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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ------------------------
Commission File Number 001-14157
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TELEPHONE AND DATA SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-2669023
- ---------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
30 North LaSalle Street, Chicago, Illinois 60602
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(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (312) 630-1900
Not Applicable
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(Former address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 30, 1999
- --------------------------------------- ----------------------------
Common Shares, $.01 par value 54,498,568 Shares
Series A Common Shares, $.01 par value 6,954,058 Shares
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<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
2nd QUARTER REPORT ON FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-20
Consolidated Statements of Income -
Three Months and Six Months Ended
June 30, 1999 and 1998 21
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 22
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 23-24
Notes to Consolidated Financial Statements 25-31
Part II. Other Information 32-33
Signatures 34
<PAGE>
PART I. FINANCIAL INFORMATION
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Telephone and Data Systems, Inc. ("TDS" or the "Company") is a diversified
telecommunications company which provides high-quality telecommunications
services to 3.3 million cellular telephone, telephone and personal
communications service ("PCS") customers. TDS's long-term business development
strategy is to expand its existing operations through internal growth and
acquisitions, and to explore and develop telecommunications businesses that
management believes utilize TDS's expertise in customer-based
telecommunications.
The Company conducts substantially all of its cellular telephone operations
through its 80.9%- owned subsidiary, United States Cellular Corporation ("U.S.
Cellular"), its telephone operations through its wholly-owned subsidiary, TDS
Telecommunications Corporations ("TDS Telecom"), and its PCS operations through
its 82.2%-owned subsidiary, Aerial Communications, Inc. ("Aerial"). In December
1998, TDS announced that it was pursuing a tax-free spin-off of its 82.2%
interest in Aerial, as well as reviewing other alternatives. See
Liquidity--Corporate Restructuring.
RESULTS OF OPERATIONS
- ---------------------
Six Months Ended 6/30/99 Compared to Six Months Ended 6/30/98
- -------------------------------------------------------------
Operating Revenues increased 26% ($220.5 million) during the first half of 1999
primarily as a result of a 24% increase in customers served. U.S. Cellular
contributed 69% ($151.7 million) of the total increase in revenues as customers
served increased by 442,000, or 23%, since June 30, 1998, to 2,364,000. Aerial
contributed 17% ($37.9 million) of the increase as customers served increased by
142,600, or 70%, since June 30, 1998, to 346,600. TDS Telecom contributed 14%
($31.0 million) of the total increase in revenues as total access lines
increased by 65,200, or 12%, since June 30, 1998 to 618,800.
Operating Expenses rose 15% ($126.3 million) in the first half of 1999
reflecting growth in operations. U.S. Cellular contributed 87% ($110.4 million)
and TDS Telecom contributed 14% ($17.6 million) of the total increase in
operating expenses while Aerial expenses declined by 1% ($1.7 million).
Operating Income was $85.6 million in the first half of 1999 compared to a loss
of ($20.0) million in 1998. U.S. Cellular's operating income increased 50% to
$124.6 million in the first half of 1999 and its operating income margin, as a
percentage of service revenues, increased to 18.8% in 1999 from 16.1% in 1998.
TDS Telecom's operating income increased 30% to $58.2 million in the first half
of 1999 and its operating margin increased to 21.9% in 1999 from 19.1% in 1998.
Aerial's operating loss declined 29% to $(97.2) million in the first half of
1999.
2
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
1999 1998 Change
---- ---- ------
(Dollars in thousands)
<S> <C> <C> <C>
Operating Income (Loss) from Ongoing Operations
U.S. Cellular $ 124,566 $ 83,292 $ 41,274
TDS Telecom 58,170 44,850 13,320
Aerial (97,181) (136,775) 39,594
--------- --------- ---------
85,555 (8,633) 94,188
American Paging Operating (Loss) -- (11,406) 11,406
--------- --------- ---------
Operating Income (Loss) $ 85,555 $ (20,039) $ 105,594
========= ========= =========
</TABLE>
TDS contributed substantially all of the assets and certain limited liabilities
of American Paging, Inc. ("American Paging") to a previously unrelated limited
liability corporation for a 30% interest in that corporation effective March 31,
1998. American Paging's revenues were netted against its expenses with the
resulting operating loss reported as American Paging Operating (Loss). American
Paging's revenues totaled $17.8 million and operating expenses totaled $29.2
million for the three months ended March 31, 1998. Beginning April 1, 1998, TDS
followed the equity method of accounting for this investment and reported these
results as a component of Investment Income.
Investment and Other Income (Expense) totaled $314.0 million in 1999 and $240.4
million in 1998.
Gain on Sale of Cellular and Other Investments totaled $339.9 million in the
first half of 1999 and $232.0 million in the first half of 1998. In accordance
with accounting rules, TDS recognized a $327.1 million gain in the second
quarter of 1999 on the difference between its historical basis in its investment
in AirTouch Communications, Inc. ("AirTouch") common shares and the value of
Vodafone AirTouch plc American Depository Receipts and cash to be received in
the merger of AirTouch and Vodafone Group plc. The AirTouch common shares were
received in 1998 by U.S. Cellular and TDS Telecom as a result of the sale of
certain minority cellular interests to AirTouch. The remaining gains in 1999 and
the 1998 gains resulted when the Company sold or traded certain non-strategic
minority cellular interests and other investments.
Investment Income, net, the Company's share of income from investments in which
the Company has a minority interest and follows the equity method of accounting,
primarily cellular investments, decreased 57% ($9.7 million) in the first half
of 1999. The decrease was primarily due to decreased operating results of
certain minority cellular interests and the sale of certain minority cellular
interests in the first quarter of 1998, along with increased amortization
related to the paging interest. Investment income is net of amortization
relating to these minority interests.
Minority Share of (Income) Loss includes the minority public shareholders' share
of U.S. Cellular's and Aerial's net income or loss, and the minority
shareholders' or partners' share of U.S. Cellular's, Aerial's and TDS Telecom's
subsidiaries' and certain other TDS subsidiaries' net income or loss. The
increase in minority share of income is primarily due to the increase in U.S.
Cellular's net income and the resulting minority public shareholders' portion of
such income. Allocations of losses to Aerial's minority public shareholders have
been limited in 1999 as
3
<PAGE>
Aerial's minority public shareholders' equity has been reduced to zero. The
minority shareholder in a subsidiary of Aerial was not allocated a portion of
its loss in 1998 as the minority shareholder investment occurred in September
1998.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1999 1998 Change
---- ---- ------
(Dollars in thousands)
<S> <C> <C> <C>
Minority Share of (Income) Loss
U.S. Cellular
Minority Public Shareholders' $(42,448) $(30,753) $(11,695)
Minority Shareholders' or Partners' (3,079) (2,695) (384)
-------- -------- --------
(45,527) (33,448) (12,079)
Aerial
Minority Public Shareholders' 5,047 31,014 (25,967)
Minority Shareholders' 5,920 -- 5,920
-------- -------- --------
10,967 31,014 (20,047)
Telephone Subsidiaries and Other (228) (694) 466
-------- -------- --------
$(34,788) $ (3,128) $(31,660)
======== ======== ========
</TABLE>
Interest Expense decreased 2% ($1.2 million) in the first half of 1999.
Improvements in the Company's cash management program has resulted in additional
internal cash balances being available to reduce short-term debt, thereby
reducing interest income and interest expense.
Minority Interest in Income of Subsidiary Trust (Trust Preferred Securities
Distributions) increased 12% ($1.3 million) in the first half of 1999. The
increase reflects a full two quarters of dividends on the $150 million of
additional securities issued in February 1998.
Income Tax Expense increased $46.8 million in 1999 to $132.6 million primarily
due to the increased pretax income as a result of improved operations and the
large gains recorded in 1999.
Net Income (Loss) Available to Common totaled $192.3 million, or $3.10 diluted
earnings per share, in the first half of 1999, compared to $59.6 million, or
$.97 diluted earnings per share, in the first half of 1998. The increase in net
income and earnings per share reflects improved operating results as well as
significant gains from the sale of cellular and other investments. A summary of
net income available to common and diluted earnings per share from operations
and gains is shown below.
4
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
1999 1998
--------------- --------------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Net Income Available to Common
Operations $ 2,686 $ (57,972)
Gains 189,570 117,607
----------------- -----------------
$ 192,256 $ 59,635
----------------- -----------------
Diluted Earnings Per Share
Operations .04 (.95)
Gains 3.06 1.92
----------------- -----------------
$ 3.10 $ .97
================= =================
</TABLE>
U.S. CELLULAR OPERATIONS
- ------------------------
TDS provides cellular telephone service through United States Cellular
Corporation ("U.S. Cellular"), an 80.9%-owned subsidiary. U.S. Cellular owns,
manages and invests in cellular markets throughout the United States. Rapid
growth in the customer base is the primary reason for the growth in U.S.
Cellular's results of operations. The number of customers served increased by
442,000, or 23%, since June 30, 1998, to 2,364,000.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenue
Local service $234,494 $198,222 $448,005 $368,307
Inbound roaming 79,114 56,675 150,077 102,881
Long-distance and other 34,915 26,034 65,635 46,087
-------- -------- -------- --------
Service Revenue 348,523 280,931 663,717 517,275
Equipment sales 12,429 9,177 23,220 17,990
-------- -------- -------- --------
360,952 290,108 686,937 535,265
-------- -------- -------- --------
Operating Expenses
System operations 61,641 52,367 120,332 89,310
Marketing and selling 63,380 51,328 121,685 101,329
Cost of equipment sold 27,659 20,357 53,100 41,105
General and administrative 79,354 65,477 158,873 124,520
Depreciation 46,685 40,878 88,301 76,798
Amortization 9,781 9,564 20,080 18,911
-------- -------- -------- --------
288,500 239,971 562,371 451,973
-------- -------- -------- --------
Operating Income $ 72,452 $ 50,137 $124,566 $ 83,292
======== ======== ======== ========
</TABLE>
Operating revenue increased 28% ($151.7 million) in the first half of 1999.
Total average monthly service revenue per customer increased 3% ($1.21) to
$48.71 in the first half of 1999 from $47.50 in 1998. The increase in average
monthly service revenue per customer resulted from increases in minutes of use
on U.S. Cellular's systems from both local retail customers and inbound roamers.
While the increase in inbound roaming minutes of use was partially offset by a
decrease in revenue
5
<PAGE>
per minute of use, average monthly roaming revenue per customer increased 17%.
The increase in average monthly local retail minutes of use was more than offset
by the decline in revenue per minute of use, resulting in a 3% decrease in
monthly local retail revenue per customer. Average monthly service revenue per
customer is expected to decline for the full year of 1999 compared to 1998,
despite the increase in the first half comparison, as local retail and inbound
roaming revenue per minute of use continue to decline, growth in inbound roaming
minutes of use slows and U.S. Cellular further penetrates the consumer market.
Local retail revenue increased 22% ($79.7 million) in the first half of 1999 due
primarily to the 23% customer growth. Average local minutes of use per retail
customer increased 10% to 112 in 1999 from 102 in 1998, while average local
retail revenue per minute declined by 12% to $.29 in 1999 from $.33 in 1998.
U.S. Cellular's use of pricing and other incentive programs in order to
stimulate overall usage, and competitive pressures resulted in a lower average
revenue per minute of use. Average monthly local retail revenue per customer
declined 3% ($.94) to $32.88 in 1999 from $33.82 in 1998.
Inbound roaming revenue (charges to customers of other systems who use U.S.
Cellular's cellular systems when roaming) increased 46% ($47.2 million) in the
first half of 1999. Roaming minutes of use increased by 81% in 1999. The
increase in minutes of use was significantly affected by certain "one rate"
programs introduced by other wireless companies in the second half of 1998.
Wireless customers who sign up for these programs are given price incentives to
roam in other markets, including U.S. Cellular's markets, thus driving an
increase in U.S. Cellular's inbound roaming minutes. The increase in minutes of
use is expected to be slower in the second half of 1999 as the effect of "one
rate" programs becomes present in both periods of comparison. Average inbound
roaming revenue per minute declined by 17% reflecting the downward trend in
negotiated rates. Average monthly inbound roaming revenue per customer increased
17% ($1.56) to $11.01 in 1999 compared to $9.45 in 1998. The increase in average
monthly inbound roaming revenue per U.S. Cellular customer is attributable to a
larger increase in inbound roaming revenue than in the U.S.
Cellular customer base.
Long-distance and other revenue increased 42% ($19.5 million) in the first half
of 1999 as the volume of long-distance calls billed by U.S. Cellular increased,
primarily from inbound roamers using U.S. Cellular's systems to make
long-distance calls. Average monthly long-distance and other revenue per
customer increased 14% ($.59) to $4.82 in 1999 compared to $4.23 in 1998.
Operating expenses increased 24% ($110.4 million) during the first half of 1999.
Costs to provide service (system operations expenses) as a percent of service
revenue were 18.1% in 1999 and 17.3% in 1998. System operations expenses include
customer usage expenses and maintenance, utility and cell site expenses.
Customer usage expenses increased 42% ($25.2 million) and consumed 12.8% of
service revenues in 1999 and 11.5% in 1998. The increase in customer usage
expense was primarily due to the 59% increase in net outbound roaming usage
expense. Net outbound roaming usage expense is the result of U.S. Cellular
offering its customers an increasingly larger service footprint in which their
calls are billed at local rates. In an increasing number of 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. Also contributing to the increase in customer usage expenses was a 25%
rise in costs related to the increase in minutes of use. Maintenance, utility
and cell site expenses increased 19% ($5.8 million) and consumed 5.4% of service
revenues in 1999 and 5.8% in 1998. The number of cell sites operated increased
to 2,163 in 1999 from 1,864
6
<PAGE>
in 1998.
Costs to expand the customer base consist of marketing and selling expenses and
the cost of equipment sold. These expenses, less equipment sales revenue,
represent the cost to acquire a new customer. Cost per gross customer addition
increased to $335 in 1999 from $309 in 1998 while gross customer activations
increased to 453,000 in 1999 from 403,000 in 1998. The cost per gross customer
addition increased primarily due to an increase commissions, additional media
and brand advertising expenses related to the change in the U.S. Cellular brand
name and logo and the increase in losses on equipment sales. The increase in
equipment sales losses was primarily driven by the sale of more dual-mode
phones, which on average generate greater equipment losses than the sale of
analog phones. The increase in sales of dual-mode phones is related to U.S.
Cellular's ongoing conversion of its systems to digital coverage, which enables
U.S. Cellular to offer its customers more features, better clarity and increased
roaming capabilities.
General and administrative expenses as a percent of service revenue were 23.9%
in 1999 and 24.1% in 1998. The overall increase in administrative expenses
reflects the growing customer base in existing markets and an expansion of local
office and corporate staff necessitated by such growth. U.S. Cellular also
incurred additional costs in the first half of 1999 related to its
communications centers, which were created to centralize certain customer
service functions; the conversion to a new billing system; and providing
dual-mode phone units to customers who migrated from analog to digital rate
plans.
Depreciation and amortization expense as a percent of service revenue was 16.3%
in 1999 and 18.5% in 1998. Depreciation expense increased 15% ($11.5 million) in
1999 primarily due to the 17% increase in average fixed assets since June 30,
1998. Beginning September 1, 1999, U.S. Cellular will begin amortization of
deferred system development costs related to its new billing and information
system over a seven-year period. Through June 30, 1999, U.S. Cellular had
capitalized approximately $118 million of costs related to these systems.
Operating income increased 50% ($41.3 million) to $124.6 million in the first
half of 1999. The improvement was primarily driven by the substantial growth in
customers and revenue. Operating margin, as a percent of service revenue,
improved to 18.8% in 1999 compared to 16.1% in 1998.
Although service revenues increased 28% and average monthly revenue per customer
increased 3% in the first half of 1999, management does not expect these trends
to continue throughout 1999 as local retail and inbound roaming revenue per
minute of use continue to decline, growth in inbound roaming minutes of use
slows and U.S. Cellular further penetrates the consumer market. Management
continues to believe seasonal trends exist in both service revenue, which tend
to increase more slowly in the first and fourth quarters, and operating expenses
which tend to be higher in the fourth quarter due to increased marketing
activities and customer growth, which may cause operating income to vary from
quarter to quarter. Additionally, competitors licensed to provide PCS services
have initiated service in certain of U.S. Cellular's markets over the past three
years. U.S. Cellular expects PCS operators to continue deployment of PCS in
portions of all of its market clusters throughout 1999. U.S. Cellular has
increased its advertising to promote its brand and to distinguish its service
from other wireless communications providers. U.S. Cellular's management
continues to monitor other wireless communications providers' strategies to
determine how this additional competition is affecting U.S. Cellular's results.
Management anticipates that customer growth will be lower in the future,
primarily as a result of the increase in the number of competitors in U.S.
Cellular's markets.
7
<PAGE>
TDS TELECOM OPERATIONS
- ----------------------
TDS operates its landline telephone business through TDS Telecommunications
Corporation ("TDS Telecom"), a wholly-owned subsidiary. Total access lines
served by TDS Telecom increased by 65,200, or 12%, since June 30, 1998 to
618,800. TDS Telecom's 105 incumbent local exchange ("ILEC") subsidiaries served
564,200 access lines at June 30, 1999, a 5% increase over the 537,500 access
lines at June 30, 1998. TDS Telecom's competitive local exchange ("CLEC")
subsidiaries served 54,600 access lines at June 30, 1999 compared to 16,100
access lines at June 30, 1998. CLEC activities began in the first quarter of
1998. TDS Telecom plans to slowly expand its CLEC operations into certain second
and third-tier cities which are geographically proximate to existing TDS Telecom
ILEC and CLEC areas.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenue
ILEC Revenue
Local service $ 38,200 $ 33,570 $ 74,589 $ 66,121
Network access and long-distance 67,876 64,171 134,173 125,017
Miscellaneous 17,463 16,514 33,064 32,097
--------- --------- --------- ---------
Total ILEC Revenue 123,539 114,255 241,826 223,235
CLEC Revenue 13,215 6,621 24,318 12,286
Intercompany Revenue (447) (721) (872) (1,200)
--------- --------- --------- ---------
Total Operating Revenue 136,307 120,155 265,272 234,321
--------- --------- --------- ---------
Operating Expenses
ILEC Expenses
Network operations 22,971 23,113 45,929 44,286
Depreciation and Amortization 29,095 27,011 58,367 53,353
Customer operations 20,518 18,372 39,072 36,683
Corporate operations 17,720 20,609 35,766 40,084
--------- --------- --------- ---------
Total ILEC Expenses 90,304 89,105 179,134 174,406
CLEC Expenses 15,234 8,953 28,840 16,265
Intercompany Expenses (447) (721) (872) (1,200)
--------- --------- --------- ---------
Total Operating Expenses 105,091 97,337 207,102 189,471
--------- --------- --------- ---------
Operating Income $ 31,216 $ 22,818 $ 58,170 $ 44,850
========= ========= ========= =========
</TABLE>
Operating revenue increased 13% ($31.0 million) in the first half of 1999
reflecting primarily customer growth.
Revenue from ILEC operations increased 8% ($18.6 million) in the first half of
1999. Average monthly revenue per access line increased 3% ($2.00) to $72.53 in
the first half of 1999 from $70.53 in the first half of 1998. Local service
revenue increased 13% ($8.5 million) during 1999. Access line growth of 5%
increased revenues by $3.3 million while the sale of custom-calling and advanced
features increased revenues by $3.0 million. Average monthly local service
revenue per customer was $22.37 in 1999 and $20.89 in 1998. Network access and
long-distance revenue increased 7%
8
<PAGE>
($9.2 million) during 1999. Revenue generated from access minute growth due to
increased network usage increased $7.0 million in 1999. Recovery of increased
costs of providing long-distance services resulted in increased revenue of $2.2
million. Average monthly network access and long-distance revenue per customer
was $40.24 in 1999 and $39.50 in 1998. Miscellaneous revenue increased 3% ($1.0
million) during 1999. Average monthly miscellaneous revenue per customer was
$9.92 in 1999 and $10.14 in 1998.
Revenue from CLEC operations increased 98% ($12.0 million) in the first half of
1999 as access lines served increased to 54,600 at June 30, 1999 from 16,100 at
June 30, 1998.
Operating expenses increased 9% ($17.6 million) during 1999 due to growth in
ILEC operations and the development of CLEC operations.
Expenses from ILEC operations increased by 3% ($4.7 million) in the first half
of 1999. The costs to provide service to customers increased 4% ($1.6 million),
primarily for increased wages and benefits expenses, and consumed 19.0% of ILEC
revenues in 1999 and 19.8% in 1998. Costs to serve customers increased 7% ($2.4
million) and consumed 16.2% of ILEC revenues in 1999 and 16.4% in 1998.
Corporate expenses decreased 11% ($4.3 million) primarily due to improved
efficiencies and cost controls, and consumed 14.8% of ILEC revenues in 1999 and
18.0% in 1998. Depreciation and amortization increased 9% ($5.0 million),
primarily due to increased investment in facilities, and consumed 24.1% of ILEC
revenues in 1999 and 23.9% in 1998.
CLEC operating expenses increased 77% ($12.6 million) in the first half of 1999
as the CLEC subsidiaries continue to grow their customer base.
Operating income increased 30% ($13.3 million) to $58.2 million in the first
half of 1999 reflecting improved ILEC results offset somewhat by increased CLEC
losses. Operating income from ILEC operations increased 28% ($13.9 million) to
$62.7 million. Operating loss from CLEC operations increased 14% ($543,000)
reflecting the expenses associated with the development and start-up of
operations.
9
<PAGE>
AERIAL OPERATIONS
- -----------------
TDS provides Personal Communications Services ("PCS") telephone service through
Aerial Communications, Inc. ("Aerial"), an 82.2%-owned subsidiary. Aerial
commenced operations in all six of its markets in the first and second quarters
of 1997. Aerial customers served increased by 142,600, or 70%, since June 30,
1998, to 346,600. In December 1998, TDS announced that it was pursuing a
tax-free spin-off of its 82.2% interest in Aerial, as well as reviewing other
alternatives. See Liquidity--Corporate Restructuring.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ --------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenue
Service revenue $ 47,795 $ 28,852 $ 91,893 $ 52,935
Equipment sales revenue 6,990 7,836 13,433 14,499
--------- --------- --------- ---------
54,785 36,688 105,326 67,434
--------- --------- --------- ---------
Operating Expenses
Systems operations 20,169 18,802 40,522 34,139
Marketing and selling 17,799 17,974 37,876 35,406
Customer service 10,311 12,752 20,162 23,651
Cost of equipment sold 13,155 20,573 25,557 43,393
General and administrative 18,260 12,805 34,181 26,680
Depreciation 20,550 19,356 40,432 37,163
Amortization 1,888 1,888 3,777 3,777
---------- --------- --------- ---------
102,132 104,150 202,507 204,209
---------- --------- --------- ---------
Operating (Loss) $ (47,347) $ (67,462) $ (97,181) $(136,775)
========== ========= ========= =========
</TABLE>
Operating revenue increased 56% ($37.9 million) in the first half of 1999.
Service revenues increased 74% ($39.0 million) in the first half of 1999 due
primarily to the 70% customer growth. The average monthly service revenue per
customer decreased to $46.37 in the first half of 1999 from $53.03 in 1998. The
decrease in average monthly service revenue per customer primarily reflects the
addition of more moderate wireless users to the customer base.
Operating expenses decreased 1% ($1.7 million) in the first half of 1999. The
costs to provide service to the customer base (system operations expenses)
consists of customer usage expenses and maintenance, utility and cell site
expenses. System operations expense increased 19% ($6.4 million) in the first
half of 1999 primarily due to a $5.4 million increase in systems maintenance
expenses for the PCS network. Aerial began incurring charges for these services
in the second quarter of 1998. Engineering and maintenance personnel costs also
increased as new employees were added to maintain the system. The number of cell
sites operated increased to 1,207 in 1999 from 1,133 in 1998.
Costs to expand the customer base consist of marketing and selling expenses and
the cost of equipment sold. These expenses, less equipment sales revenue,
represent the cost to acquire a new customer. Costs per gross customer addition
decreased to $387 in 1999 from $488 in 1998, reflecting primarily the decrease
in cost of equipment sold. Gross customer activations decreased
10
<PAGE>
slightly to 129,000 in 1999 from 132,000 in 1998. Cost of equipment sold
decreased 41% ($17.8 million) reflecting a significant decline in handset cost
per unit and a decrease in handsets sold.
Customer service expenses decreased 15% ($3.5 million) in the first half of 1999
primarily due to a decrease in bad debt expense. General and administrative
expenses increased 28% ($7.5 million) due primarily to the increased number of
employees and related expenses as well as consulting costs associated with the
Year 2000 project.
Depreciation expense increased 9% ($3.3 million) reflecting the increase in
depreciable property and equipment.
Operating loss declined 29% ($39.6 million) to $(97.2) million in the first half
of 1999 from $(136.8) million in 1998. The improvement was primarily driven by
the growth in customers and revenue. TDS anticipates that Aerial will generate
significant losses at least through 2000 as it continues to build its customer
base.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
- -----------------------------------------------------------------------------
Operating Revenues increased 24% ($105.1 million) during the second quarter of
1999 for reasons generally the same as the first six months. U.S. Cellular
revenues increased 24% ($70.8 million) in 1999. Local retail revenue increased
18% ($36.3 million) in the second quarter of 1999, while inbound roaming revenue
increased 40% ($22.4 million). Average monthly service revenue per customer was
$50.18 in the second quarter of 1999 and $50.16 in 1998. TDS Telecom revenues
increased 13% ($16.2 million) in the second quarter of 1999 due to the growth in
ILEC operations ($9.3 million) and growth in CLEC operations ($6.6 million).
Average monthly revenue per access line increased to $73.52 in the second
quarter of 1999 from $71.45 in 1998. Aerial revenues increased 49% ($18.1
million) in the second quarter of 1999.
Operating Expenses rose 12% ($54.3 million) during the second quarter of 1999
for reasons generally the same as the first six months. U.S. Cellular expenses
increased 20% ($48.5 million). System operations expense increased 18% ($9.3
million). Marketing and selling expenses, including cost of equipment sold,
increased 27% ($19.4 million). Cost per gross customer addition increased to
$351 in the second quarter of 1999 from $305 in 1998. General and Administrative
expense increased 21% ($13.9 million). Depreciation and amortization expense
increased 12% ($6.0 million). TDS Telecom expenses increased 8% ($7.8 million)
due to growth in ILEC operations ($1.2 million) and in CLEC operations ($6.3
million) for reasons generally the same as the first six months. Aerial's
operating expenses decreased 2% ($2.0 million) for reasons generally the same as
the first six months.
Operating Income increased $50.8 million to $56.3 million in the second quarter
of 1999. U.S. Cellular's operating income increased $22.3 million and Aerial's
operating loss decreased by $20.1 million reflecting continued growth in
customers and revenues. TDS Telecom's operating income increased $8.4 million
reflecting the improved results from ILEC activities offset somewhat by the
anticipated impact of the development of the CLEC activities.
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------------
1999 1998 Change
--------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Operating Income (Loss)
U.S. Cellular $ 72,452 $ 50,137 $ 22,315
TDS Telecom 31,216 22,818 8,398
Aerial (47,347) (67,462) 20,115
-------- -------- --------
Operating Income $ 56,321 $ 5,493 $ 50,828
======== ======== ========
</TABLE>
Investment and Other Income totaled $291.8 million in 1999 and $18.2 million in
1998. Gain on Sale of Cellular and Other Investments totaled $328.3 million in
the second quarter of 1999 compared to $10.5 million in 1998. The Company
recorded a $327.1 million gain related to the merger of AirTouch and Vodafone
Group plc in 1999. Investment Income decreased 85% ($3.6 million) to $650,000
primarily due to an increase in the amortization of the paging investment.
Minority Share of (Income) Loss increased $45.5 million in the second quarter of
1999 primarily for reasons generally the same as the first six months.
Allocations of losses to Aerial's minority shareholders' have been limited in
1999 as Aerial's minority shareholders' equity has been reduced to zero. The
minority shareholder in a subsidiary of Aerial was not allocated a portion of
its loss in 1998 as the minority shareholder investment occurred in September
1998.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------
1999 1998 Change
---- ---- ------
(Dollars in thousands)
<S> <C> <C> <C>
Minority Share of (Income) Loss
United States Cellular
Minority Shareholders' Share $(37,150) $ (6,219) $(30,931)
Minority Partners' Share (1,596) (1,513) (83)
-------- -------- --------
(38,746) (7,732) (31,014)
Aerial
Minority Public Shareholders' 865 15,773 (14,908)
Minority Shareholders' -- -- --
-------- -------- -------
865 15,773 (14,908)
Telephone Subsidiaries and Other (48) (430) 382
-------- -------- --------
$(37,929) $ 7,611 $(45,540)
======== ======== ========
</TABLE>
Interest Expense decreased 1% ($206,000) to $31.1 million in the second quarter
of 1999 for reasons generally the same as the first six months.
Minority Interest in Income of Subsidiary Trusts reflects the preferred dividend
requirement of the $300 million of Trust Originated Preferred Securities
outstanding.
Income Tax Expense increased to $128.3 million in the second quarter of 1999
from $(113,000) in 1998 primarily due to the increased pretax income as a result
of the large gains recorded in 1999 and improved operations.
Net Income (Loss) Available to Common totaled $182.2 million, or $2.93 diluted
earnings per share, in the second quarter of 1999, compared to a loss of $(14.1)
million, or $(.23) diluted earnings
12
<PAGE>
per share, in the second quarter of 1998. The increase in net income and
earnings per share reflects improved operating results as well as the gain
related to the merger of AirTouch and Vodafone Group plc. A summary of net
income (loss) available to common and diluted earnings per share from operations
and gains is shown below.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------------------
1999 1998
----------------- -----------------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Net Income (Loss) Available to Common
Operations $ (343) $ (19,218)
Gains 182,549 5,123
----------------- -----------------
$ 182,206 $ (14,095)
================= =================
Diluted Earnings Per Share
Operations (.01) (.32)
Gains 2.94 .09
----------------- -----------------
$ 2.93 $ (.23)
================= =================
</TABLE>
FINANCIAL RESOURCES AND LIQUIDITY
- ---------------------------------
TDS and its subsidiaries operate relatively capital-intensive businesses. Rapid
growth has caused expenditures for construction, expansion and acquisition
programs to exceed internally generated cash flow. Accordingly, in recent years,
TDS and its subsidiaries have obtained substantial funds from external sources
to finance Aerial's operations and construction activities, to fund acquisitions
and for general corporate purposes. Although U.S. Cellular's increasing internal
cash flow and TDS Telecom's steady internal cash flow have reduced the overall
need for external financing, Aerial's working capital, operating expenses and
construction activities have nevertheless required substantial additional funds
from external sources.
Cash Flows From Operating Activities. TDS is generating substantial internal
funds from the rapid growth in U.S. Cellular's customers and revenues and TDS
Telecom's steady growth. However, Aerial's operations have required substantial
funds, thereby reducing the effect of the increases in cash flows from U.S.
Cellular and TDS Telecom. Cash flows from operating activities totaled $169.3
million in the first half of 1999 compared to $105.9 million in 1998.
U.S. Cellular's operating cash flow (operating income plus depreciation and
amortization) totaled $232.9 million in the first half of 1999 (up 30%) while
TDS Telecom's operating cash flow totaled $119.3 million (up 20%). Aerial's
operating cash outflow declined to $53.0 million for the first half of 1999 from
$95.8 million in 1998. American Paging's operating cash outflow of $3.5 million
in the first half of 1998 occurred prior to April 1, 1998 when TDS contributed
substantially all the assets and certain limited liabilities of American Paging
to an unrelated limited liability corporation. Beginning April 1, 1998, TDS
followed the equity method of accounting for this investment.
Cash flows for other operating activities (investment and other income, interest
and income tax
13
<PAGE>
expense, and changes in working capital and other assets and liabilities)
required $129.9 million in the first half of 1999 and $73.2 million in 1998.
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------
1999 1998 Change
---- ---- ------
(Dollars in thousands)
<S> <C> <C> <C>
Operating cash flow
U.S. Cellular $ 232,947 $ 179,001 $ 53,946
TDS Telecom 119,258 99,409 19,849
Aerial (52,972) (95,835) 42,863
American Paging -- (3,511) 3,511
--------- --------- ---------
299,233 179,064 120,169
Other operating activities (129,925) (73,178) (56,747)
--------- --------- ---------
$ 169,308 $ 105,886 $ 63,422
========= ========= =========
</TABLE>
Cash Flows from Financing Activities. TDS has used short-term debt to finance
Aerial's construction and operations, for acquisitions and for general corporate
purposes. TDS has taken advantage of attractive opportunities from time-to-time
to reduce short-term debt with proceeds from the sale of long-term debt and
equity securities, including sales of debt and equity securities by
subsidiaries.
Cash flows from financing activities totaled $26.5 million in the first half of
1999 compared to $101.4 million in 1998. Increases in short-term debt of $42.4
million provided most of the Company's external financing requirements during
the first half of 1999. In 1998, TDS received $144.9 million on the sale of
8.04% Trust Originated Preferred Securities. The proceeds were used to reduce
notes payable balances. TDS also expended $9.1 million for the purchase of
American Paging common shares pursuant to a tender offer in the first half of
1998. Dividends paid on Common and Preferred Shares, excluding dividends
reinvested, totaled $14.6 million in 1999 and $14.0 million in 1998.
Cash Flows From Investing Activities. TDS makes substantial investments each
year to acquire, construct, operate and maintain modern high-quality
communications networks and facilities as a basis for creating long-term value
for shareowners. Cash flows from investing activities required $162.0 million in
the first half of 1999 compared to $166.3 million in 1998. Capital expenditures
required $229.5 million in 1999 and $250.5 million in 1998. Acquisitions, net of
cash acquired, required $8.1 million in 1999 and $43.4 million in 1998. The
sales of non-strategic cellular interests and other investments provided $57.6
million in 1999 and $96.8 million in 1998, reducing total cash flows required
for investing activities in each period.
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. Capital expenditures totaled $229.5
million in 1999 consisting primarily of $161.9 million for cellular property and
equipment, $48.8 million for telephone plant and equipment and $13.0 million for
PCS property and equipment. Capital expenditures totaled $250.5 million in the
first half of 1998 consisting primarily of $137.0 million for cellular property
and equipment, $62.4 million for telephone plant and equipment and $48.1 million
for PCS property and equipment.
14
<PAGE>
LIQUIDITY
- ---------
TDS anticipates that the aggregate resources required for 1999 will include
approximately $300 million for U.S. Cellular capital additions and $120 million
for TDS Telecom capital additions. At June 30, 1999, the remaining amount of
capital spending approximated $209 million, consisting of $138 million for
cellular additions and $71 million for telephone additions. The aggregate
resources required in 1999 for Aerial include approximately $100 million for
capital additions and $210 million for working capital and operating expenses,
including $75 million for interest expense. At June 30, 1999, the remaining
amount of capital spending approximated $69 million and the remaining amount of
working capital and operating expense requirement approximated $95 million,
including $40 million for interest expense. See "Corporate Restructuring" for
additional information regarding the Aerial spin-off and financing needs.
U.S. Cellular plans to finance its cellular construction program using primarily
internally generated cash supplemented by short-term financing. U.S. Cellular's
operating cash flow totaled $436.8 million for the twelve months ended June 30,
1999, up 39% ($123.1 million) from 1998. U.S. Cellular had $500 million of bank
lines of credit for general corporate purposes at June 30, 1999, all of which
was unused. These line of credit agreements provide for borrowings at the London
InterBank Offered Rate ("LIBOR") plus 26.5 basis points.
TDS Telecom plans to finance its construction program using primarily internally
generated cash supplemented by long-term financing from federal government
programs and short-term financing. Operating cash flow totaled $225.7 million
for the twelve months ended June 30, 1999, up 14% ($27.8 million) from 1998. At
June 30, 1999, TDS Telecom telephone subsidiaries had $116 million in unadvanced
loan funds from federal government programs to finance the telephone
construction program.
TDS and its subsidiaries had cash and temporary investments totaling $90.2
million and longer-term cash investments totaling $8.8 million at June 30, 1999.
These investments are primarily the result of telephone operations' internally
generated cash. While certain regulated telephone subsidiaries' debt agreements
place limits on intercompany dividend payments, these restrictions are not
expected to affect the Company's ability to meet its cash obligations.
TDS and its subsidiaries also have access to a variety of external capital
sources. TDS had $597 million of bank lines of credit for general corporate
purposes at June 30, 1999. Unused amounts of such lines totaled $384.0 million.
These line of credit agreements provide for borrowings at negotiated rates up to
the prime rate.
Management believes that 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 and if capital
requirements, financial market conditions and other factors warrant.
15
<PAGE>
Corporate Restructuring
- -----------------------
On December 18, 1998, TDS announced that it was pursuing a tax-free spin-off of
its 82.2% interest in Aerial, as well as reviewing other alternatives. There are
a number of conditions that must be met for a tax-free spin-off to occur,
including the receipt of a favorable Internal Revenue Service ruling on the
tax-free status of such a spin-off, final approval by the TDS Board of
Directors, certain government and third party approvals and review by the
Securities and Exchange Commission ("SEC") of appropriate SEC filings. On August
4, 1999, TDS submitted a request for a private letter ruling from the Internal
Revenue Service on the tax-free status of the spin-off.
Prior to any spin-off, it is expected that Aerial will seek additional financing
so that Aerial would have the appropriate capitalization to operate as a
stand-alone entity. In connection with such financing, it is anticipated that a
substantial amount of Aerial's debt to TDS may be converted into equity. TDS
intends to seek shareholder approval of a proposal to distribute Aerial Series A
Common Shares, on a pro-rata basis, to holders of TDS Series A Common Shares and
to distribute Aerial Common Shares, on a pro-rata basis, to holders of TDS
Common Shares. There can be no assurance that a spin-off will be consummated or
that other alternatives will not be pursued.
On September 8, 1998, pursuant to a purchase agreement ("Purchase Agreement")
between TDS, Aerial, Aerial Operating Company, Inc. ("AOC"), and Sonera Ltd., a
limited liability company organized under the laws of Finland ("Sonera"), Sonera
purchased approximately 2.4 million shares of common stock of AOC representing a
19.423% equity interest in AOC, subject to adjustment under certain
circumstances, for an aggregate purchase price of $200 million. Sonera has the
right, subject to adjustment under certain circumstances, to exchange each share
of AOC common stock which it owns for 6.72919 Common Shares of Aerial. Upon the
exchange of all of the AOC shares, Sonera would own an 18.452% equity interest
in Aerial, reflecting a purchase price equivalent to $12.33 per Common Share of
Aerial (the "Equivalent Purchase Price").
Following the announcement by TDS on December 18, 1998, that it intended to
distribute to its shareholders all of the capital stock of Aerial that it owns,
and that Aerial would seek additional financing from sources other than TDS in
connection therewith, Sonera contacted TDS to express certain concerns about the
announcement. Sonera has claimed that it was induced to pay an excessive price
for the AOC common stock. Sonera has requested the renegotiation of certain
matters related to Sonera's investment in AOC, including an adjustment in the
Equivalent Purchase Price, and has raised the possibility of litigation in
connection therewith.
Under the Purchase Agreement, the number of AOC shares purchased by Sonera is
subject to reduction if the average price of Aerial's Common Shares exceeds
certain threshold prices. During the second quarter and on July 7,1999, the
average price of Aerial's Common Shares exceeded all of the threshold prices set
forth in the Purchase Agreement. Accordingly, Aerial has requested Sonera to
surrender for cancellation an aggregate of 634,216 shares of AOC common stock.
Cancellation of these shares would have the effect of increasing Sonera's
Equivalent Purchase Price from $12.33 to $16.68 per Aerial Common Share.
However, Sonera has refused to surrender any AOC shares and, in connection with
its allegations, as discussed above, has objected to the application of the
share reduction provisions in the Purchase Agreement.
TDS and Aerial deny Sonera's allegations and deny that Sonera has any right to
refuse to return the shares of AOC common stock for cancellation. TDS and Aerial
are attempting to reach a mutually acceptable resolution of open issues with
Sonera, including Sonera's objection to the adjustment of
16
<PAGE>
Sonera's shares of AOC. However, there can be no assurance that any such
resolution will be possible and that this matter will not lead to litigation, or
that it will not have a material adverse effect on TDS or Aerial or on the plans
relating to the spin-off and refinancing of Aerial.
Aerial's capital additions budget totals approximately $100 million. In
addition, Aerial will require $210 million for working capital and operating
expenses, including $75 million for interest expense. Aerial plans to finance
its construction expenditures and working capital requirements through external
financing, vendor financing, the remaining amount available under the revolving
credit agreement with TDS. As part of the potential tax-free spin-off of Aerial,
TDS and Aerial are seeking short- and long-term financing so that Aerial would
have the appropriate capitalization to operate as a stand-alone entity.
In 1998, a vendor agreed to provide up to $150 million in financing to Aerial
for the purchase of network infrastructure equipment and services. Aerial
financed equipment and services aggregating $68.5 million prior to June 30,1999
and may finance an additional $75 million between June 30, 1999 and June 30,
2000. At June 30, 1999, Aerial had $75 million available under the agreement.
In March 1999, TDS paid Aerial $114.5 million as a settlement for tax losses
incurred by Aerial and utilized by the TDS consolidated tax group. The tax
settlement payment covered the actual and estimated losses incurred by Aerial
and used by TDS for the period commencing from January 1, 1996 through August
31, 1999 and is subject to adjustment once the final tax amounts are known.
Aerial used the funds to repay a portion of the existing indebtedness to TDS
thereby increasing the amount available under the revolving credit agreement. At
June 30, 1999, Aerial had $27.1 million available for borrowings under the
revolving credit agreement with TDS. In July 1999, TDS agreed to increase the
revolving credit agreement by $125 million. Accordingly, available funding under
the revolving credit agreement is now expected to last through December 1999.
TDS has not committed to any further financing of Aerial's operations. It is the
intent of TDS and Aerial management to obtain the necessary level of financial
support from sources other than TDS to enable Aerial to pay its debts as they
come due. TDS and Aerial management believe Aerial has the ability to obtain the
financial support in order to pay its debts as they come due. Sources of
additional capital may include vendor financing and public and private equity
and debt financings by Aerial or its subsidiaries. If sufficient future funding
is not available on terms and prices acceptable to Aerial, Aerial would have to
reduce its construction and operating activities or take other actions, which
could have a material adverse impact on Aerial's financial condition and results
of operations.
MARKET RISK
- -----------
The Company is subject to market rate risks due to fluctuations in interest
rates and equity markets. The majority of the Company's debt is in the form of
long-term fixed-rate notes, debentures and trust securities with original
maturities ranging up to 40 years. Accordingly, fluctuations in interest rates
can lead to fluctuations in the fair value of such instruments. TDS has not
entered into financial derivatives to reduce its exposure to interest rate
risks. There have been no material changes to TDS's outstanding debt and trust
securities instruments since December 31, 1998.
TDS maintains a portfolio of available for sale marketable equity securities
which resulted from acquisitions and the sale of non-strategic investments. The
market value of these investments, principally Vodafone AirTouch plc American
Depository Receipts, amounted to $524.6 million at June 30, 1999. A hypothetical
10% decrease in the share prices of these investments would result in a $52.5
million decline in the market value of the investments.
17
<PAGE>
YEAR 2000 ISSUE
- ---------------
The Year 2000 Issue exists because many computer systems and applications
abbreviate dates using only two digits rather than four digits, e.g., "98"
rather than "1998". Unless corrected, this shortcut may cause problems when the
century date "2000" occurs. On that date, some computer operating systems and
applications and embedded technology may recognize the date as January 1, 1900
instead of January 1, 2000. If the Company fails to correct any critical Year
2000 processing problems prior to January 1, 2000, the affected systems may
either cease to function or produce erroneous data, which could have material
adverse operational and financial consequences.
The Company's management has established a project team to address Year 2000
issues. The Company's plan to address the Year 2000 Issue consists of five
general phases: (i) Awareness, (ii) Assessment, (iii) Renovation, (iv)
Validation and (v) Implementation.
The awareness phase consisted of establishing Year 2000 project teams at each
business unit and developing an overall strategy. Management has established a
Year 2000 Program Office at the TDS corporate level to coordinate activities of
the Year 2000 project teams, to monitor the current status of individual
projects, to report periodically to the TDS Audit Committee, and to promote the
exchange of information between all business units to share knowledge and
solution techniques. On an ongoing basis, the project teams continue to provide
Year 2000 information and updates to customers, employees and business partners.
Management of each business unit has made the Year 2000 Issue a top priority.
The Year 2000 effort covers the network and supporting infrastructure for the
provision of cellular, local switched and data telecommunications and PCS
services; the operational and financial information technology ("IT") systems
and applications, such as computer systems that support key business functions
such as billing, finance, customer service, procurement and supply; and a review
of the Year 2000 compliance efforts of the Company's critical vendors.
The assessment phase included the identification of core business areas and
processes, analysis of systems and hardware supporting the core business areas
and the prioritization of renovation or replacement of systems and hardware that
are not Year 2000 compliant. Included in the assessment phase is an analysis of
risk management factors such as contingency plans and legal matters. Except for
the contingency plans as discussed below, the assessment phase was completed in
the first quarter of 1999.
The Year 2000 project teams identified those mission critical hardware, systems
and applications that were not Year 2000 compliant. These noncompliant critical
hardware, systems and applications have undergone renovation. The renovation
phase consisted of the remediation or replacement of mission critical systems,
applications and hardware. The renovation of these mission critical hardware,
systems and applications was substantially completed in July 1999.
The mission critical hardware, systems and applications that have been renovated
are undergoing Year 2000 validation testing. The validation phase includes
testing, verifying and validating the renovated or replaced platforms,
applications, databases and utilities. The validation phase consists of
independent verification testing of mission critical systems, applications and
hardware as well as network and system component upgrades received from
suppliers. In addition, selected Year 2000 upgrades are slated to undergo
testing in a controlled environment that replicates the current
18
<PAGE>
environment and is equipped to simulate the turn of the century and leap year
dates. The Company will rely on the Cellular Telephone Industry Association
("CTIA"), Alliance for Telecommunications Industry Solutions ("ATIS") and TELCO
Forum, which formed working groups to coordinate efforts of various carriers and
manufacturers to facilitate inter-network Year 2000 testing. These programs have
concluded and, generally, the findings indicate that there are no known network
inter-operability defects related to Year 2000 associated with the available
compliant upgrades for the networks. The Company has analyzed the findings and
plans to install upgrades appropriate to its network. Validation of mission
critical hardware, systems and applications is scheduled to be completed in the
third quarter of 1999.
The implementation phase involves migrating the converted, renovated and
validated mission critical systems, applications and hardware into production.
This phase is expected to be completed during the fourth quarter of 1999.
As with other telecommunications services providers, there exists a worst case
scenario possibility that a failure to correct a Year 2000 problem in one or
more of the mission critical network elements or IT applications could cause a
significant disruption of, or interruption in, certain normal business
functions. Management believes it has assembled the proper staffing and tools,
and put in place procedures to identify and prepare all mission critical systems
for the Year 2000 and believes the necessary programs are in place for a smooth
Year 2000 transition. Based on the assessments and work performed to date by the
project teams, management believes that any such material disruption to the
operations due to failure on an internal system is unlikely. However, management
cannot provide assurance that its plan to address Year 2000 compliance will be
successful as the Company is subject to various risks and uncertainties. Like
most other telecommunications operators, the Company is highly dependent on the
telecommunications network vendors to develop and provide compliant hardware,
systems and applications and on other third parties, including vendors, other
telecommunications service providers, government agencies and financial
institutions, to deliver reliable services and timely upgrades. The Company has
contacted critical vendors requesting information about their Year 2000
readiness. The responses have been used by the Company to make its renovations
and are being used in developing the Company's overall contingency plans.
The Company cannot assess with certainty the magnitude of any such potential
adverse impact. However, based upon risk assessment work conducted thus far,
management believes that the most reasonably likely worst case scenario of the
failure by the Company, its suppliers or other telecommunications carriers with
which the Company interconnects to resolve Year 2000 issues would be an
inability by the Company to (i) provide telecommunications services to the
Company's customers, (ii) route and deliver telephone calls originating from or
terminating with other telecommunications carriers, (iii) timely and accurately
process service requests and (iv) timely and accurately bill its customers. In
addition to lost earnings, these failures could also result in loss of customers
due to service interruptions and billing errors, substantial claims by customers
and increased expenses associated with stabilizing operations and executing
contingency plans.
The Company's contingency plan initiatives will include the following:
reviewing, assessing and updating existing business recovery plans; identifying
teams who will be on call during the millennium change to monitor the network,
critical systems, operations centers and business processes to react immediately
to facilitate repairs; re-prioritization of mission critical work processes and
associated resources; developing alternate processes to support critical
customer functions in the event information systems or mechanized processes
experience Year 2000 disruptions; establishing
19
<PAGE>
replacement/repair parallel paths to provide for repair and readiness of
existing systems and components that are scheduled for replacement by the year
2000, in the event the replacement schedules are not met; developing alternate
plans for critical suppliers of products/services that fail to meet Year 2000
compliance commitment schedules; and developing data retention and recovery
procedures to be in place for customer and critical business data to provide
pre-millennium backups with on-site as well as off-site data copies. The Company
anticipates substantially completing the balance of its contingency planning
early in the fourth quarter of 1999.
The Company estimates that the total costs related to the Year 2000 project will
be approximately $33 million. Through June 30, 1999, the total costs associated
with the Year 2000 Issue were $19.4 million. The timing of expenditures may vary
and is not necessarily indicative of readiness efforts or progress to date. In
recent years, the Company has made capital expenditures, primarily related to
upgrades of the cellular network to provide digital capabilities as well as
certain financial systems, billing systems, and customer care systems which are
by design thought to be Year 2000 compliant. These costs are not considered to
be directly related to the Year 2000 project because they were incurred as part
of the Company's overall operating strategies to add digital capabilities for
competitive purposes, and to improve financial systems and customer service.
However, these upgrades and financial systems will be tested for Year 2000
compliance. Though Year 2000 project costs will directly impact the reported
level of future net income, the Company intends to manage its total cost
structure, including deferral of non-critical projects, in an effort to mitigate
the impact of Year 2000 project costs.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
- -----------------------------------------------------------------------
STATEMENT
- ---------
This Management's Discussion and Analysis of Financial Condition and Results of
Operations 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; unanticipated changes in growth in
cellular and PCS customers, penetration rates, churn rates and the mix of
products and services offered in our markets; and unanticipated problems with
the Year 2000 Issue. Readers should evaluate any statements in light of these
important factors.
20
<PAGE>
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -----------------------
1999 1998 1999 1998
------------ ------------ ----------- ------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
U.S. Cellular $ 360,952 $ 290,108 $ 686,937 $ 535,265
TDS Telecom 136,307 120,155 265,272 234,321
Aerial 54,785 36,688 105,326 67,434
----------- ----------- ----------- -----------
552,044 446,951 1,057,535 837,020
----------- ----------- ----------- -----------
OPERATING EXPENSES
U.S. Cellular 288,500 239,971 562,371 451,973
TDS Telecom 105,091 97,337 207,102 189,471
Aerial 102,132 104,150 202,507 204,209
----------- ----------- ----------- -----------
495,723 441,458 971,980 845,653
----------- ----------- ----------- -----------
Operating Income (Loss) from Ongoing Operations 56,321 5,493 85,555 (8,633)
American Paging Operating (Loss) -- -- -- (11,406)
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 56,321 5,493 85,555 (20,039)
----------- ----------- ----------- -----------
INVESTMENT AND OTHER INCOME
Interest and dividend income 1,781 3,025 3,606 6,462
Investment income, net of amortization 650 4,274 7,193 16,894
Gain on sale of cellular and other investments 328,341 10,516 339,892 231,958
Other (expense), net (1,047) (7,234) (1,868) (11,829)
Minority share of (income) loss (37,929) 7,611 (34,788) (3,128)
----------- ----------- ----------- -----------
291,796 18,192 314,035 240,357
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST AND INCOME TAXES 348,117 23,685 399,590 220,318
Interest expense 31,066 31,272 61,637 62,885
Minority interest in income of subsidiary trust 6,202 6,203 12,405 11,099
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 310,849 (13,790) 325,548 146,334
Income tax expense 128,306 (113) 132,605 85,841
----------- ----------- ----------- -----------
NET INCOME (LOSS) 182,543 (13,677) 192,943 60,493
Preferred Dividend Requirement (337) (418) (687) (858)
----------- ----------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON $ 182,206 $ (14,095) $ 192,256 $ 59,635
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES (000s) 61,399 60,984 61,339 60,867
BASIC EARNINGS PER SHARE $ 2.97 $ (.23) $ 3.13 $ .98
=========== =========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE $ 2.93 $ (.23) $ 3.10 $ .97
=========== =========== =========== ===========
DIVIDENDS PER SHARE $ .115 $ .11 $ .23 $ .22
=========== =========== =========== ===========
The accompanying notes to financial statements are an
integral part of these statements.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six Months Ended
June 30,
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 192,943 $ 60,493
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 213,678 199,188
Deferred taxes 120,890 80,362
Investment income (13,866) (21,704)
Minority share of income 34,788 4,969
Gain on sale of cellular and other investments (339,892) (231,958)
Noncash interest expense 17,807 17,541
Other noncash expense 16,012 8,831
Change in accounts receivable (29,230) (25,211)
Change in materials and supplies (4,433) 15,553
Change in accounts payable (46,587) (13,569)
Change in accrued taxes 5,602 10,857
Change in other assets and liabilities 1,596 534
--------- ---------
169,308 105,886
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 2,469 955
Repayments of long-term debt (8,316) (8,833)
Change in notes payable 42,351 (15,321)
Trust preferred securities -- 144,893
Dividends paid (14,585) (14,043)
Purchase of subsidiary common stock -- (9,103)
Other financing activities 4,542 2,830
--------- --------
26,461 101,378
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (229,510) (250,501)
Investments in and advances to investment
entities and license costs 413 (3,561)
Distributions from investments 13,437 12,464
Proceeds from investment sales 57,614 96,793
Other investing activities (433) (3,201)
Acquisitions, net of cash acquired (8,131) (43,394)
Change in temporary investments and marketable securities 4,562 25,116
--------- --------
(162,048) (166,284)
--------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 33,721 40,980
CASH AND CASH EQUIVALENTS -
Beginning of period 50,083 51,008
--------- --------
End of period $ 83,804 $ 91,988
========= =========
The accompanying notes to financial statements are an integral
part of these statements.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
June 30, 1999 December 31, 1998
------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 83,804 $ 50,083
Temporary investments 6,349 10,341
Accounts receivable from customers and others 352,202 284,610
Materials and supplies, at average cost,
and other current assets 72,559 60,405
---------- ----------
514,914 405,439
---------- ----------
INVESTMENTS
Intangible Assets
Cellular license acquisition costs, net 1,150,052 1,200,653
Broadband PCS license acquisition costs, net 307,914 311,915
Franchise costs and other costs, net 179,123 181,517
Investments in unconsolidated entities 301,253 307,258
Marketable equity securities 524,584 378,812
Other investments 32,943 33,870
---------- ----------
2,495,869 2,414,025
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET
U.S. Cellular 1,200,052 1,138,585
TDS Telecom 867,129 881,507
Aerial 611,544 621,281
Other 28,875 31,216
---------- ----------
2,707,600 2,672,589
---------- ----------
OTHER ASSETS AND DEFERRED CHARGES 34,495 35,492
---------- ----------
TOTAL ASSETS $5,752,878 $5,527,545
========== ==========
The accompanying notes to financial statements are an integral
part of these statements.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
June 30, 1999 December 31, 1998
------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 15,784 $ 15,946
Current portion of vendor credit agreement 68,458 --
Notes payable 213,240 170,889
Accounts payable 220,240 288,417
Advance billings and customer deposits 37,201 37,473
Accrued interest 24,371 24,290
Accrued taxes 36,051 30,449
Accrued compensation 31,034 29,584
Other current liabilities 28,799 26,331
----------- -----------
675,178 623,379
----------- -----------
DEFERRED LIABILITIES AND CREDITS 418,152 346,989
----------- -----------
LONG-TERM DEBT, excluding current portion 1,519,339 1,553,096
----------- -----------
MINORITY INTEREST in subsidiaries 463,283 440,188
----------- -----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES of Subsidiary Trusts
Holding Solely Company Subordinated Debentures (a) 300,000 300,000
----------- -----------
PREFERRED SHARES 23,025 25,985
----------- -----------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $.01 per share 551 550
Series A Common Shares, par value $.01 per share 70 69
Capital in excess of par value 1,884,376 1,882,710
Treasury Shares, at cost (619,076 and 761,220
shares, respectively) (24,511) (29,439)
Accumulated other comprehensive income 6,647 75,609
Retained earnings 486,768 308,409
----------- -----------
2,353,901 2,237,908
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,752,878 $ 5,527,545
=========== ===========
(a) The sole asset of TDS Capital I is $154.6 million principal amount of 8.5%
subordinated debentures due 2037 from TDS. The sole asset of TDS Capital II is
$154.6 million principal amount of 8.04% subordinated debentures due 2038 from
TDS.
The accompanying notes to financial statements are an integral
part of these statements.
</TABLE>
24
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's
latest annual report on Form 10-K.
The accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring items) necessary to
present fairly the financial position as of June 30, 1999 and December 31,
1998, and the results of operations and cash flows for the six months
ended June 30, 1999 and 1998. The results of operations for the six months
ended June 30, 1999 and 1998, are not necessarily indicative of the
results to be expected for the full year.
2. Corporate Restructuring
On December 18, 1998, TDS announced that it was pursuing a tax-free
spin-off of its 82.2% interest in Aerial, as well as reviewing other
alternatives. There are a number of conditions that must be met for a
tax-free spin-off to occur, including the receipt of a favorable Internal
Revenue Service ruling on the tax-free status of such a spin-off, final
approval by the TDS Board of Directors, certain government and third party
approvals and review by the Securities and Exchange Commission ("SEC") of
appropriate SEC filings. On August 4, 1999, TDS submitted a request for a
private letter ruling from the Internal Revenue Service on the tax-free
status of the spin-off.
Prior to any spin-off, it is expected that Aerial will seek additional
financing so that Aerial would have the appropriate capitalization to
operate as a stand-alone entity. In connection with such financing, it is
anticipated that a substantial amount of Aerial's debt to TDS may be
converted into equity. TDS intends to seek shareholder approval of a
proposal to distribute Aerial Series A Common Shares, on a pro-rata basis,
to holders of TDS Series A Common Shares and to distribute Aerial Common
Shares, on a pro-rata basis, to holders of TDS Common Shares. There can be
no assurance that a spin-off will be consummated or that other
alternatives will not be pursued.
On September 8, 1998, pursuant to a purchase agreement ("Purchase
Agreement") between TDS, Aerial, Aerial Operating Company, Inc. ("AOC"),
and Sonera Ltd., a limited liability company organized under the laws of
Finland ("Sonera"), Sonera purchased approximately 2.4 million shares of
common stock of AOC representing a 19.423% equity interest in AOC, subject
to adjustment under certain circumstances, for an aggregate purchase price
of $200 million. Sonera has the right, subject to adjustment under certain
circumstances, to exchange each share of AOC common stock which it owns
for 6.72919 Common Shares of Aerial. Upon the exchange of all of the AOC
shares, Sonera would own an 18.452% equity interest in Aerial, reflecting
a purchase price equivalent to $12.33 per Common Share of Aerial (the
"Equivalent Purchase Price").
25
<PAGE>
Following the announcement by TDS on December 18, 1998, that it intended
to distribute to its shareholders all of the capital stock of Aerial that
it owns, and that Aerial would seek additional financing from sources
other than TDS in connection therewith, Sonera contacted TDS to express
certain concerns about the announcement. Sonera has claimed that it was
induced to pay an excessive price for the AOC common stock. Sonera has
requested the renegotiation of certain matters related to Sonera's
investment in AOC, including an adjustment in the Equivalent Purchase
Price, and has raised the possibility of litigation in connection
therewith.
Under the Purchase Agreement, the number of AOC shares purchased by Sonera
is subject to reduction if the average price of Aerial's Common Shares
exceeds certain threshold prices. During the second quarter and on July
7,1999, the average price of Aerial's Common Shares exceeded all of the
threshold prices set forth in the Purchase Agreement. Accordingly, Aerial
has requested Sonera to surrender for cancellation an aggregate of 634,216
shares of AOC common stock. Cancellation of these shares would have the
effect of increasing Sonera's Equivalent Purchase Price from $12.33 to
$16.68 per Aerial Common Share. However, Sonera has refused to surrender
any AOC shares and, in connection with its allegations, as discussed
above, has objected to the application of the share reduction provisions
in the Purchase Agreement.
TDS and Aerial deny Sonera's allegations and deny that Sonera has any
right to refuse to return the shares of AOC common stock for cancellation.
TDS and Aerial intend to attempt to reach a mutually acceptable resolution
of open issues with Sonera, including Sonera's objection to the adjustment
of Sonera's shares of AOC. However, there can be no assurance that any
such resolution will be possible and that this matter will not lead to
litigation, or that it will not have a material adverse effect on TDS or
Aerial or on the plans relating to the spin-off and refinancing of Aerial.
3. Marketable Equity Securities
Marketable equity securities include the Company's investments in equity
securities, primarily Vodafone AirTouch plc American Depository Receipts
("VOD ADRs") . These securities are classified as available-for-sale and
stated at fair market value.
Information regarding the Company's marketable equity securities is
summarized below.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Available-for-sale Equity Securities
Aggregate Fair Value $524,584 $378,812
Adjusted Basis 512,245 230,344
-------- --------
Gross Unrealized Holding Gains 12,339 148,468
Tax Effect 5,002 59,661
-------- --------
Unrealized Holding Gains, net of tax 7,337 88,807
Minority Share of Unrealized Holding Gains 690 13,198
-------- --------
Net Unrealized Holding Gains $ 6,647 $ 75,609
======== ========
</TABLE>
26
<PAGE>
4. Gains from Sale of Cellular and Other Investments
In accordance with accounting rules, the Company recognized a $327.1
million gain in the second quarter of 1999 on the difference between its
historical basis in its investment in AirTouch Communications, Inc.
("AirTouch") common shares and the value of Vodafone AirTouch plc American
Depository Receipts and cash received in the merger of AirTouch and
Vodafone Group plc. The remaining gains in 1999 reflect the sale of
certain minority cellular interests and other investments for cash. The
gains recorded in 1998 reflect the sale of minority interests to AirTouch
for AirTouch common shares and cash.
5. Other Comprehensive Income
The Company's Comprehensive Income includes Net Income and Unrealized
Gains from Marketable Equity Securities that are classified as
"available-for-sale". The following table summarizes the Company's
Comprehensive Income.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Accumulated Other Comprehensive Income
Balance, beginning of period $ 75,609 $ 683
Add:
Unrealized gains on securities 190,984 76,706
Income tax effect 76,187 27,961
--------- ---------
114,797 48,745
Minority share of unrealized gains 17,146 7,188
--------- ---------
Net unrealized gains 97,651 41,557
--------- ---------
Deduct:
Recognized gains on securities 327,113 --
Income tax expense 130,845 --
--------- ---------
196,268 --
Minority share of recognized gain 29,655 --
--------- ---------
Net recognized gains included in Net Income 166,613 --
--------- ---------
Net change in unrealized gains included in
Comprehensive Income (68,962) 41,557
--------- ---------
Balance, end of period $ 6,647 $ 42,240
========= =========
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Comprehensive Income
Net Income (Loss) $ 182,543 $ (13,677) $ 192,943 $ 60,493
Net unrealized gains on
securities (134,788) 26,020 (68,962) 41,557
--------- --------- --------- ---------
$ 47,755 $ 12,343 $ 123,981 $ 102,050
========= ========= ========= =========
</TABLE>
6. Earnings Per Share
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>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income (Loss) $ 182,543 $ (13,677) $ 192,943 $ 60,493
Less: Preferred Dividends (337) (418) (687) (858)
--------- --------- --------- ---------
Net Income (Loss) Available to Common used in
Basic Earnings per Share 182,206 (14,095) 192,256 59,635
Reduction in preferred dividends if Preferred
Shares converted in Common Shares 307 -- 627 292
Minority income adjustment -- (6) -- (78)
--------- --------- --------- ---------
Net Income (Loss) Available to Common used in
Diluted Earnings per Share $ 182,513 $ (14,101) $ 192,883 $ 59,849
========= ========= ========= =========
Weighted Average Number of Common Shares
used in Basic Earnings per Share 61,399 60,984 61,339 60,867
Effect of Dilutive Securities:
Common Shares outstanding if Preferred
Shares converted 614 -- 635 483
Stock options and stock appreciation rights 339 -- 266 134
Common Shares issuable 13 -- 13 13
--------- --------- --------- ---------
Weighted Average Number of Common Shares
used in Diluted Earnings per Share 62,365 60,984 62,253 61,497
========= ========= ========= =========
</TABLE>
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.
28
<PAGE>
7. Supplemental Cash Flow Information
Cash and cash equivalents include cash and those short-term, highly liquid
investments with original maturities of three months or less. Those
investments with original maturities of more than three months to twelve
months are classified as temporary investments. Temporary investments are
stated at cost, which approximates market. Those investments with original
maturities of more than 12 months are classified with other investments
and are stated at amortized cost.
TDS acquired certain cellular licenses in 1999 and certain cellular
licenses, operating companies and telephone companies in 1998. In
conjunction with these acquisitions, the following assets were acquired
and liabilities assumed and Common Shares issued.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1999 1998
---- ----
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Property, plant and equipment $ -- $ 13,271
Cellular licenses 5,464 27,563
Equity method investment in cellular interests -- (4,222)
Franchise costs -- 5,477
Long-term debt -- (4,634)
Deferred credits -- (991)
Other assets and liabilities,
excluding cash and cash equivalents -- 3,790
Decrease in Minority interest 2,667 13,168
Common Shares issued -- (10,028)
-------- --------
Decrease in cash due to acquisitions $ 8,131 $ 43,394
======== ========
</TABLE>
The following table summarizes interest and income taxes paid, and other noncash
transactions.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Interest Paid $43,401 $45,104
Income Taxes Paid (net of income tax refund
received of $10,000 in 1998) 8,417 1,697
Common Shares issued by TDS for
conversion of TDS Preferred Stock $ 2,811 $ 4,741
</TABLE>
29
<PAGE>
8. Business Segment Information
Financial data for the Company's business segments for each of the three
and six month periods ended or at June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
or at June 30, 1999 U.S. Cellular TDS Telecom Aerial All Other Total
- ------------------- ------------- ----------- ------ --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 360,952 $ 136,307 $ 54,785 $ -- $ 552,044
Operating cash flow 128,918 61,747 (24,909) -- 165,756
Depreciation and
amortization expense 56,466 30,531 22,438 -- 109,435
Operating income (loss) 72,452 31,216 (47,347) -- 56,321
Total Assets 3,279,170 1,656,069 950,078 3,373,043 9,258,360
Capital expenditures $ 77,164 $ 27,199 $ 7,713 $ 1,869 $ 113,945
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
or at June 30, 1998 U.S. Cellular TDS Telecom Aerial All Other Total
- ------------------- ------------- ----------- ------ --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 290,108 $ 120,155 $ 36,688 $ -- $ 446,951
Operating cash flow 100,579 50,601 (46,218) -- 104,962
Depreciation and
amortization expense 50,442 27,783 21,244 -- 99,469
Operating income (loss) 50,137 22,818 (67,462) -- 5,493
Total Assets 2,837,666 1,511,191 957,398 3,825,337 9,131,592
Capital expenditures $ 67,899 $ 31,693 $ 18,376 $ 7,219 $ 125,187
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
or at June 30, 1999 U.S. Cellular TDS Telecom Aerial All Other Total
- ------------------- ------------- ----------- ------ --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 686,937 $ 265,272 $ 105,326 $ -- $ 1,057,535
Operating cash flow 232,947 119,258 (52,972) -- 299,233
Depreciation and
amortization expense 108,381 61,088 44,209 -- 213,678
Operating income (loss) 124,566 58,170 (97,181) -- 85,555
Total Assets 3,279,170 1,656,069 950,078 3,373,043 9,258,360
Capital expenditures $ 161,852 $ 48,755 $ 12,966 $ 5,937 $ 229,510
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
or at June 30, 1998 U.S. Cellular TDS Telecom Aerial All Other Total
- ------------------- ------------- ----------- ------ --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 535,265 $ 234,321 $ 67,434 $ 17,783 $ 854,803
Operating cash flow 179,001 99,409 (95,835) (3,511) 179,064
Depreciation and
amortization expense 95,709 54,559 40,940 7,895 199,103
Operating income (loss) 83,292 44,850 (136,775) (11,406) (20,039)
Total Assets 2,837,666 1,511,191 957,398 3,825,337 9,131,592
Capital expenditures $ 136,992 $ 62,432 $ 48,061 $ 3,016 $ 250,501
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
or at June 30,
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Reconciliation of Segment Revenues to Consolidated Revenues:
Total Revenues for reportable segments $ 1,057,535 $ 854,803
American Paging Revenues included in "American
Paging Operating (Loss)" -- (17,783)
----------- -----------
Consolidated Revenues $ 1,057,535 $ 837,020
=========== ===========
Reconciliation of Segment Total Assets to Consolidated Total Assets:
Total Assets for reportable segments $ 9,258,360 $ 9,131,592
Intercompany eliminations (1) (3,505,482) (3,798,683)
----------- -----------
Consolidated Total Assets $ 5,752,878 $ 5,332,909
=========== ===========
(1)Intercompany eliminations consist primarily of the elimination of TDS's book
value in its subsidiaries and the elimination of intercompany receivables.
</TABLE>
31
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
At the Annual Meeting of Shareholders of TDS, held on May 14, 1999, the
following number of votes were cast for the matters indicated:
1. a. For the election of two Class I Directors of the Company by the Series
A Holders:
<TABLE>
<CAPTION>
Broker
Nominee For Withhold Non-vote
------- --- -------- --------
<S> <C> <C> <C>
James Barr III 66,338,245 965 0
Sandra L. Helton 66,339,195 15 0
</TABLE>
b. For the election of three Class III Directors of the Company by the
Series A Holders:
<TABLE>
<CAPTION>
Broker
Nominee For Withhold Non-vote
------- --- -------- --------
<S> <C> <C> <C>
LeRoy T. Carlson 66,339,195 15 0
Walter C.D. Carlson 66,339,195 15 0
Letitia G.C. Carlson 66,339,195 15 0
</TABLE>
c. For the election of one Class III Director of the Company by the Common
Holders:
<TABLE>
<CAPTION>
Broker
Nominee For Withhold Non-vote
------- --- -------- --------
<S> <C> <C> <C>
Herbert S. Wander 48,808,141 1,065,389 0
</TABLE>
2. Proposal to approve the 1999 Employee Stock Purchase Plan of the Company:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-vote
--- ------- ------- --------
<S> <C> <C> <C>
114,503,585 1,597,292 111,863 0
</TABLE>
3. Proposal to Ratify the Selection of Arthur Andersen LLP as Independent Public
Accountants for 1999:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-vote
--- ------- ------- --------
<S> <C> <C> <C>
116,019,721 154,423 38,596 0
</TABLE>
32
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 11 - Computation of earnings per common share is included
herein as footnote 6 to the financial statements.
(b) Exhibit 12 - Statement regarding computation of ratios.
(c) Exhibit 27 - Financial Data Schedule
(d) Reports on Form 8-K filed during the quarter ended June 30, 1999:
None
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELEPHONE AND DATA SYSTEMS, INC.
--------------------------------
(Registrant)
Date August 13, 1999 /s/ Sandra L. Helton
------------------- -------------------------------------------
Sandra L. Helton,
Executive Vice President-Finance
(Chief Financial Officer)
Date August 13, 1999 /s/ Gregory J. Wilkinson
------------------ -------------------------------------------
Gregory J. Wilkinson,
Vice President and Controller
(Principal Accounting Officer)
34
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12
TELEPHONE AND DATA SYSTEMS, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
For the Six Months ended June 30, 1999
(Dollars In Thousands)
<S> <C>
EARNINGS:
Income from Continuing Operations before
income taxes $ 325,548
Add (Deduct):
Minority Share of Losses (5,431)
Earnings on Equity Method (7,194)
Distributions from Minority Subsidiaries 13,437
Amortization of Capitalized Interest 790
Minority interest in majority-owned subsidiaries
that have fixed charges 37,256
---------
364,406
Add fixed charges:
Consolidated interest expense 74,043
Interest Portion (1/3) of Consolidated Rent Expense 10,197
---------
$ 448,646
=========
FIXED CHARGES:
Consolidated interest expense $ 74,043
Interest Portion (1/3) of Consolidated Rent Expense 10,197
---------
$ 84,240
=========
RATIO OF EARNINGS TO FIXED CHARGES 5.33
=========
Tax-Effected Redeemable Preferred Dividends $ 83
Fixed Charges 84,240
---------
Fixed Charges and Redeemable Preferred Dividends $ 84,323
=========
RATIO OF EARNINGS TO FIXED CHARGES
AND REDEEMABLE PREFERRED DIVIDENDS 5.32
=========
Tax-Effected Preferred Dividends $ 1,603
Fixed Charges 84,240
---------
Fixed Charges and Preferred Dividends $ 85,843
=========
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS 5.23
=========
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Telephone and Data Systems, Inc. as of
June 30, 1999 and for the six months ended, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 83,804
<SECURITIES> 524,584
<RECEIVABLES> 231,174
<ALLOWANCES> 10,897
<INVENTORY> 43,031
<CURRENT-ASSETS> 514,914
<PP&E> 4,081,912
<DEPRECIATION> 1,374,312
<TOTAL-ASSETS> 5,752,878
<CURRENT-LIABILITIES> 675,178
<BONDS> 1,519,339
0
23,025
<COMMON> 621
<OTHER-SE> 2,353,280
<TOTAL-LIABILITY-AND-EQUITY> 5,752,878
<SALES> 0
<TOTAL-REVENUES> 1,057,535
<CGS> 0
<TOTAL-COSTS> 971,980
<OTHER-EXPENSES> (314,035)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,042
<INCOME-PRETAX> 325,548
<INCOME-TAX> 132,605
<INCOME-CONTINUING> 192,943
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 192,943
<EPS-BASIC> 3.13
<EPS-DILUTED> 3.10
</TABLE>
