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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
30 North LaSalle Street, Chicago, Illinois 60602
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 630-1900
Not Applicable
-----------------------------------------
(Former address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 29, 1999
- --------------------------------------- -------------------------------
Common Shares, $.01 par value 54,799,542 Shares
Series A Common Shares, $.01 par value 6,956,464 Shares
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<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
--------------------------------
3rd QUARTER REPORT ON FORM 10-Q
-------------------------------
INDEX
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Page No.
--------
Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-19
Consolidated Statements of Income -
Three Months and Nine Months Ended
September 30, 1999 and 1998 20
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 21
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 22-23
Notes to Consolidated Financial Statements 24-32
Part II. Other Information 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 3.1 million cellular telephone and telephone 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") and its telephone operations through its wholly-owned subsidiary, TDS
Telecommunications Corporation ("TDS Telecom"). The Company continues to operate
its personal communications service ("PCS") operations through its 82.1%-owned
subsidiary, Aerial Communications Inc. ("Aerial"), pending its merger with
VoiceStream Wireless Corporation ("VoiceStream") as discussed below.
Merger of Aerial Communications, Inc.
On September 17, 1999, the Board of Directors of TDS decided not to pursue a
spin-off of Aerial and approved a plan of merger between Aerial and VoiceStream.
As a result of the board's approval of the plan, the consolidated financial
statements and supplemental data of TDS have been adjusted to reflect the
results of operations and net assets of Aerial as discontinued operations in
accordance with generally accepted accounting principles. Financial statements
for prior periods have been reclassified to conform to current year
presentation. See "Discontinued Operations."
RESULTS OF OPERATIONS
- ---------------------
Nine Months Ended 9/30/99 Compared to Nine Months Ended 9/30/98
- ---------------------------------------------------------------
Operating Revenues increased 21% ($257.9 million) during the first nine months
of 1999 primarily as a result of a 19% increase in customers served and an
increase in cellular roaming activity. U.S. Cellular's operating revenues
increased 25% ($210.9 million) as customers served increased by 435,000, or 22%,
since September 30, 1998, to 2,453,000 and as roaming revenue increased by 38%
in 1999. TDS Telecom operating revenues increased 13% ($47.0 million) as total
access lines increased by 66,200, or 12%, since September 30, 1998 to 633,800.
Operating Expenses rose 17% ($164.0 million) in the first nine months of 1999
reflecting growth in operations. U.S. Cellular's operating expenses increased
19% ($136.6 million) and TDS Telecom's expenses increased 10% ($27.4 million).
Operating Income increased 52% to $307.7 million in the first nine months of
1999 from $202.4
2
<PAGE>
million in 1998. U.S. Cellular's operating income increased 51% to $220.1
million in the first nine months of 1999 and its operating income margin, as a
percentage of service revenues, increased to 21.5% in 1999 from 17.8% in 1998.
TDS Telecom's operating income increased 29% to $87.6 million in the first nine
months of 1999 and its operating margin increased to 21.8% in 1999 from 19.1% in
1998.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
1999 1998 Change
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Operating Income from Ongoing Operations
U.S. Cellular $ 220,126 $ 145,807 $ 74,319
TDS Telecom 87,607 68,025 19,582
--------- --------- ---------
307,733 213,832 93,901
American Paging Operating (Loss) -- (11,406) 11,406
--------- --------- ---------
Operating Income $ 307,733 $ 202,426 $ 105,307
========= ========= =========
</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 $300.4 million in 1999 and $202.5
million in 1998.
Gain on Sale of Cellular and Other Investments totaled $345.9 million in the
first nine months of 1999 and $235.4 million in the first nine months of 1998.
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 received in the merger of
AirTouch and Vodafone Group plc. The AirTouch common shares were received in
1998 as a result of the sale of certain minority cellular interests to AirTouch
resulting in a $198.6 million gain. The remaining gains in 1999 and 1998
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 primarily cellular
investments in which the Company has a minority interest and follows the equity
method of accounting decreased 17% ($3.9 million) in the first nine months of
1999. The decrease was primarily due to decreased operating results of certain
minority cellular interests, the sale of certain minority cellular interests in
the first quarter of 1998 and increased amortization related to the paging
interest, offset somewhat by TDS's $7.8 million share of a one-time gain
reported by an equity-method investment in the third quarter of 1999.
Investment income is net of amortization relating to these minority interests.
3
<PAGE>
Minority Share of Income includes the minority public shareholders' share of
U.S. Cellular's net income, and the minority shareholders' or partners' share of
U.S. Cellular'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.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1999 1998 Change
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Minority Share of Income
U.S. Cellular
Minority Public Shareholders' $(53,516) $(37,476) $(16,040)
Minority Shareholders' or Partners' (6,156) (4,401) (1,755)
--------- --------- ---------
(59,672) (41,877) (17,795)
Telephone Subsidiaries and Other (510) (506) (4)
--------- --------- ---------
$(60,182) $(42,383) $(17,799)
========= ========= =========
</TABLE>
Interest Expense decreased 7% ($5.9 million) in the first nine months of 1999.
The decline in interest expense is primarily due to reduced short-term debt
balances, offset somewhat by an increase in long-term debt.
Minority Interest in Income of Subsidiary Trust (Trust Preferred Securities
Distributions) increased 8% ($1.3 million) in the first nine months of 1999. The
increase reflects a full three quarters of distributions on the $150 million of
additional securities issued in February 1998.
Income Tax Expense increased 65% ($82.9 million) in 1999 primarily due to the
increased pretax income as a result of improved operations and the increase in
gains recorded in 1999.
4
<PAGE>
Net Income From Continuing Operations totaled $302.7 million, or $4.82 diluted
earnings per share, in the first nine months of 1999, compared to $177.8
million, or $2.84 diluted earnings per share, in the first nine months of 1998.
The increase in net income from continuing operations 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 continuing operations and gains is shown
below.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1999 1998
----------- -----------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Net Income From Continuing Operations
Operations $ 111,186 $ 58,247
Gains 191,489 119,509
----------- -----------
$ 302,675 $ 177,756
=========== ===========
Diluted Earnings Per Share From Continuing Operations
Operations $ 1.75 $ .91
Gains 3.07 1.93
----------- -----------
$ 4.82 $ 2.84
=========== ===========
</TABLE>
Loss From Discontinued Operations decreased 24% to $84.2 million, or $1.35 per
diluted share in the first nine months of 1999 from $110.9 million, or $1.79 per
diluted share in the first nine months of 1998. Losses of $5.6 million
subsequent to September 17, 1999 have been deferred and will be offset against
the expected gain upon closing of the merger.
Net Income Available to Common totaled $217.5 million, or $3.47 diluted earnings
per share, in the first nine months of 1999, compared to $65.5 million, or $1.05
diluted earnings per share, in the first nine months of 1998.
5
<PAGE>
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 a primary reason for the growth in U.S.
Cellular's results of operations. The number of customers served increased by
435,000, or 22%, since September 30, 1998, to 2,453,000.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenue
Local retail $ 241,667 $ 200,885 $ 689,672 $ 569,192
Inbound roaming 91,713 71,880 241,790 174,761
Long-distance and other 26,760 31,156 92,395 77,243
------------- ------------- ------------ ------------
Service Revenue 360,140 303,921 1,023,857 821,196
Equipment sales 13,061 10,026 36,281 28,016
------------- ------------- ------------ ------------
373,201 313,947 1,060,138 849,212
------------- ------------- ------------ ------------
Operating Expenses
System operations 44,807 53,817 165,139 143,127
Marketing and selling 66,848 55,546 188,533 156,875
Cost of equipment sold 27,915 22,776 81,015 63,881
General and administrative 80,627 67,265 239,500 191,785
Depreciation 47,031 40,795 135,332 117,593
Amortization 10,413 11,233 30,493 30,144
------------- ------------- ------------ ------------
277,641 251,432 840,012 703,405
------------- ------------- ------------ ------------
Operating Income $ 95,560 $ 62,515 $ 220,126 $ 145,807
============= ============= ============ ============
</TABLE>
Operating revenue increased 25% ($210.9 million) in the first nine months of
1999. Total average monthly service revenue per customer increased less than 1%
($.19) to $49.06 in the first nine months of 1999 from $48.87 in 1998. The
increase in average monthly service revenue per customer resulted from increases
in minutes of use on U.S. Cellular's systems. Substantial increases in inbound
roaming minutes of use were partially offset by a 24% decrease in revenue per
minute of use, resulting in an 11% increase in average monthly roaming revenue
per customer. However, 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 2% 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 slight increase through nine months of 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.
Local retail revenue increased 21% ($120.5 million) in the first nine months of
1999 due primarily to the 22% customer growth. Average local minutes of use per
retail customer increased 11% to 115 in 1999 from 104 in 1998, while average
local retail revenue per minute declined by 12% to $.29 in 1999 from $.33 in
1998. U.S. Cellular's use of pricing and other incentive programs in order to
stimulate overall usage, and competitive pressures resulted in a lower average
revenue per minute of use. Average monthly local retail revenue per customer
declined 2% ($.83) to $33.04 in 1999 from $33.87 in 1998.
6
<PAGE>
Inbound roaming revenue (charges to customers of other systems who use U.S.
Cellular's cellular systems when roaming) increased 38% ($67.0 million) in the
first nine months of 1999. Roaming minutes of use increased substantially in
1999, while average inbound roaming revenue per minute declined by 24% in 1999
reflecting the downward industry-wide trend in negotiated rates. Both the
increase in minutes of use and the decrease in revenue per minute of use were
significantly affected by certain "one rate" programs offered by other wireless
companies beginning 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 inbound roaming minutes of use is
expected to be slower in the fourth quarter of 1999 and in 2000 as the effect of
"one rate" programs becomes present in both periods of comparison. Average
monthly inbound roaming revenue per customer increased 11% ($1.18) to $11.58 in
1999 compared to $10.40 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 20% ($15.2 million) in the first nine
months of 1999 as the volume of long-distance calls billed by U.S. Cellular
increased, primarily from inbound roamers using U.S. Cellular's systems to make
long-distance calls. Growth in long-distance revenue was slowed by price
reductions primarily related to long-distance charges on roaming minutes of use.
These reductions, similar to the price reductions on roaming airtime charges,
are a continuation of the industry trend toward reduced per minute prices. The
price reductions also reduced the growth in the outbound roaming expense
component of system operations expense by approximately the same amount,
resulting in no material effect on U.S. Cellular's operating cash flow or
operating income. Average monthly long-distance and other revenue per customer
decreased 4% ($.17) to $4.43 in 1999 compared to $4.60 in 1998.
Operating expenses increased 19% ($136.6 million) during the first nine months
of 1999. Costs to provide service (system operations expenses) as a percent of
service revenue were 16.1% in 1999 and 17.4% in 1998. System operations expenses
include customer usage expenses and maintenance, utility and cell site expenses.
Customer usage expenses increased 13% ($12.8 million) and consumed 10.7% of
service revenues in 1999 and 11.8% in 1998. The increase in customer usage
expense was primarily due to the $11.2 million increase in costs related to the
increase in average monthly local retail minutes of use per customer and the
substantial increase in inbound roaming minutes of use. Net outbound roaming
usage expense increased $1.3 million reflecting growth in minutes used by U.S.
Cellular's customers on other systems, offset by lower costs per roaming minute
of use. These lower costs are related to the lower roaming prices in the
industry discussed previously. Maintenance, utility and cell site expenses
increased 20% ($9.2 million) and consumed 5.4% of service revenues in 1999 and
5.7% in 1998. The number of cell sites operated increased to 2,235 in 1999 from
1,958 in 1998.
Costs to expand the customer base consist of marketing and selling expenses and
the cost of equipment sold. Selling and marketing expenses increased 20% ($31.7
million) in the first nine months of 1999 while cost of equipment sold increased
27% ($17.1 million). These expenses, less equipment sales revenue, represent the
cost to acquire a new customer. Equipment sales revenue increased 29% ($8.3
million) in the first nine months of 1999. Cost per gross customer addition
increased to $343 in 1999 from $314 in 1998 while gross customer activations
increased to 681,000 in 1999 from 614,000 in 1998. The increase in cost per
gross customer addition was primarily driven by increased commissions, and
additional advertising expenses incurred to promote the U.S. Cellular brand name
and to distinguish its service offerings from those of its competitors. Also
7
<PAGE>
contributing was an increase in equipment sales losses 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 increased 25% ($47.7 million) and consumed
23.4% of service revenues in 1999 and 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 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 increased 12% ($18.1 million) and consumed
16.2% of service revenues in 1999 and 18.0% in 1998. Depreciation expense
increased 15% ($17.7 million) in 1999 primarily due to the 17% increase in
average fixed assets since September 30, 1998. Beginning October 1, 1999,
capitalized development costs related to U.S. Cellular's new billing and
information system, totaling approximately $118 million, will be amortized over
a period of seven years.
Operating income increased 51% ($74.3 million) to $220.1 million in the first
nine months 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 21.5% in 1999 compared to 17.8% in 1998.
Although service revenues increased 25%, customers increased by 22% and average
monthly revenue per customer increased by less than 1% in the first nine months
of 1999, management does not expect service revenues to continue to grow faster
than the customer base for the remainder of 1999 and in 2000. 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 and 2000. 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.
8
<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 66,200, or 12%, since September 30, 1998 to
633,800. TDS Telecom's 104 incumbent local exchange ("ILEC") subsidiaries served
570,800 access lines at September 30, 1999, a 5% increase over the 543,200
access lines at September 30, 1998. TDS Telecom's competitive local exchange
("CLEC") subsidiaries served 63,000 access lines at September 30, 1999 compared
to 24,400 access lines at September 30, 1998. TDS Telecom began providing
services as a CLEC 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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenue
ILEC Revenue
Local service $ 38,623 $ 34,828 $ 113,212 $ 100,949
Network access and long-distance 65,732 62,406 199,905 187,423
Miscellaneous 19,142 17,314 52,206 49,411
------------ ------------ ------------ ------------
Total ILEC Revenue 123,497 114,548 365,323 337,783
CLEC Revenue 14,423 7,714 38,741 20,000
Intercompany Revenue (482) (839) (1,354) (2,039)
------------ ------------ ------------ ------------
Total Operating Revenue 137,438 121,423 402,710 355,744
------------ ------------ ------------ ------------
Operating Expenses
ILEC Expenses
Network operations 25,409 23,165 71,338 67,451
Depreciation and Amortization 29,394 27,959 87,761 81,312
Customer operations 20,199 18,151 59,271 54,834
Corporate operations 17,590 19,505 53,356 59,589
------------ ------------ ------------ ------------
Total ILEC Expenses 92,592 88,780 271,726 263,186
CLEC Expenses 15,891 10,307 44,731 26,572
Intercompany Expenses (482) (839) (1,354) (2,039)
------------ ------------ ------------ ------------
Total Operating Expenses 108,001 98,248 315,103 287,719
------------ ------------ ------------ ------------
Operating Income $ 29,437 $ 23,175 $ 87,607 $ 68,025
============ ============ ============ ============
</TABLE>
Operating revenue increased 13% ($47.0 million) in the first nine months of 1999
reflecting primarily customer growth.
Revenue from ILEC operations increased 8% ($27.5 million) in the first nine
months of 1999. Average monthly revenue per access line increased 3% ($1.95) to
$72.55 in the first nine months of 1999 from $70.60 in the first nine months of
1998. Local service revenue increased 12% ($12.3 million) during 1999. Access
line growth of 5% increased revenues by $5.0 million while the sale of
custom-calling and advanced features increased revenues by $4.3 million. Rate
increases pushed up revenue by $2.9 million. Average monthly local service
revenue per access line was $22.48 in
9
<PAGE>
1999 and $21.10 in 1998. Network access and long-distance revenue increased 7%
($12.5 million) during 1999. Revenue generated from access minute growth due to
increased network usage increased $8.9 million in 1999. Compensation from state
and national revenue pools due to increased costs of providing network access
added $4.0 million to revenues. Average monthly network access and long-distance
revenue per access line was $39.70 in 1999 and $39.17 in 1998. Miscellaneous
revenue increased 6% ($2.8 million) during 1999. Average monthly miscellaneous
revenue per access line was $10.37 in 1999 and $10.33 in 1998.
Revenue from CLEC operations increased 94% ($18.7 million) in the first nine
months of 1999 as access lines served increased to 63,000 at September 30, 1999
from 24,400 at September 30, 1998.
Operating expenses increased 10% ($27.4 million) during 1999 due to growth in
ILEC operations and the development of CLEC operations.
Expenses from ILEC operations increased by 3% ($8.5 million) in the first nine
months of 1999. The costs to provide service to customers increased 6% ($3.9
million), primarily for increased wages and benefits expenses, and consumed
19.5% of ILEC revenues in 1999 and 20.0% in 1998. Costs to serve customers
increased 8% ($4.4 million) and consumed 16.2% of ILEC revenues in 1999 and
1998. Corporate expenses decreased 10% ($6.2 million) primarily due to improved
efficiencies and cost controls, and consumed 14.6% of ILEC revenues in 1999 and
17.6% in 1998. Depreciation and amortization increased 8% ($6.4 million),
primarily due to increased investment in facilities, and consumed 24.0% of ILEC
revenues in 1999 and 24.1% in 1998.
CLEC operating expenses increased 68% ($18.2 million) in the first nine months
of 1999 as the CLEC subsidiaries continue to grow their customer base.
Operating income increased 29% ($19.6 million) to $87.6 million in the first
nine months of 1999 reflecting improved ILEC and CLEC operating results.
Operating income from ILEC operations increased 25% ($19.0 million) to $93.6
million. Operating loss from CLEC operations decreased 9% ($582,000) reflecting
the improved operating results.
10
<PAGE>
Three Months Ended September 30, 1999 Compared to Three Months Ended September
- --------------------------------------------------------------------------------
30, 1998
- --------
Operating Revenues increased 17% ($75.3 million) during the third quarter of
1999 for reasons generally the same as the first nine months. U.S. Cellular
revenues increased 19% ($59.3 million) in 1999. Local retail revenue increased
20% ($40.8 million) in the third quarter of 1999, while inbound roaming revenue
increased 28% ($19.8 million). Average monthly service revenue per customer was
$49.73 in the third quarter of 1999 and $51.40 in 1998. TDS Telecom revenues
increased 13% ($16.0 million) in the third quarter of 1999 due to the growth in
ILEC operations ($8.9 million) and growth in CLEC operations ($6.7 million).
Average monthly revenue per ILEC access line increased to $72.58 in the third
quarter of 1999 from $70.64 in 1998.
Operating Expenses rose 10% ($36.0 million) during the third quarter of 1999 for
reasons generally the same as the first nine months. U.S. Cellular expenses
increased 10% ($26.2 million). System operations expense decreased 17% ($9.0
million), driven by lower costs for minutes used by U.S. Cellular's customers
when roaming. Marketing and selling expenses, including cost of equipment sold,
increased 21% ($16.4 million). Cost per gross customer addition increased to
$358 in the third quarter of 1999 from $324 in 1998. General and administrative
expense increased 20% ($13.4 million). Depreciation and amortization expense
increased 10% ($5.4 million). TDS Telecom expenses increased 10% ($9.8 million)
due to growth in ILEC operations ($3.8 million) and in CLEC operations ($5.6
million) for reasons generally the same as the first nine months.
Operating Income increased $39.3 million to $125.0 million in the third quarter
of 1999. U.S. Cellular's operating income increased $33.0 million reflecting
continued growth in customers and revenues. TDS Telecom's operating income
increased $6.3 million reflecting the improved results from ILEC and CLEC
activities.
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------
1999 1998 Change
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Operating Income
U.S. Cellular $ 95,560 $ 62,515 $ 33,045
TDS Telecom 29,437 23,175 6,262
-------- -------- --------
Operating Income $124,997 $ 85,690 $ 39,307
======== ======== ========
</TABLE>
Investment and Other Income (Expense) totaled $200,000 in 1999 and ($2.6)
million in 1998. Gain on Sale of Cellular and Other Investments totaled $6.0
million in the third quarter of 1999 compared to $3.4 million in 1998.
Investment Income increased 96% ($5.7 million) to $11.6 million primarily due to
TDS's $7.8 million share of a one-time gain reported by an equity-method
investment.
11
<PAGE>
Minority Share of (Income) Loss increased $6.2 million in the third quarter of
1999 primarily for reasons generally the same as the first nine months.
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------
1999 1998 Change
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Minority Share of (Income) Loss
United States Cellular
Minority Shareholders' Share $(11,068) $ (6,722) $ (4,346)
Minority Partners' Share (3,077) (1,707) (1,370)
-------- -------- --------
(14,145) (8,429) (5,716)
Telephone Subsidiaries and Other (282) 188 (470)
-------- -------- --------
$(14,427) $ (8,241) $ (6,186)
======== ======== ========
</TABLE>
Interest Expense decreased 9% ($2.5 million) to $25.2 million in the third
quarter of 1999 for reasons generally the same as the first nine months.
Minority Interest in Income of Subsidiary Trusts reflects the preferred
distribution requirement of the $300 million of Trust Originated Preferred
Securities outstanding.
Income Tax Expense increased 79% ($18.0 million) to $40.9 million in the third
quarter of 1999 from $22.9 million in 1998 primarily due to the increased pretax
income as a result of improved operations.
Net Income From Continuing Operations totaled $52.9 million, or $.84 diluted
earnings per share, in the third quarter of 1999, compared to $26.3 million, or
$.41 diluted earnings per share, in the third quarter of 1998. The increase in
net income and earnings per share reflects improved operating results. A summary
of net income available to common and diluted earnings per share from continuing
operations and gains is shown below.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
1999 1998
---------- -----------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Net Income From Continuing Operations
Operations $ 51,017 $ 24,380
Gains 1,919 1,902
---------- -----------
$ 52,936 $ 26,282
========== ===========
Diluted Earnings Per Share From Continuing Operations
Operations $ .81 $ .38
Gains .03 .03
---------- -----------
$ .84 $ .41
========== ===========
</TABLE>
Loss From Discontinued Operations increased 37% to $27.4 million, or $.44 per
diluted share in the third quarter of 1999 from $20.0 million, or $.32 per
diluted share in the third quarter of 1998. Losses of $5.6 million subsequent to
September 17, 1999 have been deferred and will be offset against the expected
gain upon closing of the merger.
12
<PAGE>
Net Income Available to Common totaled $25.2 million, or $.40 diluted earnings
per share, in the third quarter of 1999, compared to $5.9 million, or $.09
diluted earnings per share, in the third quarter of 1998.
FINANCIAL RESOURCES AND LIQUIDITY
TDS and its subsidiaries operate relatively capital and marketing intensive
businesses. U.S. Cellular's increasing internal cash flow, TDS Telecom's steady
internal cash flow and cash received from the sale of cellular interests and
other investments have reduced the overall need for external financing of these
businesses. However in recent years, TDS has obtained substantial funds from
external sources to finance Aerial's operations and construction activities and
for general corporate purposes. On September 17, 1999, the Board of Directors of
TDS approved a plan of merger between Aerial and VoiceStream. See "Discontinued
Operations."
Cash Flows From Continuing 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 in customers and revenues. Cash flows from
operating activities totaled $356.1 million in the first nine months of 1999
compared to $287.0 million in 1998.
U.S. Cellular's operating cash flow (operating income plus depreciation and
amortization) totaled $386.0 million in the first nine months of 1999 (up 31%)
while TDS Telecom's operating cash flow totaled $179.6 million (up 19%).
American Paging's operating cash outflow of $3.5 million in the first nine
months 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 expense, and changes in working capital and other assets and
liabilities) required $209.5 million in the first nine months of 1999 and $154.3
million in 1998. The increase is primarily related to the changes in working
capital items.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------
1999 1998 Change
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Operating cash flow
U.S. Cellular $ 385,951 $ 293,544 $ 92,407
TDS Telecom 179,625 151,324 28,301
American Paging -- (3,511) 3,511
--------- --------- ---------
565,576 441,357 124,219
Other operating activities (209,456) (154,322) (55,134)
--------- --------- ---------
$ 356,120 $ 287,035 $ 69,085
========= ========= =========
</TABLE>
Cash Flows From Continuing Financing Activities. TDS has used short-term debt to
finance 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.
13
<PAGE>
Cash flows from financing activities required $70.4 million in the first nine
months of 1999 and $30.1 million in 1998. During 1999, the Company reduced Notes
Payable balances by $43.7 million primarily through internally generated cash.
During 1998, TDS received $198.2 million on the sale of eight-year 7% Notes and
$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 in 1998 to repurchase all of American Paging common shares, not owned by
TDS, prior to contributing substantially all American Paging's assets and
certain liabilities to a previously unrelated limited liability corporation for
a 30% interest in that corporation. Dividends paid on Common and Preferred
Shares, excluding dividends reinvested, totaled $22.0 million in 1999 and $21.2
million in 1998.
Cash Flows From Continuing 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
$201.0 million in the first nine months of 1999 compared to $290.9 million in
1998 reflecting primarily reduced acquisition expenditures and capital
expenditures. Capital expenditures required $318.9 million in 1999 and $344.7
million in 1998. Acquisitions, net of cash acquired, required $29.5 million in
1999 and $85.9 million in 1998. The sales of non-strategic cellular interests
and other investments provided $120.0 million in 1999, including $46.6 million
of cash received in the Vodafone/AirTouch merger, and $100.6 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. U.S. Cellular capital expenditures
totaled $232.8 million in 1999 and $231.0 million in 1998 representing the
construction of cell sites, the development of office systems and the change out
of analog radio equipment for digital radio equipment. TDS Telecom capital
expenditures totaled $84.8 million in 1999 and $104.7 million in 1998
representing amounts spent on accommodating growth in existing ILEC markets and
expansion of new and existing CLEC markets.
Cash Flows From Discontinued Operations. Cash outflows from discontinued
operations totaled $49.7 million in 1999 compared to a cash inflow of $65.1
million in 1998. The cash inflow in 1998 was primarily the result of the
investment by Sonera Ltd. of $200 million in a subsidiary of Aerial offset
somewhat by the cash used in operating and investing activities.
LIQUIDITY
TDS anticipates that the aggregate resources required for 1999 will include
approximately $300 million for U.S. Cellular capital additions and $125 million
for TDS Telecom capital additions. At September 30, 1999, the remaining amount
of capital spending approximated $107.4 million, consisting primarily of $67.2
million for cellular additions and $40.2 million for telephone additions.
U.S. Cellular plans to finance its cellular construction program using primarily
internally generated cash. U.S. Cellular's operating cash flow totaled $475.3
million for the twelve months ended September 30, 1999, up 36% ($124.9 million)
from 1998. U.S. Cellular had $500 million of bank lines of credit for general
corporate purposes at September 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.
14
<PAGE>
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. TDS Telecom's operating cash flow totaled
$234.1 million for the twelve months ended September 30, 1999, up 17% ($34.0
million) from 1998. At September 30, 1999, TDS Telecom telephone subsidiaries
had $119.1 million in unadvanced loan funds from federal government programs to
finance the telephone construction program.
TDS and its subsidiaries, excluding Aerial, had cash and temporary investments
totaling $86.5 million at September 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 also had $587 million of bank lines of
credit for general corporate purposes at September 30, 1999. Unused amounts of
such lines totaled $459.8 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. TDS and its subsidiaries have access to public
and private capital markets to help meet its long-term financing needs. 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.
DISCONTINUED OPERATIONS
On September 17, 1999, the Board of Directors of TDS decided not to pursue a
spin-off of Aerial Communications, Inc. ("Aerial"), an 82.1%-owned subsidiary of
TDS, and approved a plan of merger between Aerial and VoiceStream Wireless
Corporation ("VoiceStream"). As a result of the merger, Aerial shareholders will
receive 0.455 VoiceStream common shares for each share of Aerial stock they own.
The conversion number is subject to adjustment (but not below 0.455 or above 0.5
of a share of VoiceStream common stock) in the event Aerial's merger with
VoiceStream closes prior to the closing of the proposed merger of Omnipoint
Corporation and VoiceStream and the average price of VoiceStream common stock
for the 15-day trading period prior to the closing is less than $39.56 per
share. Aerial public shareholders will have a right to elect to receive $18 in
cash in lieu of shares of VoiceStream. The parties anticipate that the merger
will be tax-free to Aerial shareholders that elect to receive VoiceStream stock.
TDS and certain major shareholders of VoiceStream, including Hutchinson
Telecommunication PCS (USA), have agreed to vote in favor of the merger. This
merger is subject to the approval of the Aerial and VoiceStream shareholders as
well as federal, state, and other regulatory approvals, including those of the
Federal Communications Commission and the Federal Trade Commission. The merger
is expected to close by the end of the first quarter of 2000.
On November 1, 1999, TDS converted $420 million of intercompany debt due from a
subsidiary of Aerial into 19.1 million Aerial Common Shares at $22 per share. On
September 17, 1999, the date of the TDS Debt Replacement Agreement, the closing
price of Aerial Common Shares was $20.00 per share. Any remaining intercompany
debt due from Aerial, at the closing of the merger, will be due one year after
the closing of the merger. TDS will be released from its guarantees of Aerial's
long-term debt at the closing of the merger. Also on November 1, 1999, Sonera
Corporation ("Sonera"), a Finnish telecommunications company, invested an
additional $230 million into equity of Aerial and one of its subsidiaries, also
at an equivalent price of $22 per Aerial share. After the equity
15
<PAGE>
contributions by TDS and Sonera on November 1, 1999, TDS owned 82.5% of Aerial.
Immediately prior to the merger, Sonera will exchange its interest in the
subsidiary of Aerial for Aerial common stock. Sonera, TDS and Aerial also
reached an agreement to settle all their disputes relating to Sonera's earlier
investment in the Aerial subsidiary, effective at the closing of the merger.
TDS expects to recognize a net gain on the ultimate disposition of Aerial and,
accordingly, has deferred recognition of Aerial's net operating losses of $5.6
million from September 18, 1999 through September 30, 1999.
Management expects that the amounts available to Aerial under the revolving
credit agreement with TDS ($81 million as of September 30, 1999) and the
additional Sonera investment of $230 million will provide sufficient funding to
last until the completion of the merger with VoiceStream.
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 primarily from the sale of non-strategic investments. The market
value of these investments, principally Vodafone AirTouch plc American
Depository Receipts, amounted to $649.1 million at September 30, 1999. A
hypothetical 10% decrease in the share prices of these investments would result
in a $64.9 million decline in the market value of the investments.
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 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 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
16
<PAGE>
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 readiness 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
were determined not to be Year 2000 ready. Included in the assessment phase was
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 ready. These critical hardware, systems
and applications that were not Year 2000 ready 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 has been completed.
The renovated mission critical hardware, systems and applications have undergone
Year 2000 validation testing. The validation phase included testing, verifying
and validating the renovated or replaced platforms, applications, databases and
utilities. The validation phase consisted 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 were tested in a controlled environment that replicated the
current environment and was equipped to simulate the turn of the century and
leap year dates. The Company will rely on the Cellular Telecommunications
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 Year 2000 ready upgrades for the
networks. The Company has analyzed the findings and has installed upgrades
appropriate to its network. Validation of mission critical hardware, systems and
applications was substantially completed as of October 31, 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 readiness will be
successful as the Company is subject to various risks and uncertainties. Like
most other telecommunications operators, the
17
<PAGE>
Company is highly dependent on the telecommunications network vendors to develop
and provide Year 2000 ready 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 include business recovery planning
and establishing command centers and critical support teams. Project teams are
developing alternate processes to support critical customer functions in the
event information systems or mechanized processes experience Year 2000
disruptions; as well as for repair or replacement of any affected systems or
processes. The teams are also developing alternate plans for critical suppliers
of products/services that fail to meet established service levels due to Year
2000 disruptions. Retention and backup procedures for customer and critical
business data are being developed to provide the Company with pre-rollover
recovery capabilities. The Company anticipates completing the balance of its
contingency planning in the fourth quarter of 1999.
The Company estimates that the total costs related to the Year 2000 project will
be approximately $35 million. Through September 30, 1999, the total costs
associated with the Year 2000 Issue were $27 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 ready. 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. Though Year 2000 project costs will directly impact the
reported level of 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.
18
<PAGE>
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
This Management's Discussion and Analysis of Financial Condition and Results of
Operations 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; completion and timing of the
merger between Aerial and VoiceStream; 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.
19
<PAGE>
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
U.S. Cellular $ 373,201 $ 313,947 $ 1,060,138 $ 849,212
TDS Telecom 137,438 121,423 402,710 355,744
------------ ------------ ------------ ------------
510,639 435,370 1,462,848 1,204,956
------------ ------------ ------------ ------------
OPERATING EXPENSES
U.S. Cellular 277,641 251,432 840,012 703,405
TDS Telecom 108,001 98,248 315,103 287,719
------------ ------------ ------------ ------------
385,642 349,680 1,155,115 991,124
------------ ------------ ------------ ------------
Operating Income from Ongoing Operations 124,997 85,690 307,733 213,832
American Paging Operating (Loss) -- -- -- (11,406)
------------ ------------ ------------ ------------
OPERATING INCOME 124,997 85,690 307,733 202,426
------------ ------------ ------------ ------------
INVESTMENT AND OTHER INCOME
Interest and dividend income 718 2,190 4,065 7,989
Investment income, net of amortization 11,585 5,902 18,878 22,796
Gain on sale of cellular and other investments 6,046 3,399 345,938 235,357
Other (expense), net (3,722) (5,851) (8,265) (21,248)
Minority share of (income) (14,427) (8,241) (60,182) (42,383)
------------ ------------ ------------ ------------
200 (2,601) 300,434 202,511
------------ ------------ ------------ ------------
INCOME BEFORE INTEREST AND INCOME TAXES 125,197 83,089 608,167 404,937
Interest expense 25,170 27,712 76,410 82,277
Minority interest in income of subsidiary trust 6,202 6,202 18,607 17,301
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 93,825 49,175 513,150 305,359
Income tax expense 40,889 22,893 210,475 127,603
------------ ------------ ------------ ------------
NET INCOME FROM CONTINUING OPERATIONS 52,936 26,282 302,675 177,756
------------ ------------ ------------ ------------
Discontinued Operations (48,473) (52,469) (142,250) (162,319)
Tax effect of discontinued operations (21,079) (32,515) (58,060) (51,384)
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS - NET OF TAX (27,394) (19,954) (84,190) (110,935)
------------ ------------ ------------ ------------
NET INCOME 25,542 6,328 218,485 66,821
Preferred Dividend Requirement (316) (418) (1,003) (1,276)
------------ ------------ ------------ ------------
NET INCOME AVAILABLE TO COMMON $ 25,226 $ 5,910 $ 217,482 $ 65,545
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES (000s) 61,451 61,036 61,376 60,923
BASIC EARNINGS PER SHARE
Continuing operations $ 0.86 $ 0.42 $ 4.92 $ 2.90
Discontinued Operations (0.45) (0.32) (1.38) (1.82)
------------ ----------- ------------ ------------
$ 0.41 $ 0.10 $ 3.54 $ 1.08
============ =========== ============ ============
DILUTED EARNINGS PER SHARE
Continuing Operations $ 0.84 $ 0.41 $ 4.82 $ 2.84
Discontinued Operations (0.44) (0.32) (1.35) (1.79)
------------ ----------- ------------ ------------
$ 0.40 $ 0.09 $ 3.47 $ 1.05
============ =========== ============ ============
DIVIDENDS PER SHARE $ .115 $ .11 $ .345 $ .33
============ =========== ============ ============
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
20
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
---------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998
--------- ---------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
Net income from continuing operations $ 302,675 $ 177,756
Add (Deduct) adjustments to reconcile net income
from continuing operations to net cash provided
by operating activities
Depreciation and amortization 257,842 238,931
Deferred taxes 124,411 67,848
Investment income (28,659) (29,897)
Minority share of income 60,182 42,383
Gain on sale of cellular and other investments (345,938) (235,357)
Noncash interest expense 13,315 15,072
Other noncash expense 28,450 15,811
Change in accounts receivable (51,010) (38,446)
Change in materials and supplies (7,383) 169
Change in accounts payable (3,241) 16,139
Change in accrued interest (13,811) (7,706)
Change in accrued taxes 914 14,682
Change in other assets and liabilities 18,373 9,650
--------- ---------
356,120 287,035
--------- ---------
CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES
Long-term debt borrowings 8,868 200,655
Repayments of long-term debt (17,012) (13,243)
Change in notes payable (43,724) (333,894)
Trust preferred securities -- 144,881
Dividends paid (21,970) (21,162)
Purchase of subsidiary common stock -- (9,107)
Other financing activities 3,410 1,726
--------- ---------
(70,428) (30,144)
--------- ---------
CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES
Capital expenditures (318,918) (344,701)
Investments in and advances to investment
entities and license costs 724 (6,356)
Distributions from investments 19,225 19,748
Proceeds from investment sales 120,000 100,571
Other investing activities (392) (2,977)
Acquisitions, net of cash acquired (29,527) (85,942)
Change in temporary investments and marketable securities 7,868 28,732
--------- ---------
(201,020) (290,925)
--------- ---------
CASH FLOWS FROM DISCONTINUED OPERATIONS (49,680) 65,116
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 34,992 31,082
CASH AND CASH EQUIVALENTS -
Beginning of period 45,139 45,996
--------- ---------
End of period $ 80,131 $ 77,078
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
21
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
------------ ------------
(Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 80,131 $ 45,139
Temporary investments 6,326 10,306
Accounts receivable from customers and others 303,316 256,833
Materials and supplies, at average cost,
and other current assets 56,787 44,465
------------ ------------
446,560 356,743
------------ ------------
INVESTMENTS
Intangible Assets
Cellular license acquisition costs, net 1,161,538 1,200,653
Franchise costs and other costs, net 178,942 181,517
Investments in unconsolidated entities 286,095 305,815
Marketable equity securities 649,137 378,812
Other investments 29,997 33,870
------------ ------------
2,305,709 2,100,667
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET
U.S. Cellular 1,217,618 1,138,585
TDS Telecom 867,560 881,507
Other 28,336 31,216
------------ ------------
2,113,514 2,051,308
------------ ------------
OTHER ASSETS AND DEFERRED CHARGES 31,603 35,081
------------ ------------
NET ASSETS OF DISCONTINUED OPERATIONS 458,772 498,805
------------ ------------
TOTAL ASSETS $ 5,356,158 $ 5,042,604
============ ============
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
22
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
------------ ------------
(Dollars in thousands)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 15,505 $ 15,946
Notes payable 127,165 170,889
Accounts payable 208,618 232,320
Advance billings and customer deposits 37,767 33,283
Accrued interest 10,326 24,133
Accrued taxes 24,412 23,434
Accrued compensation 31,674 24,415
Other current liabilities 28,207 24,502
------------ -----------
483,674 548,922
------------ -----------
DEFERRED LIABILITIES AND CREDITS 343,450 223,877
------------ -----------
LONG-TERM DEBT, excluding current portion 1,281,090 1,275,086
------------ -----------
MINORITY INTEREST in subsidiaries 494,696 430,826
------------ -----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES of Subsidiary Trusts
Holding Solely Company Subordinated
Debentures (a) 300,000 300,000
------------ -----------
PREFERRED SHARES 21,860 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 1,880,965 1,882,710
Treasury Shares, at cost (615,170 and 761,220
shares, respectively) (24,394) (29,439)
Accumulated other comprehensive income 69,272 75,609
Retained earnings 504,924 308,409
------------ -----------
2,431,388 2,237,908
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,356,158 $ 5,042,604
============ ============
</TABLE>
(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.
23
<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 September 30, 1999 and
December 31, 1998, and the results of operations and cash flows for the
nine months ended September 30, 1999 and 1998. The results of operations
for the nine months ended September 30, 1999 and 1998, are not necessarily
indicative of the results to be expected for the full year.
2. Discontinued Operations
On September 17, 1999, the Board of Directors of TDS decided not to pursue
a spin-off of Aerial Communications, Inc. ("Aerial"), an 82.1%-owned
subsidiary of TDS, and approved a plan of merger between Aerial and
VoiceStream Wireless Corporation ("VoiceStream"). As a result of the
merger, Aerial shareholders will receive 0.455 VoiceStream common shares
for each share of Aerial stock they own. The conversion number is subject
to adjustment (but not below 0.455 or above 0.5 of a share of VoiceStream
common stock) in the event Aerial's merger with VoiceStream closes prior
to the closing of the proposed merger of Omnipoint Corporation and
VoiceStream and the average price of VoiceStream common stock for the
15-day trading period prior to the closing is less than $39.56 per share.
Aerial public shareholders will have a right to elect to receive $18 in
cash in lieu of shares of VoiceStream. The parties anticipate that the
merger will be tax-free to Aerial shareholders that elect to receive
VoiceStream stock. TDS and certain major shareholders of VoiceStream,
including Hutchinson Telecommunication PCS (USA), have agreed to vote in
favor of the merger. This merger is subject to the approval of the Aerial
and VoiceStream shareholders as well as federal, state, and other
regulatory approvals, including those of the Federal Communications
Commission and the Federal Trade Commission. The merger is expected to
close by the end of the first quarter of 2000.
On November 1, 1999, TDS converted $420 million of intercompany debt due
from a subsidiary of Aerial into 19.1 million Aerial Common Shares at $22
per share. On September 17, 1999, the date of the TDS Debt Replacement
Agreement, the closing price of Aerial Common Shares was $20.00 per share.
Any remaining intercompany debt due from Aerial, at the closing of the
merger, will be due one year after the closing of the merger. TDS will be
released from its guarantees of Aerial's long-term debt at the closing of
the merger. Also on November 1, 1999, Sonera Corporation ("Sonera"), a
Finnish telecommunications company, invested an additional $230 million
into equity of Aerial and one of its subsidiaries, also at an equivalent
price of $22 per Aerial share. After the equity contributions by TDS and
Sonera on November 1, 1999, TDS owned 82.5% of Aerial. Immediately prior
to the merger,
24
<PAGE>
Sonera will exchange its interest in the subsidiary of Aerial for Aerial
common stock. Sonera, TDS and Aerial also reached an agreement to settle
all their disputes relating to Sonera's earlier investment in the Aerial
subsidiary, effective at the closing of the merger.
TDS expects to recognize a net gain on the ultimate disposition of Aerial
and, accordingly, has deferred recognition of Aerial's net operating
losses of $5.6 million from September 18, 1999 through September 30, 1999.
As a result of the board's approval of the plan, the consolidated
financial statements of TDS and supplemental data have been adjusted to
reflect the results of operations and net assets of the subsidiary as
discontinued operations in accordance with generally accepted accounting
principles. Financial statements for prior periods have been reclassified
to conform to current year presentation.
Net assets of discontinued operations are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Current Assets
Cash $ 7,559 $ 4,943
Temporary investments -- 35
Accounts receivable 31,011 27,776
Inventory 9,011 11,378
Other current assets 4,105 4,564
Investments
Broadband PCS license costs, net 305,913 311,915
Other Investments 2,455 1,443
Property, plant and equipment 615,366 621,281
Other assets and deferred charges 277 411
Current portion vendor credit agreement (82,372) --
Accounts payable (34,255) (56,097)
Accrued taxes (7,981) (7,015)
Accrued compensation (7,666) (5,169)
Other accrued expenses (6,127) (6,177)
Deferred income tax liability (138,016) (123,110)
Long-term debt (246,123) (278,010)
Minority interest in subsidiaries -- (9,363)
Losses deferred after measurement date 5,615 --
------------- ------------
$ 458,772 $ 498,805
============= ============
</TABLE>
25
<PAGE>
Summarized income statement information relating to discontinued operations,
excluding any corporate charges and intercompany interest expense, is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $ 48,753 $ 38,438 $ 154,079 $ 105,872
Expenses 89,578 99,045 292,085 303,254
--------- --------- --------- ---------
Operating (Loss) (40,825) (60,607) (138,006) (197,382)
Minority share of loss -- 10,532 10,967 41,546
Other income (2,835) 2,451 (1) 6,682
Interest expense (4,813) (4,845) (15,210) (13,164)
--------- --------- --------- ---------
(Loss) Before Income Taxes (48,473) (52,469) (142,250) (162,319)
Income tax benefit (21,079) (32,515) (58,060) (51,384)
--------- --------- --------- ---------
Net (Loss) $ (27,394) $ (19,954) $ (84,190) $(110,935)
========= ========= ========= =========
</TABLE>
Summarized cash flow statement information relating to discontinued
operations is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998
---------- ---------
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities $ (25,683) $ (72,431)
Cash flows from financing activities 2,464 200,812
Cash flows from investing activities (23,845) (63,858)
---------- ----------
Cash provided (used) by discontinued operations (47,064) 64,523
(Increase) decrease in cash included in Net
assets of discontinued operations (2,616) 593
---------- ----------
Cash flows from discontinued operations $ (49,680) $ 65,116
========== ==========
</TABLE>
26
<PAGE>
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>
September 30, December 31,
1999 1998
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Available-for-sale Equity Securities
Aggregate Fair Value $ 649,137 $ 378,812
Adjusted Basis 514,151 230,344
------------- -------------
Gross Unrealized Holding Gains 134,986 148,468
Tax Effect 54,349 59,661
------------- -------------
Unrealized Holding Gains, net of tax 80,637 88,807
Minority Share of Unrealized Holding Gains 11,365 13,198
------------- -------------
Net Unrealized Holding Gains $ 69,272 $ 75,609
============= =============
</TABLE>
4. Gains from Sale of Cellular and Other Investments
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 AirTouch common shares
were received in 1998 as a result of the sale of certain minority
interests to AirTouch resulting in a $198.6 million gain. The remaining
gains in 1999 and 1998 resulted when the Company sold or traded certain
non-strategic minority cellular interest and other investments.
27
<PAGE>
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>
Nine Months Ended
September 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 313,631 67,669
Income tax effect 125,533 24,583
--------- ---------
188,098 43,086
Minority share of unrealized gains 27,822 6,480
--------- ---------
Net unrealized gains 160,276 36,606
--------- ---------
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 (6,337) 36,606
--------- ---------
Balance, end of period $ 69,272 $ 37,289
========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Comprehensive Income
Net Income $ 25,542 $ 6,328 $ 218,485 $ 66,821
Net unrealized gains (losses)
on securities 62,625 (4,951) (6,337) 36,606
--------- --------- --------- ---------
$ 88,167 $ 1,377 $ 212,148 $ 103,427
========= ========= ========= =========
</TABLE>
28
<PAGE>
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 Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income from Continuing Operations $ 52,936 $ 26,282 $ 302,675 $ 177,756
Less: Preferred Dividends (316) (418) (1,003) (1,276)
----------- ----------- ----------- -----------
Net Income from Continuing Operations
used in Basic Earnings per Share 52,620 25,864 301,672 176,480
Loss on Discontinued Operations (27,394) (19,954) (84,190) (110,935)
----------- ----------- ----------- -----------
Net Income Available to Common used
in Basic Earnings per Share $ 25,226 $ 5,910 $ 217,482 $ 65,545
=========== =========== =========== ===========
Net Income from Continuing Operations
used in Basic Earnings per Share $ 52,620 $ 25,864 $ 301,672 $ 176,480
Reduction in preferred dividends if Preferred
Shares converted in Common Shares 289 179 916 787
Minority income adjustment (621) (458) (1,954) (1,438)
----------- ----------- ----------- -----------
Net Income from Continuing Operations
used in Diluted Earnings per Share $ 52,288 $ 25,585 $ 300,634 $ 175,829
Loss on Discontinued Operations (27,394) (19,954) (84,190) (110,935)
----------- ----------- ----------- -----------
Net Income Available to Common used
in Diluted Earnings per share $ 24,894 $ 5,631 $ 216,444 $ 64,894
=========== =========== =========== ===========
Weighted Average Number of Common Shares
used in Basic Earnings per Share 61,451 61,036 61,376 60,923
Effect of Dilutive Securities:
Common Shares outstanding if Preferred
Shares converted 564 581 611 873
Stock options and stock appreciation rights 391 105 308 124
Common Shares issuable 13 13 13 14
----------- ----------- ----------- -----------
Weighted Average Number of Common Shares
used in Diluted Earnings per Share 62,419 61,735 62,308 61,934
=========== =========== =========== ===========
</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.
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
29
<PAGE>
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>
Nine Months Ended
September 30,
---------------------
1999 1998
-------- ---------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Property, plant and equipment $ 4,248 $ 13,271
Cellular licenses 19,879 68,695
Equity method investment in cellular interests (748) (2,317)
Franchise costs 1,034 5,477
Long-term debt (987) (4,634)
Deferred credits (254) (991)
Other assets and liabilities,
excluding cash and cash equivalents 2,673 3,301
Decrease in Minority interest 3,682 13,168
Common Shares issued -- (10,028)
-------- --------
Decrease in cash due to acquisitions $ 29,527 $ 85,942
======== ========
</TABLE>
The following table summarizes interest and income taxes paid, and other noncash
transactions.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Interest Paid
Continuing Operations $ 76,423 $ 74,682
Discontinued Operations 2,252 1,584
Income Taxes Paid (net of income tax refund
received of $10,000 in 1998) 18,697 6,754
Common Shares issued by TDS for
conversion of TDS Preferred Stock $ 3,800 $ 5,162
</TABLE>
30
<PAGE>
8. Business Segment Information
Financial data for the Company's business segments for each of the three
and nine month periods ended or at September 30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
Three Months Ended
or at September 30, 1999 U.S. Cellular TDS Telecom Aerial All Other Total
- ------------------------ ------------- ------------- ------------- ------------- -------------
Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 373,201 $ 137,438 $ 56,777 $ -- $ 567,416
Operating cash flow 153,004 60,367 (26,162) -- 187,209
Depreciation and
amortization expense 57,444 30,930 22,471 -- 110,845
Operating income (loss) 95,560 29,437 (48,633) -- 76,364
Total Assets 3,456,921 1,711,711 953,736 3,400,871 9,523,239
Capital expenditures $ 70,962 $ 36,004 $ 13,798 $ (4,592) $ 116,172
Three Months Ended
or at September 30, 1998 U.S. Cellular TDS Telecom Aerial All Other Total
- ------------------------ ------------- ------------- ------------- ------------- --------------
(Dollars in thousands)
Operating revenues $ 313,947 $ 121,423 $ 38,438 $ -- $ 473,808
Operating cash flow 114,543 51,915 (40,465) -- 125,993
Depreciation and
amortization expense 52,028 28,740 20,142 -- 100,910
Operating income (loss) 62,515 23,175 (60,607) -- 25,083
Total Assets 2,884,834 1,525,496 974,138 3,363,779 8,748,247
Capital expenditures $ 93,976 $ 42,218 $ 16,480 $ 6,067 $ 158,741
Nine Months Ended
or at September 30, 1999 U.S. Cellular TDS Telecom Aerial All Other Total
- ------------------------ ------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
Operating revenues $ 1,060,138 $ 402,710 $ 162,103 $ -- $ 1,624,951
Operating cash flow 385,951 179,625 (79,134) -- 486,442
Depreciation and
amortization expense 165,825 92,018 66,681 -- 324,524
Operating income (loss) 220,126 87,607 (145,815) -- 161,918
Total Assets 3,456,921 1,711,711 953,736 3,400,871 9,523,239
Capital expenditures $ 232,814 $ 84,759 $ 26,764 $ 1,345 $ 345,682
Nine Months Ended
or at September 30, 1998 U.S. Cellular TDS Telecom Aerial All Other Total
- ------------------------ ------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
Operating revenues $ 849,212 $ 355,744 $ 105,872 $ 17,783 $ 1,328,611
Operating cash flow 293,544 151,324 (136,300) (3,511) 305,057
Depreciation and
amortization expense 147,737 83,299 61,082 7,895 300,013
Operating income (loss) 145,807 68,025 (197,382) (11,406) 5,044
Total Assets 2,884,834 1,525,496 974,138 3,363,779 8,748,247
Capital expenditures $ 230,968 $ 104,650 $ 64,541 $ 9,083 $ 409,242
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Reconciliation of Segment Revenue
to Consolidated Revenues:
Total Revenues for reportable segments $ 567,416 $ 473,808 $ 1,624,951 $ 1,328,611
Aerial Revenues included in
"Discontinued Operations" (48,753) (38,438) (154,079) (105,872)
Aerial Revenues included in the deferred
losses from September 17, 1999 to
September 30, 1999 (8,024) -- (8,024) --
American Paging Revenues included in
"American Paging Operating (Loss)" -- -- -- (17,783)
------------ ------------ ------------ ------------
Consolidated Revenues $ 510,639 $ 435,370 $ 1,462,848 $ 1,204,956
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Reconciliation of Segment Total Assets to
Consolidated Total Assets:
Total Assets for reportable segments $ 9,523,239 $ 8,748,247
Intercompany eliminations (1) (3,650,154) (3,319,282)
Aerial liabilities reported to net assets
of discontinued operations (516,927) (486,731)
----------- -----------
Consolidated Total Assets $ 5,356,158 $ 4,942,234
=========== ===========
</TABLE>
(1) Intercompany eliminations consist primarily of the elimination of TDS's
book value in its subsidiaries and the elimination of intercompany
receivables.
32
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
- ---------------------------
On September 21, 1999, Herbert Behrens, who purports to be a stockholder
of Aerial, filed a putative class action complaint on behalf of
stockholders of Aerial in the Court of Chancery of the State of Delaware
in New Castle County. The complaint names as defendants Aerial, TDS,
certain directors of Aerial and TDS, and VoiceStream in connection with
the transactions contemplated by the Agreement and Plan of Reorganization
and the related agreements, particularly the Debt/Equity Replacement
Agreement. The complaint alleges a breach of fiduciary duties by the
defendants, including in connection with the proposed exchange of $420
million of debt owed by Aerial to TDS for Aerial common stock at $22.00
per share. The complaint alleges that this action benefits TDS at the
expense of Aerial's public stockholders and seeks to have the transactions
contemplated by the Agreement and Plan of Reorganization enjoined or, if
they are consummated, to have them rescinded and to recover unspecified
damages, fees and expenses. TDS and Aerial believes that this lawsuit is
without merit and intends to vigorously defend against this lawsuit.
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 for the nine months ended September
30, 1999.
(d) Reports on Form 8-K filed during the quarter ended September 30, 1999:
TDS filed a Current Report on Form 8-K on September 28, 1999, dated
September 17, 1999, which announced that TDS would not pursue a
spin-off of Aerial Communications, Inc. Instead, TDS will exchange its
shares in Aerial for VoiceStream Wireless Corporation stock in
conjunction with the announced merger between Aerial and VoiceStream.
The Current Report also included various documents related to the
merger as exhibits.
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 November 11, 1999 /s/ Sandra L. Helton
------------------- -------------------------------------------
Sandra L. Helton,
Executive Vice President-Finance
(Chief Financial Officer)
Date November 12, 1999 /s/ Gregory J. Wilkinson
------------------- ------------------------------------------
Gregory J. Wilkinson,
Vice President and Controller
(Principal Accounting Officer)
Signature page to TDS Third Quarter 1999 Form 10Q.
34
Exhibit 12
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
For the Nine Months ended September 30, 1999
(Dollars In Thousands)
<S> <C>
EARNINGS:
Income from Continuing Operations before
income taxes $ 513,150
Add (Deduct):
Minority Share of Losses (31)
Earnings on Equity Method (18,878)
Distributions from Minority Subsidiaries 19,225
Amortization of Capitalized Interest 2
Minority interest in majority-owned subsidiaries
that have fixed charges 54,121
---------
567,589
Add fixed charges:
Consolidated interest expense 95,017
Interest Portion (1/3) of Consolidated Rent Expense 9,833
---------
$ 672,439
=========
FIXED CHARGES:
Consolidated interest expense $ 95,017
Interest Portion (1/3) of Consolidated Rent Expense 9,833
---------
$ 104,850
=========
RATIO OF EARNINGS TO FIXED CHARGES 6.41
=========
Tax-Effected Redeemable Preferred Dividends $ 85
Fixed Charges 104,850
---------
Fixed Charges and Redeemable Preferred Dividends $ 104,935
=========
RATIO OF EARNINGS TO FIXED CHARGES
AND REDEEMABLE PREFERRED DIVIDENDS 6.41
=========
Tax-Effected Preferred Dividends $ 1,614
Fixed Charges 104,850
---------
Fixed Charges and Preferred Dividends $ 106,464
=========
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS 6.32
=========
</TABLE>
<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
September 30, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 80,131
<SECURITIES> 649,137
<RECEIVABLES> 312,938
<ALLOWANCES> 9,622
<INVENTORY> 35,107
<CURRENT-ASSETS> 446,560
<PP&E> 3,396,538
<DEPRECIATION> 1,283,024
<TOTAL-ASSETS> 5,356,158
<CURRENT-LIABILITIES> 483,674
<BONDS> 1,281,090
0
21,860
<COMMON> 621
<OTHER-SE> 2,430,767
<TOTAL-LIABILITY-AND-EQUITY> 5,356,158
<SALES> 0
<TOTAL-REVENUES> 1,462,848
<CGS> 0
<TOTAL-COSTS> 1,155,115
<OTHER-EXPENSES> (300,434)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,017
<INCOME-PRETAX> 513,150
<INCOME-TAX> 210,475
<INCOME-CONTINUING> 302,675
<DISCONTINUED> (84,190)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 218,485
<EPS-BASIC> 3.54
<EPS-DILUTED> 3.47
</TABLE>
