its community-based business offices offering full-service,
face-to-face customer service are a fundamental competitive advantage for the
Telecom Group. To further the Telecom Group's goal of enhancing service to its
customers, the Telecom Group is implementing a VBO initiative. The VBO builds on
the Telecom Group's current community oriented customer service by linking
business
III-4
<PAGE>
offices through technology, standardizing processes, expanding hours of
operations, and providing management information on operations and service
quality. VBO technology will be deployed across the Telecom Group's business
offices to enable multiple local business offices to perform customer sales and
service functions as if they were one "virtual" office in the eyes of the
customer. Unlike traditional call centers where service representatives and
technology are centrally located, the VBO environment distributes call center
technology to the individual business offices enabling customer service
representatives to remain in their local communities.
WHOLESALE MARKETS
The Wholesale Markets Group focuses on the Telecom Group's wholesale
customers and has traditionally provided a majority of the Telecom Group's
revenues. The Telecom Group receives much of its ILEC revenue from the sale of
traditional wholesale services, such as access charges and billing and
collections services. As a result, the Telecom Group continues to provide a high
level of service to traditional wholesale customers such as AT&T, MCI, Sprint
and the RBOCs.
The Telecom Group intends to grow its wholesale business by pursuing
opportunities created by the 1996 Act. The Telecom Group plans to expand into
new wholesale groups by targeting two groups of customers. First, the Telecom
Group will provide new entrants to markets, such as CLECs and PCS carriers, with
access to the public network, as well as dedicated services. Second, the Telecom
Group will supply existing businesses such as cable television providers,
electric utilities and long distance resellers with network services needed to
complement their existing assets. The Telecom Group also intends to pursue other
wholesale opportunities, such as network management and Internet access, as
demand for those services increases.
The primary source of the Telecom Group's wholesale business revenues are
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 on the
capital allocated to such services. Access revenues account for approximately
57% of the revenue generated by the Telecom Group's ILEC subsidiaries.
The Telecom Group's ILECs participate in the National Exchange Carrier
Association ("NECA") interstate common line and traffic sensitive tariffs for
all but one portion of one ILEC's interstate access. 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 access rates and other matters relating to
interstate telephone service. On May 16, 1997, the FCC released an order on
access reform. This order applies primarily to price cap local exchange carriers
("LECs"). However, non-price cap companies, such as the Telecom Group, were also
affected in certain areas by this order. The FCC is expected to release an order
on access charge reform for non-price cap companies in mid-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 interstate services 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 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 separa-
tions 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 up in the new federal and state universal
service mechanisms, the Telecom Group may seek rate increases in local service
rates to offset any reductions in interstate revenues.
Where applicable and subject to state regulatory approval, the Telecom
Group's ILEC subsidiaries utilize intrastate access tariffs and participate in
intrastate revenue pools. However, many intrastate toll revenue pooling
arrangements, historically a source of substantial revenues to the Telecom
Group'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. Some states are utilizing
a state high cost fund
III-5
<PAGE>
to offset access charge reductions. Given the many regulatory issues still
unresolved, the Telecom Group cannot predict the cumulative nature or extent of
impacts from federal and state regulatory reform.
TELEPHONE ACQUISITIONS
TDS and the Telecom Group continually review attractive opportunities to
acquire operating telephone companies. Since January 1, 1993, TDS has acquired
17 telephone companies serving a total of 89,600 access lines for an aggregate
consideration totaling $188.0 million, all of which were attributed to the
Telecom Group. During the past five years, TDS acquired one telephone company in
1997 serving 3,200 access lines, five telephone companies in 1996 serving an
aggregate of 33,100 access lines, four telephone companies in 1995 serving an
aggregate of 13,500 access lines, three telephone companies in 1994 serving an
aggregate of 19,700 access lines and four telephone companies in 1993 serving an
aggregate of 20,100 access lines. Recently, the Telecom Group has modified its
acquisition strategy to focus on geographic clustering of telephone companies to
achieve cost economies and to complement the the Telecom Group's growth
strategy.
It is the Telecom Group's policy to preserve, in so far as possible, the
local management of each telephone company it acquires. The Telecom Group
provides the telephone companies 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 finance;
accounting and treasury services; marketing; customer service; traffic; network
management; engineering and construction; customer billing; rate administration;
credit and collection; and the development of administrative and procedural
practices.
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"), each of
which is an agency 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 (6.01% for a 35-year note at December 31, 1997).
Substantially all of the Telecom Group's telephone plant is pledged under,
or is otherwise 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 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 entire amount above 40% net worth to total
assets can be distributed. The majority of the Telecom Group's telephone
subsidiaries exceed this percentage.
At December 31, 1997, the Telecom Group's operating telephone companies had
unadvanced loan commitments under the RUS, RTB and FFB loan programs aggregating
approximately $112.0 million, at a weighted average annual interest rate of
5.71%, to finance specific construction activities in 1998 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 government
loan programs will continue to be available or that these applications will be
accepted or what the terms or interest rates of any future loan commitments will
be.
FEDERAL AND STATE SUPPORT MECHANISMS
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 ILEC subsidiaries provide
telephone service in rural areas and all of them offer service to low-income
customers.
The 1996 Act codified universal service goals and support; set forth clear
principles for ensuring affordable access to modern telephone service
nationwide; established discounts for schools, libraries and rural health care
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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 an 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 ILECs will continue to receive support based on
their actual costs through December 31, 2000. After December 31, 2000, rural
ILECs will transition to the use of proxy cost models over an additional
three-year period. To date, management of the Telecom Group believes that no
proxy cost models have proven to provide sufficient and predictable revenue
support for the provision of universal service by rural ILECs. The FCC has not
adopted any proxy cost model for rural ILECs. Both petitions for review and
judicial appeals of portions of the FCC's universal service rules and policies
remain pending, and Congress legislated a requirement for the FCC to report on
its implementation of universal service in its appropriations legislation.
The FCC's order also mandated that all telecommunications providers
contribute to the universal service fund beginning January 1, 1998. However, the
order allows ILECs 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 the Telecom Group's ILEC 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 decreases, the Telecom Group's ILEC
subsidiaries may pursue local service rate increases to recover the difference.
Historically, 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 could affect TDS's and the Telecom Group's acquisition
and investment strategy.
CLEC TELEPHONE MARKETS
The 1996 Act facilitates entry of the Telecom Group into new markets by
requiring non-exempted ILECs (e.g., RBOCs, GTE and other-ILECs, based on state
regulators' determinations) to provide reasonable and non-discriminatory
interconnection services and access to unbundled network elements to any CLEC
that seeks to enter the markets in which the ILEC already offers services. The
Telecom Group, through TDS METROCOM, a wholly-owned subsidiary of the Telecom
Group, has targeted certain third-tier cities, geographically proximate to
existing The Telecom Group facilities and service areas, for facilities-based
entry as a CLEC. Management of the Telecom Group believes that the size of the
target markets will sustain one or two facilities-based competitors in addition
to the ILEC. While additional competitors may enter such markets as resellers,
the Telecom Group believes facility-based CLECs will have a long-run cost
advantage, establish a barrier to entry and enable an alternative wholesale
strategy for growth. To this end, the Telecom Group plans to build fiber-ring,
switching and other network facilities in its targeted CLEC markets. The Telecom
Group plans to follow a "clustering" approach to building its CLECs which will
allow it to seek regional long distance traffic, share service and repair
resources, and realize marketing efficiencies. As in its ILEC markets, the
Telecom Group intends to become an ICP in its CLEC markets. The Telecom Group
will provide local, long-distance, Internet access and other services through
its own facilities and via resale. The Telecom Group also intends to resell
mobile services in many markets.
The Telecom Group's first CLEC in Madison, Wisconsin became operational in
January 1998. The Madison CLEC is a facilities-based, full-service alternative
to Madison's existing ILECs, Ameritech and Mid-Plains Telephone Companies,
providing both voice and data services to commercial and consumer accounts, as
well as wholesale services to IXCs and other carriers. While the Telecom Group
is beginning its CLEC venture in its Madison and Minnesota markets, it plans to
expand operations to Appleton and Green Bay, Wisconsin. As of December 31, 1997,
the Telecom Group has invested $12 million in constructing its facilities in the
Madison market and plans to invest $18 million during 1998.
The CLEC strategy will place primary emphasis on small and medium-sized
commercial and wholesale customers such as IXCs, Internet Service Providers
("ISPs") and cellular, paging and PCS companies. The Telecom Group expects to
pursue consumer markets approximately six months after the CLEC enters the
commercial market. Wholesale customers purchase transmission capacity and access
services from CLECs. These services will be available to wholesale customers
shortly after network completion. The Telecom Group believes that these
customers are generally more sophisticated and are more likely to switch
providers to obtain network reliability, redundancy and more flexible pricing.
Medium-sized commercial prospects are characterized by above-average
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access line-to-employee ratios, heavier utilization of data services, and a
focus on using telecommunications for business improvement rather than by
concerns for cost reduction. These companies are generally growth-oriented and
may be underserved by the ILEC or major IXCs. The Telecom Group will pursue a
personal selling approach for its primary target markets. This approach builds
on customer preference for integrated communication services and the customer's
perception that the quality of the product is in the personalized service.
While the CLEC is positioning itself as a high-quality provider, it expects
price competition from the ILECs as they attempt to retain and regain their
customers. The CLEC will seek to maintain an efficient cost structure to ensure
it can match price-based initiatives from competitors. The Telecom Group expects
to be more flexible in responding to customer needs than its ILEC competitors.
To effectively compete in this new environment, the Telecom Group will enhance
its efforts at product development to provide high-quality, cutting-edge
services to its customers.
DATA INITIATIVES
In 1997, the Telecom Group continued to expand its investments into data
communications in order to offer a full suite of data products in its CLEC and
many of its ILEC markets. The Telecom Group believes the targeted third-tier
markets present a significant opportunity to market data services as the major
carriers serving these locations have typically underinvested in these markets
despite the growing demand. Switched data communications represent one of the
fastest growing segments of the telecommunications services market. Computer
proliferation, connectivity via local and wide area networks, the Internet and
the emergence of multimedia applications are all driving demand. As a result,
the domestic network infrastructure is strained at both the local and national
levels. The Telecom Group CLEC initiative will add local capacity in its
selected cities designed to capture this growth.
The Telecom Group has developed a LAN wiring business as part of its data
services business. The LAN wiring business provides in-building wiring services
to its customers. The Telecom Group assists its customers in designing and
constructing specialized wiring networks for their business needs. Customers of
the LAN wiring business include traditional in-market business customers of the
Telecom Group and also non-traditional business customers located in ILEC
markets not currently served by the Telecom Group. At December 31, 1997, TDS
DATACOM, the Telecom Group's LAN wiring entity, operated in 14 markets and
generated approximately $6.6 million in revenue for the year then ended.
In furtherance of the Telecom Group's strategy to position itself as a
full-service, networking service provider, it plans to make high-speed Digital
Subscriber Loop ("xDSL") based services available to customers in many of its
ILEC markets. The Telecom Group believes xDSL technology will form the
foundation for new, high-speed data services and applications and is currently
conducting trials of xDSL modems manufactured by several vendors. This
technology will be employed to offer high-speed Internet access as well as
high-speed LAN connectivity. In addition, the Telecom Group plans to develop
Frame Relay and ATM services in select markets. TDSNET, the Telecom Group's ISP,
is expanding its existing business offerings to include web hosting services and
customized web content development. TDSNET expanded its operation in 1997 by
adding an additional 13 operating markets to bring its total operating markets
to 49. It served approximately 30,000 customers and generated approximately $4
million in revenue for the year then ended.
SALES AND MARKETING
The Telecom Group seeks to leverage its networks through sales and marketing
activities targeted at two separate customer groups: retail and wholesale.
Retail customers are composed primarily of residential customers, businesses,
government and institutional telecommunications users. Wholesale customers
consist of IXCs and information service providers such as commercial data
processing service providers and ISPs.
RETAIL MARKETS
COMMERCIAL MARKETS. Businesses account for approximately 22% of the Telecom
Group's access lines. The Telecom Group focuses its business customer marketing
on information-intensive industries such as financial services, health services,
realty, hotels and motels, education and government. The Telecom Group uses its
direct sales force, targeted mailings, and telemarketing to sell products and
services to the commercial markets, which are segmented into tiers based on size
and strategic importance. Different sales and distribution channels are employed
for each segment. Specific account executives focus on the most profitable
commercial customers by staying in contact with them on a regular basis. In
1996, the Telecom Group adopted a more aggressive compensation plan for its
account executives targeted at revenue and customer satisfaction results.
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CONSUMER MARKETS. The Telecom Group's promotional and sales strategy with
respect to its residential customers consists of two major initiatives: building
brand equity by creating awareness of the TDS Telecom brand name; and using
direct marketing to sell specific products and product groupings. Approximately
78% of the Telecom Group's total access lines are residential. The nature of the
Telecom Group's residential markets has historically made direct marketing more
effective than mass media such as radio and television. In addressing its
consumer markets, the Telecom Group has made extensive and aggressive use of
direct mail. The Telecom Group has been more selective in the use of
telemarketing as a means of generating awareness, qualified leads, and sales.
Increasingly, uniform branding has made the use of mass media more attractive,
and the Telecom Group is beginning to increasingly incorporate these elements
into its marketing program.
In nearly all of its markets, the Telecom Group offers a complete family of
custom calling services, including call waiting, call forwarding, three-way
calling, and speed dialing. In 1997, the Telecom Group sold 27,700 residential
second lines, an increase of 46% over 1996. The Telecom Group recently launched
its Advanced Calling Services family, which is centered around Caller ID
service. In 1997, the Advanced Calling Services family of services were
available to 78% of the lines in service compared to 66% in 1996. In 1997,
penetration of Caller ID increased from 13% in 1996 to 16% of lines equipped and
aggregate penetration of ACS increased from 25% in 1996 to 30% of lines
equipped.
WHOLESALE MARKETS
Access charges, billing and collection services and other traditional
wholesale offerings generated $253 million, or approximately 61 percent, of the
Telecom Group's ILEC subsidiaries revenue for the year ended December 31, 1997.
The Telecom Group seeks to establish close working relationships with the IXCs.
The Telecom Group is working to establish systems to support "electronic
bonding" of its operations with those of the IXCs. Electronic bonding provides
seamless integration of the Telecom Group's and the IXCs' networks, enabling the
IXCs to access service, billing and other data directly from the Telecom Group's
network. It will also permit the IXCs to enter access service requests
electronically using the integrated network. The initial phase of establishing
these systems has taken place with the establishment of a dedicated customer
service team to provide a single point of contact for the IXCs. During 1998 and
beyond, automated systems solutions will be implemented to fully support
electronic bonding.
The Telecom Group sees significant potential in leveraging its
infrastructure to provide new wholesale offerings to non-traditional customers.
The Telecom Group has targeted high growth industry sectors such as CLECs,
independent telephone companies, cable television companies, electric utilities
and other telecommunications service providers for purchase of its wholesale
offerings. Additionally, existing cellular wireless carriers are expanding their
services in and near the Telecom Group's territories and new PCS wireless
carriers are, or soon will be, offering service.
COMPETITION
ILEC MARKETS
The 1996 Act was intended to promote competition in the telecommunications
industry as a national policy and continue the process of deregulation. The 1996
Act requires ILECs to provide reasonable and non-discriminatory interconnection
services and access to unbundled network elements to any CLEC that seeks to
enter the markets in which the ILEC already offers services. The 1996 Act also
allows CLECs to co-locate network equipment on the ILEC's premises and prevents
ILECs and CLECs from unduly restricting each other from use of facilities or
information that would allow other organizations to effectively compete with
them.
All 106 telephone company subsidiaries of the Telecom Group are currently
exempt from many of the interconnection provisions of the 1996 Act. According to
the 1996 Act, a rural telephone company (which currently includes all 106 of the
Telecom Group's ILECs) is exempt from the ILEC interconnection requirements
until (i) such company has received a bona fide request for interconnection,
resale of services, or network elements, and (ii) the state commission
determines that such request is not unduly economically burdensome, is
technically feasible, and is consistent with the universal service provisions of
the 1996 Act. The party making a bona fide request must submit a notice of its
request to the appropriate state commission which must then conduct an inquiry
to determine whether to terminate the exemption. Within 120 days after a state
commission receives notice of the request, it must determine if it will
terminate the exemption. Upon termination of the exemption, the state commission
must establish an implementation schedule for compliance with the request.
Accordingly, the length of the Telecom Group's rural exemptions will vary based
on the decisions of the various state commissions. Some the Telecom Group ILECs
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have already had requests filed by potential competitors seeking to terminate
their exemptions and the Telecom Group believes there will eventually be open
entry into nearly every aspect of the telephone industry, including local
service, and, switched and special access services.
The Telecom Group expects competition in the local telephone and access
services businesses to be increased substantially as a result of the entrance of
new competitors and the development of new technologies, products and services.
Increased competition is expected from competitive access providers, IXCs,
out-of-territory RBOCs and independent telephone companies, niche entrepreneurs,
cable and utility companies, and wireless and satellite providers. To meet this
increasing competition, the Telecom Group's strategy is to build customer
loyalty by providing superior customer service, offering a full range of
standardized products and services bundled in response to customer preferences
and to rapidly develop new data products and services.
The Telecom Group believes that the wireless companies pose the most
significant threat in the long run to the local exchange industry. Although
traditional analog cellular radio service cannot match the features or the
clarity of communications provided via wireline networks, and as a result of
high error rates and speed limitations is not currently suitable for data
transmission, advances in digital PCS technology may permit wireless companies
to eventually match the functionality and clarity of wireline communication and
still allow customers the mobility of traditional wireless service. As the
emerging PCS companies compete directly with established cellular radio
companies, flat rate pricing alternatives may drive wireless rates towards or
below wireline rates. In order to minimize the impact of wireless competition,
the Telecom Group is pursuing wholesale service agreements with wireless
companies to provide services to them and expects to provide wireless services
through resale in many of its markets.
CLEC MARKETS
In Madison and in each city in which the Telecom Group expands as a CLEC,
the Telecom Group faces, and expects to continue to face, significant
competition from the ILECs which currently dominate their local
telecommunications markets. The Telecom Group will compete with the ILECs on the
basis of price, reliability, state-of-the-art technology, product offerings,
route diversity, ease of ordering and customer service. However, the ILECs have
long-standing relationships with their customers, have the potential to
subsidize competitive services from monopoly service revenues, and benefit from
favorable state and federal regulations. The Telecom Group expects its CLECs to
provide a full range of local telecommunications services in order to compete
effectively with the ILECs.
Although the ILECs generally are subject to greater pricing and regulatory
constraints than CLECs, ILECs are achieving increased pricing flexibility for
their services as a result of, among other things, the 1996 Act. Existing
competition for private line, special access and local exchange services is
based primarily on quality, capacity and reliability of network facilities,
customer service, response to customer needs, service features and price, and is
not based on any proprietary technology. As a result of the technology used in
its networks, the Telecom Group may have cost and service quality advantages
over some currently available ILEC networks. In addition, the Telecom Group
believes that, in general, it will provide more attention and responsiveness to
its customers than its ILEC competitors.
The Telecom Group may face competition from other CLECs and other potential
competitors in certain of the cities in which the Telecom Group plans to offers
its services. Many of the Telecom Group's existing and potential competitors
have financial, personnel and other resources significantly greater than those
of the Telecom Group. However, the Telecom Group believes that its strategy of
targeting third tier cities, its capital, technical and management resources and
its orientation toward IXCs and other commercial telecommunications users will
enable it to achieve its strategic objectives. CLECs' ability to compete depends
in part on federal and state rules covering pricing and terms for ILECs'
services provided by unbundled network elements and resale, as well as ILECs'
operation support systems.
In addition to the ILECs and other CLECs, potential competitors capable of
offering private line, special access and local exchange services include long
distance carriers, cable television companies, electric utilities, microwave
carriers, wireless telephone system operators, and private networks built by
large end users. Previous impediments to certain utility companies entering
telecommunications markets under the Public Utility Holding Company Act of 1935
were removed by the 1996 Act.
REGULATION
The intrastate, local and access services of the Telecom Group's ILEC
subsidiaries are regulated by state regulatory agencies, and the Telecom Group
seeks to maintain positive relationships with these regulators. Rate
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setting, including local rates, intrastate toll rates and intrastate access
charges, are 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, public safety,
and welfare, continued service quality and consumer rights. While a state may
not impose requirements that effectively function as barriers to entry, and the
FCC must pre-empt challenged state requirements if they impose such barriers to
entry, a state 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, ILECs 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 use only those elements they choose for providing their
services; (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. Rural telephone
companies are exempted from these obligations until they receive a bona fide
request for interconnection, resale of services or network elements and the
applicable state commission determines that termination of the exemption is not
unduly economically burdensome, is technically feasible and is consistent with
universal service.
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 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 pay phone 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, all of the Telecom Group's ILEC subsidiaries
qualify as rural telephone companies. Therefore, they enjoy an exemption from
the ILEC interconnection requirements until they receive a bona fide request for
interconnection from, and the state commission lifts the exemption. The Telecom
Group has received two requests for interconnection, one of which has been
withdrawn, and the other of which is currently pending. 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 accepted for review by the U.S. Supreme Court. 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 resulting from the 1996 Act. The Telecom Group is
preparing for competition even though such changes will often require changes in
state regulation or state regulatory approvals. 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 urge that any telecommunications reform
measures treat rural areas fairly and continue
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to provide sufficient contributions to high cost rural service areas to keep the
Telecom Group ILECs' rates affordable. The ongoing changes in public policy and
introduction of competition may negatively affect the earnings of the operating
subsidiaries, and the Telecom Group is not able to predict the extent of any
such negative impact.
While the majority of the Telecom Group's ILEC 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 ILECs. Price
regulation, the most common form of alternative regulations, focuses on the
price of telecommunications services rather than rules based on authorized costs
and rates of return. The Telecom Group's ILEC subsidiaries in Alabama, Arkansas,
Michigan and Pennsylvania are currently operating in a price-regulated
environment, whereby the commissions in those states are no longer reviewing
earnings annually. For several years, the RBOCs and some of the nation's larger
ILECs have operated under an FCC "price cap" plan, modified in 1997, where
earnings can be increased through productivity improvements.
For 1998, the Telecom Group's telephone subsidiaries neither elected federal
price caps nor an alternative FCC plan, which was designed for smaller LECs.
Instead, the operating subsidiaries plan to continue to abide by traditional
rate-of-return regulation for interstate purposes, unless those regulatory terms
are changed. 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 rate-of-return regulated LECs, on their own or through NECA,
charge IXCs for local distribution of their interstate calls. Some of the
reforms already adopted for price cap regulated LECs, if expanded to cover the
the Telecom Group LECs, could reduce interstate cost recovery, and could prompt
the LECs to seek state commission approval of increased local rates.
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. NECA's most recent access charges were approved effective
January 1, 1998.
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.
EMPLOYEES
As of December 31, 1997, the Telecom Group had a total of 2,297 employees.
There are 131 employees at the Telecom Group who are represented by labor
unions. The Telecom Group considers its relations with its employees to be good.
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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 TDS Common Shares
and Series A Common Shares are, shareholders of TDS. TDS 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
Groups, including the TDS Telecommunications Group, and dividends or
distributions on, or repurchases of, any class of Common Stock will reduce the
assets of TDS legally available for payment of dividends on all classes of
Common Stock. Accordingly, TDS consolidated financial statements should be read
in conjunction with the TDS Telecommunications Group's financial information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
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 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.
OVERVIEW
The Telecom Group is a full-service local exchange carrier providing modern,
high-quality telecommunications services including local and long-distance
telephone service and Internet access to rural and suburban communities through
TDS Telecom's telephone company subsidiaries. Each of these telephone companies,
ranging in size from less than 500 to more than 50,000 access lines, is an
Incumbent Local Exchange Carrier ("ILEC"). At December 31, 1997, approximately
66% of the Telecom Group's access lines were in Tennessee, Wisconsin, Georgia,
Minnesota, Indiana, Alabama, Michigan and Maine. Internal access line growth
during 1997, 1996 and 1995 was 5.7%, 6.0% and 5.1%, respectively. The following
table summarizes certain information regarding the Telecom Group.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
States of Operations................................................................... 28 28 28
Number of Companies.................................................................... 106 105 100
Access Lines........................................................................... 515,500 484,500 425,900
Percent Residential.................................................................. 78.3 79.9 80.6
Percent Business..................................................................... 21.7 20.1 19.4
Total Revenues (in thousands).......................................................... $ 444,203 $ 395,602 $ 354,841
Percent Local Service................................................................ 27.7 27.9 26.8
Percent Network Access and Long-Distance............................................. 53.1 53.9 55.1
Percent Miscellaneous and Other Services............................................. 19.2 18.2 18.1
Average Monthly Revenue per Access Line................................................ $ 68.78 $ 67.10 $ 66.82
</TABLE>
The Telecom Group provides consumers and businesses with landline local
telephone service through its switching and intra-city network. Long-distance or
toll service is provided through connections with long-distance carriers,
primarily AT&T and the Regional Bell Operating Companies ("RBOCs"), which
purchase network access from the Telecom Group. 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 state
regulatory agencies 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.
The Telecom Group also operates U.S. Link, a regional long-distance company,
as well as new business ventures including TDSNET, an Internet access provider;
TDS DATACOM, a structured wiring business; and TDS METROCOM, a competitive local
exchange company ("CLEC"). The revenues and expenses from these businesses are
included in Other Services.
RESULTS OF OPERATIONS
OPERATING REVENUES totaled $444.2 million in 1997, up 12% ($48.6 million)
from 1996, and totaled $395.6 million in 1996, up 11% ($40.8 million) from 1995.
The increases were due to growth in telephone revenues ($40.5 million in 1997
and $39.6 million in 1996) and other services ($8.8 million in 1997 and $1.0
million in 1996).
TELEPHONE REVENUES
Telephone revenues increased 11% ($40.5 million) in 1997 to $412.4 million
and 12% ($39.6 million) in 1996 to $371.9 million from $332.3 million in 1995.
The net effect of acquisitions increased telephone revenues 2% ($8.1 million) in
1997 and 6% ($18.8 million) in 1996. The average monthly revenue per access line
was $68.78 in 1997, $67.10 in 1996 and $66.82 in 1995.
III-14
<PAGE>
LOCAL SERVICE REVENUES are derived from providing local telephone exchange
service within the franchise serving area of the Telecom Group's telephone
subsidiaries. Local service revenues increased 11% ($12.3 million) in 1997. The
effects of acquisitions increased local service revenues $2.7 million in 1997.
Internal access line growth of 5.7% increased local service revenues $5.7
million in 1997, while custom calling and advanced feature sales and other
miscellaneous revenues increased revenues by $3.1 million.
Local service revenues increased 16% ($15.3 million) in 1996. Acquisitions
increased local service revenues by $6.0 million, while internal access line
growth of 6.0% resulted in an increase of $5.2 million. The sales of custom
calling and advanced features and other miscellaneous revenues increased local
service revenues by $2.9 million in 1996.
NETWORK ACCESS AND LONG DISTANCE REVENUES are compensation for carrying
interstate and intrastate long-distance traffic on the Telecom Group's operating
telephone subsidiaries' networks. The interstate and intrastate access rates
charged include the cost of providing service plus a fair rate of return under
cost separation procedures established by the FCC. The Telecom Group
participates in the National Exchange Carrier Association ("NECA") interstate
common line and traffic sensitive tariffs for all but one of its ILEC
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. Where applicable and subject to state regulatory approval, the
Telecom Group's ILEC 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 ILECs,
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 Telecommunications Act ("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. Some states are
utilizing a state high cost fund to offset access charge reductions. 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). When the separations studies are approved and
finalized, the estimates are adjusted to actual. The intrastate portion of these
revenues, based on approved tariffs, is influenced by changes in traffic levels
as measured by minutes of use.
Network access and long distance revenues increased 11% ($22.6 million) in
1997. The effects of acquisitions increased network access revenues $4.5 million
in 1997. Recovery of increased expense and investment levels for providing
access service, as explained above, increased revenues $12.1 million in 1997
through state and national revenue pools. Increased usage of the network
generated $5.7 million of additional intrastate revenues. Revenue adjustments
due to updated cost separation and pool rate of return information increased
network access revenues by $.5 million in 1997.
Network access and long distance revenues increased 9.0% ($17.5 million) in
1996. The effects of acquisitions increased network access revenues $9.9
million. Increased expense and investment levels for providing 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 information were $3.0 million less in 1996 than in 1995. The impact of
extended area service plans implemented in Vermont and Ohio reduced access
revenue $1.0 million in 1996.
MISCELLANEOUS REVENUES include revenues related to (i) leasing, selling,
installing, maintaining and repairing customer premise telecommunications
equipment, such as telephone answering equipment or business systems and
associated peripheral equipment, and wiring ("CPE services"), (ii) providing
billing and collection services for interexchange carriers, (iii) leasing
network facilities and (iv) sale of satellite dishes (Digital Broadcast
Satellite or "DBS"). Miscellaneous revenues increased 11% ($5.5 million) in
1997. The effects of acquisitions increased miscellaneous revenues $1.0 million.
Higher sales and leases of customer premise equipment, including satellite
sales, increased revenues $6.1 million in 1997. Billing and collection revenues
decreased $1.9 million compared to 1996, primarily due to reduced prices for
billing and collection services and less services performed.
Miscellaneous revenues increased 16% ($6.8 million) in 1996. The effects of
acquisitions increased miscellaneous revenues $2.9 million. Higher sales and
leases of customer premise equipment, including satellite sales, increased
miscellaneous revenues $2.2 million in 1996.
III-15
<PAGE>
OTHER SERVICES REVENUES
Other services revenues increased 35% ($8.8 million) in 1997 and 4% ($1.0
million) in 1996. Revenues from structured wiring increased $6.0 million in
1997, while revenues from Internet services increased $2.8 million in 1997.
TDSNET (Internet service) began operations in early 1996 while TDS DATACOM
(structured wiring) began operations in late 1996. TDS METROCOM (CLEC) began
operations in early 1998.
OPERATING EXPENSES totaled $345.6 million in 1997, up 18% ($52.7 million)
from 1996, and totaled $292.9 million in 1996, up 14% ($36.3 million) from 1995.
The increases were due to the growth in telephone expenses ($40.3 million in
1997 and $33.6 million in 1996) and other services ($13.1 million in 1997 and
$2.5 million in 1996).
TELEPHONE EXPENSES
Operating expenses from local telephone operations increased 15% ($40.3
million) in 1997 to $309.4 million and 14% ($33.6 million) in 1996 to $269.1
million from $235.5 million in 1995. The net effect of acquisitions increased
telephone expenses 2% ($6.2 million) in 1997 and 6% ($14.6 million) in 1996.
NETWORK OPERATIONS EXPENSE consists of costs to maintain the high-quality
telecommunications networks to provide advanced telecommunications services and
the cost of CPE services, including DBS, sold to customers. Network operations
expense increased 19% ($13.0 million) in 1997, with acquisitions increasing
expenses $1.5 million. The increased sales activity from DBS, a new product
offering in 1997, and increased sales and lease activity of CPE services,
resulted in network operations expense increases of $5.2 million. General wage
increases and inflation in 1997 increased network operations expenses by an
additional $3.3 million. In 1997, the Telecom Group implemented the next phase
of its program to upgrade, standardize and expand its network. This program is
expected to monitor the network 24 hours-a-day, and to proactively identify and
correct network faults to minimize interruption or degradation of service to the
customer. The increased quality of the network is expected to provide long-term
benefits in terms of future cost avoidance, the ability to offer advanced
technological services to the customer, and to increase customer loyalty and
satisfaction. The increase in staff to support this network increased network
operations expense by $1.8 million.
Network operations expense increased 23% ($12.6 million) in 1996, 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 operating expenses of $3.4 million in 1996.
Other increases in operating expenses can be attributed to factors such as
general wage increases and inflation.
CUSTOMER OPERATIONS EXPENSE includes costs for marketing, sales, and product
management, as well as expenses for establishing and servicing customer
accounts. Customer operations expense increased 21% ($11.4 million) in 1997 and
15% ($6.9 million) in 1996. Acquisitions increased customer operations expense
by $1.4 million in 1997 and $2.7 million in 1996. Increased product advertising
in conjunction with aggressive sales and marketing campaigns for DBS and
advanced calling features increased expenses by $4.7 million in 1997. Also in
1997, costs incurred to update customer billing systems and infrastructure
support costs for customer service representatives increased expenses by $4.6
million. The cost to explore new business opportunities caused customer
operations expenses to increase by $3.2 million in 1996.
CORPORATE AND OTHER EXPENSES consist of costs incurred for executive
administration and management, accounting, human resource management,
information management, legal services, and property and other non-income taxes.
Corporate and other expenses increased 10% ($6.2 million) in 1997 and 6% ($3.3
million) in 1996. Acquisitions increased expenses by $1.3 million in 1997 and
$3.8 million in 1996. Costs incurred to support and maintain general computer
applications and local and wide area networks increased by $3.8 million in 1997.
DEPRECIATION AND AMORTIZATION EXPENSE increased 11% ($9.7 million) in 1997
and 14% ($10.8 million) in 1996. Acquisitions increased depreciation and
amortization by $2.0 million in 1997 and $4.0 million in 1996. Increased
investment in plant and equipment was the primary driver of the increase in
depreciation expense in 1997 and 1996. The composite depreciation rate was 7.4%
in 1997, 7.2% in 1996 and 7.1% in 1995.
OTHER SERVICES EXPENSES
OTHER SERVICES EXPENSES increased 53% ($13.1 million) in 1997 and 11% ($2.5
million) in 1996. The increase in other services expenses in 1997 primarily
related to the growth at TDS DATACOM of $7.6 million and at TDSNET of $3.2
million. The remaining increase was primarily due to start-up activities at TDS
METROCOM.
OPERATING INCOME decreased 4% ($4.1 million) in 1997 and increased 5% ($4.5
million) in 1996. The operating margin declined to 22.2% in 1997 from 26.0% in
1996 and 27.7% in 1995 primarily due to increased costs
III-16
<PAGE>
associated with the development of the centralized network management center and
new business opportunities, as well as earnings pressures from regulatory
agencies and long-distance providers. The operating margin 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 13% ($2.7 million) in 1997 and 3% ($.6 million)
in 1996. CELLULAR EQUITY INCOME decreased $2.0 million in 1997 due to the
transfer of the majority of the cellular interests to TDS during 1996 and
increased $3.5 million in 1996 reflecting increased earnings from minority
interests in cellular partnerships. The cellular interests held by the Telecom
Group were owned by telephone subsidiaries prior to being acquired by TDS. GAIN
ON SALES OF INVESTMENTS decreased $4.1 million in 1996 as the Telecom Group sold
a cellular interest, a telephone company and various marketable securities in
1995.
INTEREST EXPENSE increased 3% ($1.6 million) in 1997 and 2% ($.9 million) in
1996, primarily due to the added interest expense from acquisitions.
INCOME TAX EXPENSE decreased 12% ($3.1 million) in 1997 and increased 6%
($1.5 million) in 1996. The effective income tax rate was 42.7% in 1997 compared
to 41.8% in 1996 and 41.5% in 1995.
NET INCOME decreased 15% ($5.3 million) in 1997 and increased 5% ($1.5
million) in 1996. The decrease in net income in 1997 relates primarily to the
reduction in operating income as well as the reduction in other income.
OTHER MATTERS
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." Criteria that would give rise to the discontinuance of
SFAS No. 71 include: 1) increasing competition that would restrict the Telecom
Group's ability to establish prices to recover specific costs, and 2) a
significant change in the manner in which rates are set by regulators from cost-
based regulation to another form 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 reporting purposes are consistent with generally
accepted accounting principles. Therefore any adjustments to telecommunications
plant would be immaterial, as would be the write-off of regulatory assets and
liabilities.
INFLATION
Management believes that inflation affects the Telecom Group's business to
no greater extent than the general economy.
FINANCIAL RESOURCES
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, as needed.
Internally generated cash financed 90%, 92% and 88% of telecommunications plant
and equipment additions in 1997, 1996 and 1995, respectively. Financing from
federal government programs provided 10%, 8% and 12% of telecommunications plant
and equipment additions in 1997, 1996 and 1995, respectively.
CASH FLOWS FROM OPERATING ACTIVITIES decreased 3% ($3.7 million) to $134.9
million in 1997, and increased 13% ($15.9 million) to $138.7 million in 1996.
Operating cash flow (operating income plus depreciation and amortization)
totaled $196.7 million in 1997, $191.2 million in 1996 and $175.6 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 $61.8 million in 1997, $52.5 million in 1996 and $52.8
million in 1995.
CASH FLOWS FROM FINANCING ACTIVITIES required $.5 million in 1997, $5.5
million in 1996, and $14.2 million in 1995, reflecting the payment of cash
dividends to TDS, and borrowing and repayment of short- and long-term debt.
CASH FLOWS FROM INVESTING ACTIVITIES required $133.3 million in 1997, $142.8
million in 1996 and $60.8 million in 1995. The maturing of temporary and
longer-term cash investments provided cash of $11.2 million in 1997 and $29.1
million in 1995. In 1996, the investment in temporary and longer-term cash
investments reduced cash by $2.9
III-17
<PAGE>
million. Proceeds from the sales of certain investments and marketable
securities provided $2.1 million in 1997, $5.9 million in 1996 and $10.1 million
in 1995.
The Telecom Group makes substantial investments each year to construct,
operate and maintain modern high-quality telecommunications networks and
facilities. 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 $151.5 million in 1997,
$144.4 million in 1996 and $104.4 million in 1995. The following table
summarizes the Telecom Group's investments in telecommunications plant during
the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Central Office Equipment..................................................... $ 52,479 $ 47,208 $ 38,697
Outside Plant................................................................ 60,974 53,130 55,569
Systems Development.......................................................... 9,127 20,497 7,137
Other........................................................................ 28,880 23,605 2,969
----------- ----------- -----------
$ 151,460 $ 144,440 $ 104,372
----------- ----------- -----------
----------- ----------- -----------
</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 32 digital switches in
1997, 35 in 1996, and 39 in 1995 and made substantial improvements in outside
plant facilities during each year.
Capital expenditures during 1998 are expected to total approximately $140
million, including about $50 million for new digital switches and other
switching facilities, $35 million for improvements to outside plant facilities,
$25 million for systems development and $20 million for other services,
primarily CLEC expenditures. 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 acquired one telephone company
in 1997, five in 1996, and five in 1995. A majority-owned telephone subsidiary
also purchased an additional interest in a cellular entity in 1996.
Consideration of $13.4 million was paid for the acquisition in 1997, consisting
of approximately 240,000 TDS Common Shares, 30,000 TDS Preferred Shares and
$200,000 in cash. The 1996 consideration of $88.1 million consisted of
approximately 1.5 million TDS Common Shares and $17.4 million in cash. The 1995
consideration of $46.1 million consisted of approximately 1.0 million TDS Common
Shares and $250,000 in cash.
LIQUIDITY
The Telecom Group is generating substantial internal funds to finance its
construction program. Operating cash flow (operating income plus depreciation
and amortization) increased 3% to $196.7 million in 1997 from $191.2 million in
1996, and 9% in 1996 from $175.6 million in 1995. Operating cash flows were 130%
of capital additions in 1997, 132% in 1996 and 168% in 1995.
The Telecom Group had cash and cash equivalents, temporary cash investments,
construction funds and marketable securities totaling $230.7 million at December
31, 1997. These investments are primarily the result of internally generated
cash from telephone operations. While certain debt agreements of the Telecom
Group's telephone subsidiaries place limits on the transfer of funds to TDS
Telecom, these restrictions are not expected to affect the parent's ability to
meet its cash obligations.
From time to time, the Telecom Group has borrowed funds from TDS to
temporarily finance its construction program, acquisitions and for general
corporate purposes. At December 31, 1997 the amount of such borrowings
aggregated $28.2 million for such debt classified as current and $255.3 million
classified as long-term debt.
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 $112.0 million in unadvanced loan
funds from federal government programs at December 31, 1997 to finance its
telephone construction program. These loan commitments have a weighted average
annual interest rate of 5.71%.
III-18
<PAGE>
Cash dividends paid by the Telecom Group totaled $18.1 million in 1997,
$15.6 million in 1996 and $17.1 million in 1995. Subject to the approval of the
Tracking Stock Proposal, the Board of Directors intends to establish an annual
dividend on the Telecom Group Shares in an amount of $.50 per share. Based upon
the the distribution of two-thirds of a Telecom Group Share for each outstanding
Series A Common Share and Common Share of TDS, the Telecom Group would be
required to pay approximately $20.4 million annually, not including any amounts
for Telecom Group Shares issued in the public offering described below. The
Telecom Group plans to finance the dividend requirements through internally
generated cash flow.
Subject to approval of the Tracking Stock Proposal by shareholders, TDS
intends to, among other things, offer and sell Telecom Group Shares in a public
offering for cash, and allocate the net proceeds to the Telecom Group. TDS
intends to file with the Securities and Exchange Commission 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, subject to
prevailing market conditions and other factors. Management estimates proceeds of
approximately $150 million from the offering which the Telecom Group would use
to repay obligations to TDS.
Management believes the Telecom Group has sufficient internal and external
resources to finance the anticipated requirements of its business development
and construction programs.
The Telecom Group has assessed, and continues to assess, the impact of the
Year 2000 Issue on its reporting systems and operations. The Telecom Group
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 Telecom Group'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. If
management's steps are not successful in making the systems Year 2000 compliant,
it could have a material adverse effect on results of operations.
REGULATION
The Telecom Group's ILEC subsidiaries are regulated by state regulatory
agencies for rate setting, including local rates, and intrastate toll rates and
intrastate access charges. State regulators can approve service areas and have
traditionally regulated entry into local markets by designating a single carrier
to be the universal service provider. The 1996 Act has almost completely
pre-empted state authority over market entry, but states retain 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. Many of the
FCC determinations made to implement the 1996 Act and to facilitate competition
in local service and other telephone services require investment and upgrades to
the Telecom Group ILEC networks, 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.
As defined in the 1996 Act, all of the Telecom Group's ILEC subsidiaries
qualify as rural telephone companies. Therefore, they enjoy an exemption from
the ILEC requirements until they receive a bona fide request for interconnection
and the state commission lifts the exemption. Management of the Telecom Group
does not anticipate significant requests in the near term. The FCC has also
adopted extensive rules for state commissions to follow in mediating and
arbitrating interconnection negotiations between incumbent ILECs 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 struck 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. The U.S. Supreme Court has
agreed to review this case and certain other cases. TDS cannot predict the
outcome of this or the numerous other court and FCC proceedings stemming from
the 1996 Act.
III-19
<PAGE>
NECA requested access charge changes from the FCC which would use a "banded"
rate structure to help pool members with lower costs charge more competitive
rates. These changes were approved effective January 1, 1998. Management of the
Telecom Group does not anticipate significant revenue impacts in the near term.
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.
PROPOSED TDS CORPORATE RESTRUCTURING
The board of directors of Telephone and Data Systems, Inc. (the "TDS Board")
has adopted a proposal which, if approved by TDS shareholders and implemented by
the TDS Board, would authorize the TDS Board to issue three new classes of
common stock and change the state of incorporation of TDS from Iowa to Delaware
(the "Tracking Stock Proposal"). The three new classes of stock are intended to
separately reflect the performance of TDS's cellular telephone, landline
telephone and personal communications services businesses ("Tracking Stocks").
Under the Tracking Stock Proposal, one of the three new classes of common
stock created by TDS would be designated as TDS Telecommunications Group Common
Shares (the "Telecom Group Shares"). The Telecom Group Shares, when issued, are
intended to reflect the separate performance of the TDS Telecommunications Group
(the "Telecom Group"), which primarily consists of TDS's interest in TDS
Telecommunications Corporation.
Subject to the approval of the Tracking Stock Proposal by TDS shareholders,
TDS 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. TDS also
intends to distribute two-thirds of a Telecom Group Share in the form of a stock
dividend with respect to each outstanding Series A Common Share and Common Share
of TDS (the "Distribution").
Following the Distribution, subject to the legal and contractual
restrictions on the payment of dividends, the TDS Board currently intends to
establish an annual dividend on the TDS Common Shares and Series A Common Shares
in an amount equal to $.11 per share. The TDS Board also currently intends to
establish an annual dividend on the Telecom Group Shares in an amount equal to
$.50 per share. (Based on the expected distribution ratio of two-thirds of a
Telecom Group Shares for each existing Common Share and Series A Common Share,
the dividend on Telecom Group shares would equate to a per share dividend of
$.33 per existing Common Shares and Series A Common Share. The total of the
dividend on TDS Common Shares and Series A Common shares of $.11 and the
equivalent dividend on Telecom Group Shares of $.33 equals the existing current
annual dividend on the existing Common Shares and Series A Common shares of
$.44.)
Funds of TDS legally available for the payment of dividends ("Surplus")
(approximately $1,966 million as of December 31, 1997, based on the financial
statements) is an amount approximately equal to the Total Common and Preferred
Equity of TDS less the par or stated value of all shares of common and preferred
stock outstanding (204,922,000 shares as of December 31, 1997 after the
Distribution). With respect to any Tracking Group, the Available Dividend Amount
(approximately $287 million for the Telecom Group as of December 31, 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.
Subsequent to TDS shareholder approval of the Tracking Stock Proposal, cash
management, taxes and allocation of principal corporate activities between TDS
and the Telecom Group would be based upon methods that TDS management believes
to be reasonable and would be reflected in the Telecom Group's financial
information. Many of the policies would continue the arrangements which
presently exist between TDS and the Telecom Group.
III-20
<PAGE>
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 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-21
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING REVENUES
Telephone Revenues
Local service...................................................................... $ 122,826 $ 110,501 $ 95,184
Network access and long distance................................................... 235,725 213,113 195,575
Miscellaneous...................................................................... 53,829 48,299 41,528
----------- ----------- -----------
Total Telephone Revenues......................................................... 412,380 371,913 332,287
Other services....................................................................... 33,516 24,747 23,764
Intercompany revenues................................................................ (1,693) (1,058) (1,210)
----------- ----------- -----------
Total Operating Revenues......................................................... 444,203 395,602 354,841
----------- ----------- -----------
OPERATING EXPENSES
Telephone Expenses
Network operations................................................................. 80,487 67,521 54,964
Depreciation and amortization...................................................... 95,278 85,575 74,758
Customer operations................................................................ 65,167 53,764 46,818
Corporate operations............................................................... 68,454 62,276 58,998
----------- ----------- -----------
Total Telephone Expenses......................................................... 309,386 269,136 235,538
Other services....................................................................... 37,897 24,816 22,273
Intercompany expenses................................................................ (1,693) (1,058) (1,210)
----------- ----------- -----------
Total Operating Expenses......................................................... 345,590 292,894 256,601
----------- ----------- -----------
OPERATING INCOME....................................................................... 98,613 102,708 98,240
----------- ----------- -----------
OTHER INCOME AND (EXPENSES)
Interest and dividend income......................................................... 5,510 5,942 6,895
Interest and dividend income--affiliated............................................. 9,252 8,945 7,950
Cellular investment income........................................................... 5,553 7,556 4,039
Amortization of license related to cellular investment............................... (564) (1,156) (957)
Allowance for funds used during construction......................................... 686 825 682
Gain on sale of investments.......................................................... 722 -- 4,094
Other (expenses), net................................................................ (3,630) (1,869) (1,909)
----------- ----------- -----------
17,529 20,243 20,794
----------- ----------- -----------
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES........................................ 116,142 122,951 119,034
----------- ----------- -----------
Interest expense..................................................................... 39,542 39,317 37,765
Interest expense--affiliate.......................................................... 23,609 22,255 22,883
----------- ----------- -----------
63,151 61,572 60,648
----------- ----------- -----------
INCOME BEFORE INCOME TAXES............................................................. 52,991 61,379 58,386
Income tax expense..................................................................... 22,603 25,685 24,231
----------- ----------- -----------
NET INCOME............................................................................. $ 30,388 $ 35,694 $ 34,155
----------- ----------- -----------
----------- ----------- -----------
Proforma (Unaudited): See Note 1
Net Income Attributable to TDS Group through Retained Interest......................... $ 7,597 $ 8,924 $ 8,539
Net Income Attributable to TDS
Telecommunications Group Common Shares............................................... $ 22,791 $ 26,770 $ 25,616
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
III-22
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income........................................................................ $ 30,388 $ 35,694 $ 34,155
Add (Deduct) adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization................................................... 98,066 88,459 77,355
Deferred income taxes, net...................................................... 2,439 (1,510) (3,172)
Cellular investment income...................................................... (5,553) (7,556) (4,039)
Gain on sale of investments..................................................... (722) -- (4,094)
Other noncash expense........................................................... 28,387 29,188 28,844
Change in accounts receivable................................................... (9,260) (3,925) (7,663)
Change in accounts payable...................................................... (461) (4,013) (4,943)
Change in accrued federal income taxes.......................................... (8,890) 2,135 5,625
Change in other accrued taxes................................................... (879) 135 2,873
Change in other assets and liabilities.......................................... 1,412 62 (2,166)
------------ ------------ ------------
134,927 138,669 122,775
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowing.......................................................... 30,097 34,056 25,563
Repayment of long-term debt....................................................... (16,942) (26,390) (17,769)
Change in notes payable........................................................... 4,402 11,663 (5,118)
Dividends paid.................................................................... (18,100) (24,824) (16,828)
------------ ------------ ------------
(543) (5,495) (14,152)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.............................................................. (151,460) (144,440) (104,372)
Proceeds from investment sales.................................................... 2,085 5,942 10,091
Acquisitions, excluding cash acquired............................................. 2,015 32 2,351
Change in temporary cash investments and marketable securities.................... 11,177 (2,879) 29,126
Investment in cellular partnerships............................................... 2,021 1,557 452
Change in investments............................................................. 824 (2,991) 1,518
------------ ------------ ------------
(133,338) (142,779) (60,834)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ 1,046 (9,605) 47,789
CASH AND CASH EQUIVALENTS
Beginning of period............................................................. 183,535 193,140 145,351
------------ ------------ ------------
End of period................................................................... $ 184,581 $ 183,535 $ 193,140
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
III-23
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents
General funds............................................................................... $ 22,640 $ 33,519
Affiliated cash equivalents................................................................. 161,941 150,016
------------- -------------
184,581 183,535
Temporary cash investments.................................................................... 21,658 39,383
Construction funds............................................................................ 775 1,405
Accounts receivable
Customers................................................................................... 33,482 25,821
Connecting companies........................................................................ 40,548 37,363
Affiliated.................................................................................. 1,213 2,004
Other....................................................................................... 5,971 6,260
Notes receivable--affiliated.................................................................. 3,746 3,660
Other current assets.......................................................................... 13,559 12,305
------------- -------------
305,533 311,736
------------- -------------
INVESTMENTS
Franchise and other costs in excess of underlying book value of subsidiaries, net of
accumulated amortization of $34,942 and $29,705, respectively............................... 180,683 182,281
Cellular investments.......................................................................... 48,562 57,241
Marketable securities......................................................................... 23,729 17,626
Other investments............................................................................. 12,451 12,703
------------- -------------
265,425 269,851
------------- -------------
TELECOMMUNICATIONS PLANT
In service and under construction, substantially at original cost............................. 1,420,890 1,293,779
Less accumulated depreciation................................................................. 590,123 524,418
------------- -------------
830,767 769,361
------------- -------------
OTHER ASSETS AND DEFERRED CHARGES............................................................... 4,323 1,981
------------- -------------
TOTAL ASSETS.................................................................................... $ 1,406,048 $ 1,352,929
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
III-24
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
BALANCE SHEETS
LIABILITIES AND GROUP EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt............................................................. $ 14,816 $ 13,554
Notes payable--affiliated..................................................................... 28,181 25,039
Accounts payable
Connecting companies........................................................................ 13,833 17,852
Affiliated.................................................................................. 2,411 4,305
Other....................................................................................... 26,475 23,904
Advance bills and customer deposits........................................................... 5,329 5,423
Accrued federal income taxes due TDS.......................................................... 103 9,849
Other accrued taxes........................................................................... 7,764 8,426
Accrued compensation.......................................................................... 7,386 3,394
Other......................................................................................... 5,440 6,644
------------- -------------
111,738 118,390
------------- -------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability............................................................. 60,550 57,217
Postretirement benefits obligation other than pensions........................................ 10,668 10,804
Other......................................................................................... 12,079 14,064
------------- -------------
83,297 82,085
------------- -------------
LONG-TERM DEBT
Affiliated.................................................................................... 255,302 239,538
Other, excluding current portion.............................................................. 548,558 547,290
------------- -------------
803,860 786,828
------------- -------------
MINORITY INTEREST IN SUBSIDIARIES............................................................... 23,394 21,810
------------- -------------
TDS TELECOMMUNICATIONS GROUP EQUITY............................................................. 383,759 343,816
------------- -------------
TOTAL LIABILITIES AND GROUP EQUITY.............................................................. $ 1,406,048 $ 1,352,929
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
III-25
<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 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) PROPOSED TDS CORPORATE RESTRUCTURING
The board of directors of Telephone and Data Systems, Inc. (the "TDS Board")
has adopted a proposal which, if approved by TDS shareholders and implemented by
the TDS Board, would authorize the TDS Board to issue three new classes of
common stock and change the state of incorporation of TDS from Iowa to Delaware
(the "Tracking Stock Proposal"). The three new classes of stock are intended to
separately reflect the performance of TDS's cellular telephone, landline
telephone and personal communications services businesses ("Tracking Stocks").
Under the Tracking Stock Proposal, one of the three new classes of common
stock created by TDS would be designated as TDS Telecommunications Group Common
Shares (the "Telecom Group Shares"). The Telecom Group Shares, when issued, are
intended to reflect the separate performance of the TDS Telecommunications Group
(the "Telecom Group"), which primarily consists of TDS's interest in TDS
Telecommunications Corporation.
Subject to the approval of the Tracking Stock Proposal by TDS shareholders,
TDS 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. TDS also
intends to distribute two-thirds of a Telecom Group Share in the form of a stock
dividend with respect to each outstanding Series A Common Share and Common Share
of TDS (the "Distribution").
Subsequent to TDS shareholder approval of the Tracking Stock Proposal, cash
management, taxes and allocation of principal corporate activities between TDS
and the Telecom Group would be based upon methods that TDS management believes
to be reasonable and would be reflected in the Telecom Group's financial
information. Many of the policies would continue the arrangements which
presently exist between TDS and the Telecom Group.
(2) 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 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 Telecom Group financial statements give effect to the
management and accounting policies that would be applicable upon implementation
of the Tracking Stock Proposal.
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.
Financial effects arising from the Cellular Group, the Telecom Group, the
Aerial Group or the TDS Group that affect the consolidated results of operations
or financial condition of TDS could affect the results of operations or
financial condition of the Cellular Group, the Telecom Group, the Aerial Group
or the TDS Group, or could affect the market price of any or all classes of
Common Stock. In addition, any net losses of TDS or the Cellular Group, the
Telecom Group, the Aerial Group or the TDS Group, and dividends or distributions
on, or repurchases of, any class
III-26
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of Common Stock will reduce the assets of TDS legally available for payment of
dividends on any class of Common Stock. Accordingly, TDS's consolidated
financial statements should be read in conjunction with the Telecom 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.
Following the Distribution, subject to the legal and contractual
restrictions on the payment of dividends, the Board currently intends to
establish an annual dividend on the TDS Common Shares and Series A Common Shares
in an amount equal to $.11 per share. The Board also currently intends to
establish an annual dividend on the Telecom Group Shares in an amount equal to
$.50 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
$.33 per existing Common Share and Series A Common Share. The total of the
dividend on TDS Common Shares and Series A Common Shares of $.11 and the
equivalent dividend on Telecom Group Shares of $.33 equals the existing current
annual dividend on the existing Common Shares and Series A Common Shares of
$.44.) Future dividends on the shares of common stock will be payable when, as
and if declared by the Board out of the lesser of (1) all funds of TDS legally
available therefor and (2) the available dividend amount with respect to the
relevant Group.
Funds of TDS legally available for the payment of dividends ("Surplus")
(approximately $1,966 million as of December 31, 1997, based on the financial
statements) is an amount approximately equal to the Total Common and Preferred
Equity of TDS less the par or stated value of all shares of common and preferred
stock outstanding (204,922,000 shares as of December 31, 1997 after the
Distribution). With respect to any Tracking Group, the Available Dividend Amount
(approximately $287 million for the Telecom Group as of December 31, 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.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, TDS will prepare
and file with the Securities and Exchange Commission consolidated financial
statements of TDS 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 TDS 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 the Cellular Group, the Telecom Group and the
Aerial Group Common Shares will be, and holders of TDS Common Shares and Series
A Common Shares will continue to be, shareholders of TDS. TDS and its
subsidiaries will each continue to be responsible for their respective
liabilities.
(A) NATURE OF OPERATIONS
The Telecom Group operates 106 telephone companies serving 515,500 access
lines in 28 states. The Telecom Group also operates a long-distance company, an
Internet access provider, a structured wiring business and a competitive local
exchange company. The Telecom Group expands its operations through internal
access line growth, acquisitions, new services and entry into new territories.
III-27
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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. Investments in entities in which
the Telecom Group does not have a controlling interest are generally accounted
for using the equity method.
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.
Certain amounts reported in prior years have been reclassified to conform to
current period presentation.
(C) 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.
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 (5.84% at December 31,
1997).
The carrying amount of Cash and Cash Equivalents and Temporary Investments
approximate face value due to the short-term nature of the investments.
Marketable equity securities are stated at fair value. The market value of all
marketable securities was $23.7 million and $17.6 million at December 31, 1997
and 1996, respectively.
(D) NOTES RECEIVABLE--AFFILIATED
Rural Development Acquisition Corporation ("RDAC"), a wholly owned
subsidiary of TDS Telecom, has loaned $3.7 million to certain rural cable and
service companies (subsidiaries of TDS) at December 31, 1997 and 1996, bearing
interest at the prime rate plus 1/2 percent (9.0% at December 31, 1997). RDAC's
intent is to further the interests of rural telecommunications companies by
investing in telecommunications projects and acquisitions located in rural
areas.
(E) MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost or market.
(F) INVESTMENTS
Franchise and other costs include the costs in excess of the underlying book
value of acquired telephone companies. Costs aggregating $209.1 million and
$205.5 million at December 31,1997 and 1996, respectively, relating to
acquisitions since November 1, 1990, are being amortized on a straight-line
basis over a 40-year period. Amortization amounted to $5.2 million, $4.9 million
and $4.4 million in 1997, 1996 and 1995, respectively. Costs in excess of
underlying book value relating to acquisitions initiated before November 1,
1970, aggregating $6.5 million, are not being amortized. Included in franchise
and other costs is approximately $135 million and $143 million at December 31,
1997 and 1996, respectively, of goodwill related to various acquisitions
structured to be tax-free.
III-28
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cellular investments includes amounts invested in cellular entities and
costs incurred in acquiring cellular interests.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cellular Entities...................................................................................... $ 8,913 $ 13,317
Cellular License Costs, net of amortization............................................................ 39,649 43,924
--------- ---------
$ 48,562 $ 57,241
--------- ---------
--------- ---------
</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 ($8.1 million and $12.4 million at December 31, 1997 and
1996, respectively). Income and losses from these entities are reflected in the
income statements on a pretax basis. At December 31, 1997, the cumulative share
of income from minority cellular investments accounted for under the equity
method was approximately $10.8 million, of which $6.9 million was undistributed.
The cost method of accounting is followed for those insignificant minority
interests ($783,000 and $898,000 at December 31, 1997 and 1996, respectively).
Cellular license costs consist of costs incurred in acquiring minority
interests in cellular entities which have been awarded Federal Communications
Commission ("FCC") licenses to provide cellular service. These costs include all
direct and incremental costs relating to acquiring these interests. These costs
are capitalized and amortized through charges to expense over 40 years.
Amortization amounted to $564,000, $1.2 million and $957,000 in 1997, 1996 and
1995, respectively. Accumulated amortization of cellular license costs was $1.8
million and $1.5 million at December 31, 1997 and 1996, respectively.
(G) IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Telecom Group 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 Telecom Group 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 a long-lived asset is
not 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 Telecom Group's
financial position or results of operations.
(H) 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.
(I) 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.
III-29
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(J) 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 one telephone company in 1997, five telephone companies in 1996
and five telephone companies in 1995. 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,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Telecommunications plant, net........................................................... $ 7,669 $ 48,764 $ 20,804
Franchise and other costs in excess of underlying book value of subsidiaries............ 2,452 25,603 25,263
Cellular minority interests and licenses................................................ 8,200 (20,071) 7,952
Long-term debt.......................................................................... (4,857) (22,978) (5,943)
Deferred credits........................................................................ (802) (6,239) (995)
Other assets and liabilities, excluding cash and cash equivalents....................... 688 7,963 (3,079)
TDS Telecommunications Group Equity..................................................... (15,365) (33,074) (46,353)
---------- ---------- ----------
(Increase) in cash and cash equivalents due to acquisition.............................. $ (2,015) $ (32) $ (2,351)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table summarizes interest paid, income taxes paid and certain
noncash transactions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest paid.............................................................................. $ 23,367 $ 23,198 $ 20,562
Income taxes paid.......................................................................... 46,078 43,064 33,099
Additions to telecommunications plant financed through accounts payable.................... $ 3,034 $ 4,319 $ 3,233
</TABLE>
The Board of Directors of TDS attributed TDS long-term debt to the Telecom
Group. The long-term debt and the related interest expense of $21.8 million,
$21.8 million and $21.6 million for 1997, 1996 and 1995, respectively, were
recorded as noncash transactions through TDS Telecommunications Group Equity.
(3) 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-30
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAXES (CONTINUED)
Tax provisions charged to expense for the years ended December 31, 1997,
1996 and 1995 are summarized below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision:
Current.................................................................................. $ 16,364 $ 21,037 $ 21,768
Deferred................................................................................. 2,784 (134) (2,120)
State income tax provision:
Current.................................................................................. 5,901 6,494 7,029
Deferred................................................................................. (944) (47) (673)
Amortization of deferred investment tax credits............................................ (1,502) (1,665) (1,773)
--------- --------- ---------
Total Income tax expense............................................................... $ 22,603 $ 25,685 $ 24,231
--------- --------- ---------
--------- --------- ---------
</TABLE>
The statutory federal income tax rate is reconciled to the Telecom Group's
effective income tax rate below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate............................................................. 35.0% 35.0% 35.0%
State income taxes, net of federal benefit.................................................... 5.7 5.1 5.4
Amortization of intangibles................................................................... 2.7 2.1 1.8
Amortization of deferred investment tax credits............................................... (2.8) (2.1) (2.3)
Effects of corporations not in consolidated federal tax return................................ 3.5 1.9 2.5
Other......................................................................................... (1.4) (.2) (.9)
--- --- ---
Effective income tax rate..................................................................... 42.7% 41.8% 41.5%
--- --- ---
--- --- ---
</TABLE>
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
liability totaled $179,000 and $(191,000) as of December 31, 1997 and 1996,
respectively.
The temporary differences that gave rise to the noncurrent deferred tax
assets and liabilities as of December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred Tax Asset:
Postretirement benefits.............................................................................. $ 3,558 $ 3,558
Acquisition cost amortization........................................................................ 5,578 4,885
Regulatory........................................................................................... 2,184 2,064
Other................................................................................................ 447 --
--------- ---------
Total Deferred Tax Asset........................................................................... 11,767 10,507
--------- ---------
Deferred Tax Liability:
Property, plant and equipment........................................................................ 72,051 66,821
Other................................................................................................ 266 903
--------- ---------
Total Deferred Tax Liability....................................................................... 72,317 67,724
--------- ---------
Net Deferred Income Tax Liability.................................................................... $ 60,550 $ 57,217
--------- ---------
--------- ---------
</TABLE>
III-31
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAXES (CONTINUED)
The Telecom Group has recorded deferred income tax liabilities related to
temporary differences not deferred under rate-making policy. As of December 31,
1997 a corresponding net regulatory asset of $612,000 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.
(4) GAIN ON SALES OF INVESTMENTS
The Telecom Group sold a cellular interest, a cable company and various
marketable securities in 1997 for aggregate consideration of $2.1 million,
resulting in a pre-tax gain of $722,000. The Telecom Group sold a telephone
company, a cellular interest and various marketable securities in 1995 for
aggregate consideration of $10.1 million, resulting in a pre-tax gain of $4.1
million.
(5) 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 $686,000,
$825,000 and $682,000 in 1997, 1996 and 1995, respectively. The composite
weighted average rates were 5.5%, 7.3% and 9.3% in 1997, 1996 and 1995,
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.
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 over the estimated useful lives of the assets. Composite
depreciation rates, as applied to the average cost of depreciable property were
7.4%, 7.2% and 7.1% for 1997, 1996 and 1995, respectively.
The following table summarizes the telecommunications plant in service and
under construction at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and Buildings.............................................................................. $ 67,203 $ 67,181
Central Office Equipment........................................................................ 399,016 372,008
Cable and Wire.................................................................................. 719,945 639,537
Furniture and Office Equipment.................................................................. 112,921 77,046
Vehicles and Other Equipment.................................................................... 42,632 39,928
Plant Under Construction........................................................................ 52,677 59,213
Non-regulated investments and Other............................................................. 26,496 38,866
------------- -------------
$ 1,420,890 $ 1,293,779
------------- -------------
------------- -------------
</TABLE>
The Telecom Group's telephone operations follow accounting for regulated
enterprises prescribed by 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
III-32
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) TELECOMMUNICATIONS PLANT (CONTINUED)
accepted accounting principles and, therefore, any adjustments to
telecommunications plant would be immaterial, as would be the write-off of
regulatory assets and liabilities.
(6) NOTES PAYABLE--AFFILIATED
The Telecom Group had notes payable to a wholly owned subsidiary of TDS and
to TDS (included in the TDS Group) totaling $28.2 million and $25.0 million at
December 31, 1997 and 1996, respectively.
Interest on notes payable is accrued at the prime rate plus 1/2 percent (for
a rate of 9.0% at December 31, 1997). The carrying amounts of notes payable
approximate fair values due to the short-term nature of these instruments.
(7) LONG-TERM DEBT
Long-term debt as of December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
RUS, RTB, and FFB Mortgage
Notes, due through 2031
Various rates averaging 5.5%, 5.4% and 5.4% in 1997, 1996 and 1995, respectively................ $ 313,012 $ 308,371
Other long-term notes,
0% to 12.6%, due through 2009................................................................... 8,722 10,601
----------- -----------
Telecom Group debt.................................................................................. 321,734 318,972
Less current portion............................................................................ 14,577 13,322
----------- -----------
Total Telecom Group long-term debt.................................................................. 307,157 305,650
----------- -----------
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, 9% to 14%, due through 2003....................... 2,440 2,672
----------- -----------
241,640 241,872
Less current portion............................................................................ 239 232
----------- -----------
Total parent debt................................................................................... 241,401 241,640
----------- -----------
Total long-term debt................................................................................ 548,558 547,290
Long-term debt--affiliated.......................................................................... 255,302 239,538
----------- -----------
$ 803,860 $ 786,828
----------- -----------
----------- -----------
</TABLE>
Long-term debt includes the debt of the parent company, TDS totaling $241.4
million and $241.9 million at December 31, 1997 and 1996, respectively, which
was attributed to the Telecom Group by the Board of Directors of TDS. The Medium
Term Notes ("MTNs") carry original maturities of 12 to 30 years, maturing at
various times from 2003 to 2025. The MTNs may be redeemed by TDS at par value
beginning in 1999.
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 RUS, RTB and FFB 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
III-33
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) LONG-TERM DEBT (CONTINUED)
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
$112.0 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 $14.8 million, $15.2 million, $15.0 million, $14.7 million and
$15.0 million for the years 1998 through 2002, respectively.
The estimated fair value of the Telecom Group's non-affiliated long-term
debt was $565.7 million and $515.8 million at December 31, 1997 and 1996,
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.
(8) 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,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at the beginning of period..................................................... $ 343,816 $ 265,387 $ 228,800
Net income............................................................................. 30,388 35,694 34,155
Dividends to TDS....................................................................... (32,701) (71,719) (16,828)
Equity contributions................................................................... 42,256 114,454 19,260
----------- ----------- -----------
Balance at the end of period........................................................... $ 383,759 $ 343,816 $ 265,387
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Telecom Group transferred interests in 13 cellular markets held by
various telephone subsidiaries to TDS in September 1996. Such cellular
interests, with an aggregate book value of $47.2 million, were transferred by
TDS Telecom to TDS via dividends.
(9) EMPLOYEE BENEFIT PLANS
(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 tax laws. 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 $3.6 million, $2.8 million and
$2.7 million in 1997, 1996 and 1995, 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 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. TDS will limit overall contributions to the
aggregate accruals recorded by its subsidiaries.
III-34
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the plans' funded status reconciled with the
amount shown in the Telecom Group's consolidated balance sheet at December 31,
1997.
<TABLE>
<CAPTION>
LIFE HEALTH
INSURANCE CARE
PLAN PLAN TOTAL
----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................................. $ 1,888 $ 4,948 $ 6,836
Fully eligible active plan participants.................................................. 578 2,375 2,953
Other active plan participants........................................................... 1,039 9,303 10,342
----------- --------- ---------
3,505 16,626 20,131
Plan assets at fair value.................................................................. 1,554 11,642 13,196
----------- --------- ---------
Accumulated postretirement benefit obligation in excess of plan assets..................... 1,951 4,984 6,935
Unrecognized prior service cost............................................................ (290) (1,801) (2,091)
Unrecognized net gain from past experience different from that assumed and from changes in
assumptions............................................................................... 797 5,027 5,824
----------- --------- ---------
Accrued postretirement benefit cost at December 31, 1997................................... $ 2,458 $ 8,210 $ 10,668
----------- --------- ---------
----------- --------- ---------
</TABLE>
Net postretirement cost for 1997, 1996 and 1995 includes the following
components:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service Cost................................................................................... $ 774 $ 695 $ 429
Interest cost on accumulated postretirement benefit obligation................................. 1,265 1,049 911
Actual return on plan assets................................................................... (565) (648) (549)
Net amortization and deferral.................................................................. (297) 104 231
--------- --------- ---------
Net postretirement cost........................................................................ $ 1,177 $ 1,200 $ 1,022
--------- --------- ---------
--------- --------- ---------
</TABLE>
For measurement purposes, a 9.6% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1997; the rate was assumed
to decrease over six years to 6.1% and to remain at 6.1% thereafter. The assumed
rate of return on plan assets was 8.0%. 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,
1997, by $3.3 million and the aggregate of the service and interest cost
components of postretirement expense for the year then ended by $465,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0%.
III-35
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) PRO FORMA ACQUISITION EFFECTS
TDS purchased and subsequently attributed to the Telecom Group one telephone
company in 1997 and five telephone companies in 1996. Assuming that these
transfers had taken place on January 1, 1996, unaudited proforma results of
operations would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating revenues.................................................................................. $ 447,213 $ 405,597
Net income.......................................................................................... $ 31,154 $ 37,501
----------- -----------
----------- -----------
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
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 $140 million during 1998, including about $50
million for new digital switches and other switching facilities and $35 million
for improvements to outside plant facilities, $25 million for systems
development and $20 million for other services, primarily CLEC expenditures.
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 1997, 1996 and
1995, rent expense for noncancelable, long-term leases was $1.2 million, $1.8
million and $1.6 million, respectively, and rent expense under cancelable,
short-term leases was $3.3 million, $3.1 million and $2.4 million, respectively.
At December 31, 1997, the aggregate minimum rental commitments under
noncancelable, long-term operating leases were as follows:
<TABLE>
<CAPTION>
MINIMUM FUTURE RENTAL
PAYMENTS
---------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
1998................................................................................ $ 1,619
1999................................................................................ 1,609
2000................................................................................ 1,589
2001................................................................................ 1,571
2002................................................................................ 113
Thereafter.......................................................................... $ 47
</TABLE>
LEGAL PROCEEDINGS
The Telecom Group is involved in legal proceedings before 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 Telecom Group.
(12) RELATED PARTY TRANSACTIONS
The Telecom Group 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 the Telecom Group
and on allocations 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 and 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
III-36
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) RELATED PARTY TRANSACTIONS (CONTINUED)
basis. Billings to the Telecom Group from TDS totaled $28.0 million, $21.2
million and $28.4 million in 1997, 1996 and 1995, respectively.
The Telecom Group transferred interests in 13 cellular markets held by
various telephone subsidiaries to TDS in September 1996. Such cellular
interests, with an aggregate book value of $47.2 million, were transferred by
TDS Telecom to TDS via dividends.
Long-term debt includes the debt of the parent company, TDS totaling $241.4
million and $241.9 million at December 31, 1997 and 1996, respectively, 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-37
<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, 1997 and 1996, and the related statements of
income and cash flows for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 28, 1998
III-38
<PAGE>
ANNEX IV
DESCRIPTION OF THE AERIAL COMMUNICATIONS GROUP
The Aerial Communications Group ("Aerial Group") consists solely of Aerial
Communications, Inc. an 83%-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., 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"). The Aerial Group has
constructed networks for its PCS Markets using Global Systems for Mobile
Communications ("GSM") technology. The Aerial Group has commenced service in
each of its markets. At December 31, 1997, the Aerial Group had expanded its
system coverage to 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. The Aerial Group 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.
The Aerial Group's strategic goal is to take full advantage of the potential
of wireless telecommunications. The Aerial Group 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.
The Aerial Group 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 18%.
During 1996 and early 1997, the Aerial Group contracted for network
equipment, billing systems, support software and the equipment and services
necessary to launch service. Additionally during this period, the Aerial Group
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. The
Aerial Group's five remaining MTAs launched service during the second quarter of
1997. Across all six markets, the Aerial Group launched with approximately 600
cell sites in service. The Aerial Group launched service in its Orlando market
in early November of 1997. Aerial had more than 1,000 cell sites in service by
the end of 1997. The coverage of the Aerial Group'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 network switching services from
the Aerial Group. The network will use GSM technology. The Aerial Group expects
to benefit from the joint venture by extending the GSM footprint without the
capital investment required to build out the network.
IV-1
<PAGE>
TECHNOLOGY
With GSM technology, the Aerial Group 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,
the Aerial Group 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. The Aerial Group
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. The Aerial Group 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, the Aerial Group expects that
PCS customers will be able to roam into service areas served by analog cellular
providers.
To date, 17 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. The Aerial Group
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. The Aerial Group 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
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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 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 airtime usage
rates, which usually are higher than standard airtime 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
The Aerial Group 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. The Aerial Group provides roaming capabilities,
through agreements with other GSM and cellular operators.
The Aerial Group'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 the Aerial
Group's retail customers who use the network operated by the Aerial Group, and
charges for long-distance calls made on the Aerial Group's systems. Equipment
sales revenue consists of the sale of handsets and related accessories to
retailers, independent agents and end user customers. At December 31, 1997, the
Aerial Group had 125,000 customers. Service revenues and equipment sales
revenues totaled $32.3 million and $23.6 million, respectively, for the year
ended December 31, 1997.
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THE AERIAL GROUP 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 the Aerial Group 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, the Aerial
Group 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 the Aerial Group to offer a quicker and less expensive form of
wireless communication when a full conversation is not necessary.
ENHANCED SECURITY. The Aerial Group'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,
the Aerial Group 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
The Aerial Group'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. The
Aerial Group has developed overall marketing strategies as well as certain,
specific local marketing strategies for each PCS Market.
The Aerial Group's mass marketing efforts emphasize the value of the Aerial
Group's high-quality, innovative services and are supported by heavily promoting
the Aerial brand name. This is supported by a substantial advertising program.
The Aerial Group offers its services and products through traditional
cellular sales channels as well as through new, lower cost channels. The Aerial
Group 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. The Aerial Group 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, the Aerial Group 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
The Aerial Group does not manufacture any of the GSM network equipment,
handsets or accessories ("equipment") used or anticipated to be used in its
operations. The equipment that the Aerial Group uses or anticipates to use is
available from multiple sources, and the Aerial Group anticipates such equipment
will continue to be available to the Aerial Group 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", the
Aerial Group is able to design its GSM networks and systems without being
dependent upon any single manufacturing source. Nokia Telecommunications Inc.
has been the Aerial Group's sole supplier of digital radio channel and switching
infrastructure equipment during the initial build-out of its PCS networks. The
Aerial Group's current handset vendors are Nokia Mobile Phones, Inc., Ericsson
Inc., and Mitsubishi Wireless Communications, Inc.
THE AERIAL GROUP'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
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and favorable business climates. The Aerial Group 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
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, the Aerial Group 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.
The Aerial Group 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). The
Aerial Group 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 the Aerial Group. 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, the Aerial
Group competes with SMR provider Nextel Communications, Inc. in each of its six
PCS Markets.
The Aerial Group 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, the Aerial Group 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 the Aerial Group will be able to compete successfully in this environment
or that new technologies and products that are more commercially effective than
the Aerial Group's technologies and products will not be developed. In addition,
many of the Aerial Group's competitors have substantially greater financial,
technical, marketing, sales and distribution resources than those of the Aerial
Group and have significantly greater experience than the Aerial Group 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 the Aerial Group'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. The Aerial Group 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 the Aerial Group's ability to attract
current cellular customers or potential new wireless communication customers
that desire the ability to access service providers in several markets.
The Aerial Group anticipates that market prices for two-way wireless
services generally will decline in the future based on increased competition.
The Aerial Group 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. The Aerial Group'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 the Aerial Group'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
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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 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
the Aerial Group. The Aerial Group is watching the FCC proceedings closely.
The grants of licenses to the Aerial Group 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. The Aerial Group is currently engaged in this registration process.
All new towers must be registered at the time of construction.
The FCC licenses granted to the Aerial Group 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 the Aerial Group'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 the Aerial Group is unaware of any circumstances
which would prevent the approval of any future renewal applications, there can
be no assurance that the Aerial Group'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 the
Aerial Group.
RECENT EVENTS. There are certain regulatory proceedings currently pending
before the FCC which are of particular importance to the broadband PCS industry.
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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 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 1997, the FCC
established universal service support mechanisms which require
telecommunications providers, including all wireless carriers, to contribute.
The Aerial Group has made the required Universal Service Worksheet filings and
expects to make the required periodic payments starting in the first quarter of
1998.
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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 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.
The Aerial Group 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. The Aerial Group is
unable to predict the scope, pace, or financial impact of policy changes which
could be adopted in these proceedings.
EMPLOYEES
As of December 31, 1997, the Aerial Group had a total of 1,414 employees.
None of the Aerial Group's employees is represented by a labor union. The Aerial
Group considers its relations with its employees to be good.
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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 TDS Common Shares and
Series A Common Shares are, shareholders of TDS. TDS 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 Groups, including the
Aerial Communications Group, and dividends or distributions on, or repurchases
of, any class of Common Stock will reduce the assets of TDS legally available
for payment of dividends on all classes of Common Stock. Accordingly, TDS
consolidated financial statements should be read in conjunction with the Aerial
Communications Group's financial information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
The Aerial Communications Group ("Aerial Group") consists solely of Aerial
Communications, Inc. and its subsidiaries ("Aerial"), an 82.5%-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
The Aerial Group 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, the Aerial Group 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).
The Aerial Group'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. The Aerial Group's five
remaining MTAs launched service during the second quarter of 1997. Across all
six markets, the Aerial Group launched with approximately 600 cell sites in
service. The Aerial Group currently has 1,044 cell sites in service across all
its markets.
With the launch of service in its MTAs between March and June of 1997, the
Aerial Group transitioned from the development stage to being an operating
enterprise. As a result of this transition, the Aerial Group experienced in 1997
increased revenues and operating expenses, and incurred substantial losses. The
Aerial Group had no revenues and significantly less expenses in 1995, 1996 and
for the first quarter of 1997.
RESULTS OF OPERATIONS
The Aerial Group's results of operations for 1997 compared to 1996 and 1995
reflect primarily increased activities undertaken to launch and grow PCS
services in its MTAs. Such activities significantly increased the Aerial Group's
net loss to $247.1 million from $37.9 million in 1996 and $6.5 million in 1995.
During 1997 the Aerial Group ceased to be classified as a development stage
enterprise with the launch of service in its six MTAs. In addition to launching
PCS services, the Aerial Group's focus in 1997 was the continued build-out of
its PCS network and expansion of its customer base. Building its customer base
will be the Aerial Group's focus in 1998.
OPERATING REVENUES
OPERATING REVENUES totaled $55.9 million for the year ended December 31,
1997, reflecting the launch of service in all six MTAs during 1997. In late
March 1997 the Aerial Group began offering PCS service in Columbus, Ohio and
during the second quarter the Aerial Group began offering service in its
remaining MTAs. The Aerial Group finished 1997 with approximately 125,000
customers.
SERVICE REVENUE primarily consists of charges for access, airtime and
value-added services provided to the Aerial Group's retail customers who use the
network operated by the Aerial Group, and charges for long-distance calls made
on the Aerial Group's systems. Service revenue totaled $32.3 million in 1997.
EQUIPMENT SALES REVENUE totaled $23.6 million in 1997. Equipment sales
revenue represents the sale of handsets and related accessories to retailers,
independent agents, and end user customers.
OPERATING EXPENSES
OPERATING EXPENSES totaled $252.5 million for the year ended December 31,
1997, reflecting the Aerial Group's operating activities subsequent to the
launch of service in its markets.
IV-10
<PAGE>
SYSTEM OPERATIONS EXPENSE totaled $30.7 million in 1997, reflecting the
costs of operating the Aerial Group's network in all MTAs. Significant costs
include cell site rent and maintenance, utilities, landline interconnection and
toll charges and salaries and benefits of engineering and maintenance employees.
MARKETING AND SELLING EXPENSE totaled $46.0 million in 1997, primarily
reflecting the Aerial Group's aggressive marketing campaign that accompanied the
launch of service and continued throughout the remainder of the year. Marketing
and selling expenses primarily consist of salaries and benefits of sales and
marketing personnel, sales commissions, the cost of promotions, and the cost of
print, radio and television advertising.
CUSTOMER SERVICE EXPENSE totaled $20.9 million in 1997, reflecting customer
service activity at the Aerial Group's National Operations Center in connection
with the launch and support of its six MTAs.
COST OF EQUIPMENT SOLD totaled $71.5 million in 1997, reflecting the launch
of service and filling of third-party distribution channels for handsets.
GENERAL AND ADMINISTRATIVE EXPENSE totaled $44.5 million in 1997, reflecting
expenses associated with the Aerial Group's management and operating teams
required to launch service and transition to post-launch operations, and the
resulting increases in salaries, employee benefits, and overhead expenses. The
Aerial Group had 1,414 employees at December 31, 1997, compared to 424 employees
at December 31, 1996, and less than 50 employees at December 31, 1995.
OTHER
DEVELOPMENT COSTS totaled $21.6 million in 1997 as compared to $44.0 million
in 1996 and $7.8 million in 1995. The decrease in development costs in 1997 is
primarily due to the Aerial Group being a development stage enterprise for all
of 1996 while, in the second quarter of 1997, the Aerial Group ceased to be
classified as a development stage enterprise with the launch of service in its
six MTAs.
INVESTMENT LOSSES totaled $2.5 million in 1997 as compared to $0.3 million
in 1996. Investment losses represent Aerial's 49% share of the net loss of the
Wireless Alliance, LLC, a joint venture associated with the Aerial Group's
Minneapolis MTA and designed to extend the PCS footprint to areas that were not
in the Aerial Group's initial build-out.
INTEREST INCOME-AFFILIATE totaled $0.1 million in 1997 as compared to $4.5
million in 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 $2.4 million in 1997 as compared to $1.2
million in 1996. Interest income-other primarily represents 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 income-other was not significant in 1995.
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 totaled $21.6 million in 1997 as compared to $2.0
million in 1996 and $1.1 million in 1995. The $19.6 million increase in 1997 is
primarily due to the average outstanding balance of borrowings under the
Revolving Credit Agreement with TDS being greater in 1997. Interest
expense-affiliate in 1997 represents interest on amounts borrowed under the
Revolving Credit Agreement and the TDS 3% guarantee fees primarily 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 $0.6 million. The 1995
amount represents interest on amounts borrowed under the Revolving Credit
Agreement, less interest capitalized of $16.6 million.
INTEREST EXPENSE-OTHER totaled $5.5 million in 1997 as compared to $0.8
million in 1996 and relates to the Series A Zero Coupon Notes issued in November
1996, less interest capitalized. The Aerial Group capitalized interest expense
of $3.3 million and $0.6 million related to the Series A Zero Coupon Notes and
interim financing under the Nokia Credit Agreement in 1997 and 1996,
respectively.
IV-11
<PAGE>
Interest capitalization in 1997 and 1996 is based solely upon expenditures
incurred related to PCS network construction and information system development.
Interest capitalization in 1995 represents interest capitalized on the cost of
licenses acquired prior to TDS's $289.2 million equity contribution which
covered such costs.
INCOME TAX EXPENSE totaled $1.8 million in 1997, as compared to a benefit of
$0.9 million in 1996 and a benefit of $2.1 million in 1995. The $2.7 million
increase in income tax expense is primarily due to an increase in the estimated
valuation allowance associated with deferred tax assets generated by net
operating losses. See "Income Taxes" below for a discussion of the Aerial
Group's tax allocation agreement with TDS.
INCOME TAXES
The Aerial Group is included in a consolidated federal income tax return
with other members of the TDS consolidated group. For financial reporting
purposes, the Aerial Group computes federal income taxes as if it were filing a
separate return as its own affiliated group and was not included in the TDS
consolidated tax return. TDS and the Aerial Group are parties to a Tax
Allocation Agreement under which the Aerial Group is able to carry forward any
losses and credits and use them to offset any future income tax liabilities to
TDS.
For 1995 and prior years, TDS reimbursed the Aerial Group for the federal
income tax benefit of any net operating loss of the Aerial Group which reduced
the provision for income taxes reflected in TDS's consolidated statements of
income. The Aerial Group 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 the Aerial Group
on a current basis for losses or credits used by TDS in the year they are
generated. Instead, the Aerial Group will be compensated (i.e., future tax
liabilities will be reduced) for TDS's use of tax benefits at such time as the
Aerial Group could utilize such benefits on a separate return basis.
If the 1996 Tax Allocation Agreement had been in place during 1995, the
Aerial Group 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. 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 the Aerial Group, a valuation must be 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 the Aerial Group's business to no
greater extent than the general economy.
LIQUIDITY AND CAPITAL RESOURCES
The costs of development, construction, start-up and post-launch activities
of the Aerial Group require substantial capital. From inception through December
31, 1997, the Aerial Group had expended $304.4 million for licenses, including
capitalized interest, $642.1 million for all other capital expenditures and
incurred cumulative net losses of $292.9 million. The Aerial Group expects to
incur significant operating losses and to 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 $206.9 million in 1997 and
$17.8 million in 1996, and cash flows provided by operating activities were $0.1
million in 1995. Operating cash outflow (operating loss before depreciation and
amortization expense) totaled $157.5 million in 1997. Cash flows used by other
operating activities (investment and other income, interest expense, changes in
working capital and changes in other assets and liabilities) required cash
investments of $29.3 million in 1997.
Cash flows from financing activities provided $449.9 million in 1997, $164.1
million in 1996 and $297.9 million in 1995. Cash provided in 1997 was due
primarily to $448.2 million in borrowings under the Revolving Credit Agreement.
In April 1996, Aerial received proceeds from its IPO of $195.3 million, net of
underwriting discounts and commissions. The Aerial Group used a portion of the
net proceeds to repay the then outstanding balance under the
IV-12
<PAGE>
Revolving Credit Agreement with TDS. In 1996 the Aerial Group received from TDS
$28.8 million representing the balance due in connection with TDS's $289.2
million contribution to the equity capital of the Aerial Group 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 were generated
by borrowings under the Revolving Credit Agreement with TDS.
Cash flows used in investing activities totaled $273.3 million in 1997,
$111.3 million in 1996 and $297.8 million in 1995. Cash used in 1997 resulted
primarily from $274.7 million in additions to property and equipment, primarily
launch-related network and information system assets. Total 1997 additions to
property and equipment, including noncash transactions, were $387.7 million,
including $291.9 million for cell sites, $38.4 million for switching equipment,
$55.6 million for information system assets and $1.8 million for other
activities. Cash used in 1996 resulted primarily from $112.9 million in
additions to property and equipment, primarily network and information system
assets, offset by $2.3 million in proceeds received from the sale of PCS
licenses. Total 1996 additions to property and equipment, including noncash
transactions, were $242.3 million, including $150.4 million for cell sites,
$53.2 million for switching equipment, and $38.7 million for other activities,
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 the Aerial Group'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.
The Aerial Group has substantially completed all phases of its network
build-out and anticipates that the continuing development of its PCS networks
and services will require substantial capital over the next several years. For
1998 the Aerial Group estimates that the aggregate funds required for capital
expenditures will total approximately $75 million. The Aerial Group estimates
requiring $235 million for working capital requirements to fund operations for
all of 1998, including an estimated $57 million in interest expense related to
the Revolving Credit Agreement. The Aerial Group expects 1998 capital 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 an investment by a minority equity investor.
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 agreed to
provide up to $200 million in financing for the equipment through a Credit
Agreement with Aerial dated June 19, 1996 ("Credit Agreement"). In accordance
with the provisions of the Credit Agreement, Aerial issued, in tranches, 10-year
unsecured zero coupon promissory notes, the proceeds of which were 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 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 per annum yield to
maturity on the Series A Notes is 8.34% (computed on a semi-annual bond
equivalent basis). 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.
Pursuant to the Credit Agreement, on February 5, 1998, Aerial issued $220.0
million in aggregate principal amount at maturity Series B Zero Coupon Notes
("Series B Notes") due in 2008 (representing the final issuance of zero coupon
notes under the Credit Agreement). The issue price of the Series B Notes was
$100 million and there is no periodic payment of interest. The per annum yield
to maturity on the Series B Notes is 8.05% (computed on a semi-annual bond
equivalent basis). The proceeds of the sale of the Series B Notes were 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 the Aerial Group. 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. The Notes are subject to optional redemption by Aerial after five
years from the applicable date of issuance at redemption prices which reflect
original issue discount accrued since issuance.
In April of 1996, Aerial sold 12.3 million of its Common Shares,
approximately 17.2% of the then total outstanding shares of common stock, at a
price of $17 per share in its IPO. The net proceeds from the offering, after
IV-13
<PAGE>
underwriters fees, were $195.3 million. A portion of the net proceeds was
applied to the repayment of 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 December 31, 1997, the Aerial Group had approximately $26.8 million
available for borrowing under its $475 million Revolving Credit Agreement with
TDS. In February 1998, the Aerial Group secured from TDS a $50 million increase
in the amount it may borrow under the Revolving Credit Agreement to $525
million. 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. If sufficient additional future funding is not made available to
the Aerial Group on terms and prices acceptable to the Aerial Group, the Aerial
Group would have to reduce its operating activities, which could have a material
adverse impact on the Aerial Group's financial condition and results of future
operations.
The Aerial Group has assessed, and continues to assess, the impact of the
Year 2000 Issue on its reporting systems and operations for purposes of ensuring
its systems are Year 2000 compliant. The Aerial Group's major systems have been
recently purchased or developed and management does not expect the effort needed
to achieve Year 2000 compliance to be significant. 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. Additionally, computer applications may be affected
before January 1, 2000, if calculations into the year 2000 are involved.
Management believes that the cost of addressing the Year 2000 Issue to be
incurred in 1998 and 1999 will not be material to future results or financial
condition. If management's steps are not successful in making its systems Year
2000 compliant, it could have a material adverse effect on results of
operations.
PROPOSED TDS CORPORATE RESTRUCTURING
In December 1997, Aerial received a proposal from TDS to acquire all of the
issued and outstanding Common Shares of Aerial not already owned by TDS. The
offer was made in connection with, and is subject to TDS shareholder approval of
and the effectiveness of, TDS's proposed corporate restructuring. The Board of
Directors of TDS (the "TDS Board") has adopted a proposal which, if approved by
TDS shareholders and implemented by the TDS Board, would authorize the TDS Board
to issue three new classes of common stock and change the state of incorporation
of TDS from Iowa to Delaware (the "Tracking Stock Proposal"). The three new
classes of stock are intended to separately reflect the performance of TDS's
cellular telephone, landline telephone and personal communications services
businesses ("Tracking Stocks").
Under the Tracking Stock Proposal, one of the three new classes of common
stock created by TDS would be designated as Aerial Communications Group Common
Shares (the "Aerial Group Shares"). The Aerial Group Shares, when issued, are
intended to reflect the separate performance of the Aerial Communications Group
(the "Aerial Group") which consists of TDS's interest in Aerial Communications,
Inc.
Subject to the approval of the Tracking Stock Proposal by TDS shareholders,
TDS intends to, among other things, issue Aerial Group Shares in exchange for
all of the Common Shares of Aerial which are not currently owned by TDS, subject
to approval by Aerial's board of directors and shareholders.
In January 1998, Aerial's board of directors created a special committee of
the Board (the "Special Committee") to review the proposal from TDS. The Special
Committee, consisting of two independent directors of Aerial, has engaged a
financial advisor and legal advisor to assist in reviewing the proposal. The
Special Committee will consider how Aerial should respond to the TDS proposal,
take the steps it deems appropriate to respond to the TDS proposal and, at such
time as it considers it appropriate, report its recommendations to Aerial's
Board of Directors.
Subsequent to TDS shareholder approval of the Tracking Stock Proposal, TDS
intends to terminate certain intercompany agreements between TDS and Aerial.
Thereafter, some or all of the policies between TDS and Aerial would be
determined solely by methods that TDS management believes to be reasonable. Many
of such policies would continue the arrangements which presently exist between
TDS and Aerial pursuant to the intercompany agreements, but TDS would have no
contractual obligation to continue such policies after the intercompany
agreements have been terminated. The TDS Board currently intends to retain
future earnings, if any, for the development of the business of the Aerial Group
and does not anticipate paying dividends on the Aerial Group Shares in the
foreseeable future.
IV-14
<PAGE>
LEGAL PROCEEDINGS. On January 5, 1998, an individual 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 defendants have been served with the complaint in this case
but have not yet responded to the complaint. The time for the defendants to
respond has been extended. The timing for a response will be determined based on
discussions between counsel for plaintiffs and defendants, but a response is not
expected to take place for at least one or more months. A virtually identical
complaint has been filed by a second individual. None of the defendants have
been served with this complaint. It is expected that these cases will be
consolidated. 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.
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 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 THE AERIAL GROUP'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 THE AERIAL GROUP'S MARKETS. READERS SHOULD EVALUATE ANY
STATEMENTS IN LIGHT OF THESE IMPORTANT FACTORS.
IV-15
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
------------ ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING REVENUES
Service............................................................................... $ 32,307 $ -- $ --
Equipment sales....................................................................... 23,645 -- --
------------ ---------- ---------
Total Operating Revenues............................................................ 55,952 -- --
------------ ---------- ---------
OPERATING EXPENSES
System operations..................................................................... 30,655 -- --
Marketing and selling................................................................. 45,974 -- --
Customer service...................................................................... 20,882 -- --
Cost of equipment sold................................................................ 71,454 -- --
General and administrative............................................................ 44,467 -- --
Depreciation.......................................................................... 34,569 -- --
Amortization of intangibles........................................................... 4,502 -- --
------------ ---------- ---------
Total Operating Expenses............................................................ 252,503 -- --
------------ ---------- ---------
OPERATING (LOSS)........................................................................ (196,551) -- --
------------ ---------- ---------
INVESTMENT AND OTHER INCOME (EXPENSE)
PCS development costs................................................................. (21,614) (43,950) (7,829)
Investment (losses)................................................................... (2,518) (304) --
Interest income--affiliate............................................................ 95 4,488 --
Interest income--other................................................................ 2,402 1,158 48
Gain on sale of PCS licenses.......................................................... -- 2,582 --
Other income (expense)................................................................ -- -- 268
------------ ---------- ---------
Total Investment and Other Income (Expense)......................................... (21,635) (36,026) (7,513)
------------ ---------- ---------
(LOSS) BEFORE INTEREST AND INCOME TAXES................................................. (218,186) (36,026) (7,513)
Interest expense--affiliate........................................................... 21,558 1,960 1,051
Interest expense--other............................................................... 5,507 802 --
------------ ---------- ---------
Total Interest Expense.............................................................. 27,065 2,762 1,051
------------ ---------- ---------
(LOSS) BEFORE INCOME TAXES.............................................................. (245,251) (38,788) (8,564)
Income tax expense (benefit)............................................................ 1,806 (867) (2,096)
------------ ---------- ---------
NET (LOSS).............................................................................. (247,057) (37,921) (6,468)
Net (Loss) to Minority Shareholders of Aerial........................................... 43,038 4,944 --
------------ ---------- ---------
Net (Loss) to TDS....................................................................... $ (204,019) $ (32,977) $ (6,468)
------------ ---------- ---------
------------ ---------- ---------
Pro Forma (Unaudited): (See Note 2)
Net (Loss) Attributable to the TDS Group through Retained Interest...................... $ (51,005) $ (8,244) $ (1,617)
Net (Loss) Attributable to Aerial Communications Group Common Shares.................... $ (153,014) $ (24,733) $ (4,851)
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
IV-16
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss).......................................................................... $ (247,057) $ (37,921) $ (6,468)
Add (Deduct) adjustments to reconcile net (loss) to net cash (used) provided by
operating activities:
Depreciation and amortization....................................................... 40,554 1,934 47
Noncash interest expense--Series A Notes............................................ 8,341 1,327 --
Investment losses................................................................... 2,518 304 --
Gain on sale of PCS licenses........................................................ -- (2,582) --
Change in accounts receivable--customer............................................. (24,030) -- --
Change in income tax refund receivable--affiliate................................... -- 12,502 (12,320)
Change in inventory................................................................. (25,949) -- --
Change in accounts payable--affiliates.............................................. 284 (795) 1,284
Change in accounts payable--trade and other......................................... 30,606 3,491 6,401
Change in other accrued interest affiliates......................................... 3,665 (1,497) 1,392
Change in deferred tax liability--net............................................... 1,806 2,231 10,407
Change in other assets and liabilities.............................................. 2,399 3,225 (617)
------------ ------------ ------------
(206,863) (17,781) 126
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Revolving Credit Agreement--TDS........................................... 448,234 (60,238) 297,937
Change in note receivable--affiliate................................................ -- 28,836 --
Issuance of common stock............................................................ 1,699 195,485 --
------------ ------------ ------------
449,933 164,083 297,937
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................................................ (274,709) (112,940) (12,134)
Investment in PCS licenses.......................................................... -- -- (285,417)
Change in note receivable--other.................................................... 1,925 -- --
Proceeds from sale of PCS licenses.................................................. -- 2,275 --
Change in temporary and other investments........................................... (558) (614) (261)
------------ ------------ ------------
(273,342) (111,279) (297,812)
------------ ------------ ------------
Net (Decrease) Increase in Cash and Cash Equivalents................................ (30,272) 35,023 251
Cash and Cash Equivalents--
Beginning of Period............................................................... 35,284 261 10
------------ ------------ ------------
End of Period..................................................................... $ 5,012 $ 35,284 $ 261
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
IV-17
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents:
General funds................................................................................... $ 5,012 $ 869
Affiliated cash equivalents..................................................................... -- 34,415
----------- -----------
5,012 35,284
Temporary investments............................................................................. 197 315
Accounts receivable:
Customers, less allowance of $7,252 in 1997..................................................... 24,030 --
Affiliates...................................................................................... 22
Other........................................................................................... 185
Interest receivable-affiliate..................................................................... -- 243
Interest receivable-other......................................................................... -- 508
Note receivable-other............................................................................. -- 1,925
Inventory......................................................................................... 25,949 --
Other............................................................................................. 2,808 704
----------- -----------
58,203 38,979
----------- -----------
PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated depreciation of $38,018 in 1997 and
$1,981 in 1996.................................................................................. 584,723 18,592
Work in process................................................................................... 19,381 233,831
Prepaid network infrastructure costs.............................................................. -- 70,300
----------- -----------
604,104 322,723
----------- -----------
INVESTMENTS
Investments in PCS licenses, net of accumulated amortization of $4,489 in 1997.................... 297,043 304,354
Other............................................................................................. 1,298 6,771
----------- -----------
298,341 311,125
----------- -----------
TOTAL ASSETS........................................................................................ $ 960,648 $ 672,827
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
IV-18
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
BALANCE SHEETS
LIABILITIES AND GROUP EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable:
Affiliates........................................................................................ $ 773 $ 489
Trade............................................................................................. 92,020 57,114
Other............................................................................................. -- 36,246
Accrued interest-affiliate.......................................................................... 3,665 --
Microwave relocation costs payable.................................................................. 7,354 17,046
Contribution payable................................................................................ -- 6,453
Other............................................................................................... 5,957 1,978
----------- -----------
109,769 119,326
----------- -----------
REVOLVING CREDIT AGREEMENT--TDS..................................................................... 448,234 --
----------- -----------
LONG-TERM DEBT...................................................................................... 196,439 103,743
----------- -----------
DEFERRED TAX LIABILITY--NET......................................................................... 13,779 11,973
----------- -----------
AERIAL COMMUNICATIONS GROUP EQUITY.................................................................. 192,427 437,785
----------- -----------
TOTAL LIABILITIES AND GROUP EQUITY.................................................................. $ 960,648 $ 672,827
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
IV-19
<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"), currently an 82.5%-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.
NOTE 1 PROPOSED TDS CORPORATE RESTRUCTURING
In December 1997, Aerial received a proposal from TDS to acquire all of the
issued and outstanding Common Shares of Aerial not already owned by TDS. The
offer was made in connection with, and is subject to TDS shareholder approval of
and the effectiveness of, TDS's proposed corporate restructuring. The Board of
Directors of TDS (the "TDS Board") has adopted a proposal which, if approved by
TDS shareholders and implemented by the TDS Board, would authorize the TDS Board
to issue three new classes of common stock and change the state of incorporation
of TDS from Iowa to Delaware (the "Tracking Stock Proposal"). The three new
classes of stock are intended to separately reflect the performance of TDS's
cellular telephone, landline telephone and personal communications services
businesses ("Tracking Stocks").
Under the Tracking Stock Proposal, one of the three new classes of common
stock created by TDS would be designated as Aerial Communications Group Common
Shares (the "Aerial Group Shares"). The Aerial Group Shares, when issued, are
intended to reflect the separate performance of the Aerial Communications Group
(the "Aerial Group"), which consists of TDS's interest in Aerial Communications,
Inc.
Subject to the approval of the Tracking Stock Proposal by TDS shareholders,
TDS intends to, among other things, issue Aerial Group Shares in exchange for
all of the Common Shares of Aerial which are not currently owned by TDS, subject
to approval by Aerial's board of directors and shareholders.
In January 1998, Aerial's board of directors created a special committee of
the Board (the "Special Committee") to review the proposal from TDS. The Special
Committee, consisting of two independent directors of Aerial, has engaged a
financial advisor and legal advisor to assist in reviewing the proposal. The
Special Committee will consider how Aerial should respond to the TDS proposal,
take the steps it deems appropriate to respond to the TDS proposal and, at such
time as it considers it appropriate, report its recommendations to Aerial's
Board of Directors.
Subsequent to TDS shareholder approval of the Tracking Stock Proposal, TDS
intends to terminate certain intercompany agreements between TDS and Aerial.
Thereafter, some or all of the policies between TDS and Aerial would be
determined solely by methods that TDS management believes to be reasonable. Many
of such policies would continue the arrangements which presently exist between
TDS and Aerial pursuant to the intercompany agreements, but TDS would have no
contractual obligation to continue such policies after the intercompany
agreements have been terminated. The TDS Board currently intends to retain
future earnings, if any, for the development of the business of the Aerial Group
and does not anticipate paying dividends on the Aerial Group Shares into the
foreseeable future.
NOTE 2 ORGANIZATION OF BUSINESS
Aerial Communications, Inc. ("Aerial") is an 82.5%-owned subsidiary of
Telephone and Data Systems, Inc. ("TDS"). 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 January 18, 1996. 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").
IV-20
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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 Aerial 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 Aerial Merger,
TDS intends to terminate certain intercompany agreements between TDS and Aerial.
Thereafter, some or all of the relationships between TDS and Aerial would be
determined solely by methods that management of TDS believes to be reasonable.
Many of such policies would continue the arrangements which presently exist
between TDS and Aerial pursuant to the intercompany agreements, but TDS 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.
Financial effects arising from the Cellular Group, the Telecom Group, the
Aerial Group or the TDS Group that affect the consolidated results of operations
or financial condition of the Company could affect the results of operations or
financial condition of the Cellular Group, the Telecom Group, the Aerial Group
or the TDS Group, or could affect the market price of any or all classes of
Common Stock. In addition, any net losses of the Company 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 TDS legally available for payment of dividends on any class of Common
Stock. Accordingly, TDS's consolidated financial statements should be read in
conjunction with the Aerial 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.
Funds of TDS legally available for the payment of dividends ("Surplus")
(approximately $1,966 million as of December 31, 1997, based on the financial
statements) is an amount approximately equal to the Total Common and Preferred
Equity of TDS less the par or stated value of all shares of common and preferred
stock outstanding (204,922,000 shares as of December 31, 1997 after the
Distribution). With respect to any Tracking Group, the Available Dividend Amount
(approximately $144 million for the Aerial Group as of December 31, 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. The TDS Board currently
intends to retain future earnings, if any, for the development of the business
of the Aerial Group and does not anticipate paying dividends on the Aerial Group
Shares in the foreseeable future.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, TDS will prepare
and file with the Securities and Exchange Commission consolidated financial
statements of TDS 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
IV-21
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and the TDS Group will separately report the assets, liabilities (including
contingent liabilities) and shareholders' equity of TDS 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 the Cellular Group, the Telecom Group and the
Aerial Group Common Shares will be, and holders of TDS Common Shares and Series
A Common Shares will continue to be, shareholders of TDS. TDS and its
subsidiaries will each continue to be responsible for their respective
liabilities.
(a) DEVELOPMENT STAGE COMPANY
Effective with the second quarter of 1997, the Aerial Group ceased to be a
development stage company and presents its 1997 results of operations, cash
flows and financial position in a manner similar to other operating enterprises
within the industry.
(b) PRINCIPLES OF CONSOLIDATION
The accounting policies of the Aerial Group conform to generally accepted
accounting principles. The financial statements include the accounts of the
Aerial Group. All material intercompany balances and transactions 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 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.
Certain amounts reported in prior years have been reclassified to conform to
the current year presentation.
(c) REVENUE RECOGNITION AND INVENTORY
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.
(d) ADVERTISING COSTS
The Aerial Group expenses advertising costs as incurred. Beginning with the
launch of service during the second quarter of 1997 the Aerial Group's
advertising costs are included in Marketing and selling expenses. Prior to
launching service, the Aerial Group was a development stage enterprise and
advertising costs were included in PCS Development Costs.
(e) PENSION PLAN
Effective July 1, 1995, the Aerial Group began providing pension benefits
for its employees under a qualified, noncontributory, defined contribution
pension plan. Under this plan, pension benefits and costs are calculated
separately for each participant and are funded currently. Pension costs were
$326,000, $72,000 and $11,000 in 1997, 1996 and 1995, respectively.
(f) CASH AND CASH EQUIVALENTS, TEMPORARY INVESTMENTS AND MARKETABLE SECURITIES
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 but less than
twelve months are classified as temporary investments. Temporary investments are
stated at cost. Those investments with original maturities of more than twelve
months are classified as marketable securities and are stated at amortized cost.
The Aerial Group's investments in marketable non-equity securities, included in
Other Investments, have maturities of one to five years and are classified as
held-to-maturity.
IV-22
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The carrying amounts of cash and cash equivalents and temporary investments
approximate fair value due to the short-term nature of these investments. The
amortized cost of the marketable non-equity securities approximate their
aggregate fair value.
(g) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided
based on 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.
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Network.............................................................................................. $ 514,525 $ --
Information systems.................................................................................. 83,950 15,951
Office equipment..................................................................................... 15,800 3,180
Leasehold improvements and other..................................................................... 8,466 1,442
----------- ---------
622,741 20,573
Accumulated depreciation............................................................................. (38,018) (1,981)
----------- ---------
Property and equipment-net......................................................................... $ 584,723 $ 18,592
----------- ---------
----------- ---------
</TABLE>
(h) WORK IN PROCESS
Work in process includes expenditures for the design, construction and
testing of the Aerial Group's PCS networks as well as the cost to relocate
dedicated private microwave links currently operating in the Aerial Group's
spectrum in its MTAs. Work in process also includes the costs associated with
developing information systems. The Aerial Group capitalizes interest on such
expenditures where appropriate. When the assets are placed in service, the
Aerial Group transfers the assets to the appropriate property and equipment
category.
(i) INVESTMENT IN PCS LICENSES
Investment in licenses is recorded at historical cost, which includes the
purchase price of the licenses acquired by the Aerial Group in the PCS auction
plus capitalized interest of $16.6 million incurred while readying the licenses
in the Aerial Group's MTAs for use. The Aerial Group recorded capitalized
interest through December 31, 1995, when TDS contributed approximately $289.2
million in equity capital to the Aerial Group for the original cost of its
licenses. The Aerial Group began amortizing the licenses straight-line over 40
years upon commencement of service in each respective MTA. Accumulated
amortization on the licenses at December 31, 1997, totaled $4.5 million.
(j) IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Aerial Group 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 Aerial Group 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 a long-lived asset is
not 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 Aerial Group's
financial position or results of operations.
(k) MICROWAVE RELOCATION COSTS PAYABLE
Microwave relocation costs payable represent obligations of the Aerial Group
to pay its share of the costs to relocate dedicated private microwave links
currently operating in the Aerial Group's spectrum in its MTAs. The
IV-23
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
carrying amount reported in the balance sheet for microwave relocation costs
payable approximates fair value because of the short maturity of those
instruments.
(l) PRO FORMA NET (LOSS) AND (LOSS) PER SHARE
Pro forma net (loss) attributable to the Aerial Group and to the TDS Group
through the 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 the 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 the Retained Interest.
(Loss) per Share was omitted from the historical statements of operations
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.
(m) SUPPLEMENTAL CASH FLOW DISCLOSURES
The following summarizes interest and income taxes paid and certain noncash
transactions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income tax benefits--cash payments from TDS resulting from taxable losses generated by
the Aerial Group in prior years......................................................... $ -- $ 15,598 $ 185
Interest paid to non-affiliates.......................................................... 428 1,107 --
Interest and guarantee fees paid to TDS or converted to debt under the Revolving Credit
Agreement............................................................................... 24,297 3,496 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 1997, $113.0 million in additions to property and equipment (amounts in
service and work in process, collectively) were financed through a combination
of long-term debt, accounts payable-trade, microwave relocation costs payable
and prepaid network infrastructure costs. In 1996, $199.6 million in additions
to property and equipment and prepaid network infrastructure costs were financed
through a combination of long-term debt, accounts payable-trade and other and
microwave relocation costs payable.
The Aerial Group incurred interest charges totaling $33.1 million in 1997.
In 1997, the interest charges were comprised of $21.0 million paid to TDS
relating to the Revolving Credit Agreement (See Note 5--Revolving Credit
Agreement), $3.3 million paid to TDS for guarantee fees on the Series A Zero
Coupon Notes and obligations under the Nokia Credit Agreement (See Note
6--Long-Term Debt), $0.4 million paid to Nokia for interest charges relating to
the Credit Agreement, $8.3 million in accrued interest on the Series A Zero
Coupon Notes and $0.1 million in other interest charges. Of these amounts, the
Aerial Group capitalized $6.0 million relating to its work in process
expenditures. The remaining $27.1 million was charged to expense.
In 1996, the Aerial Group incurred interest charges of $4.0 million. The
interest charges were comprised of $2.0 million paid to TDS relating to the
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,
$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, the Aerial Group capitalized $1.2 million relating to its work in
process expenditures. The remaining $2.8 million was charged to expense.
During 1995, the Aerial Group incurred interest charges of $17.7 million
related to its Revolving Credit Agreement with TDS. Of this amount, the Aerial
Group capitalized $16.6 million relating to the development of its PCS licenses.
The remaining $1.1 million was charged to expense.
IV-24
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 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 in the TDS affiliated group. Aerial had recorded these
amounts in "Income tax refund receivable-affiliate" (See Note 3 (m)--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
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.
Subject to the completion of the Aerial Merger, TDS intends to terminate
certain intercompany agreements between TDS and Aerial. See Note 1--Proposed TDS
Corporate Restructuring for a discussion of the proposed merger.
The Aerial Group 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,
--------------------------------
1997 1996 1995
--------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision (benefit):
Current................................................................................... $ -- $ (3,098) $ (12,502)
Deferred.................................................................................. 1,561 1,671 9,574
State income tax provision:
Current................................................................................... -- -- --
Deferred.................................................................................. 245 560 832
--------- --------- ----------
Income tax expense (benefit)................................................................ $ 1,806 $ (867) $ (2,096)
--------- --------- ----------
--------- --------- ----------
</TABLE>
The temporary differences which gave rise to significant portions of the net
deferred tax liability were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards.................................................................. $ 171,896 $ 26,419
Less: valuation allowance......................................................................... (129,412) (15,029)
------------ ----------
Total deferred tax asset............................................................................ 42,484 11,390
------------ ----------
Deferred tax liability:
Licenses.......................................................................................... 19,025 13,650
Property and equipment............................................................................ 19,004 435
Partnership investment............................................................................ 9,235 2,573
Deferred charges-interest......................................................................... 6,088 6,088
Other............................................................................................. 2,911 617
------------ ----------
Total deferred tax liability........................................................................ 56,263 23,363
------------ ----------
Net deferred tax liability.......................................................................... $ 13,779 $ 11,973
------------ ----------
------------ ----------
</TABLE>
The Aerial Group 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, 1997, the
IV-25
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 INCOME TAXES (CONTINUED)
federal net operating loss carryforward available to offset future taxable
income is $377.8 million and expires between 2012 and 2013. The amount of state
net operating loss carryforward available to offset future taxable income is
$552.9 million and expires between 1998 and 2013.
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 1997, the
valuation allowance increased $114.4 million primarily due to the Aerial Group's
increased net operating losses.
The statutory federal income tax rate is reconciled to the Aerial Group's
effective income tax rate below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax rate............................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal benefit................................................... (0.1) (0.9) (6.3)
Effects of valuation allowance on deferred tax asset......................................... (35.6) (29.7) --
Other........................................................................................ -- (2.2) (4.2)
----------- ----------- ---
Effective income tax rate.................................................................... (0.7)% 2.2% 24.5%
----------- ----------- ---
----------- ----------- ---
</TABLE>
NOTE 5 REVOLVING CREDIT AGREEMENT
Aerial entered into a Revolving Credit Agreement with TDS on August 1, 1995,
as amended, under which all of the outstanding obligations of Aerial to TDS are
incorporated. At December 31, 1997, Aerial had secured from TDS an agreement to
borrow up to $475 million under the Revolving Credit Agreement. Pursuant to the
Revolving Credit Agreement, the Aerial Group may borrow from TDS 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, 1999. 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 Aerial Group under the Revolving Credit Agreement as of December 31, 1997,
was $448.2 million. The carrying value of the Aerial Group's borrowings under
the Revolving Credit Agreement approximates the fair value of the borrowings, as
the Revolving Credit Agreement is variable debt with the interest rate based on
the prime lending rate.
Subject to the completion of the Aerial Merger, TDS intends to terminate
certain intercompany agreements between TDS and Aerial. See Note 1--Proposed TDS
Corporate Restructuring for a discussion of the proposed merger.
NOTE 6 LONG-TERM DEBT
On November 4, 1996, Aerial issued $226.2 million in aggregate principal
amount at maturity 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 per annum yield to maturity on the Series A Notes is
8.34% (computed on a semi-annual bond equivalent basis) and the effective rate
is 8.09%. The proceeds of the sale of the Series A Notes were paid to Nokia
Telecommunications Inc. ("Nokia") in satisfaction of all then outstanding
obligations and future obligations up to $100 million of Aerial under the June
19, 1996, Credit Agreement, as amended, with Nokia (the "Credit Agreement" or
"Nokia Credit Agreement"). The excess of the proceeds from the sale of the
Series A Notes over Aerial's current obligations (i.e., financed purchases under
the Credit Agreement) to Nokia was recorded as "prepaid network infrastructure
costs". Nokia paid Aerial monthly interest on the unused portion of the proceeds
from the Series A Notes. At December 31, 1996, Aerial had recorded $70.3 million
in prepaid network infrastructure costs. Aerial paid Nokia for future equipment
purchases by reducing the amount of the prepaid balance by the cost of the
equipment purchased. Prepaid network infrastructure costs were fully utilized
for the purchase of equipment by the end of August 1997.
IV-26
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 LONG-TERM DEBT (CONTINUED)
The Series A Notes are unsecured obligations of Aerial and rank in the same
priority with all other unsecured and unsubordinated indebtedness of Aerial. The
Series A Notes and obligations of Aerial under the Credit Agreement are fully
and unconditionally guaranteed by TDS at an annual fee rate of 3%. Guarantee
fees owed TDS are payable semiannually. The Series A Notes are subject to
optional redemption by Aerial after five years from the date of issuance at
redemption prices which reflect original issue discount accrued since issuance.
At December 31, 1997, the Aerial Group had a balance of $196.4 million in
"long-term debt" which consisted of $112.1 million related to the Series A Notes
and $84.3 million in obligations under the Nokia Credit Agreement. Aerial pays
interest monthly to Nokia on the outstanding balance under the Credit Agreement.
At December 31, 1996, the balance in long-term debt was $103.7 million which
related entirely to the Series A Notes.
The carrying value of Aerial's Series A Notes is greater than its fair
value, estimated to be $108.8 million. The fair value was estimated using
discounted cash flow analysis. The carrying value of Aerial's obligations under
the Nokia Credit Agreement approximates the fair value of the obligations, as
the Credit Agreement is variable debt with the interest rate based on the 30 day
London Interbank Offered Rate rate plus 0.32%.
NOTE 7 RELATED PARTY TRANSACTIONS
The Aerial Group is billed for all services it receives from TDS and its
subsidiaries, consisting primarily of information processing and general
management services. Such billings are based on expenses specifically identified
to the Aerial Group and on allocations of common expenses. Such allocations are
based on the relationship of the Aerial 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 and that all expenses and costs applicable to the Aerial Group are
reflected in the accompanying financial statements on a basis which is
representative of what they would have been if the Aerial Group operated on a
stand alone basis. Billings to the Aerial Group from TDS totaled $3.9 million,
$2.0 million and $1.2 million during 1997, 1996 and 1995, respectively.
In 1996, TDS completed development of a new financial reporting system for
all of its subsidiaries, including the Aerial Group. The Aerial Group recorded
approximately $2.4 million related to this system in "Property and Equipment."
In 1997 and 1996, the Aerial Group deposited its excess cash in a cash
management program administered by TDS. Deposits made into the program were
generally available to the Aerial Group with interest each month equal to 30 day
commercial paper rates plus 0.25%.
On December 31, 1995, the Aerial Group received additional equity funding of
$289.2 million from TDS. The Aerial Group recorded the $289.2 million in "Aerial
Communications Group Equity."
Subject to the completion of the Aerial Merger, TDS intends to terminate
certain intercompany agreements between TDS and Aerial. See Note 1--Proposed TDS
Corporate Restructuring for a discussion of the proposed merger.
NOTE 8 COMMITMENTS
The costs of development, construction, start-up and post-launch activities
of the Aerial Group require substantial capital. From inception through December
31, 1997, the Aerial Group had expended approximately $304.4 million for its six
licenses, including capitalized interest, approximately $642.1 million for all
other capital expenditures and incurred cumulative net losses of $292.9 million.
At December 31, 1997, the Aerial Group had orders totaling approximately $12.9
million with Nokia and certain tower vendors for infrastructure equipment as
part of the Aerial Group's initial build out of its PCS networks. Also at
December 31, 1997, the Aerial Group had orders totaling approximately $27.1
million with various handset vendors for handsets and accessories. The Aerial
Group expects to incur significant operating losses and to generate negative
cash flow from operating activities during the next several years as it
continues to build its PCS customer base. The Aerial Group estimates that its
aggregate capital
IV-27
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 COMMITMENTS (CONTINUED)
requirements for 1998 will total approximately $310 million, with $75 million
needed for capital additions and $235 million needed to fund operations.
The Aerial Group has leases for certain office facilities, warehouses,
retail store locations and cell sites which are classified as operating leases.
For the years ended December 31, 1997, 1996 and 1995 rent expense for term
leases was $10.3 million, $2.1 million and $0.2 million, respectively, and for
cancelable leases $1.1 million, $0.5 million and $0.1 million, respectively. At
December 31, 1997, the aggregate minimum rental commitments under noncancelable
operating leases for the years 1998 through 2002 and 2003 and thereafter, are
approximately $15.5 million, $15.5 million, $15.2 million, $14.2 million, $9.3
million and $14.3 million, respectively.
LEGAL PROCEEDINGS. On January 5, 1998, an individual, 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. A virtually identical complaint has been filed by a second
individual. None of the defendants have been served with this complaint. The
Aerial Group intends to vigorously defend against these lawsuits.
NOTE 9 AERIAL COMMUNICATIONS GROUP EQUITY
The changes in the Aerial Group equity for the periods presented is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period......................................................... $ 437,785 $ 281,282 $ (1,444)
Net (Loss)............................................................................. (247,057) (37,921) (6,468)
Equity contribution.................................................................... -- -- 289,194
Initial Public Offering................................................................ -- 194,204 --
Other.................................................................................. 1,699 220 --
----------- ----------- -----------
Balance at end of period............................................................... $ 192,427 $ 437,785 $ 281,282
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
TAX-DEFERRED SAVINGS PLAN
Effective July 1, 1995, the Aerial Group adopted the TDS Tax-Deferred
Savings Plan (the "Savings 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. The Aerial
Group has reserved 300,000 Aerial Common Shares for issuance under the Savings
Plan. Employer matching contributions are made in Aerial Common Shares. The
Aerial Group employees were issued 184,533 Aerial Common Shares in 1997 and
23,460 Common Shares in 1996 in connection with the Savings Plan.
STOCK-BASED COMPENSATION PLANS
The Aerial Group accounts for stock options and its employee stock purchase
plan under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). No compensation costs have been recognized for
the employee stock purchase plan. Some options granted in 1997 had exercise
prices that were less than the quoted market price of Aerial's stock on the date
they were granted. In accordance with APB 25, compensation expense of $26,000
was recorded related to these options in 1997.
IV-28
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 AERIAL COMMUNICATIONS GROUP EQUITY (CONTINUED)
Had compensation expense for all plans been determined consistent with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the Aerial Group's net (loss) would have been increased to the
following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net (Loss)
As Reported.................................................................................. $ (247,057) $ (37,921)
Pro Forma.................................................................................... $ (250,957) $ (38,323)
</TABLE>
A summary of the status of the Aerial Group's stock option plan at December
31, 1996 and 1997, and changes during the years ended is presented in the table
and narrative below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
-------------------- REMAINING
NUMBER OF OPTION FAIR CONTRACTUAL
SHARES PRICES VALUES LIFE
----------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Outstanding January 1, 1996................................................. --
Granted..................................................................... 310,305 $ 17.00 $ 7.41
-----------
Outstanding December 31, 1996 (61,397 exercisable at $17.00)................ 310,305 $ 17.00 9.33 Years
Granted..................................................................... 1,137,435 $ 9.46 $ 4.42
Exercised................................................................... (2,553) $ 4.94
Forfeited................................................................... (56,450) $ 14.44
-----------
Outstanding December 31, 1997 (633,030 exercisable from $4.94 to $17.00).... 1,388,737 $ 10.95 8.51 Years
-----------
-----------
</TABLE>
EMPLOYEE STOCK OPTIONS. Effective April 25, 1996, the Aerial Group began
providing long-term incentive benefits for its senior managers by adopting the
Aerial Communications, Inc. Long-Term Incentive Plan (the "Stock Option Plan").
The Aerial Group has reserved 1.5 million Common Shares for option grants.
During 1997, the Aerial Group employees were issued 767 Common Shares in
connection with the Stock Option Plan. The options are exercisable over a
specified period not in excess of ten years from the date they are granted.
Options granted in 1996 and 1997 expire in 2006 and 2007, or the date of the
employee's termination of employment, if earlier. Most options vest annually
over five years in 20% increments, from December 15, 1996, through December 15,
2000. The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1996, respectively: risk free interest rates of 6.59%
and 5.53%; dividend yield of 0%; expected lives of 9.4 years and 7.4 years; and
volatility of 51.32% and 26.36%.
EMPLOYEE STOCK PURCHASE PLAN. The Aerial Group adopted the 1996 APTI
Employee Stock Purchase Plan (the "Stock Purchase Plan") effective October 1,
1996. The Aerial Group has reserved 200,000 Common Shares for sale to the
employees of the Aerial Group and its subsidiaries in connection with the Stock
Purchase Plan. Shares can be purchased twice a year and the price per share is
85% of the stock's closing price on designated purchase dates. During 1997, the
Aerial Group employees were issued 59,822 Common Shares in connection with the
Stock Purchase Plan. The fair value of the employees' purchase rights was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions for 1997: risk free interest rate of
6.21%; dividend yield of 0%; expected life of 0.8 years; and volatility of
51.18%.
NON-EMPLOYEE DIRECTOR COMPENSATION
In April 1997, the Aerial Group established the Compensation Plan For
Non-Employee Directors (the "Compensation Plan"). Under the Compensation Plan,
Aerial's independent directors are to be paid an annual fee of $20,000 that is
payable half in cash and half in Aerial stock. The number of Common Shares to be
delivered to each independent director is based upon the average market value of
Aerial's stock for a certain period prior to the date of the Annual
Shareholder's Meeting. The Aerial Group has reserved 20,000 Aerial Common Shares
for issuance to
IV-29
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 AERIAL COMMUNICATIONS GROUP EQUITY (CONTINUED)
Aerial's independent director's under the Compensation Plan. In 1997, 6,003
shares were issued to non-employee directors under this plan.
INITIAL PUBLIC OFFERING
Aerial sold 12.3 million 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. The Aerial Group
used a portion of the net proceeds to repay TDS approximately $64.1 million,
representing the then 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. Proceeds of the offering were fully utilized by the end of January
1997.
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 million Common Shares, $1.00 par value per
share; (b) 60 million Series A Common Shares, $1.00 par value per share; (c) 60
million Series B Common Shares, $1.00 par value per share; and (d) 10 million
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 19.1 million Common Shares and 40
million 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 1997 or 1996.
NOTE 10 SUBSEQUENT EVENT
Pursuant to the Credit Agreement, on February 5, 1998, Aerial issued $220.0
million in aggregate principal amount at maturity Series B Zero Coupon Notes
("Series B Notes") due in 2008. The issuance of the Series B Notes represents
the final issuance of zero coupon notes under the Credit Agreement. The issue
price of the Series B Notes was $100 million and there is no periodic payment of
interest. The per annum yield to maturity on the Series B Notes is 8.05%
(computed on a semi-annual bond equivalent basis). The proceeds from the sale of
the Series B Notes were paid to Nokia in satisfaction of all then outstanding
obligations and future obligations of the Aerial Group (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 B Notes are unsecured obligations of Aerial and rank in the same
priority with all other unsecured and unsubordinated indebtedness of Aerial. The
Series B Notes are fully and unconditionally guaranteed by TDS at an annual fee
rate of 3%. Guarantee fees owed TDS are payable semiannually. The Series B Notes
are subject to optional redemption by Aerial after five years from the date of
issuance at redemption prices which reflect original issue discount accrued
since issuance.
In February 1998, the Aerial Group secured from TDS a $50 million increase
in the amount it may borrow under the Revolving Credit Agreement to $525
million.
IV-30
<PAGE>
THE AERIAL COMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Operating Revenues......................................................... $ -- $ 7,143 $ 18,648 $ 30,161
Operating (Loss)........................................................... (21,614) (51,633) (64,537) (80,381)
Net (Loss)................................................................. $ (22,340) $ (55,475) $ (76,598) $ (92,644)
1996
Operating Revenues......................................................... $ -- $ -- $ -- $ --
Operating (Loss)........................................................... (5,746) (7,761) (10,805) (19,638)
Net (Loss)................................................................. $ (6,671) $ (7,206) $ (9,829) $ (14,215)
</TABLE>
IV-31
<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 the Aerial
Communications Group (representing a business unit of Telephone and Data
Systems, Inc.) as of December 31, 1997 and 1996, and the related consolidated
statements of operations and cash flows for each of the three years in the
period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 28, 1998 (Except with respect to the matters discussed in Note 10,
as to which the date is February 5, 1998)
IV-32
<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 of TDS ("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 American Paging 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 services (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
V-2
<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 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, some or 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.
V-4
<PAGE>
The TDS Group had loans outstanding to the Groups as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current
Telecom Group......................... $ 28,181 $ 25,039 $ 15,464 $ 14,812 $ 11,830
----------- ----------- ----------- ----------- -----------
Long-term
Cellular Group........................ -- -- -- 230,745 141,032
Telecom Group......................... 255,302 239,538 233,176 224,742 229,015
Aerial Group.......................... 448,233 -- 60,238 650 650
----------- ----------- ----------- ----------- -----------
703,535 239,538 293,414 456,137 370,697
----------- ----------- ----------- ----------- -----------
$ 731,716 $ 264,577 $ 308,878 $ 470,949 $ 382,527
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
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 programs
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%, (5.85% 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 zero, $47.9 million, $30.1 million, $1.2 million and
$1.2 million at December 31, 1997, 1996, 1995, 1994 and 1993, 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 (5.84% at
December 31, 1997). The amounts of such investments totaled $161.9 million,
$150.0 million, $153.8 million, $127.3 million and $122.3 million at December
31, 1997, 1996, 1995, 1994 and 1993, 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
V-5
<PAGE>
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 consisted 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 its investment in the new company 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 TDS Common Shares and Series A Common Shares are,
shareholders of TDS. TDS 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 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 TDS legally available for payment of dividends on all classes of
Common Stock. Accordingly, TDS's consolidated financial statements should be
read in conjunction with the TDS Group's financial information.
V-7
<PAGE>
TDS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
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 of TDS ("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."
The Tracking Stock Proposal contemplates that, upon completion of all of the
Transactions as contemplated, the Common Shares and Series A Common Shares would
represent a common equity interest in the TDS Group. Following such
Transactions, the Common Shares and Series A Common Shares 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
American Paging 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 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.
AMERICAN PAGING, INC.
In December 1997, TDS announced an agreement with TSR Paging, Inc. ("TSR")
to combine their respective paging businesses. On February 10, 1998, the board
of directors of American Paging approved a merger agreement providing for the
acquisition by TDS of all of the issued and outstanding shares of American
Paging not owned by TDS for cash in an amount equal to $2.50 per share,
approximately $9.1 million in total. Upon consummation of the merger, TDS will
contribute substantially all of the assets and certain, limited liabilities of
American Paging, and TSR will 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 the new company. TDS will not
have any funding requirements once the combination is completed.
RESULTS OF OPERATIONS
RETAINED INTEREST IN INCOME OF THE CELLULAR GROUP, THE TELECOM GROUP AND THE
AERIAL GROUP reflects the Net Income Attributable to the TDS Group through
Retained Interest from the Cellular Group, the 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,
the Telecom Group and the Aerial Group Financial Statements and Management's
Discussions for a discussion of the operations and results for the Cellular
Group, the Telecom Group and the Aerial Group.
Income from Retained Interests totaled $(20.8 million) in 1997, $26.9
million in 1996 and $27.1 million in 1995. The decrease in Income from Retained
Interests in 1997 reflects the large start-up losses from the Aerial Group due
to the costs associated with the launch of service in its markets. Retained
Interest from the Aerial Group was $(51.0 million) in 1997 compared to $(8.2
million) in 1996 and $(1.6 million) in 1995. Retained Interest from the Cellular
Group was $22.6 million in 1997 compared to $26.2 million in 1996 and $20.2
million in 1995 reflecting the rapid growth in cellular operations and gains
(which vary from year to year) from the sales of cellular interests.
V-8
<PAGE>
Retained Interest from the Telecom Group was $7.6 million in 1997 compared to
$8.9 million in 1996 and $8.5 million in 1995 reflecting the steady growth in
telephone operations offset somewhat in 1997 by increased costs associated with
the development of a centralized network management center and new business
opportunities.
INVESTMENT AND OTHER INCOME (EXPENSE) totaled $29.6 million in 1997 compared
to $34.9 million in 1996 and $27.6 million in 1995. Investment and other income
primarily includes (i) interest earned on funds advanced to the Cellular Group,
the Telecom Group and the Aerial Group (INTEREST INCOME-AFFILIATES), (ii)
interest expense on excess cash of the Cellular Group, the Telecom Group and the
Aerial Group deposited with the TDS Group (INTEREST EXPENSE-AFFILIATES), (iii)
interest on borrowed funds (INTEREST EXPENSE-OTHER), (iv) distributions on the
8.5% Company-Obligated Mandatorily Redeemable Preferred Securities of TDS
Capital I, a subsidiary trust (MINORITY INTEREST IN INCOME OF SUBSIDIARY TRUST)
and all other income and expenses of the TDS Group, excluding American Paging
which is presented separately.
INTEREST INCOME-AFFILIATES totaled $48.1 million in 1997 compared to $24.3
million in 1996 and $46.0 million in 1995. Interest income-affiliates 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 more permanent financing
arrangements. The increase in 1997 reflects primarily the increase in borrowings
by the Aerial Group to fund construction of its PCS systems and for operations.
During 1995 the Aerial Group purchased certain PCS licenses which were financed
with affiliated debt increasing interest income-affiliates in 1995. Such debt
was converted to equity at the end of 1995 reducing interest income-affiliates
in 1996. Also during 1995, the Cellular Group repaid its affiliated debt
reducing interest income-affiliates in 1996. The following table summarizes
interest income-affiliates by affiliated group.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Telecom Group.......................................................... $ 23,622 $ 22,114 $ 22,883
Aerial Group........................................................... 22,577 2,139 12,884
Cellular Group......................................................... 1,948 -- 10,213
--------- --------- ---------
$ 48,147 $ 24,253 $ 45,980
--------- --------- ---------
--------- --------- ---------
</TABLE>
INTEREST EXPENSE-AFFILIATES totaled $10.4 million in 1997 compared to $17.9
million in 1996 and $8.7 million in 1995 relating primarily to interest paid to
affiliates on their excess cash balances deposited with the parent. The Aerial
and Cellular Groups had larger average balances of excess cash invested with the
TDS Group in 1996 increasing interest expense-affiliates in that year. The
following table summarizes interest expense-affiliates by affiliated group.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Telecom Group.......................................................... $ 9,062 $ 8,549 $ 7,765
Aerial Group........................................................... 95 4,487 --
Cellular Group......................................................... 1,289 4,839 907
--------- --------- ---------
$ 10,446 $ 17,875 $ 8,672
--------- --------- ---------
--------- --------- ---------
</TABLE>
INTEREST EXPENSE-OTHER totaled $25.1 million in 1997 compared to $6.6
million in 1996 and $9.3 million in 1995 primarily from interest on short-term
borrowings under Telephone and Data Systems, Inc.'s bank lines of credit. The
increase in 1997 reflects the increase in the average amount of short-term
borrowings outstanding to $406.6 million in 1997 from $111.1 million in 1996 and
$139.5 million in 1995. The weighted average interest rate on such short-term
debt was 6.0% in 1997, 5.7% in 1996 and 6.4% in 1995.
The TDS Group financial statements do not reflect interest expense totaling
$21.8 million in 1997, $21.8 million in 1996 and $21.6 million in 1995 related
to certain long-term debt of Telephone and Data Systems, Inc. attributed to the
Telecom Group. The long-term debt and related interest expense is reflected on
the balance sheet and income statement of the Telecom Group.
MINORITY INTEREST IN INCOME OF SUBSIDIARY TRUST totaled $1.5 million in 1997
reflecting distributions on the 8.5% Company-Obligated Mandatorily Redeemable
Preferred Securities of TDS Capital I, a subsidiary trust, issued in
V-9
<PAGE>
November 1997. The sole asset of TDS Capital I is $154.6 million principal
amount of TDS's 8.5% Subordinated Debentures due 2037.
CAPITALIZED INTEREST totaled $6.8 million and $22.7 million during 1997 and
1996, respectively, reflecting interest capitalized on qualifying PCS
investments. The TDS Group began amortizing these costs through charges to
expense in 1997 upon commencement of PCS operations. GAIN (LOSS) ON SALE OF
INVESTMENTS represents gains (losses) on the sale of certain minority cellular
telephone interests in 1997 and miscellaneous investments in 1996 and 1995.
INVESTMENT INCOME reflects equity income from minority investments and has
varied as the net income from such investments has varied.
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 for a discussion of the operations and results for
American Paging, Inc.
INCOME TAX (BENEFIT) EXPENSE totaled ($79.8 million) in 1997 compared to
($13.2 million) in 1996 and $26.1 million in 1995. The benefit in 1997 and 1996
compared to the expense in 1995 reflects primarily the tax benefits and credits
generated by the Aerial Group in 1997 and 1996 which the Aerial Group could not
use on a separate company basis but which TDS could use in the consolidated
federal income tax return along with the tax benefits and credits generated by
the TDS Group. The expense in 1995 reflects primarily the tax benefits and
credits of U.S. Cellular which TDS had used in prior years but which U.S.
Cellular could use on a separate company basis.
The Company has entered into Tax Allocation Agreements with U.S. Cellular
and Aerial. The Agreements provide that U.S. Cellular, 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, 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 and
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.
The Telecom Group currently calculates 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, the Telecom Group
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 Cellular Group, the Telecom Group and the Aerial Group 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. Long-term debt
and equity financing from time to time, including sales of debt and equity
securities by subsidiaries, have reduced such short-term debt.
CASH FLOWS FROM OPERATING ACTIVITIES provided cash totaling $57.3 million in
1997, $33.2 million in 1996 and $2.9 million in 1995. The increase in cash flows
from operating activities is primarily due to the excess of the income
V-10
<PAGE>
taxes received from the Tracking Groups over income taxes paid to taxing
authorities. The following table summarizes the taxes received from the Groups
and income taxes paid to taxing authorities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income taxes received from Tracking Groups............................. $ 76,282 $ 84,640 $ 27,939
Less: Income taxes paid to taxing authorities.......................... 3,358 55,380 52,101
--------- --------- ---------
Net income taxes received (paid)....................................... 72,924 29,260 (24,162)
All other cash flows................................................... (15,588) 3,933 27,109
--------- --------- ---------
Cash Flows from Operating Activities................................... $ 57,336 $ 33,193 $ 2,947
--------- --------- ---------
--------- --------- ---------
</TABLE>
CASH FLOWS FROM FINANCING ACTIVITIES required cash totaling $72.9 million in
1997 and provided cash totaling $92.9 million in 1996 and $95.0 million in 1995.
Changes in notes payable-other provided $371.0 million in 1997, required $22.9
million in 1996 and provided $84.9 million in 1995. The changes reflect
primarily increases and decreases in borrowings on TDS's revolving bank line of
credit agreements. The TDS Group uses short-term debt to finance its investments
in PCS and radio paging operations, for acquisitions and for general corporate
purposes. Long-term debt and equity financing from time to time, including sales
of debt and equity securities by subsidiaries, have reduced such short-term
debt. In 1997, the TDS Group received net proceeds of $144.8 million on the sale
of 8.5% Trust Originated Preferred Securities and in 1995 the TDS Group received
$39.0 million from TDS's sale of Medium-Term Notes. The proceeds of these
transactions were used to reduce short-term debt balances.
Changes in notes payable-affiliates required $36.8 million in 1997 and
provided $80.2 million in 1996 and $61.6 million in 1995. Notes
payable-affiliates represents the TDS Group's liability for the excess cash of
the Telecom Group, the Cellular Group and the Aerial Group deposited with the
TDS Group in the cash management programs. The decrease in 1997 reflects the
decrease in the Cellular Group and the Aerial Group investments in the cash
management programs. The increases in 1996 and 1995 reflect the Tracking Groups
additional cash deposited with the TDS Group.
Changes in notes receivable-affiliates required $467.5 million in 1997,
provided $33.8 million in 1996 and required $87.6 million in 1995. Notes
receivable-affiliates represent financing provided to the Groups by the TDS
Group. The requirements in 1997 and 1995 reflect primarily funds provided to the
Aerial Group to finance its PCS construction program and working capital
requirements. During 1996, Aerial completed its Initial Public Offering and
repaid its intercompany debt. The Telecom Group required financing totaling
$18.9 million in 1997, $15.9 million in 1996 and $9.1 million in 1995.
Dividends received from affiliates totaled $18.1 million in 1997, $24.8
million in 1996 and $16.8 million in 1995 reflecting dividends received from the
Telecom Group. The Cellular Group and the Aerial Group have not paid cash
dividends. Aggregate dividends paid by TDS on Common and Preferred Shares,
excluding dividends reinvested, totaled $27.4 million in 1997, $26.7 million in
1996 and $24.6 million in 1995. During 1997, TDS repurchased 1.8 million Common
Shares for $69.9 million. The Company authorized the repurchase of up to 3.0
million Common Shares over a period of three years in December 1996. The Company
also purchased 350,000 shares of U.S. Cellular common stock on the open market
for $9.8 million.
CASH FLOWS FROM INVESTING ACTIVITIES provided cash totaling $5.1 million in
1997 and required cash totaling $116.8 million in 1996 and $92.5 million in
1995. Cash expenditures for capital additions required $41.4 million in 1997,
$44.6 million in 1996 and $36.9 million in 1995. Investments in PCS licenses
totaled $6.8 million in 1997 and $26.6 million in 1996 reflecting primarily
capitalized interest on qualifying PCS investments and $42.1 million in 1995
reflecting primarily the payment to the FCC for narrowband PCS licenses. Cash
required for the acquisition of telephone and cellular interests totaled $2.2
million in 1997, $17.4 million in 1996 and $27.2 million in 1995. These
telephone and cellular interests were transferred to the Telecom Group and the
Cellular Group, respectively. Changes in temporary investments and marketable
securities provided $28.8 million in 1997, required $30.2 million in 1996 and
provided $9.9 million in 1995. The TDS Group had excess cash at the end of 1996
which increased the temporary investment and marketable securities balances.
This cash was redeployed in 1997 reducing such balances. Proceeds from the sale
of investments provided $21.0 million in 1997, reflecting the sale of a cellular
minority interest, and $.5 million in 1996 and $4.8 million in 1995 reflecting
the sales of miscellaneous investments.
V-11
<PAGE>
CAPITAL EXPENDITURES
Parent capital expenditures, primarily for computer equipment, software and
systems development, totaled $21.0 million in 1997, $10.5 million in 1996 and
$7.8 million in 1995. American Paging's capital expenditures for pagers,
terminals and transmitters, and other fixed assets totaled $18.6 million in
1997, $32.5 million in 1996 and $26.5 million in 1995. The following table
summarizes the TDS Group's investment in property and equipment during the past
three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Parent
Computer equipment, software and systems development................. $ 17,780 $ 8,857 $ 6,079
Leasehold improvements............................................... 1,730 554 915
Office equipment and other........................................... 1,447 1,053 769
--------- --------- ---------
20,957 10,464 7,763
--------- --------- ---------
American Paging
Pagers............................................................... 14,875 12,081 15,582
Terminals and transmitters........................................... 3,603 4,595 6,353
Customer Telecare Center............................................. 98 10,216 --
Other................................................................ 48 5,625 4,592
--------- --------- ---------
18,624 32,517 26,527
--------- --------- ---------
Other.................................................................. 1,819 1,579 2,615
--------- --------- ---------
$ 41,400 $ 44,560 $ 36,905
--------- --------- ---------
--------- --------- ---------
</TABLE>
LIQUIDITY
The TDS Group has access to a variety of external capital sources. TDS had
$644 million of bank lines of credit for general corporate purposes at December
31, 1997. Unused amounts of such lines totaled $118 million. TDS has used
short-term debt to finance its investments in PCS 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 reduced such
short-term debt. The TDS Group had cash, temporary investments and marketable
securities totaling $19.2 million at December 31, 1997.
In February 1998, the TDS Group received net proceeds of $145 million on the
sale of 6.0 million 8.04% Trust Originated Preferred Securities at $25 per
Preferred Security. The net proceeds were used to repay short-term indebtedness.
Subject to the approval of the Tracking Stock Proposal by Telephone and Data
Systems, Inc. shareholders, TDS intends to, among other things, offer and sell
Telecom Group Shares in a public offering for cash, and allocate the net
proceeds to the Telecom Group. Telephone and Data Systems, Inc. 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 Telephone and Data Systems, Inc. shareholders, subject to prevailing market
conditions and other factors. TDS management estimates proceeds of approximately
$150 million from the offering which the Telecom Group would use to repay
indebtedness to the TDS Group, and which the TDS Group would use to repay
certain short-term indebtedness.
The TDS Group has assessed, and continues to assess, the impact of the Year
2000 Issue on its reporting systems and operations. The TDS Group 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 TDS Group'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. If management's
steps are not successful in making its systems Year 2000 compliant, it could
have a material adverse effect on its results of operations.
V-12
<PAGE>
PROPOSED CORPORATE RESTRUCTURING
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal which, if approved by shareholders and implemented by the
Board, would authorize the Board to issue three new classes of common stock and
change the state of incorporation of TDS from Iowa to Delaware (the "Tracking
Stock Proposal"). The three new classes of stock are intended to separately
reflect the performance of TDS's cellular telephone, landline telephone and
personal communications services businesses ("Tracking Stocks").
The Tracking Stocks are intended to result in greater market recognition of
the value (individually and collectively) of TDS and of TDS's three principal
business groups ("Tracking Groups"), thereby enhancing shareholder value over
the long term, while at the same time enabling TDS's businesses to preserve the
benefits of being part of a consolidated enterprise. The Tracking Stock Proposal
is expected to:
- provide TDS with greater flexibility in raising capital and making
acquisitions, using equity securities specifically related to the Tracking
Groups;
- enable TDS to more effectively tailor employee benefit plans to provide
incentives to employees of the Tracking Groups;
- provide shareholders with the opportunity to invest in separate securities
that specifically reflect the underlying businesses, depending upon their
investment objectives;
- permit shareholders to continue to invest in all of the TDS businesses
through the Common Shares and the Series A Common Shares.
Pursuant to the Tracking Stock Proposal each issued TDS Preferred Share, no
par value, TDS Common Share and Series A Common Share, $1.00 par value per
share, would be converted into a new TDS Preferred Share, $. 01 par value per
share, a new TDS Common Share and Series A Common Share, $.01 par value per
share, of the new TDS Delaware Corporation. In addition, the Tracking Stock
Proposal would 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 TDS's
interest in United States Cellular Corporation, a subsidiary of TDS 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
primarily consists of TDS's interest in TDS Telecommunications Corporation, a
subsidiary of TDS operating landline telephone companies ("TDS Telecom"). The
Aerial Group Shares, when issued, are intended to reflect the separate
performance of the Aerial Communications Group (the "Aerial Group"), which
consists of TDS's interest in Aerial Communications, Inc., a subsidiary of TDS
providing broadband personal communications services ("Aerial").
Subject to the approval of the Tracking Stock Proposal by shareholders, TDS
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,
- issue Cellular Group Shares in exchange 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, (the "U.S. Cellular
Merger"),
- issue Aerial Group Shares in exchange 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 (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
TDS (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, although the Board reserves the right to effect
all or any part of the Distribution at any time after the approval of the
Tracking Stock Proposal, 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 in the common equity value of TDS in
each Tracking Group (the "Outstanding Interest"). When considering
V-13
<PAGE>
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 TDS.
The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the Cellular Group,
the Telecom Group and the Aerial Group to the extent of the Retained Interest in
the respective groups, and to reflect the performance of the other assets and
businesses attributed to the TDS Group.
Following the Distribution, subject to the legal and contractual
restrictions on the payment of dividends, the Board currently intends to
establish an annual dividend on the TDS Common Shares and Series A Common Shares
in an amount equal to $.11 per share. The Board also currently intends to
establish an annual dividend on the Telecom Group Shares in an amount equal to
$.50 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
$.33 per existing Common Share and Series A Common Share. The total of the
dividend on TDS Common Shares and Series A Common Shares of $.11 and the
equivalent dividend on Telecom Group Shares of $.33 equals the existing current
annual dividend on the existing Common Shares and Series A Common Shares of
$.44.) 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. Future dividends on the shares of common stock
will be payable when, as and if declared by the Board out of the lesser of (1)
all funds of TDS legally available therefor and (2) the available dividend
amount with respect to the relevant Group.
Funds of TDS legally available for the payment of dividends ("Surplus")
(approximately $1,966 million as of December 31, 1997, based on the financial
statements) is an amount approximately equal to the Total Common and Preferred
Equity of TDS less the par or stated value of all shares of common and preferred
stock outstanding (204,922,000 shares as of December 31, 1997 after the
Distribution). With respect to any Tracking Group, the Available Dividend Amount
(approximately $1,222 million for the Cellular Group, $287 million for the
Telecom Group and $144 million for the Aerial Group as of December 31, 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 $602 million as of December
31, 1997) is an amount approximately equal to the greater of a) an amount
(approximately $313 million) which is approximately equal to the Surplus of TDS
less the sum of all Available Dividend Amounts of all Tracking Groups or b) an
amount (approximately $602 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 Shares outstanding.
Subject to the completion of the U.S. Cellular Merger and the Aerial Merger,
TDS intends to terminate certain intercompany agreements between TDS and U.S.
Cellular and Aerial, respectively. Thereafter, some or all of the policies
between TDS and such subsidiaries would be determined solely by methods that
management of TDS believes to be reasonable. Many of such policies would
continue the arrangements which presently exist between TDS 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.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, TDS will prepare
and file with the Securities and Exchange Commission consolidated financial
statements of TDS 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 TDS 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 the Cellular Group, the Telecom Group and the
Aerial Group Common Shares will be, and holders of TDS Common Shares and Series
A Common Shares will continue to be, shareholders of TDS. TDS and its
subsidiaries will each continue to be responsible for their respective
liabilities.
V-14
<PAGE>
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 MAY
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 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-15
<PAGE>
THE TDS GROUP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
RETAINED INTEREST IN NET INCOME OF --
The Cellular Group.................................................................... $ 22,569 $ 26,188 $ 20,174
The Telecom Group..................................................................... 7,597 8,924 8,539
The Aerial Group...................................................................... (51,005) (8,244) (1,617)
---------- ---------- ----------
(20,839) 26,868 27,096
---------- ---------- ----------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest income--affiliates........................................................... 48,147 24,253 45,980
Interest expense--affiliates.......................................................... (10,446) (17,875) (8,672)
Interest expense--other............................................................... (25,057) (6,635) (9,265)
Minority interest in income of subsidiary trust....................................... (1,523) -- --
Capitalized interest.................................................................. 6,755 22,688 --
Gain (loss) on sale of investments.................................................... 10,398 3,435 (963)
Investment income..................................................................... 3,784 4,188 467
Other, net............................................................................ (2,486) 4,825 101
---------- ---------- ----------
29,572 34,879 27,648
---------- ---------- ----------
NET (LOSS) OF AMERICAN PAGING, INC...................................................... (51,636) (39,159) (12,928)
Less: Intra-group interest.............................................................. 16,073 11,797 6,952
---------- ---------- ----------
(35,563) (27,362) (5,976)
---------- ---------- ----------
INCOME TAX (BENEFIT) EXPENSE............................................................ (79,798) (13,155) 26,077
---------- ---------- ----------
NET INCOME.............................................................................. 52,968 47,540 22,691
Preferred Dividend Requirement.......................................................... (1,892) (1,957) (2,509)
---------- ---------- ----------
NET INCOME AVAILABLE TO COMMON.......................................................... $ 51,076 $ 45,583 $ 20,182
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
V-16
<PAGE>
THE TDS GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................................................... $ 52,968 $ 47,540 $ 22,691
Add (Deduct) adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization.................................................... 43,285 46,175 32,481
Deferred taxes................................................................... (11,539) 11,931 4,459
Retained interest in net loss (income) of Cellular, Telecom and Aerial Groups.... 20,839 (26,868) (27,096)
Investment income................................................................ (3,784) (4,188) (467)
(Gain) loss on sale of investments............................................... (10,398) (3,435) 963
Interest attributed to Telecom Group............................................. (21,766) (21,848) (21,576)
Other noncash income............................................................. (1,468) (6,876) (2,376)
Change in accounts receivable.................................................... 159 13,806 8,667
Change in accounts payable....................................................... 934 (5,207) (1,294)
Change in accrued taxes.......................................................... (10,025) (16,788) (16,127)
Change in other assets and liabilities........................................... (1,869) (1,049) 2,622
------------ ------------ ----------
57,336 33,193 2,947
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in notes payable-other...................................................... 371,013 (22,899) 84,901
Change in notes payable-affiliates................................................. (36,798) 80,161 61,555
Trust preferred securities......................................................... 144,788 -- --
Change in notes receivable-affiliates.............................................. (467,487) 33,844 (87,604)
Dividends received from affiliates................................................. 18,100 24,824 16,828
Dividends paid..................................................................... (27,396) (26,704) (24,602)
Repurchase of TDS Common Shares.................................................... (69,942) -- --
Purchase of subsidiary Common Shares............................................... (9,801) -- --
Long-term debt borrowings.......................................................... -- -- 39,000
Other financing activities......................................................... 4,635 3,654 4,890
------------ ------------ ----------
(72,888) 92,880 94,968
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................................................... (41,400) (44,560) (36,905)
Investments in PCS licenses........................................................ (6,755) (26,550) (42,053)
Acquisitions....................................................................... (2,166) (17,425) (27,157)
Change in temporary investments and marketable securities.......................... 28,829 (30,158) 9,852
Proceeds from investment sales..................................................... 20,999 500 4,800
Other investments.................................................................. 5,555 1,418 (1,032)
------------ ------------ ----------
5,062 (116,775) (92,495)
------------ ------------ ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................. (10,490) 9,298 5,420
CASH AND CASH EQUIVALENTS
Beginning of period................................................................ 19,995 10,697 5,277
------------ ------------ ----------
End of period...................................................................... $ 9,505 $ 19,995 $ 10,697
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
V-17
<PAGE>
THE TDS GROUP
BALANCE SHEETS--ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents..................................................................... $ 9,505 $ 19,995
Temporary investments......................................................................... 2,485 23,803
Due from affiliates
Notes receivable............................................................................ 28,181 25,039
Accounts receivable......................................................................... 10,271 6,810
Taxes receivable............................................................................ 21,785 13,425
Accounts receivable
Customers, less allowance of $2,300 and $1,883, respectively................................ 9,913 13,237
Other....................................................................................... 3,557 3,965
Prepaid income taxes.......................................................................... 23,504 21,532
Inventory..................................................................................... 7,278 9,010
Other......................................................................................... 5,420 3,642
------------- -------------
121,899 140,458
------------- -------------
INVESTMENTS
Notes receivable-affiliates................................................................... 703,535 239,538
Investment in affiliated groups
United States Cellular Group................................................................ 330,306 297,592
TDS Telecommunications Group................................................................ 95,677 85,565
Aerial Communications Group................................................................. 39,684 90,472
Investment in Narrowband PCS license costs.................................................... 60,901 60,901
Investment in Broadband PCS license costs..................................................... 22,875 18,066
Investment in minority interests.............................................................. 28,354 26,856
Marketable securities......................................................................... 7,259 14,770
Other investments............................................................................. 776 788
------------- -------------
1,289,367 834,548
------------- -------------
PROPERTY AND EQUIPMENT
Radio Paging
In service and under construction........................................................... 118,275 113,000
Less accumulated depreciation............................................................... 75,045 61,528
------------- -------------
43,230 51,472
------------- -------------
Other
In service and under construction........................................................... 96,809 82,781
Less accumulated depreciation............................................................... 49,511 48,202
------------- -------------
47,298 34,579
------------- -------------
Net Property and Equipment.............................................................. 90,528 86,051
------------- -------------
OTHER ASSETS AND DEFERRED CHARGES............................................................... 18,035 18,918
------------- -------------
TOTAL ASSETS.................................................................................... $ 1,519,829 $ 1,079,975
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
V-18
<PAGE>
THE TDS GROUP
BALANCE SHEETS--LIABILITIES AND GROUP EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Notes payable................................................................................. $ 530,175 $ 159,162
Due to affiliates
Notes payable............................................................................... 165,686 201,641
Accounts payable............................................................................ 1,555 1,166
Accrued interest............................................................................ -- 996
Accounts payable.............................................................................. 6,192 5,005
Unearned revenue and deposits................................................................. 7,121 10,815
Accrued interest.............................................................................. 10,888 10,750
Accrued taxes................................................................................. 999 653
Other current liabilities..................................................................... 10,879 6,319
------------- -------------
733,495 396,507
------------- -------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability............................................................. 27,626 35,769
Other......................................................................................... 6,237 5,694
------------- -------------
33,863 41,463
------------- -------------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY
COMPANY SUBORDINATED DEBENTURES (a)........................................................... 150,000 --
------------- -------------
TDS GROUP EQUITY................................................................................ 602,471 642,005
------------- -------------
TOTAL LIABILITIES AND GROUP EQUITY.............................................................. $ 1,519,829 $ 1,079,975
------------- -------------
------------- -------------
</TABLE>
- ---------
(a) As described in Note 8, the sole asset of TDS Capital I is $154.6 million
principal amount of 8.5% subordinated debentures due 2037 from TDS.
The accompanying notes to financial statements are an integral part of these
statements.
V-19
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS
NOTE 1--PROPOSED RESTRUCTURING
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal which, if approved by shareholders and implemented by the
Board, would authorize the Board to issue three new classes of common stock and
change the state of incorporation of TDS from Iowa to Delaware (the "Tracking
Stock Proposal"). The three new classes of stock are intended to separately
reflect the performance of TDS's cellular telephone, landline telephone and
personal communications services businesses ("Tracking Stocks").
The Tracking Stocks are intended to result in greater market recognition of
the value (individually and collectively) of TDS and of TDS's three principal
business groups ("Tracking Groups"), thereby enhancing shareholder value over
the long term, while at the same time enabling TDS's businesses to preserve the
benefits of being part of a consolidated enterprise. The Tracking Stock Proposal
is expected to:
- provide TDS with greater flexibility in raising capital and making
acquisitions, using equity securities specifically related to the
Tracking Groups;
- enable TDS to more effectively tailor employee benefit plans to provide
incentives to employees of the Tracking Groups;
- provide shareholders with the opportunity to invest in separate
securities that specifically reflect the underlying businesses, depending
upon their investment objectives;
- permit shareholders to continue to invest in all of the TDS businesses
through the Common Shares and the Series A Common Shares.
The Cellular Group Shares, when issued, are intended to reflect the separate
performance of the Cellular Group, which consists of TDS's interest in United
States Cellular Corporation, a subsidiary of TDS. The Telecom Group Shares, when
issued, are intended to reflect the separate performance of the Telecom Group,
which primarily consists of TDS's interest in TDS Telecommunications
Corporation, a subsidiary of TDS. The Aerial Group Shares, when issued, are
intended to reflect the separate performance of the Aerial Group, which consists
of TDS's interest in Aerial Communications, Inc., a subsidiary of TDS.
Subject to the approval of the Tracking Stock Proposal by shareholders, TDS
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,
- issue Cellular Group Shares in exchange 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, (the "U.S.
Cellular Merger"),
- issue Aerial Group Shares in exchange 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 (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 TDS (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.
The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the Cellular Group,
the Telecom Group and the Aerial Group to the extent of the Retained Interest in
the respective groups, and to reflect the performance of the assets and
businesses attributed to the TDS Group.
Subject to the completion of the U.S. Cellular Merger and the Aerial Merger,
TDS intends to terminate certain intercompany agreements between TDS and U.S.
Cellular and Aerial, respectively. Thereafter, some or all of the policies
between TDS and such subsidiaries would be determined solely by methods that
management of TDS
V-20
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--PROPOSED RESTRUCTURING (CONTINUED)
believes to be reasonable. Many of such policies would continue the arrangements
which presently exist between TDS 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.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, TDS will prepare
and file with the Securities and Exchange Commission, consolidated financial
statements of TDS 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.
For additional information regarding the Tracking Stock Proposal, see
"Proposed Corporate Restructuring" in Management's Discussion and Analysis of
Results of Operations and Financial Condition.
NOTE 2--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 of TDS ("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
V-21
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--DESCRIPTION OF THE TDS GROUP (CONTINUED)
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.
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
V-22
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--DESCRIPTION OF THE TDS GROUP (CONTINUED)
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 services (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.
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 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 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 this definition);
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
V-23
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--DESCRIPTION OF THE TDS GROUP (CONTINUED)
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 of 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 property so
transferred and such Tracking Group shall include such cash, securities or other
property.
AMERICAN PAGING, INC.
In December 1997, TDS announced an agreement with TSR Paging, Inc. ("TSR")
to combine their respective paging businesses. On February 10, 1998, the board
of directors of American Paging approved a merger agreement providing for the
acquisition by TDS of all of the issued and outstanding shares of American
Paging not owned by TDS for cash in an amount equal to $2.50 per share,
approximately $9.1 million in total. Upon consummation of the merger, TDS will
contribute substantially all of the assets and certain, limited liabilities of
American Paging, and TSR will 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 the new company. TDS will not
have any funding requirements once the combination is completed.
The following table summarizes the assets and liabilities which TDS would
contribute to the new company as of December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Current Assets
Cash................................................................................ $ 3,058
Temporary investments............................................................... 61
Accounts receivable................................................................. 9,051
Inventory........................................................................... 6,851
Other............................................................................... 1,076
Property, plant and equipment, net.................................................... 41,762
Narrowband PCS license................................................................ 60,901
Other Investments..................................................................... 429
Deferred assets....................................................................... 10,959
Current Liabilities
Accounts payable.................................................................... (942)
Advance billings and customer deposits.............................................. (6,827)
Other............................................................................... (42)
----------
$ 126,337
----------
----------
</TABLE>
V-24
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--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 of TDS ("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."
BASIS OF PRESENTATION
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, TDS
intends to terminate certain intercompany agreements between the Company and
U.S. Cellular and Aerial, respectively. Thereafter, some or all of the
relationships between the Company and such subsidiaries would be determined
solely by methods that management of TDS believes to be reasonable. Many of such
policies would continue the arrangements which presently exist between TDS 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.
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.
Financial effects arising from the Cellular Group, the Telecom Group, the
Aerial Group or the TDS Group that affect the consolidated results of operations
or financial condition of the Company could affect the results of operations or
financial condition of the Cellular Group, the Telecom Group, the Aerial Group
or the TDS Group, or could affect the market price of any or all classes of
Common Stock. In addition, any net losses of the Company 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 TDS legally available for payment of dividends on any class of Common
Stock. Accordingly, TDS'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.
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 Tracking 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 as "Investment In Affiliated Groups" on the balance sheet.
Similarly, the net income or loss of the Groups attributable to the TDS
V-25
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Group Retained Interest is reflected as "Retained Interest in the Net Income of
the Cellular Group, the Telecom Group and the Aerial Group" in the Statements of
Operations.
Funds of TDS legally available for the payment of dividends ("Surplus")
(approximately $1,966 million as of December 31, 1997, based on the financial
statements) is an amount approximately equal to the Total Common and Preferred
Equity of TDS less the par or stated value of all shares of common and preferred
stock outstanding (204,922,000 shares as of December 31, 1997 after the
Distribution). With respect to any Tracking Group, the Available Dividend Amount
(approximately $1,222 million for the Cellular Group, $287 million for the
Telecom Group and $144 million for the Aerial Group as of December 31, 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 $602 million as of December
31, 1997) is an amount approximately equal to the greater of a) an amount
(approximately $313 million) which is approximately equal to the Surplus of TDS
less the sum of all Available Dividend Amounts of all Tracking Groups or b) an
amount (approximately $602 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 Shares outstanding.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, TDS will prepare
and file with the Securities and Exchange Commission consolidated financial
statements of TDS 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 TDS 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 the Cellular Group, the Telecom Group and the
Aerial Group Common Shares will be, and holders of TDS Common Shares and Series
A Common Shares will continue to be, shareholders of TDS. TDS and its
subsidiaries will each continue to be responsible for their respective
liabilities.
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.
Effective January 1, 1996, the TDS Group implemented the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of."
Under SFAS No. 121, the TDS Group is required to review long-lived assets and
certain identifiable intangible assets for impairment whenever events or changes
in circumstances indicate that the book value of a long-lived asset is not
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 TDS Group's
financial position or results of operations.
V-26
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The carrying amounts of Cash and Cash Equivalents and Temporary Investments
approximate fair value due to the short-term nature of these instruments.
INVENTORY
Inventory consists primarily of paging subscriber devices on hand.
Subscriber device cost is determined by the average cost method.
NOTES RECEIVABLE-AFFILIATES
The TDS Group currently lends funds to the Cellular Group and the Aerial
Group pursuant to Revolving Credit Agreements at interest rates of prime plus
.75% and prime plus 1.5%, respectively (the prime rate was 8.5% at December 31,
1997).
The TDS Group also currently lends funds to the Telecom Group at an interest
rate of prime plus .5%. No principal will be payable until maturity, January 4,
1999. Certain notes which mature within a year are classified as current assets.
INVESTMENT IN AFFILIATED GROUPS
Investment in affiliated groups represents the TDS Group's Retained Interest
in the equity value of the Cellular Group, the Telecom Group and the Aerial
Group.
INVESTMENT IN PCS LICENSES
Broadband PCS license costs consists of capitalized interest on the
investment in the licenses. These costs are being amortized over 40 years.
Narrowband PCS licenses consist of costs incurred in acquiring the licenses
($55.3 million) and capitalized interest ($5.6 million). These licenses are to
be contributed to the new combined paging company as a part of the merger
agreement with TSR.
INVESTMENT IN MINORITY INTERESTS
Investments in minority interests consist of investments 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 ($28.1 million and $26.6 million at December 31, 1997 and
1996, respectively). Income and losses from these entities are reflected in the
statements of operations on a pretax basis. At December 31, 1997, the cumulative
share of income from minority investments accounted for under the equity method
was $9.0 million, of which $6.6 million was undistributed. The cost method of
accounting is followed for certain minority interests managed by others
($236,000 and $277,000 at December 31, 1997 and 1996, 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.
V-27
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER COMMON SHARE
Earnings per Common Share were omitted from the historical statements of
operations since the recapitalization in connection with the Tracking Stock
Proposal has not been completed and the TDS 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,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest paid....................................................... $ 59,486 $ 47,389 $ 37,363
Income taxes (received) from Tracking Groups........................ (76,282) (84,640) (27,939)
Income taxes paid to taxing authorities............................. 3,358 55,380 52,101
Common Shares issued by Telephone and Data
Systems, Inc. for conversion of Preferred Shares.................. 1,487 4,602 948
Additions to property, plant and equipment financed through accounts
payable and accrued expenses...................................... $ 642 $ 3,522 $ (1,743)
</TABLE>
Telephone and Data Systems, Inc. has acquired operating cellular and
telephone companies and certain cellular licenses since January 1, 1995. The
cellular and telephone properties were acquired for the benefit of the Cellular
Group and the 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,
--------------------------------------
1997 1996 1995
---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Investment in subsidiaries....................................... $ 47,851 $ 84,737 $ 133,292
Notes receivable-other........................................... -- 4,100 --
Notes receivable-affiliates...................................... -- -- 16,371
Other assets and liabilities, excluding cash and cash
equivalents.................................................... -- (5,245) 5,330
Notes payable-affiliates......................................... -- 102,791 --
TDS Group Equity................................................. (45,685) (168,958) (127,836)
---------- ------------ ------------
Decrease in cash due to acquisitions............................. $ 2,166 $ 17,425 $ 27,157
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
NOTE 4--INCOME TAXES
TDS has 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, TDS does not reimburse U.S. Cellular and 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 TDS the required income tax due.
V-28
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--NOTES PAYABLE-AFFILIATE
The TDS Group provides cash management services to the Cellular Group, the
Telecom Group and the Aerial 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 .25%, or such higher rate as the TDS
Group may at its discretion offer on such deposits.
NOTE 6--PROPERTY AND EQUIPMENT
RADIO PAGING
Radio Paging property and equipment is stated at original cost. Depreciation
is provided using the straight-line method over the estimated useful lives of
the assets. The provision for depreciation as a percentage of depreciable
property and equipment was 24.6%, 27.9% and 22.1% in 1997, 1996 and 1995,
respectively.
Radio Paging property and equipment in service and under construction
consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Subscriber devices......................................................... $ 41,059 $ 39,714
Terminals and transmitters................................................. 48,181 44,251
Computer equipment......................................................... 16,402 16,595
Furniture and fixtures..................................................... 10,515 10,314
Other...................................................................... 2,118 2,126
----------- -----------
$ 118,275 $ 113,000
----------- -----------
----------- -----------
</TABLE>
OTHER
Other property and equipment is stated at original cost. Depreciation is
provided using the straight-line method over the estimated useful lives of
assets. The provision for depreciation as a percentage of depreciable property
and equipment was 12.3%, 15.9% and 10.0% in 1997, 1996 and 1995, respectively.
Other property and equipment in service and under construction consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Computer equipment............................................................ $ 54,062 $ 42,682
Furniture and fixtures........................................................ 18,710 15,772
Cable, printing and other equipment........................................... 12,138 11,737
Work in process............................................................... 11,899 5,055
Capital leases................................................................ -- 7,535
--------- ---------
$ 96,809 $ 82,781
--------- ---------
--------- ---------
</TABLE>
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.
NOTE 7--NOTES PAYABLE
The TDS Group has used short-term debt to finance its investments in PCS and
radio paging operations, for acquisitions, and for general corporate purposes.
Long-term debt and equity financing from time to time, including sales of debt
and equity securities by TDS's subsidiaries, have reduced such short-term debt.
Proceeds from the issuance of long-term debt and equity securities reduced
short-tem debt by $241.4 million, $131.2 million and $131.4 million in 1997,
1996 and 1995, respectively. Proceeds from the sales of non-strategic cellular
and other investments from time to time in 1997, 1996 and 1995 have also been
used to reduce short-term debt.
V-29
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--NOTES PAYABLE (CONTINUED)
TDS had $644.2 million of bank lines of credit for general corporate
purposes at December 31, 1997, all of which were committed. Unused amounts of
such lines totaled $117.9 million, all of which were committed. These
line-of-credit agreements provide for borrowings at negotiated rates up to the
prime rate.
The carrying amounts of short-term debt approximate fair value due to the
short-term nature of these instruments.
Information concerning notes payable for the TDS Group is shown in the table
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at end of period........................................... $ 530,175 $ 159,162 $ 182,625
Weighted average interest rate at end of period.................... 6.1% 6.0% 6.3%
Maximum amount outstanding during the period....................... $ 586,308 $ 202,765 $ 182,625
Average amount outstanding during the period(1).................... $ 406,596 $ 111,072 $ 139,527
Weighted average interest rate during the period(1)................ 6.0% 5.7% 6.4%
</TABLE>
- ---------
(1) The average was computed based on month-end balances.
NOTE 8-- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES
In November 1997, TDS Capital I, a subsidiary trust ("the Trust") of TDS,
issued 6,000,000 of its 8.5% Company-Obligated Mandatorily Redeemable Preferred
Securities (the "Preferred Securities") at $25 per Preferred Security. Net
proceeds from the issuance totaled $144.8 million and were used to reduce
short-term debt.
The sole asset of TDS Capital I is $154.6 million principal amount of TDS's
8.5% Subordinated Debentures due December 31, 2037. There is a full and
unconditional guarantee by TDS of the Trust's obligations under the Preferred
Securities issued by the Trust. However, TDS's obligations are subordinate and
junior in right of payment to certain other indebtedness of TDS. TDS has the
right to defer payments of interest on the Subordinated Debentures by extending
the interest payment period, at any time, for up to 20 consecutive quarters. If
interest payments on the Subordinated Debentures are so deferred, distributions
on the Preferred Securities will also be deferred. During any deferral,
distributions will continue to accrue with interest thereon. In addition, during
any such deferral, TDS may not declare or pay any dividend or other distribution
on, or redeem or purchase, any of its common stock.
The Subordinated Debentures are redeemable by TDS, in whole or in part, from
time to time, on or after November 18, 2002, or, in whole but not in part, at
any time in the event of certain income tax circumstances. If the Subordinated
Debentures are redeemed, the Trust must redeem Preferred Securities on a pro
rata basis having an aggregate liquidation amount equal to the aggregate
principal amount of the Subordinated Debentures so redeemed. In the event of the
dissolution, winding up or termination of the Trust, the holders of Preferred
Securities will be entitled to receive, for each Preferred Security, a
liquidation amount of $25 plus accrued and unpaid distributions thereon to the
date of payment, unless, in connection with the dissolution, winding up or
termination, Subordinated Debentures are distributed to the holders of the
preferred securities.
V-30
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--TDS GROUP EQUITY
The changes in the TDS Group equity for the periods presented is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.................................... $ 642,005 $ 509,421 $ 683,783
Net income........................................................ 52,968 47,540 22,691
Dividends......................................................... (27,396) (26,426) (24,602)
Repurchase of Common Shares....................................... (69,942) -- --
Issuance of stock by Aerial....................................... -- 114,056 --
Recapitalization of Aerial........................................ -- -- (216,896)
All other changes................................................. 4,836 (2,586) 44,445
----------- ----------- ------------
Balance at end of period.......................................... $ 602,471 $ 642,005 $ 509,421
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
PREFERRED STOCK
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 TDS Board of Directors who establish the terms of the issue. At
December 31, 1997, TDS had 324,667 shares of Preferred Stock outstanding.
COMMON AND SERIES A SHARES
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 other 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.
Through December 31, 1997, Telephone and Data Systems, Inc. purchased
1,798,100 Common Shares for $69.9 million. Telephone and Data Systems, Inc.
reissued 1,003,524 Common Shares primarily for acquisitions.
SALE OF STOCK BY SUBSIDIARIES
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%. The Aerial Communications, Inc. Common Shares offering was
recorded at fair market value which was more than Telephone and Data Systems,
Inc.'s book value investment in Aerial Communications, Inc. The TDS Group
adjusted its book value investment as a result of this issue and increased TDS
Group Equity $114.1 million in 1996. On December 31, 1995, prior to the initial
public offering, TDS converted certain Notes Receivable-Affiliate from Aerial to
equity, decreasing the TDS Group equity $216.9 million.
COMMON STOCK ACQUISITIONS
During 1997, 1996 and 1995, Telephone and Data Systems, Inc. issued 998,783,
2,634,408 and 2,947,777 Telephone and Data Systems, Inc. Common Shares,
respectively, for the acquisition of cellular and telephone interests. The 1997
Common Shares issued for acquisitions are reissued Treasury Shares (See Common
Share Repurchase Program).
V-31
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--TDS GROUP EQUITY (CONTINUED)
COMMON SHARES ISSUABLE
A certain acquisition agreement requires Telephone and Data Systems, Inc. to
deliver 10,480 Telephone and Data Systems, Inc. Common Shares in 1998.
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,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Common Shares
Tax-deferred savings plan............................................ 32,354 36,269 40,624
Dividend reinvestment plan........................................... 25,273 28,827 105,001
Employee stock options, awards, stock appreciation rights and
employee stock purchase plan....................................... 64,367 35,273 40,025
--------- --------- ---------
121,994 100,369 185,650
--------- --------- ---------
--------- --------- ---------
Series A Common Shares
Dividend reinvestment plan........................................... 19,731 26,445 17,855
--------- --------- ---------
--------- --------- ---------
</TABLE>
TAX-DEFERRED SAVINGS PLAN. Telephone and Data Systems, Inc. had reserved
78,558 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.
DIVIDEND REINVESTMENT PLANS. Telephone and Data Systems, Inc. had reserved
460,742 Common Shares for issue under the Automatic Dividend Reinvestment and
Stock Purchase Plan and 172,523 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. had reserved 1,291,107 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
to officers and employees. The options are exercisable over a specified period
not in excess of ten years. The options expire from 1998 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 $91,000, $263,000 and $408,000 in 1997,
1996 and 1995, respectively. Had compensation cost for all plans been
V-32
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--TDS GROUP EQUITY (CONTINUED)
determined consistent with 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,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Income
As Reported.......................................................... $ 52,968 $ 47,540 $ 22,691
Pro Forma............................................................ $ 47,511 $ 46,198 $ 22,132
--------- --------- ---------
--------- --------- ---------
</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.
A summary of the status of Telephone and Data Systems, Inc.'s stock option
plans at December 31, 1997, 1996 and 1995 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, 1995 (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
Granted 68,137 $ 43.90 $ 10.61
Exercised............................................................. (43,824) $ 19.51
Cancelled............................................................. (41,243) $ 40.78
---------
Outstanding December 31, 1997 (492,917 exercisable) 574,508 $ 35.87
---------
---------
</TABLE>
The fair value of each option grant was estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: risk-free
interest rates of 6.1%, 5.6% and 6.6%; expected dividend yields of 1.0%, 1.0%
and 1.0%; expected lives of 5.0 years, 5.1 years and 6.9 years and expected
volatility of 19.2%, 20.5% and 25.0%.
Stock appreciation rights allowed 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 expired March
1997. The fair value of each stock appreciation right grant was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995,
respectively: risk-free interest rates of
V-33
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--TDS GROUP EQUITY (CONTINUED)
4.9%, 5.2% and 5.5%; expected dividend yields of 1.0%, 1.0% and 1.0%; expected
lives of 0.1 year, 0.2 year and 0.7 year; and expected volatility of 20.5%,
18.4% and 20.2%.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Outstanding beginning of period.......................................... 10,070 16,034 12,096
Granted................................................................ 630 5,923 8,174
Exercised.............................................................. (10,700) (11,887) (4,236)
--------- --------- ---------
Outstanding end of period................................................ -- 10,070 16,034
--------- --------- ---------
--------- --------- ---------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. Telephone and Data Systems, Inc. had reserved
159,816 Common Shares for sale to the employees of Telephone and Data Systems,
Inc. The fair value of the employees' purchase rights was estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants rights in 1997 and 1996: risk-free
interest rate of 5.6% and 5.6%; expected dividend yield of 1.0% and 1.0%;
expected lives of 1.2 years and 0.5 year; and expected volatility of 16.9% and
15.3%.
CONVERTIBLE PREFERRED SHARES
Telephone and Data Systems, Inc. convertible Preferred Shares are
convertible into 932,011 Common Shares. Telephone and Data Systems, Inc. issued
56,365, 347,707 and 40,734 Common Shares in 1997, 1996 and 1995, respectively,
for Telephone and Data Systems, Inc. preferred shares converted and 11,345 and
3,781 Common Shares in 1997 and 1996, respectively, for 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 6,936,277 Common Shares for possible issuance upon
such conversion.
NOTE 10--COMMITMENTS AND CONTINGENCIES
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 1997, 1996 and 1995, rent expense for noncancelable, long-term leases was
$8.2 million, $4.1 million and $2.6 million, respectively, and rent expense
under cancelable, short-term leases was $4.3 million, $5.2 million and $4.5
million, respectively. At December 31, 1997, the aggregate minimum rental
commitments under noncancelable, long-term operating leases were as follows:
<TABLE>
<CAPTION>
MINIMUM FUTURE RENTAL
PAYMENTS
---------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
1998............................................................................... $ 7,055
1999............................................................................... 6,280
2000............................................................................... 5,600
2001............................................................................... 5,061
2002............................................................................... 4,669
Thereafter......................................................................... $ 45,755
</TABLE>
V-34
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--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 11--INVESTMENTS IN ENTITIES ACCOUNTED FOR BY 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,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets
Current assets........................................................... $ 56,581 $ 58,143
Due from affiliates...................................................... -- 67
Property and other....................................................... 75,666 66,534
----------- -----------
$ 132,247 $ 124,744
----------- -----------
----------- -----------
Liabilities and Equity
Current liabilities...................................................... $ 34,671 $ 38,891
Due to affiliates........................................................ -- 406
Deferred credits......................................................... 2,666 2,589
Long-term debt........................................................... 34,386 25,070
Partners' capital and stockholders' equity............................... 60,524 57,788
----------- -----------
$ 132,247 $ 124,744
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Results of Operations
Revenues.......................................................... $ 58,586 $ 52,954 $ 47,956
Costs and expenses................................................ (49,765) (46,342) (38,835)
Other income...................................................... 1,481 1,098 927
Interest expense.................................................. (2,266) (1,683) (2,004)
Income taxes...................................................... (2,760) (1,680) (3,079)
Extraordinary item................................................ -- (2,211) --
---------- ---------- ----------
Net income........................................................ $ 5,276 $ 2,136 $ 4,965
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
V-35
<PAGE>
THE TDS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--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, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Revenues
Service revenue.................................................. $ 85,937 $ 93,841 $ 93,034
Equipment sales revenue.......................................... 8,476 10,346 14,116
----------- ----------- -----------
94,413 104,187 107,150
----------- ----------- -----------
Operating Expense
Cost of services................................................. 27,822 26,712 22,294
Selling, general and administrative.............................. 62,089 70,441 55,064
Depreciation and amortization.................................... 32,040 33,777 24,692
Cost of equipment sold........................................... 7,769 9,883 14,097
----------- ----------- -----------
129,720 140,813 116,147
----------- ----------- -----------
Operating (Loss)................................................... (35,307) (36,626) (8,997)
----------- ----------- -----------
Investment and Other Income (Expense)
Investment (loss) in joint venture............................... (459) (1,201) (1,151)
Interest income.................................................. 128 259 175
Other, net....................................................... 75 33 121
----------- ----------- -----------
(256) (909) (855)
----------- ----------- -----------
(Loss) Before Interest and Income Taxes............................ (35,563) (37,535) (9,852)
----------- ----------- -----------
Interest expense-affiliates........................................ 16,073 11,797 6,953
Capitalized interest............................................... -- (4,147) (1,420)
----------- ----------- -----------
16,073 7,650 5,533
----------- ----------- -----------
(Loss) Before Income Taxes......................................... (51,636) (45,185) (15,385)
Income tax expense................................................. -- 342 325
----------- ----------- -----------
Net (Loss) to Shareholders......................................... (51,636) (45,527) (15,710)
Net (Loss) to Minority Shareholders................................ -- 6,368 2,782
----------- ----------- -----------
Net (Loss) to Telephone and Data Systems, Inc.
Shareholders..................................................... $ (51,636) $ (39,159) $ (12,928)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 13--SUBSEQUENT EVENT
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES
In February 1998, TDS Capital II, a subsidiary trust of TDS, issued
6,000,000 of its 8.04% Company-Obligated Mandatorily Redeemable Preferred
Securities at $25 per Preferred Security. Net proceeds from the issuance totaled
$145.0 million and were used to reduce short-term debt. The sole asset of TDS
Capital II is $154.6 million principal amount of TDS's 8.04% Subordinated
Debentures due March 31, 2038 or such date to which the maturity is extended by
TDS, but in no event later than March 31, 2047. The Subordinated Debentures are
redeemable by TDS, in whole or in part, from time to time, on or after March 31,
2003, or, in whole but not in part, at any time in the event of certain income
tax circumstances. All other terms and conditions are identical to those of TDS
Capital I. (See Note 8--Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Company Subordinated Debentures)
V-36
<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, 1997 and 1996, and the related statements of operations and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 28, 1998 (except with respect to the matters discussed in
Note 2, "American Paging, Inc."; and in Note 13 as to which the
date is February 18, 1998)
V-37
