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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 001-14157
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TELEPHONE AND DATA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 36-2669023
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602
(Address of principal executive offices) (Zip code)
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REGISTRANT'S TELEPHONE NUMBER: (312) 630-1900
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Shares, $.01 par value American Stock Exchange
8.5% TDS-Obligated Mandatorily
Redeemable Preferred Securities
of Subsidiary Trust American Stock Exchange
8.04% TDS-Obligated
Mandatorily Redeemable Preferred
Securities of Subsidiary Trust American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_
As of February 29, 2000, the aggregate market values of the registrant's
Common Shares, Series A Common Shares and Preferred Shares held by
non-affiliates were approximately $5.7 billion, $38.8 million and $28.3 million,
respectively. The closing price of the Common Shares on February 29, 2000, was
$105.50, as reported by the American Stock Exchange. Because no market exists
for the Series A Common Shares and Preferred Shares, the registrant has assumed
for purposes hereof that (i) each Series A Common Share has a market value equal
to one Common Share because the Series A Common Shares were initially issued by
the registrant in exchange for Common Shares on a one-for-one basis and are
convertible on a share-for-share basis into Common Shares, (ii) each
nonconvertible Preferred Share has a market value of $100 because each of such
shares had a stated value of $100 when issued, and (iii) each convertible
Preferred Share has a value of $105.50 times the number of Common Shares into
which it was convertible on February 29, 2000.
The number of shares outstanding of each of the registrant's classes of
common stock, as of February 29, 2000, is 54,197,342 Common Shares, $.01 par
value, and 6,958,391 Series A Common Shares, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the registrant's 1999 Annual Report to
Shareholders and of the registrant's Notice of Annual Meeting of Shareholders
and Proxy Statement for its Annual Meeting of Shareholders to be held May 19,
2000, described in the cross reference sheet and table of contents attached
hereto are incorporated by reference into Part II and III of this report.
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<PAGE>
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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PAGE NUMBER
OR REFERENCE(1)
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Item 1. Business.................................................... 3
Item 2. Properties.................................................. 46
Item 3. Legal Proceedings........................................... 46
Item 4. Submission of Matters to a Vote of Security Holders......... 46
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 47(2)
Item 6. Selected Financial Data..................................... 47(3)
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 47(4)
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 47(4)
Item 8. Financial Statements and Supplementary Data................. 47(5)
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 47
Item 10. Directors and Executive Officers of the Registrant.......... 48(6)
Item 11. Executive Compensation...................................... 48(7)
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 48(8)
Item 13. Certain Relationships and Related Transactions.............. 48(9)
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 49
</TABLE>
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(1) Parenthetical references are to information incorporated by reference from
the registrant's Exhibit 13, which includes portions of its Annual Report to
Shareholders for the year ended December 31, 1999 ("Annual Report") and from
the registrant's Notice of Annual Meeting of Shareholders and Proxy
Statement for its Annual Meeting of Shareholders to be held on May 19, 2000
("Proxy Statement").
(2) Annual Report sections entitled "TDS Stock and Dividend Information" and
"Market Price per Common Share by Quarter."
(3) Annual Report section entitled "Selected Consolidated Financial Data."
(4) Annual Report section entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
(5) Annual Report sections entitled "Consolidated Statements of Operations,"
"Consolidated Statements of Cash Flows," "Consolidated Balance Sheets,"
"Consolidated Statements of Common Stockholders' Equity," "Notes to
Consolidated Financial Statements," "Consolidated Quarterly Income
Information (Unaudited)" and "Report of Independent Public Accountants."
(6) Proxy Statement sections entitled "Election of Directors" and "Executive
Officers."
(7) Proxy Statement section entitled "Executive Compensation," except for the
information specified in Item 402(a)(8) of Regulation S-K under the
Securities Exchange Act of 1934, as amended.
(8) Proxy Statement section entitled "Security Ownership of Certain Beneficial
Owners and Management."
(9) Proxy Statement section entitled "Certain Relationships and Related
Transactions."
2
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TELEPHONE AND DATA SYSTEMS, INC.
30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602
TELEPHONE (312) 630-1900
[LOGO]
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PART I
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ITEM 1. BUSINESS
Telephone and Data Systems, Inc. ("TDS"), is a diversified
telecommunications service company with cellular telephone and telephone
operations. At December 31, 1999, TDS served approximately 3.2 million customer
units in 35 states, including 2,602,000 cellular telephones and 645,800
telephone access lines. For the year ended December 31, 1999, cellular
operations provided 72% of TDS's consolidated revenues and telephone operations
provided 28%. TDS's long-term business development strategy is to expand its
existing operations through internal growth and acquisitions and to explore and
develop other telecommunications businesses that management believes will
utilize TDS expertise in customer-based telecommunications. On September 17,
1999, the Board of Directors of TDS approved a plan of merger between Aerial
Communications Inc. and VoiceStream Wireless Corporation. See Discontinued
Operations.
TDS, conducts substantially all of its cellular operations through its
80.7%-owned subsidiary, United States Cellular Corporation. U.S. Cellular is
traded on the American Stock Exchange under the symbol "USM". At December 31,
1999, U.S. Cellular provided cellular telephone service to 2,602,000 customers
through 139 majority-owned and managed ("consolidated") cellular systems serving
approximately 17% of the geography and approximately 9% of the population of the
United States. Since 1985, when U.S. Cellular began providing cellular service
in Knoxville, Tennessee, U.S. Cellular has expanded its cellular networks and
customer service operations to cover 145 managed markets in 26 states as of
December 31, 1999. In total, U.S. Cellular operated eight market clusters, of
which four had a total population of more than two million, and each of which
had a total population of more than one million. Overall, 91% of
U.S. Cellular's 26.4 million population equivalents were in markets which were
consolidated, 1% were in managed but not consolidated markets and 8% were in
markets in which U.S. Cellular holds an investment interest.
TDS conducts substantially all of its telephone operations through its
wholly-owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom"). At
December 31, 1999, TDS Telecom operated 104 Incumbent Local Exchange Carrier
("ILEC") telephone companies serving 571,700 access lines in 28 states. TDS
Telecom is expanding by offering additional lines of telecommunications products
and services to existing customers and through the selective acquisition of
local exchange telephone companies serving rural and suburban areas. TDS Telecom
has acquired 13 telephone companies and divested one telephone company since the
beginning of 1995. These net acquisitions added 56,800 access lines during this
five-year period, while internal growth added 122,400 lines. TDS Telecom also
began offering services as a Competitive Local Exchange Carrier ("CLEC") in 1998
in certain markets in certain second and third-tier cities. At December 31,
1999, TDS Telecom's CLECs served 74,100 access lines.
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TDS was incorporated in 1968 and changed its corporate domicile from Iowa to
Delaware in 1998. TDS executive offices are located at 30 North LaSalle Street,
Chicago, Illinois 60602. Its telephone number is 312-630-1900.
Unless the context indicates otherwise: (i) references to "TDS" refer to
Telephone and Data Systems, Inc., and its subsidiaries; (ii) references to "USM"
or "U.S. Cellular" refer to United States Cellular Corporation and its
subsidiaries; (iii) references to "TDS Telecom" refer to TDS Telecommunications
Corporation and its subsidiaries; (iv) references to "AERL" or "Aerial" refer to
Aerial Communications, Inc. and its subsidiaries; (v) references to "MSA" or to
a particular city refer to the Metropolitan Statistical Area, as designated by
the U.S. Office of Management and Budget and used by the Federal Communications
Commission ("FCC") in designating metropolitan cellular market areas;
(vi) references to "RSA" refer to the Rural Service Area, as used by the FCC in
designating non-MSA cellular market areas; (vii) references to cellular
"markets" or "systems" refer to MSAs, RSAs or both; (viii) references to "MTA"
refer to Major Trading Areas, as used by the FCC in designating PCS markets;
(ix) references to "population equivalents" mean the population of a market,
based on 1999 Claritas estimates, multiplied by the percentage interests that
TDS owns or has the right to acquire in an entity licensed, designated to
receive a license or expected to receive a construction permit ("licensee") by
the FCC to construct or operate a cellular or a personal communications service
("PCS") system in such market.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
This Annual Report on Form 10-K, including exhibits, contains statements
that are not based on historical fact, including the words "believes,"
"anticipates," "intends," "expects," and similar words. These statements
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, events or developments to be significantly different from
any future results, events or developments expressed or implied by such
forward-looking statements. Such factors include:
- general economic and business conditions, both nationally and in the
regions in which TDS operates,
- technology changes,
- competition,
- changes in business strategy or development plans,
- changes in governmental regulations,
- TDS's ability and the ability of its third-party suppliers to take
corrective action in a timely manner with respect to the year 2000 issue,
- availability of future financing,
- changes in growth in cellular customers, penetration rates, and churn
rates, and
- completion and timing of the merger between Aerial and VoiceStream.
TDS undertakes no obligation to update publicly any forward-looking
statements whether as a result of new information, future events or otherwise.
Readers should evaluate any statements in light of these important factors.
DISCONTINUED OPERATIONS
On September 17, 1999, the Board of Directors of TDS decided not to pursue a
spin-off of Aerial Communications, Inc., an 82.1%-owned subsidiary of TDS, and
approved a merger between Aerial and VoiceStream Wireless Corporation
("VoiceStream") pursuant to an Agreement and Plan of Reorganization dated
September 17, 1999. As a result of the merger, Aerial shareholders will receive
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0.455 VoiceStream common shares for each share of Aerial stock they own, subject
to adjustment in certain circumstances. 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. This merger is subject to the approval of
the Federal Communications Commission. The merger is expected to close in the
second quarter of 2000.
The merger agreement provides for TDS to be released from its guarantees of
Aerial's long-term debt and vendor financing at the closing of the merger. TDS
has also agreed to advance approximately $280 million to Aerial under the
revolving credit agreement between TDS and a subsidiary of Aerial. At
December 31, 1999, TDS had loaned a total of $37.8 million to Aerial. At the
time of the merger, under certain circumstances, TDS is required to advance
funds to a subsidiary of Aerial to bring the amount outstanding under the
revolving credit agreement to $315 million. The $315 million outstanding will be
repaid by VoiceStream one year from the date of the merger, or earlier at
VoiceStream's option.
Aerial is traded on the NASDAQ market under the symbol "AERL". Aerial
provides PCS service in the Minneapolis, Tampa-St. Petersburg-Orlando, Houston,
Pittsburgh, Kansas City and Columbus Major Trading Areas ("MTAs"). Such PCS
markets include approximately 27.9 million population equivalents. Aerial has
commenced service in all its markets and provided service to 422,900 PCS
telephones as of December 31, 1999.
TDS expects to recognize a net gain on the ultimate disposition of Aerial
and, accordingly, has deferred recognition of Aerial's net operating losses
subsequent to September 17, 1999 which will be offset against the expected gain
upon closing of the merger. As of December 31, 1999, TDS has deferred Aerial net
operating losses totaling $44.2 million.
Pursuant to a Debt/Equity Replacement Agreement entered into between TDS and
Aerial on September 17, 1999 in connection with the Aerial-VoiceStream plan of
merger, 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/Equity Replacement
Agreement, the closing price of Aerial Common Shares was $20 per share. Also on
November 1, 1999, Sonera invested an additional $230 million into the equity of
Aerial and one of its subsidiaries, also at an equivalent price of $22 per
Aerial share.
On September 21, 1999, Herbert Behrens, who purports to be an Aerial
stockholder, 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
exchange of $420 million of debt owed by Aerial to TDS for Aerial common stock
at $22 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. The defendants believe that this lawsuit is without merit and
intend to vigorously defend against this lawsuit.
In connection with the merger agreement between Aerial and VoiceStream,
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. This dispute is discussed below.
On September 8, 1998, pursuant to a purchase agreement among TDS, Aerial,
Aerial Operating Company, Inc., and Sonera Corporation a company organized under
the laws of Finland and formerly known as Sonera Ltd., Sonera purchased
approximately 2.4 million shares of common stock of Aerial Operating Company,
representing a 19.423% equity interest in Aerial Operating Company, 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 Aerial Operating Company common stock
which it owns for 6.72919 Common Shares of Aerial. Upon the
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exchange of all of the Aerial Operating Company shares, Sonera would have owned
an 18.452% equity interest in Aerial, reflecting a purchase price equivalent to
$12.33 per Common Share (the "Equivalent Purchase Price").
Following the announcement by TDS in December 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. Sonera
asserted, among other things, that Aerial and TDS misrepresented and failed to
disclose certain material facts to Sonera, thereby inducing Sonera to pay an
excessive price for the Aerial Operating Company common stock. Sonera requested
the renegotiation of certain matters related to Sonera's investment in Aerial
Operating Company, including an adjustment in the Equivalent Purchase Price, and
raised the possibility of litigation in connection therewith.
Under the Purchase Agreement, the number of Aerial Operating Company shares
purchased by Sonera is subject to reduction if the average price of Aerial's
Common Shares exceeds certain threshold prices during the first three years
after Sonera's investment. 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 requested Sonera to
surrender for cancellation an aggregate of 634,216 shares of Aerial Operating
Company common stock. Sonera refused to surrender any Aerial Operating Company
shares and, in connection with its allegations, as discussed above, objected to
the application of the share reduction provisions in the Purchase Agreement.
In connection with an Agreement and Plan of Reorganization, Sonera, TDS,
Aerial and Aerial Operating Company executed a Settlement Agreement and Release
as of September 17, 1999. Under the Settlement Agreement and Release, Sonera
surrendered for cancellation 317,108 Aerial Operating Company shares,
representing one-half of the 634,216 disputed shares, on November 1, 1999,
without releasing its claims with respect to such surrendered shares, in
connection with the closing of transactions under a Debt/Equity Replacement
Agreement. Upon satisfaction of all of the conditions to the closing of the
transactions contemplated by the Agreement and Plan of Reorganization, the
remaining 317,108 Aerial Operating Company shares will be surrendered for
cancellation immediately prior to the closing of such transactions. At this
closing, each of Sonera and Sonera U.S., on the one hand, and TDS, Aerial,
Aerial Operating Company, VoiceStream and VoiceStream Holdings, on the other
hand, will release each other from all claims relating to actions occurring
through the date of the Settlement Agreement and Release, including all claims
by Sonera to all of the disputed shares and, subject to certain exceptions, will
extend such release to actions occurring through the date of such closing. Also
at that closing, the Purchase Agreement and the other agreements entered into in
connection with Sonera's original investment in Aerial Operating Company will be
terminated.
CELLULAR TELEPHONE OPERATIONS
TDS's cellular operations are conducted through U.S. Cellular and its
subsidiaries. U.S. Cellular is the eighth largest wireless company in the United
States, based on the aggregate number of customers in its consolidated markets.
U.S. Cellular's corporate development strategy is to operate controlling
interests in cellular market licensees in areas adjacent to or in proximity to
its other markets, thereby building clusters of operating markets. Customers
benefit from larger service areas such as these, which provide longer
uninterrupted service and the ability to make outgoing calls and receive
incoming calls within the designated area without special roaming arrangements.
In addition, U.S. Cellular anticipates that clustering will continue to provide
it certain economies in its capital and operating costs. Over the past few
years, U.S. Cellular has completed exchanges of controlling interests in its
less strategic markets for controlling interests in markets which better
complement its clusters. U.S. Cellular has also completed outright sales of
other less strategic markets, and has purchased controlling interests in markets
which enhance its clusters.
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The following table summarizes the status of U.S. Cellular's interests in
cellular markets at December 31, 1999.
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Owns Majority Interest and Manages (consolidated)........... 139
Owns Minority Interest and Manages.......................... 6
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Total Markets Managed by TDS................................ 145
Markets Managed by Others (1)............................... 35
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Total Markets............................................... 180
====
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(1) Represents markets in which U.S. Cellular owns a minority or other
noncontrolling interest and which are managed by third parties; as of
December 31, 1999, U.S. Cellular accounted for its interests in 29 of these
markets using the equity method and accounted for the remaining six markets
using the cost method.
Cellular systems in U.S. Cellular's 139 majority-owned and managed markets
served 2,602,000 customers at December 31, 1999, and contained 2,300 cell sites.
The average penetration rate in U.S. Cellular's consolidated markets was 10.39%
at December 31, 1999, and the churn rate in all consolidated markets averaged
2.1% per month for the twelve months ended December 31, 1999.
THE CELLULAR TELEPHONE INDUSTRY
Cellular telephone technology provides high-quality, high-capacity
communications services to in-vehicle and hand-held portable cellular
telephones. Cellular technology is a major improvement over earlier mobile
telephone technologies. Cellular telephone systems are designed for maximum
mobility of the customer. Access is provided through system interconnections to
local, regional, national and world-wide telecommunications networks. Cellular
telephone systems also offer a full range of ancillary services such as
conference calling, call-waiting, call-forwarding, voice mail, Internet access,
facsimile and data transmission.
Cellular telephone systems divide each service area into smaller geographic
areas or "cells." Each cell is served by radio transmitters and receivers
operating on discrete radio frequencies licensed by the FCC. All of the cells in
a system are connected to a computer-controlled Mobile Telephone Switching
Office ("MTSO"). The MTSO is connected to the conventional "landline" telephone
network and potentially other MTSOs. Each conversation on a cellular phone
involves a transmission over a specific set of radio frequencies from the
cellular phone to a transmitter/receiver at a cell site. The transmission is
forwarded from the cell site to the MTSO and from there may be forwarded to the
landline telephone network to complete the call. As the cellular telephone moves
from one cell to another, the MTSO determines radio signal strength and
transfers ("hands off") the call from one cell to the next. This hand-off is not
noticeable to either party on the phone call.
The FCC currently grants only two licenses to provide cellular telephone
service in each market. However, competition for customers includes competing
communications technologies such as conventional landline and mobile telephone,
Specialized Mobile Radio ("SMR") systems, radio paging and PCS. PCS has become
available in many areas of the United States, including the majority of
U.S. Cellular's markets, and U.S. Cellular expects PCS operators to continue
deployment of PCS in portions of all of U.S. Cellular's clusters through 2000.
Additionally, technologies such as Enhanced Specialized Mobile Radio ("ESMR")
are proving to be competitive with cellular service in certain of
U.S. Cellular's markets.
The services available to cellular customers and the sources of revenue
available to cellular system operators are similar to those provided by
conventional landline telephone companies. Customers may be charged a separate
fee for system access, airtime, long-distance calls and ancillary services.
Cellular system operators often provide service to customers of other operators'
cellular systems while the customers are temporarily located within the
operators' service areas. Customers using service away from their home system
are called "roamers." Roaming is available because technical standards require
that analog cellular telephones be compatible in all market areas in the United
States. Additionally, because U.S. Cellular has deployed digital technologies in
many of its service areas, its customers with digital or dual-mode (both analog
and digital capabilities) wireless telephones can roam in other
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companies' service areas which have a compatible digital technology in place.
Likewise, in its service areas with digital technologies in place,
U.S. Cellular can provide roaming service to other companies' customers who have
compatible digital wireless telephones. This type of roaming is not limited to
cellular customers and systems; PCS customers and systems have this roaming
capability as well. In all cases, the system that provides the service to
roamers will generate usage revenue. Many operators, including U.S. Cellular,
charge premium rates for this roaming service.
There have been a number of technical developments in the cellular industry
since its inception. Currently, while most companies' MTSOs process information
digitally, on certain cellular systems the radio transmission is done on an
analog basis. Several years ago, certain digital transmission techniques were
approved for implementation by the cellular industry. Time Division Multiple
Access ("TDMA") technology was selected as one industry standard by the cellular
industry and has been deployed by many wireless operators, including
U.S. Cellular's operations in portions of several clusters. Another digital
technology, Code Division Multiple Access ("CDMA"), is also being deployed by
U.S. Cellular in portions of several clusters. Digital radio technology offers
several advantages, including greater privacy, less transmission noise, greater
system capacity and potentially lower incremental costs to accommodate
additional system usage. The conversion from analog to digital radio technology
is continuing on an industry-wide basis; however, this process is expected to
take a number of years. PCS operators have deployed TDMA, CDMA and a third
digital technology, Global System for Mobile Communication ("GSM"), in the
markets where they have begun operations.
The cellular telephone industry is characterized by high initial fixed
costs. Accordingly, if and when revenues less variable costs exceed fixed costs,
incremental revenues should yield an operating profit. The amount of profit, if
any, under such circumstances is dependent on, among other things, prices and
variable marketing costs which in turn are affected by the amount and extent of
competition. Until technological limitations on total capacity are approached,
additional cellular system capacity can normally be added in increments that
closely match demand and at less than the proportionate cost of the initial
capacity.
CELLULAR OPERATIONS
From its inception in 1983 until 1993, U.S. Cellular was principally in a
start-up phase. Until 1993, U.S. Cellular's activities were concentrated
significantly on the acquisition of interests in cellular licensees and on the
construction and initial operation of cellular systems. The development of a
cellular system is capital-intensive and requires substantial investment prior
to and subsequent to initial operation. U.S. Cellular experienced operating
losses and net losses from its inception until 1993. In years since 1993,
U.S. Cellular has generated operations-driven net income and has significantly
increased its operating cash flows. Management anticipates further growth in
cellular units in service and revenues as U.S. Cellular continues to expand
through internal growth. Marketing and system operations expenses associated
with this expansion may reduce the rate of growth in operating cash flows and
operating income during the period of additional growth. In addition,
U.S. Cellular anticipates that the seasonality of revenue streams and operating
expenses may cause U.S. Cellular's operating income to vary from quarter to
quarter.
While U.S. Cellular produced operating income and net income since 1993,
changes in any of several factors may reduce U.S Cellular's growth in operating
income and net income over the next few years. These factors include:
- the growth rate in U.S. Cellular's customer base;
- the usage and pricing of cellular services;
- the churn rate;
- the cost of providing cellular services, including the cost of attracting
new customers;
- continued competition from PCS and other technologies; and
- continuing technological advances which may provide additional competitive
alternatives to cellular service.
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U.S. Cellular is building a substantial presence in selected geographic
areas throughout the United States where it can efficiently integrate and manage
cellular telephone systems. Its cellular interests include regional market
clusters in the following areas:
Midwest Regional Market Cluster
- Western Wisconsin/Northern Illinois
- Eastern Wisconsin
- Missouri/Illinois/Indiana
- Eastern Iowa
- Western Iowa
Mid-Atlantic Regional Market Cluster
- Eastern North Carolina/South Carolina
- Virginia/North Carolina
- West Virginia/Maryland/Pennsylvania/Ohio
Northwest Regional Market Cluster
- Washington/Oregon/Idaho
- Oregon/California
Maine/New Hampshire/Vermont Market Cluster
Florida/Georgia Market Cluster
Texas/Oklahoma/Missouri/Kansas Regional Market Cluster
- Oklahoma/Missouri/Kansas
- Texas/Oklahoma
Eastern Tennessee/Western North Carolina Market Cluster
Southern Texas Market Cluster
See "U.S. Cellular's Cellular Interests." U.S. Cellular has acquired its
cellular interests through the wireline application process (16%), including
settlements and exchanges with other applicants, and through acquisitions (84%),
including acquisitions from TDS and third parties.
CELLULAR SYSTEMS DEVELOPMENT
ACQUISITIONS, DIVESTITURES AND EXCHANGES. U.S. Cellular assesses its
cellular holdings on an ongoing basis in order to maximize the benefits derived
from clustering its markets. Over the past few years, U.S. Cellular has
completed exchanges of controlling interests in its less strategic markets for
controlling interests in markets which better complement its clusters.
U.S. Cellular has also completed outright sales of other less strategic markets,
and has purchased controlling interests in markets which enhance its clusters.
As a result, U.S. Cellular has not substantially increased its population
equivalents during the past five years, but has shifted the balance of its
holdings between investment and operating interests so that currently over 90%
of U.S. Cellular's interests are in markets where it is the operator.
Recently, the pace of acquisitions, exchanges and divestitures has slowed as
industry-wide consolidation has reduced the number of markets available for
acquisition. U.S. Cellular may continue to make opportunistic acquisitions or
exchanges in markets that further strengthen its market clusters and in other
attractive markets. U.S. Cellular also seeks to acquire minority interests in
markets where it already owns the majority interest and/or operates the market.
There can be no assurance that U.S. Cellular, or TDS for the benefit of
U.S. Cellular, will be able to negotiate additional acquisitions or exchanges on
terms acceptable to it or that regulatory approvals, where required, will be
received. U.S. Cellular plans
9
<PAGE>
to retain minority interests in certain cellular markets which it believes will
earn a favorable return on investment. Other minority interests may be exchanged
for interests in markets which enhance U.S. Cellular's market clusters or may be
sold for cash or other consideration. U.S. Cellular also continues to evaluate
the disposition of certain managed interests which are not essential to its
corporate development strategy.
COMPLETED ACQUISITIONS. During 1999, U.S. Cellular purchased a majority
interest in one market and several minority interests in markets in which it
currently owns a majority interest, representing approximately
245,000 population equivalents, for $31.5 million in cash.
COMPLETED DIVESTITURES. During 1999, U.S. Cellular sold a majority interest
in one market and several minority interests, representing approximately
612,000 population equivalents, for cash and receivables totaling
$59.7 million.
PENDING ACQUISITIONS AND DIVESTITURE. As of December 31, 1999,
U.S. Cellular had agreements pending to acquire a majority interest in one
market and a minority interest in another market in which it currently owns a
majority interest, representing an aggregate of 160,000 population equivalents,
in exchange for $24.0 million in cash and the issuance of approximately 28,000
U.S. Cellular Common Shares. Also at December 31, 1999, U.S. Cellular had an
agreement pending to divest a minority interest in one market, representing
114,000 population equivalents, for $22.5 million in cash. U.S. Cellular expects
all of the pending transactions to be completed in the first half of 2000.
TDS maintains a shelf registration of Common Shares and U.S. Cellular
maintains shelf registrations of Common Shares and Preferred Stock under the
Securities Act of 1933 for issuance specifically in connection with
acquisitions.
U.S. Cellular is a majority-owned subsidiary of TDS. At December 31, 1999,
TDS owned 80.7% of the combined total of the outstanding Common Shares and
Series A Common Shares of U.S. Cellular and controlled 95.6% of the combined
voting power of both classes of common stock.
CELLULAR INTERESTS AND CLUSTERS
U.S. Cellular operates clusters of adjacent cellular systems in nearly all
of its markets, enabling its customers to benefit from larger service areas than
otherwise possible. Where U.S. Cellular offers wide-area coverage, its customers
enjoy uninterrupted service within the designated area. Customers may also make
outgoing calls and receive incoming calls within this area without special
roaming arrangements. In addition to benefits to customers, clustering also has
provided to U.S. Cellular certain economies in its capital and operating costs.
These economies are made possible through increased sharing of facilities,
personnel and other costs and have resulted in a reduction of U.S. Cellular's
per customer cost of service. The extent to which U.S. Cellular benefits from
these revenue enhancements and economies of operation is dependent on market
conditions, population size of each cluster and engineering considerations.
U.S. Cellular may continue to make opportunistic acquisitions and exchanges
which will complement its established market clusters. From time to time,
U.S. Cellular may also consider exchanging or selling its interests in markets
which do not fit well with its long-term strategies.
U.S. Cellular owned interests in cellular telephone systems in 180 markets
at December 31, 1999, representing 26,395,000 million population equivalents.
Including the interest to be purchased and the
10
<PAGE>
interest to be sold during 2000, U.S. Cellular owned or had the right to acquire
180 markets, representing 26,362,000 million population equivalents, at
December 31, 1999. The following table summarizes the changes in
U.S. Cellular's population equivalents in recent years.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(THOUSANDS OF POPULATION EQUIVALENTS)(1)
<S> <C> <C> <C> <C> <C>
Operational Markets:
Majority-Owned and Managed...................... 24,079 23,825 23,051 20,625 20,325
Minority-Owned and Managed (2).................. 306 358 405 405 516
Majority-Owned Markets to be Managed, Net of
Markets to be Divested: (2)(3).................. -- -- -- 221 274
------ ------ ------ ------ ------
Total Markets Managed and to be Managed....... 24,385 24,183 23,456 21,251 21,115
Minority Interests in Markets Managed by Others... 1,977 2,166 2,163 4,614 4,115
------ ------ ------ ------ ------
Total......................................... 26,362 26,349 25,619 25,865 25,230
====== ====== ====== ====== ======
</TABLE>
- ------------------------------
(1) Based on 1999 Claritas estimates for all years.
(2) Includes markets where U.S. Cellular has the right to acquire an interest
but does not currently own an interest.
(3) Includes markets which are operational but which are currently managed by
third parties.
The following section details U.S. Cellular's cellular interests, including
those it owned or had the right to acquire as of December 31, 1999. The table
presented therein lists clusters of markets that U.S. Cellular manages.
U.S. Cellular's market clusters show the areas in which U.S. Cellular is
currently focusing its development efforts. These clusters have been devised
with a long-term goal of allowing delivery of cellular service to areas of
economic interest and along corridors of economic activity. The number of
population equivalents represented by U.S. Cellular's cellular interests may
have no direct relationship to the number of potential cellular customers or the
revenues that may be realized from the operation of the related cellular
systems.
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<PAGE>
U.S. CELLULAR'S CELLULAR INTERESTS
The table below sets forth certain information with respect to the interests
in cellular markets which U.S. Cellular owned or had the right to acquire
pursuant to definitive agreements as of December 31, 1999.
<TABLE>
<CAPTION>
TOTAL CURRENT AND
ACQUIRABLE
POPULATION
CLUSTER/MAJOR SERVICE AREA 1999 POPULATION EQUIVALENTS
-------------------------- --------------- -----------------
<S> <C> <C>
MIDWEST REGIONAL MARKET CLUSTER:
Western Wisconsin/Northern Illinois....................... 2,627,000 2,583,000
Eastern Wisconsin......................................... 2,291,000 2,268,000
Missouri/Illinois/Indiana................................. 1,943,000 1,834,000
Eastern Iowa.............................................. 1,785,000 1,622,000
Western Iowa.............................................. 956,000 903,000
---------- ----------
Total Midwest Regional Market Cluster................... 9,602,000 9,210,000
---------- ----------
MID-ATLANTIC REGIONAL MARKET CLUSTER:
Eastern North Carolina/South Carolina..................... 2,637,000 2,626,000
Virginia/North Carolina................................... 1,322,000 1,315,000
West Virginia/Maryland/Pennsylvania/Ohio.................. 1,383,000 1,255,000
---------- ----------
Total Mid-Atlantic Regional Market Cluster.............. 5,342,000 5,196,000
---------- ----------
NORTHWEST REGIONAL MARKET CLUSTER:
Washington/Oregon/Idaho................................... 1,500,000 1,400,000
Oregon/California......................................... 1,053,000 1,053,000
---------- ----------
Total Northwest Regional Market Cluster................. 2,553,000 2,453,000
---------- ----------
MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER:................. 1,697,000 1,643,000
---------- ----------
FLORIDA/GEORGIA MARKET CLUSTER:............................. 1,597,000 1,597,000
---------- ----------
TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET CLUSTER:
Oklahoma/Missouri/Kansas.................................. 1,451,000 896,000
Texas/Oklahoma............................................ 691,000 604,000
---------- ----------
Total Texas/Oklahoma/Missouri/Kansas Regional Market
Cluster:............................................... 2,142,000 1,500,000
---------- ----------
EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET CLUSTER:.... 1,653,000 1,331,000
---------- ----------
SOUTHERN TEXAS MARKET CLUSTER:.............................. 1,311,000 1,311,000
---------- ----------
Other Operations:........................................... 144,000 144,000
---------- ----------
Total Managed Markets....................................... 26,041,000 24,385,000
Markets Managed by Others................................... 1,977,000
----------
Total Population Equivalents................................ 26,362,000
==========
</TABLE>
SYSTEM DESIGN AND CONSTRUCTION
U.S. Cellular designs and constructs its systems in a manner it believes
will permit it to provide high-quality service to analog and certain types of
digital cellular telephones, based on market and engineering studies which
relate to specific markets. Engineering studies are performed by U.S. Cellular
personnel or independent engineering firms. U.S. Cellular's switching equipment
is digital, which reduces noise and crosstalk and is capable of interconnecting
in a manner which reduces costs of operation. While digital microwave
interconnections are typically made between the MTSO and cell
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<PAGE>
sites, both analog and digital radio transmissions are made between cell sites
and the cellular telephones themselves. Network reliability is given careful
consideration and extensive redundancy is employed in virtually all aspects of
U.S. Cellular's network design. Route diversity, ring topology and extensive use
of emergency standby power are also utilized to enhance network reliability and
minimize service disruption from any particular network failure.
In accordance with its strategy of building and strengthening market
clusters, U.S. Cellular has selected high capacity digital cellular switching
systems that are capable of serving multiple markets through a single MTSO. U.S.
Cellular's cellular systems are designed to facilitate the installation of
equipment which will permit microwave interconnection between the MTSO and the
cell site. U.S. Cellular has implemented such microwave interconnection in most
of the cellular systems it manages. Otherwise, such systems will rely upon
landline telephone connections to link cell sites with the MTSO. Although the
installation of microwave network interconnection equipment requires a greater
initial capital investment, a microwave network enables a system operator to
avoid the current and future charges associated with leasing telephone lines
from the landline telephone company, while generally improving system
reliability. In addition, microwave facilities can be used to connect separate
cellular systems to allow shared switching, which reduces the aggregate cost of
the equipment necessary to operate multiple systems. Microwave facilities can
also be used to carry long-distance calls, which reduces the costs of
interconnecting to the landline network.
U.S. Cellular has continued to expand its Wide Area Network ("WAN") to
accommodate various business functions, including:
- automatic call delivery
- intersystem handoff
- credit validation
- fraud prevention
- network management and
- interconnectivity of all U.S. Cellular's MTSOs and cell sites.
In addition, the WAN accommodates virtually all internal data communications
between various U.S. Cellular office locations and a significant number of U.S.
Cellular's retail locations to process customer activations. The WAN is deployed
in U.S. Cellular's five regional customer service centers ("Communications
Centers") for all customer service functions using U.S. Cellular's new billing
and information system.
Management believes that currently available technologies will allow
sufficient capacity on U.S. Cellular's networks to meet anticipated demand over
the next few years.
COSTS OF SYSTEM CONSTRUCTION AND FINANCING
Construction of cellular systems is capital-intensive, requiring substantial
investment for land and improvements, buildings, towers, MTSOs, cell site
equipment, microwave equipment, engineering and installation. U.S. Cellular,
consistent with FCC control requirements, uses primarily its own personnel to
engineer and oversee construction of each cellular system it owns and operates.
The costs (exclusive of license costs) of the systems in which U.S. Cellular
owns an interest have historically been financed through capital contributions
or intercompany loans from U.S. Cellular to the entities owning the systems, and
through certain vendor financing. In recent years, these funding requirements
have been met with cash generated from operations, proceeds from debt offerings
and proceeds from the sales of cellular interests.
MARKETING
U.S. Cellular's marketing plan is centered around rapid penetration of its
market clusters, increasing customer awareness of cellular service and reducing
churn. U.S. Cellular achieves these results through
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<PAGE>
the building of brand awareness and the implementation of loyalty programs which
give customer service priority to U.S. Cellular's most valuable customers. The
marketing plan stresses the value of U.S. Cellular's service offerings and
incorporates combinations of rate plans and cellular telephone equipment which
are designed to meet the needs of defined customer segments and their usage
patterns. U.S. Cellular supports a multi-faceted distribution program, including
direct sales, agents and retail service centers in the vast majority of its
markets, and the Internet for those customers who wish to contact U.S. Cellular
through that medium.
U.S. Cellular-owned and managed locations are designed to market cellular
service to the consumer segment in a familiar setting. In late 1999, U.S.
Cellular expanded its e-commerce site to make additional accessories available
online. U.S. Cellular anticipates that as customers become more comfortable with
e-commerce, the Internet will become more of a robust marketing channel for both
sales of rate plans as well as accessories.
U.S. Cellular manages each cluster of markets with a local staff, including
sales, engineering and in some cases installation personnel. U.S. Cellular
operates five regional Communications Centers whose personnel are responsible
for customer service and certain other functions. Direct sales consultants
market cellular service to business customers throughout each cluster. Retail
sales associates work out of U.S. Cellular's nearly 500 U.S. Cellular-owned
retail stores and kiosks and market cellular service primarily to the consumer
and small business segment. U.S. Cellular maintains an ongoing training program
to improve the effectiveness of sales consultants and retail associates by
focusing their efforts on obtaining customers and maximizing the sale of
high-use packages. These packages enable customers to buy substantial amounts of
minutes for fixed monthly rates.
U.S. Cellular continues to expand its relationships with agents, dealers and
non-U.S. Cellular retailers to obtain customers, and at year-end 1999 had
contracts with more than 2,000 of these businesses. Agents and dealers are
independent business people who obtain customers for U.S. Cellular on a
commission basis. U.S. Cellular's agents are generally in the business of
selling cellular telephones, cellular service packages and other related
products. U.S. Cellular's dealers include car stereo companies, major appliance
dealers, office supply dealers and mass merchants including national companies
such as Best Buy and Circuit City.
U.S. Cellular created a new class of agent during 1999, the Value Added
Distributor agent channel. This channel's initial focus was on the sale of U.S.
Cellular's prepaid service product, TalkTracker-Registered Trademark-, to
selected market segments, and complements U.S. Cellular's own distribution
channels. Additionally, in support of its overall Internet initiatives, U.S.
Cellular has actively recruited agents who provide services exclusively through
the Internet. Such agents include Sundial, Telstreet, StartSmart and
Buyphone.com.
U.S. Cellular uses a variety of direct mail, billboard, radio, television
and newspaper advertising to stimulate interest by prospective customers in
purchasing U.S. Cellular's cellular service and to establish familiarity with
U.S. Cellular's name. In 1999, U.S. Cellular began operating under a unified
brand name and logo, U.S. Cellular( SM), across all its markets. All markets
were converted to the new brand name in the second quarter of 1999. The new logo
is simpler and bolder than the old logo. U.S. Cellular retained its tag line
"The way people talk around here( SM)," which is still used to promote the U.S.
Cellular( SM) brand.
U.S. Cellular continues to advertise its digital service offerings through
both television and radio advertising, which contributed to a significant
increase in the number of customers using U.S. Cellular's digital services
during 1999. Advertising is directed at gaining customers, improving customers'
awareness of the U.S. Cellular brand, increasing existing customers' usage of
U.S. Cellular's services and increasing the public awareness and understanding
of the cellular services offered by U.S. Cellular. U.S. Cellular attempts to
select the advertising and promotion media that are most appealing to the
targeted groups of potential customers in each local market. U.S. Cellular
utilizes local advertising media and public relations activities and establishes
community relations programs to enhance public awareness of U.S. Cellular. These
programs are aimed at supporting the communities in which U.S. Cellular serves.
The programs range from loaning phones to public service operations in
emergencies to assisting victims of domestic abuse through U.S. Cellular's Stop
Abuse From Existing(SM) programs.
14
<PAGE>
The following table summarizes, by operating cluster, the total population,
U.S. Cellular's customer units and penetration for U.S. Cellular's
majority-owned and managed markets that were operational as of December 31,
1999.
<TABLE>
<CAPTION>
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION
------------------ ---------- --------- -----------
<S> <C> <C> <C>
Midwest Regional Market Cluster.......................... 9,209,000 1,140,000 12.38%
Mid-Atlantic Regional Market Cluster..................... 5,091,000 415,000 8.15
Northwest Regional Market Cluster........................ 2,553,000 254,000 9.95
Maine/New Hampshire/Vermont Market Cluster............... 1,697,000 165,000 9.72
Florida/Georgia Market Cluster........................... 1,597,000 151,000 9.46
Texas/Oklahoma/Missouri/Kansas Regional Market Cluster... 2,142,000 226,000 10.55
Eastern Tennessee/Western North Carolina Market
Cluster................................................ 1,300,000 152,000 11.69
Southern Texas Market Cluster............................ 1,311,000 77,000 5.87
Other Operations......................................... 144,000 22,000 15.28
---------- --------- -----
25,044,000 2,602,000 10.39%
========== ========= =====
</TABLE>
CUSTOMERS AND SYSTEM USAGE
Cellular customers come from a wide range of demographic segments. Business
users typically include a large proportion of individuals who work outside of
their offices such as people in the construction, real estate, wholesale and
retail distribution businesses and professionals. Increasingly, U.S. Cellular is
providing cellular service to consumers and to customers who use their cellular
telephones for mixed business and personal use as well as for security purposes.
A major portion of U.S. Cellular's recent customer growth is from these lower
revenue segments. Although some of U.S. Cellular's customers still use
in-vehicle cellular telephones, the vast majority of new customers are selecting
portable cellular telephones. These units are more compact and fully featured as
well as more attractively priced, and they appeal to newer segments of the
customer population.
U.S. Cellular's cellular systems are used most extensively during normal
business hours between 7:00 AM and 6:00 PM. On average, the local retail
customers in U.S. Cellular's consolidated markets used their cellular systems
approximately 115 minutes per unit each month and generated retail revenue of
approximately $33 per month during 1999, compared to 105 minutes and $33 per
month in 1998. Revenue generated by roamers using U.S. Cellular's systems
("inbound roaming"), together with local retail, toll and other revenues,
brought U.S. Cellular's total average monthly service revenue per customer unit
in consolidated markets to $48 during 1999. Average monthly service revenue per
customer unit decreased approximately 1% during 1999. This decrease was not as
significant as in recent years, due to the proliferation of certain national
pricing plans used by other wireless companies which significantly increased
inbound roaming minutes of use on U.S. Cellular's systems during 1999. This
effect was offset by decreases in average revenue per minute of use from both
local retail customers and inbound roamers. Competitive pressures and U.S.
Cellular's increasing use of pricing and other incentive programs to stimulate
overall usage resulted in a decrease in average local retail revenue per minute
of use in 1999. Inbound roaming revenue per minute also decreased during the
year, partially due to the ongoing trend toward reduced per minute prices for
roaming negotiated between U.S. Cellular and other cellular operators and also
due to the additional minutes generated by customers with national pricing
plans, which are at lower than average rates. U.S. Cellular anticipates that
average monthly service revenue per customer unit will continue to decline in
the future. However, this effect is more than offset by U.S. Cellular's
increasing number of customers; therefore, U.S. Cellular expects total revenues
to continue to grow for the next few years.
U.S. Cellular's main sources of revenue are from its own customers and from
inbound roaming customers. U.S. Cellular's roaming service allows a customer to
place or receive a call in a cellular service area away from the customer's home
service area. U.S. Cellular has entered into "roaming
15
<PAGE>
agreements" with operators of other cellular systems covering virtually all
systems in the United States, Canada, and Mexico. U.S. Cellular also has roaming
agreements with several PCS operators. Roaming agreements offer customers the
opportunity to roam in these systems. These reciprocal agreements automatically
pre-register the customers of U.S. Cellular's systems in the other carriers'
systems. Also, a customer of a participating system roaming (i.e. traveling) in
a U.S. Cellular market where this arrangement is in effect is able to make and
receive calls on U.S. Cellular's system. The charge for this service is
typically at premium rates and is billed by U.S. Cellular to the customer's home
system, which then bills the customer. U.S. Cellular has entered into agreements
with other cellular carriers to transfer roaming usage at agreed-upon rates. In
some instances, based on competitive factors, U.S. Cellular may charge a lower
amount to its customers than the amount actually charged to U.S. Cellular by
another cellular carrier for roaming.
The following table summarizes certain information about customers and
market penetration in U.S. Cellular's consolidated operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Majority-owned and managed markets:
Cellular markets in operation (1)............... 139 138 134 131 137
Total population of markets in service (000s)... 25,044 24,683 24,034 21,712 22,309
Customer Units: (2)
at beginning of period........................ 2,183,000 1,710,000 1,073,000 710,000 421,000
additions during period....................... 1,015,000 915,000 941,000 561,000 426,000
disconnects during period..................... 596,000 442,000 304,000 198,000 137,000
at end of period.............................. 2,602,000 2,183,000 1,710,000 1,073,000 710,000
Market penetration at end of period (3)......... 10.39% 8.84% 7.11% 4.94% 3.18%
Consolidated revenues............................. $1,417,181 $1,162,467 $ 876,965 $ 680,068 $ 480,316
Depreciation expense.............................. 184,830 167,150 97,591 74,631 57,302
Amortization expense.............................. 45,142 39,629 34,788 34,208 32,156
Operating Income.................................. 255,842 176,075 129,543 87,366 42,755
Capital expenditures.............................. 277,450 320,417 318,748 248,123 210,878
Business segment assets........................... $3,331,590 $3,011,237 $2,508,916 $2,071,522 $1,876,262
</TABLE>
- ------------------------------
(1) Represents the number of markets in which U.S. Cellular owned at least a 50%
interest and which it managed. The revenues and expenses of these cellular
markets are included in U.S. Cellular's consolidated revenues and expenses.
(2) Represents the approximate number of revenue-generating cellular telephones
served by the cellular markets referred to in footnote (1). The revenue
generated by such cellular telephones is included in consolidated revenues.
(3) Computed by dividing the number of customer units at the end of the period
by the total population of markets in service as estimated by Claritas
(1997-1999) or Donnelley Marketing Service (1995-1996) for the respective
years.
PRODUCTS AND SERVICES
CELLULAR TELEPHONES AND INSTALLATION. There are a number of different types
of cellular telephones, all of which are currently compatible with analog
cellular systems nationwide. U.S. Cellular offers a full range of cellular
telephones for use by its customers. Features offered in some of the cellular
telephones include hands-free calling, repeat dialing, voice mail and others. In
the systems where U.S. Cellular offers digital service, additional features such
as caller ID and short messaging services are available on those cellular
telephones.
U.S. Cellular negotiates volume discounts from its cellular telephone
suppliers. U.S. Cellular's discounts cellular telephones to meet competition or
to stimulate sales by reducing the cost of becoming a cellular customer. In
these instances, where permitted by law, customers are generally required to
sign a service contract with U.S. Cellular. U.S. Cellular also cooperates with
cellular equipment manufacturers in local advertising and promotion of cellular
equipment.
U.S. Cellular has established service and/or installation facilities in many
of its local markets to ensure quality installation and service of the cellular
telephones it sells. These facilities allow U.S.
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<PAGE>
Cellular to improve its service by promptly assisting customers who experience
equipment problems. Additionally, U.S. Cellular maintains a repair facility in
Tulsa, Oklahoma, which handles more complex service and repair issues.
CELLULAR SERVICES. U.S. Cellular's customers are able to choose from a
variety of packaged pricing plans which are designed to fit different calling
patterns. The ability to help a customer find the right technology and the right
pricing plan is central to U.S. Cellular's brand positioning. During 1999, U.S.
Cellular focused its efforts on new products with the continued promotion of its
digital service offering, called Digital PCS, and its prepaid offering,
TalkTracker-Registered Trademark-. Both offerings continued their success during
the year, as many higher revenue customers purchased U.S. Cellular's digital
offering and new market segments such as individuals with credit difficulties
were able to purchase cellular service through U.S. Cellular's prepaid offering.
U.S. Cellular's customer bills typically show separate charges for
custom-calling features, airtime in excess of the packaged amount, and toll
calls. Custom-calling features provided by U.S. Cellular include wide-area call
delivery, call forwarding, call waiting, three-way calling and no-answer
transfer. U.S. Cellular also offers a voice message service in many of its
markets. This service, which functions like a sophisticated answering machine,
allows customers to receive messages from callers when they are not available to
take calls. Additional services, such as short messaging services, are available
in U.S. Cellular's markets where digital service is offered.
REGULATION
REGULATORY ENVIRONMENT. The operations of U.S. Cellular are subject to FCC
and state regulation. The cellular telephone licenses held by U.S. Cellular are
granted by the FCC for the use of radio frequencies and are an important
component of the overall value of the assets of U.S. Cellular. The construction,
operation and transfer of cellular systems in the United States are regulated to
varying degrees by the FCC pursuant to the Communications Act of 1934. In 1996,
Congress enacted the Telecommunications Act of 1996, which amended the
Communications Act. The Telecommunications Act mandates significant changes in
existing telecommunications rules and policies to promote competition, ensure
the availability of telecommunications services to all parts of the nation and
to streamline regulation of the telecommunications industry to remove regulatory
burdens, as competition develops. The FCC has promulgated regulations governing
construction and operation of cellular systems, licensing (including renewal of
licenses) and technical standards for the provision of cellular telephone
service under the Communications Act, and is implementing the legislative
objectives of the Telecommunications Act, as discussed below.
LICENSING. For cellular telephone licensing purposes, the FCC has divided
the United States into separate geographic markets (MSAs and RSAs). In each
market, the allocated cellular frequencies are divided into two equal blocks.
During the application process, the FCC reserved one block of frequencies for
non-wireline applicants and another block for wireline applicants. Subject to
FCC approval, a cellular system may be sold to either a wireline or non-wireline
entity, but no entity which controls a cellular system may own a significant
interest in another cellular system in the same MSA or RSA.
The completion of acquisitions involving the transfer of control of a
cellular system requires prior FCC approval. Acquisitions of minority interests
generally do not require FCC approval. Whenever FCC approval is required, any
interested party may file a petition to dismiss or deny the application for
approval of the proposed transfer.
The FCC must be notified each time an additional cell is constructed which
enlarges the service area of a given market. The FCC's rules also generally
require persons or entities holding cellular construction permits or licenses to
coordinate their proposed frequency usage with neighboring cellular licensees in
order to avoid electrical interference between adjacent systems. The height and
power of base stations in the cellular system are regulated by FCC rules, as are
the types of signals emitted by these stations. In addition to regulation by the
FCC, cellular systems are subject to certain Federal Aviation Administration
("FAA") regulations with respect to the siting and construction of cellular
transmitter towers and antennas as well as local zoning requirements.
17
<PAGE>
Beginning in 1996, the FCC has also imposed a requirement that all licensees
register and obtain FCC registration numbers for all of their antenna towers
which require prior FAA clearance. All new towers must be registered at the time
of construction and existing towers were required to be registered by May 1998
on a staggered state-by-state basis. U.S. Cellular believes that it is in
compliance with the FCC's tower registration requirements.
Beginning in October 1997, cellular systems, which previously were
"categorically excluded" from having to evaluate their facilities to ensure
their compliance with federal "radio frequency" radiation requirements, were
made subject to those requirements. As a result, all cellular towers of less
than 10 meters in height, building mounted antennas and cellular telephones must
comply with radio frequency radiation guidelines. After October 1997, all new
cellular facilities must be in compliance when they are brought into service. As
of September 1, 2000, all existing facilities must be brought into compliance.
U.S. Cellular believes that the majority of its existing facilities already
comply with the requirements and will seek to ensure that the remainder are
brought into compliance as required.
Initial cellular telephone licenses were granted for ten-year periods. The
FCC has established standards for conducting comparative renewal proceedings
between a cellular licensee seeking renewal of its license and challengers
filing competing applications. The FCC has: (i) established criteria for
comparing the renewal applicant to challengers, including the standards under
which a renewal expectancy will be granted to the applicant seeking license
renewal; (ii) established basic qualifications standards for challengers; and
(iii) provided procedures for preventing possible abuses in the comparative
renewal process. The FCC has concluded that it will award a renewal expectancy
if the licensee has (i) provided "substantial" performance, which is defined as
"sound, favorable and substantially above a level of mediocre service just
minimally justifying renewal," and (ii) complied with FCC rules, policies and
the Communications Act. If a renewal expectancy is awarded to an existing
licensee, its license is renewed and competing applications are not considered.
All of U.S. Cellular's licenses which it applied to have renewed between 1995
and 1999 were renewed.
U.S. Cellular conducts and plans to conduct its operations in accordance
with all relevant FCC rules and regulations and anticipates being able to
qualify for a renewal expectancy in its upcoming renewal filings. Accordingly,
U.S. Cellular believes that current regulations will have no significant effect
on its operations and financial condition. However, changes in the regulation of
cellular operators or their activities and of other mobile service providers
could have a material adverse effect on U.S. Cellular's operations.
The FCC has also provided that five years after the initial licenses are
granted, unserved areas within markets previously granted to licensees may be
applied for by both wireline and non-wireline entities and by third parties.
Accordingly, many unserved area applications have been filed by U.S. Cellular
and others and have generally been routinely granted. U.S. Cellular's strategy
with respect to system construction in its markets has been to build cells
covering areas within such markets that U.S. Cellular considers economically
feasible to serve or might conceivably wish to serve and to do so within the
five-year period following issuance of the license. In cases where applications
for unserved areas are filed which are mutually exclusive and would result in
overlapping service areas, the FCC decides between the competing applicants by
an auction process.
Pursuant to 1993 amendments to the Communications Act, cellular service is
classified as a Commercial Mobile Radio Service, in that it is service offered
to the public, for a fee, which is interconnected to the public switched
telephone network. The FCC has determined that it will forbear from requiring
such carriers to comply with a number of statutory provisions otherwise
applicable to common carriers, such as the filing of tariffs.
RECENT EVENTS. There are certain regulatory proceedings currently pending
before the FCC which are of particular importance to the cellular industry. In
one proceeding, the FCC has imposed new "enhanced 911" regulations on cellular
carriers. Enhanced 911 capabilities will enable cellular systems to determine
the precise location of persons making emergency calls. The new rules will
require cellular carriers to work with local public safety officials to process
911 calls, including those made from mobile
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telephones not registered with the cellular system. Since April 1998, cellular
carriers have had to be able to identify the cell from which the call has been
made. The rules will require cellular systems to improve their ability to locate
wireless 911 callers during 2001 and 2002.
The FCC has adopted a limited expansion of the obligation of cellular
carriers to serve the roaming subscribers of broadband PCS providers, among
others, even though the subscribers involved have no pre-existing service
relationships with such cellular carriers. Under these policies, broadband PCS
providers may offer their subscribers handsets which are capable of operating
over broadband PCS and cellular networks so that when their subscribers are out
of range of broadband PCS networks, they will be able to obtain access to
cellular networks. The FCC expects that implementation of these roaming
capabilities will promote competition between broadband PCS and cellular service
providers.
The FCC has adopted requirements which will make it possible for subscribers
to retain, subject to certain geographic and other limitations, their existing
telephone numbers when they switch from one service provider to another. This
numbering portability will include switching between Local Exchange Carriers
("LECs") and other wireline providers, between wireless service providers and
between LEC/ wireline and wireless providers. LECs in the 100 largest MSAs, had
implementation deadlines by the end of 1998 at those switches which received
specific requests for numbering portability. The FCC has extended the compliance
date for cellular, broadband PCS, and certain other wireless providers until
November 2002.
In another proceeding, the FCC in 1996 adopted rules regarding the method by
which cellular carriers and LECs shall compensate each other for interconnecting
cellular and local exchange facilities. The FCC rules provided for symmetrical
and reciprocal compensation between LECs and cellular carriers, and also
prescribed interim interconnection proxy rates, which are much lower than the
rates that were formerly paid by cellular carriers to LECs. Symmetrical and
reciprocal compensation means they must pay each other at the same rate.
Interconnection rate issues will be decided by the states. Cellular carriers are
now paying and in the future can be expected to pay lower rates to LECs than
they previously paid. This result is expected to be favorable to the wireless
industry and somewhat unfavorable to LECs.
The FCC is also proceeding to implement other parts of the
Telecommunications Act. The Telecommunications Act provides that implementing
its legislative objectives will be the task of the FCC, the state public
utilities commissions and a Federal-state Joint Board. Much of this
implementation is proceeding in numerous, concurrent proceedings with aggressive
deadlines. U.S. Cellular cannot predict the full extent of, nature of and
interrelationships among state and federal implementation and other responses to
the Telecommunications Act.
The primary purpose and effect of the new law is to open all
telecommunications markets to competition. The Telecommunications Act makes most
direct or indirect state and local barriers to competition unlawful. It directs
the FCC to preempt all inconsistent state and local laws and regulations, after
notice and comment proceedings. It also enables electric and other utilities to
engage in telecommunications service through qualifying subsidiaries.
Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the Telecommunications Act's universal
service provisions and necessary for universal services, public safety and
welfare, continued service quality and consumer rights. While a state may not
impose requirements that effectively function as barriers to entry, it retains
limited authority to regulate certain competitive practices in rural telephone
company service areas.
The Telecommunications Act establishes principles and a process for
implementing a modified "universal service" policy. This policy seeks
nationwide, affordable service and access to advanced telecommunications and
information services. It calls for reasonably comparable urban and rural rates
and services. The Telecommunications Act also requires universal service to
schools, libraries and rural health facilities at discounted rates. Cellular
carriers must provide such discounted rates to such organizations in accordance
with federal regulations. The FCC has implemented the mandate of the
Telecommunications Act to create a new universal service support mechanism "to
ensure that all
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Americans have access to telecommunications services." The Telecommunications
Act requires all interstate telecommunications providers, including wireless
service providers, to "make an equitable and non-discriminatory contribution" to
support the cost of providing universal service, unless their contribution would
be de minimis. At present, the provision of landline telephone service in high
cost areas is subsidized by access charges and other payments by interexchange
carriers to LECs. The obligation to make payments to support universal service
has been expanded to include other telecommunications service providers,
including cellular carriers. Such payments, based on a percentage of the total
"billed revenue" of carriers for a given previous half year, began in the first
quarter of 1998. Carriers are free to pass such charges on to their customers.
Cellular carriers are also eligible to receive universal service support
payments in certain circumstances under the new systems if they provide
specified services in "high cost" areas. U.S. Cellular has sought designation as
an "eligible telecommunications carrier" qualified to receive universal service
support in certain states and has been designated as such a carrier in
Washington State. It has also sought FCC clarification of the standards under
which wireless eligible telecommunications carriers will be designated.
Under a 1994 federal law, the Communications Assistance to Law Enforcement
Act, all telecommunications carriers, including U.S. Cellular and other wireless
licensees, must implement by June 30, 2000, certain equipment changes necessary
to assist law enforcement authorities in achieving an enhanced ability to
conduct electronic surveillance of those suspected of criminal activity. In
August 1999, the FCC added certain additional capabilities necessary to meet the
requirements of such act, which are to become applicable by September 2001.
Also, issues remain as to when carriers may obtain reimbursement from the
federal government for upgrades related to such requirements. U.S. Cellular will
work diligently to comply with all applicable requirements of the Communications
Assistance to Law Enforcement Act in cooperation with industry groups and
standard setting bodies.
The FCC has recently taken action in proceedings: (1) to ensure that the
customers of wireless providers, among other carriers, will receive complete,
accurate, and understandable bills; (2) to establish safeguards to protect
against unauthorized access to customer information, though these rules have
been overturned, at least temporarily, by court order; (3) to increase to 55
megahertz ("MHz") in rural areas its 45 MHz "cap" on the amount of spectrum
which entities under common ownership and control may hold in a single wireless
market and to relax its related cellular cross ownership restrictions; and
(4) to require improved access to telecommunications facilities by persons with
disabilities.
The FCC also has pending proceedings: (1) to implement a wireless billing
option under which wireline customers who call wireless customers could be
charged for wireless "airtime" as opposed to the wireless customer receiving the
call, as is the case at present ("calling party pays"); (2) to implement
requirements for wireless providers to set interstate interexchange rates in
each state at levels no higher than the rates charged to subscribers in any
other state; and (3) to set national policy for the allocation by state public
utilities commissions of telephone numbers to wireline and wireless carriers.
U.S. Cellular will monitor such proceedings and comply with new federal
requirements as they become applicable.
The FCC has also allocated a total of 140 MHz to broadband PCS (a portion of
radio spectrum from 1850 MHz to 1990 MHz), 20 MHz to unlicensed operations and
120 MHz to licensed operations, consisting of two 30 MHz blocks in each of the
51 Major Trading Areas ("MTAs") and one 30 MHz block and three 10 MHz blocks in
each of 493 Basic Trading Areas ("BTAs"). Cellular operators and those entities
under common ownership with them are permitted to participate in the ownership
of PCS licenses, except for those PCS licenses reserved for small businesses,
and licenses for PCS service areas in which the cellular operator owns a 20% or
greater interest in a cellular licensee, the service area of which covers 10% or
more of the population of the PCS service area. In the latter case, the cellular
license holder is limited to 20 MHz of PCS channels in urban areas. In rural
areas, such cellular operators may also now have 30 MHz of PCS channels.
PCS technology is similar in some respects to cellular technology. Where it
has become commercially available, this technology is capable of offering
increased capacity for wireless two-way and one-way voice, data and multimedia
communications services and has resulted in increased competition with U.S.
Cellular's operations in the markets where PCS systems have begun operations.
The
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ability of these PCS licensees to complement or compete with existing cellular
licensees will be affected by future FCC rule-makings. These and other future
technological and regulatory developments in the wireless telecommunications
industry and the enhancement of current technologies will likely create new
products and services that are competitive with the services currently offered
by U.S. Cellular. U.S. Cellular could be adversely affected by such
technological and regulatory developments.
In January, 2000, the FCC took an action which may have an impact on both
cellular and PCS licensees. Pursuant to a congressional directive, the FCC
adopted service rules for licensing the commercial use of 30 MHz of spectrum in
the 746-764 MHz and 776-794 MHz spectrum bands. That spectrum is to be
auctioned, beginning in June 2000. The licenses are divided into six regional
service areas, with 20 and 10 MHz blocks, and are designed to allow for a wide
range of wireless services. There will be no eligibility restrictions on
participation in the auctions for this spectrum. Cellular and PCS carriers and
other entities will be eligible to bid in the auction. Use of the spectrum by
licensees selected in the auction may be affected by the presence of incumbent
broadcast licensees on some of the auctioned frequencies through at least
December 31, 2006.
STATE AND LOCAL REGULATION. U.S. Cellular is also subject to state and
local regulation in some instances. In 1981, the FCC preempted the states from
exercising jurisdiction in the areas of licensing, technical standards and
market structure. In 1993, Congress preempted states from regulating the entry
of cellular systems into service and the rates charged by cellular systems to
customers. The siting and construction of the cellular facilities, including
transmitter towers, antennas and equipment shelters are still subject to state
or local zoning and land use regulations. However, in 1996, Congress amended the
Communications Act to provide that states could not discriminate against
wireless carriers in tower zoning proceedings and had to decide on zoning
requests with reasonable speed. In addition, states may still regulate other
terms and conditions of cellular service.
The FCC is required to forbear from applying any statutory or regulatory
provision that is not necessary to keep telecommunications rates and terms
reasonable or to protect consumers. A state may not apply a statutory or
regulatory provision that the FCC decides to forbear from applying. In addition,
the FCC must review its telecommunications regulations every two years and
change any that are no longer necessary. Further, the FCC is empowered under
certain circumstances to preempt state regulatory authorities if a state is
obstructing the Communications Act's basic purposes.
U.S. Cellular and its subsidiaries have been and intend to remain active
participants in proceedings before the FCC and state regulatory authorities.
Proceedings with respect to the foregoing policy issues before the FCC and state
regulatory authorities could have a significant impact on the competitive market
structure among wireless providers and the relationships between wireless
providers and other carriers. U.S. Cellular is unable to predict the scope, pace
or financial impact of policy changes which could be adopted in these
proceedings.
COMPETITION
U.S. Cellular's principal competitor for cellular telephone service in each
market is the licensee of the second cellular system in that market. Since each
competitor operates its cellular system on a 25 MHz frequency block licensed by
the FCC using comparable technology and facilities, competition for customers
between the two systems in each market is principally on the basis of quality of
service, price, size of area covered, services offered, and responsiveness of
customer service. The competing entities in many of the markets in which U.S.
Cellular has an interest have financial resources which are substantially
greater than those of U.S. Cellular and its partners in such markets.
The FCC's rules require all operational cellular systems to provide, on a
nondiscriminatory basis, cellular service to resellers which purchase blocks of
mobile telephone numbers from an operational system and then resell them to the
public.
In addition to competition from the other cellular licensee in each market,
there is also competition from PCS providers and SMR/ESMR system providers, both
of which are able to connect with the landline telephone network. PCS providers
have initiated service in many markets across the United States, including
markets where U.S. Cellular has operations. PCS providers offer digital,
wireless
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communications services to their customers. U.S. Cellular expects PCS operators
to continue deployment of PCS in portions of all of U.S. Cellular's clusters
throughout 2000. ESMR, an enhanced SMR system, has cells and frequency reuse
like other wireless services, thereby eliminating any technological limitation.
In recent years, ESMR providers have initiated service in several of U.S.
Cellular's markets. Although less directly a substitute for cellular service,
wireless data services and paging services may be adequate for those who do not
need full two-way voice service. Similar technological advances or regulatory
changes in the future may make available other alternatives to cellular service,
thereby creating additional sources of competition.
Continuing technological advances in the communications field make it
difficult to predict the extent of additional future competition for cellular
systems. For example, the FCC has allocated radio channels to mobile satellite
systems in which transmissions from mobile units to satellites would augment or
replace transmissions to cell sites, and several consortia to provide such
service have been formed. Such systems are designed primarily to serve the
communications needs of remote locations and mobile satellite systems could
provide viable competition for cellular systems in such areas. It is also
possible that the FCC may in the future assign additional frequencies to
cellular telephone service to provide for more than two cellular telephone
systems per market.
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TELEPHONE OPERATIONS
OVERVIEW
TDS's telephone operations are conducted through TDS Telecom and its
subsidiaries. TDS Telecom is a full-service local exchange carrier providing
high-quality telecommunication services, including local and long-distance
telephone service and Internet access, to rural and suburban communities through
TDS Telecom's 104 telephone company subsidiaries and to small and midsized towns
and metropolitan areas through TDS Telecom's two CLEC subsidiaries. Each of the
104 telephone companies, ranging in size from approximately 500 to 64,000 access
lines, is an ILEC. An ILEC is an incumbent local telephone company that
traditionally had the exclusive right and responsibility to provide local
transmission and switching services in its designated service territory. TDS
Telecom served approximately 571,700 access lines through its ILEC subsidiaries
at December 31, 1999, in 28 states.
The table below sets forth, as of December 31, 1999, the nine largest states
of ILEC operations of TDS Telecom based on the number of access lines and the
total number of access lines operated by all of the telephone subsidiaries of
TDS Telecom.
<TABLE>
<CAPTION>
NUMBER OF ILEC ACCESS LINES AT
STATE DECEMBER 31, 1999 % OF TOTAL
- ----- ------------------------------ ----------
<S> <C> <C>
Tennessee............................................. 98,106 17.2%
Wisconsin............................................. 94,466 16.5
Georgia............................................... 45,262 7.9
Minnesota............................................. 33,076 5.8
Indiana............................................... 30,435 5.3
Alabama............................................... 27,332 4.8
Michigan.............................................. 25,359 4.4
Maine................................................. 24,980 4.4
New York.............................................. 23,602 4.1
------- -----
Total for 9 Largest States........................ 402,618 70.4
Other States.......................................... 169,082 29.6
------- -----
Total ILEC...................................... 571,700 100.0%
======= =====
</TABLE>
TDS Telecom provides consumers and businesses with landline local telephone
service through its switching and intra-city network. Long-distance or toll
service is provided through connections with long-distance carriers, primarily
AT&T and the Regional Bell Operating Companies ("RBOCs"), which purchase network
access from TDS Telecom.
In 1998, TDS Telecom began providing telecommunications services as a CLEC
in Madison, Appleton, Green Bay, Menasha and Neenah, Wisconsin under the TDS
METROCOM brand name and in Minnesota markets including Brainerd, Duluth and St.
Cloud under the USLink brand name. CLEC is a term which depicts companies that
enter the operating areas of ILECs to offer competing local exchange service and
other telephone services. In 1999, TDS METROCOM began providing service in
Oshkosh, Wisconsin. TDS Telecom served approximately 74,100 customers through
its CLEC subsidiaries at December 31, 1999.
Future growth in ILEC telephone operations is expected to be derived from
providing service to new or presently underserved establishments, from business
expansion in the areas served by TDS Telecom and others, from upgrading existing
customers to higher grades of service and increasing penetration of services,
from increased usage of the network through both local and long-distance
calling, from providing additional services made possible by advances in
technology and from the acquisition of additional telephone companies.
Future growth in CLEC telephone operations is expected to be derived from
expansion into new markets and continued penetration in markets currently
served.
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TDS Telecom is committed to offering its customers a full complement of
telecommunications services, and is bundling those services in customer friendly
packages in order to be a single source for their telecommunications needs. TDS
Telecom intends to provide its customers with an ever-growing range of
communications products and services covering their local, long distance, data,
video and wireless needs.
The following table summarizes certain information regarding TDS Telecom's
telephone operations:
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ILEC Access lines(1).......... 571,700 547,500 515,500 484,500 425,900
% Residential............... 77.9% 78.1% 78.3% 79.9% 80.6%
% Business
(nonresidential)........... 22.1% 21.9% 21.7% 20.1% 19.4%
CLEC Access lines(1).......... 74,100 34,100 -- -- --
Total Revenues................ $ 545,917 $ 488,104 $ 437,624 $ 395,059 $ 354,841
Operating cash flow........... 237,901 205,814 198,164 190,995 175,594
Depreciation and amortization
expense...................... $ 123,350 $ 111,402 $ 98,021 $ 88,346 $ 77,354
Operating income.............. 114,551 94,412 100,143 102,649 98,240
Construction expenditures..... 122,181 143,126 151,460 144,440 104,372
Business segment assets....... $1,472,556 $1,352,554 $1,244,174 $1,213,884 $1,074,439
</TABLE>
- ------------------------------
(1) An "access line" is a single or multi-party circuit between the customer's
establishment and the central switching office.
TDS Telecom is a wholly-owned business unit of TDS, founded in 1968. TDS
Telecom's corporate headquarters are located in Madison, Wisconsin.
BUSINESS STRATEGY
TDS Telecom has historically produced revenue growth in its ILEC markets by
providing its customers with state-of-the-art telecommunications solutions,
maintaining a high quality of on-going service and selectively acquiring local
telephone companies. Management believes that TDS Telecom has a number of
advantages as an ILEC, including a modern network substantially upgraded to
provide a variety of advanced calling services ("ACS"), a strong local presence
and established brand name, economies of scale not available to smaller
independent operators and attractive, growing markets. However, the competitive
environment in the telecommunications industry has changed significantly as a
result of technological advances, increasing customer requirements and
regulatory changes, including the Telecommunications Act of 1996. In response to
this changing competitive environment, TDS Telecom's business plan is designed
to leverage TDS Telecom's strength as an ILEC into a full-service
telecommunications company. The business plan provides for TDS Telecom to meet
these challenges in three areas:
- by growing and protecting TDS Telecom's core ILEC business;
- by leveraging its strengths into attractive new markets; and
- by creating a robust line of data products and services, and selling them
in existing and new markets.
GROW AND PROTECT CORE ILEC BUSINESS
Management of TDS Telecom believes that the key to growing and protecting
its existing ILEC markets is to continue to build customer loyalty by providing
superior customer service, offering a suite of standardized products and
services, including bundled service offerings, and rapidly developing new
products and services. Management of TDS Telecom believes that its
community-based business offices offering full face-to-face customer service are
a fundamental competitive advantage. That advantage was further enhanced in 1999
when TDS Telecom completed its virtual business office initiative,
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<PAGE>
which links multiple business offices electronically, permitting TDS Telecom to
maintain its local presence while expanding hours and achieving certain
efficiencies of a consolidated call center. With respect to products and
services, TDS Telecom markets itself to consumers as a single telecommunications
provider offering bundled packages of advanced telecommunications services
including local, long distance, Internet and data services. These service
packages are all offered under the TDS Telecom brand name in order to benefit
from the brand equity in this name. In addition, management of TDS Telecom
believes it can achieve cost economies by refining its acquisition strategy to
focus on certain acquisitions which will increase the geographic clustering of
TDS Telecom's ILEC markets. See "ILEC Telephone Markets".
LEVERAGE STRENGTHS INTO CLEC MARKETS
TDS Telecom has begun its controlled entry into certain targeted midsized
communities, geographically proximate to existing TDS Telecom facilities and
service areas, for facilities-based entry as a CLEC. Management of TDS Telecom
believes that the smaller size of these markets reduces the likelihood of facing
significant competition and it can offer a significantly improved service level
over that of the incumbent local exchange carrier. Because it can utilize the
infrastructure (e.g. billing systems, network control center, operating systems,
financial and control accounting, technology planning, etc.) developed for the
TDS Telecom ILEC business, management believes that TDS Telecom can become
profitable in markets too small for start-ups and become profitable faster than
start-ups in the larger of its targeted markets. As in its ILEC markets, TDS
Telecom intends to be the single source for customers' telecommunications needs
in its CLEC markets.
The geographic focus of TDS Telecom's CLEC strategy is designed to leverage
TDS Telecom's existing infrastructure to facilitate early entry into new CLEC
markets and to complement TDS Telecom's ILEC clustering strategy. Consistent
with this strategy, TDS Telecom initiated service as a CLEC in Madison,
Wisconsin, and in Brainerd, Duluth and St. Cloud, Minnesota, in January 1998 and
initiated service as a CLEC in Appleton, Green Bay, Menasha and Neenah,
Wisconsin, in June 1998. In 1999, TDS Telecom initiated service in Oshkosh,
Wisconsin. In Minnesota, TDS Telecom has adopted a slightly different strategy
by entering as a CLEC through its long-distance subsidiary, USLink. USLink is
able to build on its relationship developed as a long distance reseller and now
offers local and Internet access services to its long distance customers in a
number of locations in Minnesota. USLink began converting customers in Brainerd,
Duluth and St. Cloud to its facilities in late 1999, as part of its long-term
strategy. USLink will complete a substantial portion of this conversion in 2000.
TDS Telecom plans to expand its CLEC operations to additional markets with a
controlled entry strategy. See "CLEC Telephone Markets".
PURSUE EMERGING DATA MARKETS
Data communications is one of the fastest growing segments of the
telecommunications services industry. In light of the growth of Internet use and
rapid introduction of new telecommunications technology, TDS Telecom intends to
offer a suite of data products in all of its markets, thereby positioning itself
as a full-service data networking service provider. TDS Telecom currently
provides Internet access service to its ILEC and CLEC customers. Most of TDS
Telecom's data products are in the early stages of development. See "Data
Initiatives".
ILEC TELEPHONE MARKETS
TDS Telecom's goal is to be a leading provider of electronically deliverable
products in its ILEC markets. According to published sources, at December 31,
1999 TDS Telecom was the 8th largest non-Bell local exchange telephone company
in the United States, based on the number of telephone access lines served. At
December 31, 1999, the telephone subsidiaries of TDS Telecom served
approximately 571,700 access lines in 28 states. TDS Telecom currently operates
over 460 central office and remote switching centers in its telephone operating
areas. All of TDS Telecom's access lines are served by digital switching
technology, which, in conjunction with other technologies, allows TDS Telecom to
offer additional premium services to its customers, including call forwarding,
conference calling, caller identification, selective call ringing and call
waiting.
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As one of the major independent telephone companies in the United States,
TDS Telecom's ILECs provide both local telephone service and access to the long
distance network for customers in their respective service areas. The ILECs also
provide directory advertising through a contract with another company, and
billing and collection services to interexchange carriers ("IXCs"). IXCs are
telephone companies that provide long-distance telephone service between points
in different local exchange areas, states or geographically defined Local and
Access Transport Areas ("LATAs"). TDS Telecom provides centralized
administrative and support services to field operations from its corporate
offices in Madison, Wisconsin.
RETAIL MARKETS
TDS Telecom's ILEC presence includes a Retail Markets Group and Wholesale
Markets Group. The Retail Markets Group is the customer-facing organization for
all retail sales with residential and commercial customers. The Retail Markets
Group includes 109 sales and service offices located in 28 states. The retail
customer base is a mix of rural and suburban customers, with significant
concentrations in the Upper Midwest and in the Southeast. Approximately 78% of
TDS Telecom's retail access lines serve residential customers and approximately
22% serve business customers. Most business customers could be described as
small business or small office/home office type customers.
The Retail Markets Group has three primary goals to support its grow and
protect strategy:
- build customer loyalty;
- grow revenues; and
- control costs.
Management of TDS Telecom believes it can achieve these goals by offering a
continually updated flow of new products and services through value-added
packages and bundles, by building brand equity in the TDS Telecom brand name,
and by providing superior customer service to its retail customers.
VALUE ADDED PRODUCT BUNDLES AND PACKAGES. Management of TDS Telecom
believes that its consumer and business customers have a strong preference to
purchase all of their telecommunications services from a single provider. TDS
Telecom believes that by offering a full complement of telecommunication
services and bundling those services in customer-friendly packages it can build
customer loyalty and reduce customer churn. TDS Telecom added several new
bundles and services in 1999 by combining existing services of its network or
partnering with other vendors. These products include:
- Privacy Pack (five ACS services or switch-based number translation
services offered to customers as a package),
- Caller ID Starter Pack (Caller ID and Call Waiting),
- TDSNET (Internet service)/Voice Mail (switch-base answering machine
service) and
- National Directory Assistance (directory assistance that covers the entire
nation versus a single area code).
TDS Telecom will continue to pursue relationships with strategic partners to
further develop the long distance, video and wireless components of its product
mix.
BRAND EQUITY. TDS Telecom continued the branding process started in 1996.
This process adopted the TDS Telecom name as a unified brand name across its
markets to build its brand image. TDS Telecom has continued its customer
awareness campaign to build awareness of the TDS Telecom name. TDS Telecom
continues to build name awareness through existing customer-facing vehicles such
as bill statements, and vehicle and company signage. Centralized media
purchasing has enabled higher reach and frequency at a lower cost. In 1999, TDS
Telecom continued to focus on building a positive share of mind with current and
prospective customers. This was done by increasing the volume of public
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<PAGE>
relations messages and through linkage of company image with sales and marketing
messages. Management of TDS Telecom believes that branding will increase the
loyalty of its customers and also reduce expenses through more cost-effective
marketing.
CUSTOMER SERVICE. TDS Telecom makes a unique customer service offer to its
retail customers. TDS Telecom is a large national company with a local sales and
service office in each of its markets. This combination provides TDS Telecom's
retail customers with the economies of scale and product offers generally
associated with large companies. It also provides the high levels of personal
customer service generally associated with small companies, through
community-based professional service representatives and field representatives
who both live and work in the communities served. TDS Telecom's strength in two
key areas--product/price and customer service--provides a fundamental
competitive advantage for TDS Telecom.
TDS Telecom completed the Virtual Business Office ("VBO") initiative in
1999. This initiative enables multiple TDS Telecom local sales and service
offices to function as a single office. Management of TDS Telecom believes that
VBO facilitates enhanced customer service at a lower cost. Cost savings are
expected to come through standardization of training and procedures and improved
voice and customer service application technology. Enhanced customer service
will come through expanded hours of operation, improved product, service and
sales training for all customer sales and service representatives, and through
improved customer access to company personnel on the first call. Initial
customer surveys show that customer satisfaction with transactions in the VBO
environment is equal to or better than satisfaction with transactions in the
prior environment.
WHOLESALE MARKETS
The Wholesale Markets Group focuses on TDS Telecom's wholesale customers and
has traditionally provided a majority of TDS Telecom's revenues. TDS Telecom
receives much of its ILEC revenue from the sale of traditional wholesale
services, such as local network access and billing and collections services, to
the IXCs. As a result, TDS Telecom continues to provide a high level of service
to traditional IXC wholesale customers such as AT&T, MCI, Sprint and the RBOCs.
ACCESS REVENUES. TDS Telecom's operating telephone subsidiaries receive
access revenue as compensation for carrying interstate and intrastate
long-distance traffic on its local networks. The interstate and intrastate
access rates charged include the cost of providing service plus a fair rate of
return. Access revenues account for approximately 55% of the revenue generated
by TDS Telecom's ILEC subsidiaries.
TDS Telecom participates in the National Exchange Carrier Association
("NECA") interstate common line and traffic sensitive tariffs for all but one of
its ILEC subsidiaries. These operating companies participate in the access
revenue pools administered by NECA, which collect and distribute revenue from
interstate access services. The FCC created NECA and it is subject to FCC rules
and oversight.
The FCC regulates interstate rates for dominant carriers and other matters
relating to interstate telephone service. On June 4, 1998, the FCC released a
Notice of Proposed Rulemaking on access reform for local exchange carriers
subject to rate of return regulation. In the Notice, the FCC proposed changes
similar to those which were ordered for price cap LECs in 1997. The proposed
changes could negatively affect rural LECs' ability to recover costs from the
interstate jurisdiction. In addition to the FCC's initiatives to reform access,
there have been industry initiatives to develop an overall plan for access
reform, universal service, the form of regulation and separations. These
initiatives seek to reduce access rates, eliminate implicit subsidies, and
maintain universal service in a way acceptable to small, rural LECs as markets
become more competitive. The FCC also released a Notice of Proposed Rule making
on jurisdictional separations reform on October 7, 1997. In the Notice, the FCC
reviewed the current procedures for separating LECs' service costs between state
and federal jurisdictions. Many of the proposals in the Notice seek to limit
costs assigned to the interstate jurisdiction and seek to assign greater costs
to the intrastate jurisdiction. To the extent that the costs are not made up in
the federal and state universal service mechanisms, TDS Telecom may seek rate
increases to offset any reductions in interstate revenues. The FCC has not yet
issued a final order on either Notice.
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TDS Telecom is also monitoring the effects of increasing volumes of Internet
traffic on the operating telephone subsidiaries' ability to appropriately
recover the network-related costs associated with this traffic. Unless changes
to the access charge methodology and/or to the separations process are made,
increasing costs will continue to be shifted to the intrastate jurisdiction for
recovery and TDS Telecom may need to seek rate increases to recover these costs.
The ILEC trade associations are advocating a freeze in the traffic factors that
would otherwise continue are shifting increasing levels of Internet costs into
the intrastate jurisdiction.
Where applicable and subject to state regulatory approval, TDS Telecom's
ILEC subsidiaries utilize intrastate access tariffs and participate in
intrastate revenue pools. Many intrastate toll revenue pooling arrangements, a
source of substantial revenues to TDS Telecom's ILECs, have been replaced with
access-charge-based arrangements. In these cases, access charges are typically
set to generate revenue flows similar to those realized in the pooling process.
To the extent that state-ordered access charge revisions reduce revenues, TDS
Telecom may seek adjustments in other rates. Some states are utilizing state
high cost funds to offset access charge reductions.
FEDERAL FINANCING
TDS Telecom's primary sources of long-term financing for additions to
telephone plant and equipment have been the Rural Utilities Service ("RUS"), the
Rural Telephone Bank ("RTB") and the Federal Financing Bank ("FFB"), agencies of
the United States of America. The RUS has made primarily 35-year loans to
telephone companies since 1949, at interest rates of 2% and 5%, for the purpose
of improving telephone service in rural areas. Currently, the RUS is authorized
to issue hardship loans at a 5% interest rate and other loans at an interest
rate approximating the government's rate for instruments of comparable maturity.
The RTB, established in 1971, makes loans at interest rates based on its average
cost of money (5.54% for its fiscal year ended September 30, 1999), and in some
cases makes loans concurrently with RUS loans. In addition, the RUS guarantees
loans made to telephone companies by the FFB at the federal cost of money. All
such loans have a maturity date based on the life of the assets being financed.
Substantially all of TDS Telecom's telephone plant is pledged under, or is
otherwise subject to, mortgages securing obligations of the operating telephone
companies to the RUS, RTB and FFB. The amount of dividends on common stock that
may be paid by the operating telephone companies is limited by certain financial
requirements set forth in the mortgages. In any calendar year, companies with
greater than 40% net worth to total assets can distribute the entire amount
above 40%. The majority of TDS Telecom's telephone subsidiaries exceed this
percentage. Approximately $470.1 million may be paid as dividends from the
operating subsidiaries to TDS Telecom.
At December 31, 1999, TDS Telecom's operating telephone companies had
unadvanced loan commitments under the RUS, RTB and FFB loan programs aggregating
approximately $124.3 million, at a weighted average annual interest rate of
6.01%, to finance specific construction activities in 2000 and future years.
These loan commitments are generally issued for five-year periods and may be
extended under certain circumstances. TDS Telecom's operating telephone
companies intend to make further applications for additional loans from the RUS,
RTB and FFB as their needs arise. There is no assurance that these applications
will be accepted or what the terms or interest rates of any future loan
commitments will be.
FEDERAL SUPPORT REVENUES
To promote universal service, the FCC developed a number of federal support
mechanisms to keep telephone rates affordable for both high-cost rural areas and
low-income customers. Many of TDS Telecom's ILEC subsidiaries provide telephone
service in rural areas and all of them offer service to a range of customers
including low-income customers.
The FCC continues to work on reforming universal service. The
Telecommunications Act codified universal service; set forth clear principles
for ensuring affordable access to modern telephone service
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<PAGE>
nationwide; established discounts for schools, libraries and rural health care
facilities; and established a federal-state joint board to make recommendations
to the FCC regarding implementation of the universal service provisions of the
Telecommunications Act.
On May 8, 1997, the FCC released its universal service order. The FCC
adopted the use of forward-looking proxy cost models to determine costs rather
than relying on actual costs. Non-rural companies will begin using the FCC's
Hybrid Cost Proxy Model in 2000 to determine their costs of providing universal
service. Rural LECs will continue to receive support based on their actual costs
using the existing mechanisms, as opposed to proxy models, through at least
December 31, 2000. The Rural Task Force (which is a committee appointed by the
FCC including representatives of the rural ILEC industry, the public and other
telecommunications companies) is currently working on its recommendation to the
Federal-State Joint Board on the appropriate mechanism for rural carriers. Rural
LECs will not transition to another method of receiving support until it can be
shown that the method will be sufficient to meet the universal service needs of
customers in the areas they serve. The Rural Task Force's recommendation is not
due to the Joint Board and the FCC until September 2000.
All telecommunications carriers are required to contribute to the universal
service fund based on their interstate and international revenues. Carriers may
recover their contributions through their access charges; however, they are not
required to do so. Since TDS Telecom's ILECs are members of the NECA pools, they
will continue to recoup their contributions through access charges rather than
through end-user charges.
Historically, telephone company acquisition and investment decisions assumed
the ability to recover costs and a reasonable rate of return through local
service, access, and support revenues. As universal service and access are being
reformed, these revenues streams are becoming less certain. Potential declining
access rates and revisions to universal service support may lead to higher local
rates and/or declining earnings. Significant changes in the universal service
funding system could affect TDS's and TDS Telecom's acquisition and investment
strategy.
TELEPHONE ACQUISITIONS
TDS and TDS Telecom continually review attractive opportunities to acquire
operating telephone companies. Since January 1, 1995, TDS has acquired 14
telephone companies serving a total of 57,900 net access lines for an aggregate
consideration totaling $161.5 million, all of which were transferred to TDS
Telecom. The consideration paid by TDS consisted of $22.3 million in cash and
notes, 30,000 TDS Preferred Shares and 3.0 million TDS Common Shares. TDS sold
one telephone company serving 1,100 access lines in 1995.
Telephone holding companies and others actively compete for the acquisition
of telephone companies and such acquisitions are subject to the consent or
approval of regulatory agencies in most states and, in some cases, to federal
waivers that may affect the form of regulation or amount of interstate cost
recovery of acquired telephone exchanges. While management believes that it will
be successful in making additional acquisitions, there can be no assurance that
TDS or TDS Telecom will be able to negotiate additional acquisitions on terms
acceptable to them or that regulatory approvals, where required, will be
received.
TDS Telecom provides the telephone subsidiaries with centralized purchasing
and general management and other services. These services afford the
subsidiaries expertise in finance, accounting and treasury services; marketing;
customer service; traffic; network management; engineering and construction;
customer billing; rate administration; credit and collection; and the
development of administrative and procedural practices.
CLEC TELEPHONE MARKETS
The Telecommunications Act facilitates entry of TDS Telecom into new markets
by requiring non-exempted ILECs (e.g., RBOCs and GTE) to provide reasonable and
non-discriminatory interconnection services and access to unbundled network
elements to any CLEC that seeks to enter the markets in which the ILEC already
offers services. TDS Telecom, through TDS METROCOM and USLink,
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wholly owned subsidiaries of TDS Telecom, has targeted certain midsized,
geographically clustered communities, for facilities-based entry as a CLEC.
Management of TDS Telecom believes that the size of many of the target markets
will sustain a limited number of facilities-based competitors in addition to the
ILEC. While additional competitors may enter such markets as resellers, TDS
Telecom believes only facility-based CLECs will be significantly profitable over
the long term because facilities will provide a long-run cost advantage,
discourage further competitors from entry and enable an alternative wholesale
strategy for growth. To this end, TDS Telecom plans to build switching and other
network facilities in its targeted CLEC markets. TDS Telecom plans to follow a
"clustering" approach to building its CLECs which will allow it to seek regional
long distance traffic, share service and repair resources, and realize marketing
efficiencies. As in its ILEC markets, TDS Telecom intends to become an
Integrated Communications Provider ("ICP") in its chosen CLEC markets. It will
provide local, long distance, Internet access and other services through its own
facilities and via resale. TDS Telecom intends to resell mobile services in many
markets.
TDS Telecom's first CLEC, TDS METROCOM, became operational in Madison,
Wisconsin, in January 1998. TDS METROCOM is a facilities-based, full-service
alternative to the Ameritech (now SBC) telephone company, providing both voice
and data services to commercial and consumer accounts, as well as wholesale
services to IXCs and other carriers. TDS METROCOM now also operates as a CLEC in
Appleton, Green Bay, Menasha, Neenah and Oshkosh, Wisconsin. In early 2000, TDS
METROCOM expects to begin facility-based services in the western suburbs of
Milwaukee and Fond Du Lac, Wisconsin. USLink began offering local service (in
addition to its long distance and Internet products) on a resale basis in 1998
in Minnesota, with a focus on the Brainerd, St. Cloud and Duluth markets. In
1999, USLink deployed local switching platforms in three markets in
Minnesota--Brainerd, St. Cloud and Duluth to enhance the operating margins. TDS
Telecom's CLEC strategy is currently focused on markets in Wisconsin and
Minnesota and adjoining geographical areas. TDS Telecom expects to continue to
grow the competitive local exchange business with a controlled entry strategy.
The CLEC strategy will place primary emphasis on the small and medium-sized
commercial and wholesale customers. Consumer markets are typically pursued soon
after the CLEC enters the commercial market. Wholesale customers purchase
transmission capacity and access services from CLECs. These services will be
available to wholesale customers shortly after network completion. TDS Telecom
believes that these customers are generally more sophisticated and are more
likely to switch providers to obtain network reliability, redundancy and more
flexible pricing. Medium-sized commercial prospects are characterized by
above-average access line to employee ratios, heavier utilization of data
services, and a focus on using telecommunications for business improvement
rather than on cost reduction concerns. Commercial prospects are generally
growth-oriented and may be underserved by the ILEC or major IXCs. TDS Telecom's
CLECs will pursue a personal selling approach for their primary target markets.
This approach builds on customer preference for integrated communication
services and the customer's perception that the quality of the product includes
personalized service.
While the CLECs are positioning themselves as high-quality providers, they
expect price competition from the ILECs as they attempt to retain and regain
their customers. The CLECs will seek to maintain an efficient cost structure to
ensure that they can match price-based initiatives from competitors. The ILEC is
likely to be constrained in the short term by the existing regulatory
environment; as a result, TDS Telecom's CLECs expect to be more flexible in
responding to customer needs. To effectively compete in this new environment,
TDS Telecom's CLECs will enhance their efforts at product development to provide
high-quality, cutting-edge services to their customers.
TDS Telecom believes the targeted CLEC markets present a significant
opportunity to market data services, as the major carriers serving these
locations have typically underinvested in these markets despite the growing
demand. Switched data communications represents one of the fastest growing
segments of the telecommunications services market. Computer proliferation,
connectivity via local and wide area networks, the Internet and the emergence of
multimedia applications are all driving demand. As a result, the United States
network infrastructure is strained at the local level. TDS Telecom's CLEC
initiative will add local capacity in its selected markets designed to help
accommodate this growth.
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DATA INITIATIVES
TDS Telecom is also seeking to recognize additional revenue opportunities in
related areas of the telecommunications industry. In 1999 TDS Telecom continued
to expand its investments into data communications to offer a suite of data
products in its CLEC and in many of its ILEC markets. TDSNET, TDS Telecom's
Internet service provider, expanded its operation in 1999 adding 16 additional
markets. During 1999, TDS Telecom completed the integration of its Internet and
developing data services operations into products and services offered by its
ILEC and CLEC business units. Alignment of TDS's growing Internet product line
into its core business units, coupled with sales and marketing strategies
focused on in-territory and nearby markets, has allowed TDS Telecom to continue
its Internet sales growth while benefiting from operational and financial
synergies. At December 31, 1999, TDS Telecom provided Internet services to
approximately 73,000 customers through its ILEC and CLEC subsidiaries.
In furtherance of TDS Telecom's strategy to position itself as a
full-service, networking service provider, it plans to make high-speed Digital
Subscriber Loop ("DSL") based services available in the near term to customers
in several of its ILEC markets. TDS Telecom believes DSL technology will form
the foundation for new, high-speed data services and applications and has
conducted trials of DSL modems manufactured by several vendors. TDS Telecom's
first commercial offering of DSL began in Wisconsin in 1998 in TDS METROCOM and
DSL was introduced in the ILEC Tennessee market in the fall of 1999. This
technology is employed to offer high-speed Internet access as well as high-speed
LAN connectivity. TDS Telecom's data business offerings include web-hosting
services, co-location services and customized web content development for
various sized customer market segments.
TDS Telecom is offering enterprise network management center services to
large businesses and government through expanded use of its own network
management facilities, and its knowledgeable personnel. Such services consist of
centralized network monitoring as well as network management. In 1997, the State
of Wisconsin awarded TDS Telecom the "BadgerNet" enterprise network management
center multi-year contract. The BadgerNet enterprise network management center
has been designed to provide a focal point for the operational management of
state agency and university networks, services and equipment and began
operations in 1998. TDS Telecom is currently developing an enterprise network
management center product offering. TDS Telecom believes that it has the
experience, partnerships and technology to actively manage networks for third
parties, and has the capacity to provide enterprise network management center
services to additional third parties.
Although TDS Telecom currently operates these data businesses, they are in
early stages of development. There can be no assurance that TDS Telecom will
substantially expand these businesses.
SALES AND MARKETING--ILEC
TDS Telecom seeks to leverage its networks through sales and marketing
activities targeted at two separate customer groups: retail and wholesale.
Retail customers are composed primarily of residential customers, businesses,
government and institutional telecommunications users. Wholesale customers
consist of IXCs and information service providers such as commercial data
processing service providers and Internet service providers.
RETAIL MARKETS
COMMERCIAL MARKETS. Businesses account for approximately 22% of TDS
Telecom's ILEC access lines. TDS Telecom focuses its marketing on
information-intensive industries such as financial services, health services,
realty, hotels and motels, education and government. TDS Telecom uses its direct
sales force, targeted mailings, and telemarketing to sell products and services
to the commercial markets, which are segmented into tiers based on size and
strategic importance. Different sales and distribution channels are employed for
each segment. Account executives focus on the most profitable customers by
staying in contact with them on a regular basis. TDS Telecom employs an
aggressive compensation plan for its account executives targeted at revenue and
customer satisfaction results.
CONSUMER MARKETS. TDS Telecom's promotional and sales strategy consists of
two major initiatives: building brand equity by creating awareness of the TDS
Telecom brand name; and using direct
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marketing to sell specific products and product groupings. Approximately 78% of
TDS Telecom's total ILEC access lines are residential. Approximately 71% of
these residential customers live in rural areas, while the other 29% are located
in suburban settings. The nature of TDS Telecom's markets has historically made
direct marketing more effective than mass media such as radio and television. In
addressing its consumer markets, TDS Telecom has made extensive and aggressive
use of direct mail. It has been more selective, though still active, in the use
of telemarketing as a means of generating awareness, qualified leads, and actual
sales. Newspaper advertising is used as well. Uniform branding has made the use
of mass media more attractive, and TDS Telecom has increasingly incorporated
these elements into its marketing media mix.
In nearly all of its ILEC markets, TDS Telecom offers the complete family of
custom calling services including call waiting, call forwarding, three-way
calling, and speed dialing. In 1999, TDS Telecom sold 10,959 residential second
lines, an increase of 29% over 1998. TDS Telecom's advanced calling services
family of products is centered around Caller ID service. In 1999, the ACS family
of services was available to 96% of the lines in service compared to 89% in
1998. Penetration of Caller ID increased from 19% to 24% of lines equipped, and
aggregate penetration of ACS increased from 35% to 41% of lines equipped.
WHOLESALE MARKETS
Access charges, billing and collection services and other primarily
traditional wholesale offerings generated $286 million, or approximately 58%, of
TDS Telecom's revenue for the year ended December 31, 1999. Account teams in
Madison, Wisconsin, and Knoxville, Tennessee currently service wholesale
customers. These teams manage and coordinate the purchasing of access services
by the major IXCs and RBOCs on a national basis.
TDS Telecom also provides new wholesale offerings to non-traditional
customers. TDS Telecom has targeted wireline and wireless telecommunications
service providers and select vertical markets.
COMPETITION
ILEC MARKETS
The Telecommunications Act has helped to introduce a new wave of competition
in the telecommunications industry. The Telecommunications Act embraced
competition in telecommunications as a national policy and also started the
process of deregulation. The Telecommunications Act requires ILECs to provide
reasonable and non-discriminatory interconnection services and access to
unbundled network elements to any CLEC that seeks to enter the markets in which
the ILEC already offers services. The Telecommunications Act also allows CLECs
to co-locate network equipment on the ILEC's premises and prevents ILECs and
CLECs from unduly restricting each other from use of facilities or information
that would allow other organizations to effectively compete with them. The FCC
has recently added further interconnection requirements to spur competitive
broadband development.
All 104 TDS Telecom ILEC companies are exempt from many of the provisions of
the Telecommunications Act. Specifically, they are exempt from the requirements
imposed on the ILECs until they receive a bona fide request for interconnection
and the state commission lifts the exemption. This, coupled with the economics
of competing in lower population density markets, may delay certain forms of
competition in TDS Telecom ILEC service areas while additional regulatory issues
are resolved. However, some TDS Telecom ILECs already face interconnection
requests, filed by potential competitors, and TDS Telecom believes there will
eventually be open entry into nearly every aspect of the telephone industry,
including local service, interstate and intrastate toll, switched and special
access services and customer premises equipment.
TDS Telecom expects competition in the telephone business to be dynamic and
intense as a result of the entrance of new competitors and the development of
new technologies, products and services. Increased competition is expected from
competitive access providers, IXCs, out-of-territory RBOCs and independent
telephone companies, niche entrepreneurs, cable and utility companies, and
wireless and satellite providers. To face this increasing competition, TDS
Telecom's strategy is to build customer loyalty by providing superior customer
service, offering a suite of standardized products and services bundled in
response to customer preferences, and rapidly developing new data products and
services.
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In the long run, TDS Telecom believes that the wireless companies pose the
most significant threat to the local exchange industry. Wireless providers are
also seeking universal service support in various rural markets. Although
traditional analog cellular radio service currently cannot match the features or
the clarity of communications provided via wireline networks, and as a result of
high error rates and speed limitations is not suitable for data transmission,
advances in digital cellular and PCS technology may permit wireless companies to
match the functionality and clarity of wireline communication and still allow
customers the mobility of traditional wireless service. As the emerging PCS
companies compete directly with established cellular radio companies, flat-rate
pricing alternatives may drive wireless rates towards or below wireline rates.
In order to minimize the impact of wireless competition, TDS Telecom is pursuing
wholesale service agreements with wireless companies to provide services to them
and expects to provide wireless services through resale in many of its markets.
CLEC MARKETS
In Wisconsin and Minnesota and in each geographical area in which TDS
Telecom expands as a CLEC, TDS Telecom faces, and expects to continue to face,
significant competition from the ILECs which currently dominate their local
telecommunications markets. TDS Telecom will compete with the ILECs on the basis
of price, reliability, state-of-the-art technology, product offerings, route
diversity, ease of ordering and customer service. However, the ILECs have
long-standing relationships with their customers, may have the potential to
subsidize competitive services from monopoly service revenues, and benefit from
some favorable state and federal regulations.
Although the ILECs generally are subject to greater pricing and regulatory
constraints than CLECs, ILECs are achieving increased pricing flexibility for
their services as a result of, among other things, the Telecommunications Act.
Existing competition for private line, special access and local exchange
services is based primarily on quality, capacity and reliability of network
facilities, customer service, response to customer needs, service features and
price, and is not based on any proprietary technology. As a result of the
technology used in its networks, TDS Telecom may have cost and service quality
advantages over some currently available ILEC networks. In addition, TDS Telecom
believes that, in general, it will provide more attention and responsiveness to
its customers than will its ILEC competitors.
TDS Telecom may face competition from other CLECs and other potential
competitors in the cities in which TDS Telecom offers and plans to offer its
services. Many of TDS Telecom's existing and potential competitors have
financial, personnel and other resources significantly greater than those of TDS
Telecom. However, TDS Telecom believes that its strategy of targeting midsized
communities, and its capital, technical and management resources will enable it
to achieve its strategic objectives.
In addition to the ILECs and other CLECs, potential competitors capable of
offering private line, special access and local exchange services include long
distance carriers, cable television companies, electric utilities, microwave
carriers, wireless telephone system operators, and private networks built by
large end users. Previous impediments to certain utility companies entering
telecommunications markets under the Public Utility Holding Company Act of 1935
were removed by the Telecommunications Act.
CONSTRUCTION AND DEVELOPMENT PROGRAM--ILEC
In 1999, TDS Telecom continued its program of enhancing and expanding its
service providing network. TDS Telecom intends to meet competition by providing
its customers with high-quality telecommunications services and building its
network to take full advantage of advanced telecommunications technologies such
as:
- Signaling System 7 ("SS7"), a high speed data network with dedicated
access points that provides for various call set up, call routing and
enhanced calling features,
- Fiber optic fed Digital Serving Areas ("DSAs"), a defined geographic area
within an exchange that is served by a digital loop carrier system. The
digital loop carrier system extends to that geographic area the line side
hardware of the central switch.
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- Integrated Services Digital Network ("ISDN"), a digital switched service
that provides end-to-end digital transmission and signaling, and
- Advanced Calling Services.
The following table shows that TDS Telecom continues to make these advanced
features available to a large majority of its ILEC customers:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------------------------------
# OF ILEC WORKING LINES % OF ILEC WORKING LINES
----------------------- -----------------------
<S> <C> <C>
Signaling System 7............................... 556,973 98%
Advanced Calling Services........................ 556,973 98%
Integrated Services Digital Network.............. 450,711 79%
</TABLE>
As TDS Telecom upgrades and expands its network, it is also standardizing
equipment and processes to increase efficiency and has centralized the
monitoring and management of its network to reduce costs and improve service
reliability. TDS Telecom formed strategic alliances with Lucent Technologies and
Siemens Telecom Networks to modernize and standardize TDS Telecom's ILEC
switching platform with the Lucent 5ESS-2000 and Siemens EWSD switches. This
standardized switching platform assisted TDS Telecom in implementing its
24-hour-a-day/7-day-per-week ILEC and CLEC network management center. The
network management center continuously monitors the network in an effort to
proactively identify and correct network faults prior to any customer impact.
The network management center is proactively monitoring 100% of TDS Telecom's
ILEC network.
TDS Telecom's total 2000 capital budget is $125.0 million compared to actual
capital expenditures of $122.2 million in 1999 and $143.1 million in 1998. The
telephone capital additions budget for 2000 includes approximately
$30.2 million for CLEC markets, and $39.3 million for outside plant facilities
and $31.3 million for switching facilities in the ILEC markets. Financing for
the 2000 capital additions will be primarily provided by internally generated
funds and supplemented by federal long-term financing.
REGULATION
TDS Telecom subsidiaries are primarily ILECs, the traditional regulated
local telephone companies in their communities. TDS Telecom's ILEC subsidiaries
are regulated by state regulatory agencies and TDS Telecom seeks to maintain
positive relationships with these regulators. Rates, including local rates,
intrastate toll rates and intrastate access charges, are subject to state
commission approval in most states. The state regulators also establish and
oversee any state universal service funds. TDS Telecom intends to continue to
pursue changes in rate structures and regulation that will provide affordable
rates and reasonable earnings. TDS Telecom is currently evaluating whether to
elect alternative forms of regulation in each of its states. Alternative
regulation describes regulatory frameworks which allow local exchange carriers
to benefit from revenue growth and expense control in exchange for rate ceilings
and other restrictions. In some states, alternative regulation, together with
controls on expense growth, has the potential to boost regulated earnings. The
TDS Telecom subsidiaries that provide services in competition with other ILECs,
or long distance services in competition with other long distance providers are
subject to minimal regulation with respect to such services.
For the TDS Telecom ILECs, state regulators can approve service areas,
service standards, and accounting methods. In some states, construction plans,
borrowing, depreciation rates, affiliated charge transactions and certain other
financial transactions are also subject to regulatory approval. States
traditionally regulated entry into local markets by designating a single carrier
to be the universal service provider. However, the Telecommunications Act has
almost completely pre-empted state authority over market entry. Each state
retains the power to impose competitively neutral requirements that are
consistent with the Telecommunications Act's universal service provision and
necessary for universal services, public safety, and welfare, continued service
quality and consumer rights. While a state may not impose requirements that
effectively function as barriers to entry, and the FCC must pre-empt challenged
state requirements if they impose such barriers to entry, a state retains
limited authority to regulate certain competitive practices in rural telephone
company service areas. Proceedings to pre-empt laws and policies in several
states are pending before the FCC, and the FCC has preempted several state laws
as unduly restricting competitive entry or unduly giving preferences to
incumbents.
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The Telecommunications Act establishes a general duty for all
telecommunications carriers, including wireless providers, to interconnect with
other carriers. Congress prescribed a more specific list of interconnection
requirements for all local exchange carriers ("LECs") including resale, number
portability, dialing parity, access to rights-of-way and reciprocal
compensation. Unless exempted or granted suspension or modification, ILECs have
additional obligations: (a) to negotiate in good faith terms of interconnection;
(b) to comply with more detailed interconnection terms, including
non-discrimination and unbundling their network and service components so
competitors may use only those elements they choose for providing their
services; (c) to offer their retail services at wholesale rates to facilitate
resale by their competitors; and (d) to allow other carriers to place equipment
necessary for interconnection or access on their premises. The FCC also requires
ILEC's rates for interconnection and network components to be based on
"forward-looking economic costs." Challenges to the new cost methodology,
pending in a federal court of appeals, attack the requirement because it does
not let ILECs recover their full historical or actual costs as measured under
the FCC's prior cost measurement approach.
As defined in the Telecommunications Act, all of TDS Telecom's ILEC
subsidiaries qualify as rural telephone companies. Therefore, they are exempt
from the ILEC interconnection requirements until they receive a bona fide
request for interconnection and the state commission lifts the exemption. That
process is underway in some TDS Telecom ILEC markets. Under an FCC
interpretation of the Telecommunications Act, under challenge in the same
federal appellate court case, rural telephone companies bear the burden of proof
to show that elimination of the rural exemption would be likely to cause undue
economic burden beyond the economic burdens typically associated with efficient
competitive entry or to meet other tests in the law for remaining exempt. The
FCC has also adopted extensive rules for state commissions to follow in
mediating and arbitrating interconnection negotiations between incumbent LECs
and carriers requesting interconnection, services or network elements. The
Telecommunications Act establishes deadlines, standards for state commission
approval of interconnection agreements and recourse to the FCC if a state
commission fails to act.
The FCC is still considering rules and policies implementing the provisions
of the Telecommunications Act. Many of the FCC determinations made to implement
the Telecommunications Act and to facilitate competition in local service and
other telephone services involve mandatory investment in and upgrades to TDS
Telecom LEC networks, and impose greater costs and obligations on ILECs than on
their competitors. These investments and upgrades include requirements to
implement local number portability so subscribers may change to competitors'
services without changing their telephone numbers, network signaling information
that must be provided to certain other carriers and pay phone providers, and
other changes that require additional investments and expenses. TDS Telecom is
seeking to comply with these requirements or to obtain the necessary suspensions
or modifications where appropriate, while at the same time also pursuing
policies that provide a fair opportunity to recover its costs. For example, the
ILEC industry is seeking FCC reconsideration of an order setting rates for
providing directory listing information about ILEC customers to competing
telephone directory publishers because the rates, set to recover the costs of
the largest ILECs, are inadequate for companies such as the TDS Telecom ILECs. A
new law also requires LECs to provide access to certain communications for law
enforcement purposes. The full cost of complying and the adequacy of the
government compensation are not yet known, but the LEC industry is pursuing
regulatory policies that cover any shortfall in available government
compensation.
The FCC continues to explore how to comply with the requirement in the
Telecommunications Act for federal and state authorities to encourage nationwide
advanced broadband infrastructure development. Future FCC decisions could
require extensive additional investment. For example, in November 1999, the FCC
released an order mandating line sharing. In its order, the FCC amended its
unbundling rules to require ILECs to provide unbundled access to a new network
element--the high frequency portion of the local loop. As noted, TDS Telecom
ILECs are currently exempt from the interconnection and unbundling provisions of
the Telecommunications Act. Until a TDS Telecom ILEC has received a bona fide
request and the state commission has terminated the rural exemption, that ILEC
will not be required to provide line sharing. When a currently exempt ILEC is
required to provide line sharing, additional costs may be incurred to condition
loops to provide the service. As another example,
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any requirement for nationwide access to advanced network capabilities at this
time would entail large investments. If such regulatory requirements did not
carry sufficient added support or cost recovery based on real market demand, TDS
Telecom would need to seek rate increases or other relief.
TDS Telecom seeks to maintain and enhance existing revenue streams despite
heightened earnings review activity by state regulators and the advent of local
exchange competition sparked by the Telecommunications Act. TDS Telecom is
preparing for competition even though its operating subsidiaries remain governed
by state regulators. For example, TDS Telecom is seeking the necessary pricing
flexibility to adjust its rate structures to a more competitive model. TDS
Telecom also continues to participate in state and federal regulatory and
legislative processes to urge that any telecommunications reform measures treat
rural areas fairly and continue to provide sufficient contributions to high cost
rural service areas to keep TDS Telecom ILECs' rates affordable and allow for
the continued development of rural infrastructure. The ongoing changes in public
policy due to numerous FCC and court proceedings and the introduction of
competition may affect the earnings of the operating subsidiaries, and TDS
Telecom is not able to predict the impact of these changes.
While the majority of TDS Telecom's ILEC subsidiaries continue to operate in
a rate-of-return environment, a number of state commissions are negotiating, or
have agreed to, alternative regulation plans with LECs. Price regulation, the
most common form of alternative regulation, focuses on the price of
telecommunication services. TDS Telecom's ILEC subsidiaries in Alabama,
Arkansas, Michigan and Pennsylvania are currently operating in a price-regulated
environment, whereby the commissions in those states no longer review earnings.
For several years, the regional Bell operating companies and some of the
nation's larger LECs have operated under an FCC "price cap" plan, modified in
1997, where earnings can be increased only through productivity improvements.
In 1999, TDS Telecom's telephone subsidiaries did not elect either price
caps or an alternative FCC plan, which was designed for smaller LECs. Instead,
the operating subsidiaries plan to continue under traditional rate-of-return
regulation for interstate purposes, unless those regulatory requirements are
changed. Approximately one-third of TDS Telecom's telephone subsidiaries serve
high-cost areas and a number of TDS Telecom ILECs receive federal universal
service support under the current transitional federal high cost support
program. Important averaging mechanisms associated with the NECA pooling process
would be lost if TDS Telecom elected either of the alternatives to traditional
rate-of-return regulation. TDS Telecom is also participating in ongoing
proceedings to make universal service sustainable as competition takes hold in
rural markets. TDS Telecom and rural ILEC associations seek to demonstrate that
proposals to measure rural telephone companies' costs for universal service
support calculations using a forward-looking proxy model based on the costs of a
hypothetical maximally-efficient carrier, fail to comport with the universal
service mandate of the Telecommunications Act. Significant reductions in high
cost support for TDS Telecom's high cost ILECs, due to changes in support
mechanisms or the shifting of support per line that is "portable" to competitors
that qualify for support, may affect their ability to modernize and recover
their full actual costs. The proceeding to represcribe the authorized rate of
return for interstate services provided by ILECs remains pending at the FCC.
Currently, this rate is set at 11.25%. Reduction of the interstate rate of
return would have detrimental effects on ILECs and could impact the ability of
ILECs to continue to invest in infrastructure. TDS Telecom, along with the rural
industry associations, believes that it is inappropriate for the FCC to
represcribe the rate of return at this time, and that represcription should not
occur until after the FCC resolves other pending issues including universal
service, access reform, and separations (the allocation of costs to state and
interstate jurisdictions) reform. If the FCC proceeds with the represcription,
TDS Telecom may potentially be faced with a lower allowed interstate rate of
return, a reduction in universal service funds, and potentially higher local
rates. Both access reform and universal service reform issues remain to be
resolved by the FCC in further proceedings. A rural industry association effort,
led in part by TDS Telecom, has developed a comprehensive plan to address
universal service, access reform, rate of return and separations reform for
rural and rate of return LECs.
Access to affordable long-distance service in rural areas was achieved
because the FCC ordered AT&T to provide nationwide average rates. As a result of
increasing competition, the FCC lifted all regulations relating to AT&T's
interstate services in 1996. However, the Telecommunications Act preserves
interstate toll rate averaging and imposes a nationwide policy that interstate
and intrastate
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long-distance rates of all long-distance carriers should not be higher in rural
areas than in urban areas they serve. In 1999, AT&T and several regional Bell
operating companies began limiting and/or discontinuing their long distance
services in TDS Telecom serving areas. TDS Telecom will continue to monitor and
participate in regulatory activities at both the federal and state levels to
ensure continued affordable long-distance and local rates for even its most
remote exchanges. Unresolved issues affecting TDS Telecom ILECs' access charge,
jurisdictional cost separations and federal universal service support payments
are described in "Wholesale Markets" and "Federal Support Revenues," above.
The FCC is investigating objections by interexchange carriers that they
should not be required to use CLECs' terminating access services when they
consider the charges excessive and is considering whether and how to prevent
excessive charges by CLECs although the person to whom a call is terminated, not
the interexchange carrier, controls the choice of what terminating access
carrier the interexchange carrier must use. The FCC's ruling that Internet
access is an interstate service, and not a local service when an Internet access
call is delivered to an information provider, also may result in decreased
intrastate revenues for CLECs providing access to information providers when
current grandfathered contract terms expire.
BROADBAND PCS OPERATIONS
VOICESTREAM MERGER
On September 17, 1999, the Board of Directors of TDS decided not to pursue a
spin-off of Aerial Communications, Inc., an 82.1%-owned subsidiary of TDS, and
approved a merger between Aerial and VoiceStream Wireless Corporation
("VoiceStream") pursuant to an Agreement and Plan of Reorganization dated
September 17, 1999. As a result of the merger, Aerial shareholders will receive
0.455 VoiceStream common shares for each share of Aerial stock they own, subject
to adjustment in certain circumstances. 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. This merger is subject to the approval of
the Federal Communications Commission. The merger is expected to close in the
second quarter of 2000. See "Discontinued Operations."
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.
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
$44.2 million from September 18, 1999 through December 31, 1999.
COMPANY
Aerial is a provider of Personal Communications Services in the Minneapolis,
Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus
Major Trading Areas (collectively, the "PCS Markets"). The PCS Markets include
approximately 27.9 million population equivalents. Aerial has constructed
networks for its PCS Markets using Global System for Mobile Communication
("GSM") technology. Aerial served 422,900 PCS telephones at December 31, 1999.
At December 31,1999, Aerial had expanded its system coverage to total more than
80% of the six Major Trading Areas ("MTAs") total population.
PCS is the term used to describe the wireless telecommunications services
that are offered by those companies that acquired licenses for radio spectrum
(frequency range 1850-1990 MHz) in the FCC auctions and are the newest entrants
in the wireless telecommunications market. PCS competes directly with existing
cellular telephone, paging and specialized mobile radio services. PCS providers
were the first in most markets to offer mass market all-digital mobile networks.
In addition, Aerial believes PCS providers may be among the first to be able to
offer mass market wireless local loop applications, in competition with switched
and direct access local telecommunications services.
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Aerial's strategic goal is to take full advantage of the potential of
wireless telecommunications. Aerial sees an opportunity for significant growth
in the wireless telecommunications market through the shift of existing wireless
usage patterns from applications focused on business use, special occasions and
emergencies to much broader applications for everyday use. Aerial is structured
to meet the increasingly competitive challenges of the wireless
telecommunications marketplace, and has a marketing-oriented approach focused on
serving its customers and their needs. Since 1983, the demand for wireless
telecommunications services has grown dramatically as cellular, paging and other
emerging wireless personal communications services have become widely available
and increasingly affordable. As of December 31, 1999, there were an estimated
86 million domestic wireless telephone subscribers (representing both cellular
and PCS customers), which represented U.S. market penetration of approximately
32%.
During 1996 and early 1997, Aerial contracted for network equipment, billing
systems, support software and the equipment and services necessary to launch
service. Additionally during this period, Aerial completed the design for its
PCS networks, acquired and built out the switching centers serving each market,
leased and built out a National Operations Center, leased or purchased the cell
sites required to launch service and commenced zoning and building the sites.
The Columbus MTA launched service on March 27, 1997. Aerial's five remaining
MTAs launched service during the second quarter of 1997. Across all six markets,
Aerial launched with approximately 600 cell sites in service. Aerial had 1,278
cell sites in service by the end of 1999. The coverage of Aerial's PCS networks
includes the major metropolitan areas within the PCS Markets, as well as
portions of the major highway corridors extending out from those areas.
In November 1996, TDS entered into a Member Control Agreement ("Agreement")
forming a joint venture with Rural Cellular Corporation ("RCC"), called the
Wireless Alliance, LLC ("WALLC"), to build out certain rural areas covering
approximately 925,000 population equivalents in the Minneapolis MTA. Aerial has
contributed 20 MHz of its Minneapolis MTA license covering certain territories
as defined in the Agreement in return for a 30% equity interest in the joint
venture. RCC built the network and is responsible for the ongoing operations.
The WALLC launched service in 1998. The joint venture purchases services such as
network switching from Aerial. The network uses GSM technology.
WIRELESS TELECOMMUNICATIONS INDUSTRY
OVERVIEW. Wireless service is currently available using analog or digital
technology. Traditionally wireless services transmitted voice and data signals
over analog-based networks by varying the amplitude or frequency of one
continuous electronic signal transmitted over a single radio channel. Analog
technology currently has several limitations, including inconsistent service
quality, lack of privacy, limited capacity and less reliability in transferring
data without errors. Aerial has chosen GSM, which utilizes a digital technology,
for use in the PCS Markets. Digital systems convert voice or data signals into a
stream of digits that is compressed before transmission, enabling a single radio
channel to carry multiple simultaneous signal transmissions. This additional
capacity, along with improvements in digital protocols, allows digital-based
wireless technologies to offer new and enhanced services, such as greater call
privacy and more robust data transmission features, such as "mobile office"
applications (including facsimile, electronic mail and wireless connections to
computer/data networks, including the Internet).
PCS spectrum differs from existing cellular and SMR spectrum in three basic
ways: frequency, spectrum and geographic division. PCS networks will operate in
a higher frequency range (1850-1990 MHz) compared to the cellular and SMR
frequency range (800-900 MHz). PCS is comprised of 30 or 10 MHz spectrum versus
25 MHz spectrum for cellular networks. As a result of the improved capacity of
the infrastructure and large allocation of spectrum in the A, B and C PCS
frequency Blocks, PCS will have more capacity for new wireless services such as
data and video transmission. Finally, the geographic areas for PCS licenses are
divided differently than for cellular licenses. PCS is segmented among 51 MTAs
and 493 Basic Trading Areas ("BTAs") as opposed to cellular's 306 Metropolitan
Statistical Areas ("MSA") and 428 Rural Service Areas ("RSA"). An MTA license
generally covers a much larger geographic area than a BTA, MSA or RSA license.
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OPERATION OF WIRELESS NETWORKS. Wireless service areas are divided into
smaller geographic areas called "cells", each of which contains an antenna and a
base transceiver station ("BTS") consisting of a low-power transmitter, a
receiver and signaling equipment. The cells are typically configured on a grid
in a honeycomb-like pattern, although terrain factors (including natural and
man-made obstructions) and signal coverage patterns may result in irregularly
shaped cells and overlaps or gaps in coverage. The BTS in each cell is connected
by microwave, fiber optic cable or telephone wires to a switching office
("mobile switching center" or "MSC"). The MSC controls the operation of the
wireless phone network for its entire service area, performing inter-BTS
hand-offs, managing call delivery to phones, allocating calls among the cells
within the network and connecting calls to local landline telephone systems or
to long-distance telephone carriers. Wireless service providers have
interconnection agreements with various local exchange carriers and
interexchange carriers, thereby integrating the wireless phone network with
landline telecommunications systems. Because two-way wireless networks are fully
interconnected with landline telephone networks and long-distance networks,
customers can receive and originate both local and long-distance calls from
their wireless phones.
The signal strength of a transmission between a phone and a BTS antenna
declines as the phone moves away from the BTS antenna. The MSC and the BTSs
monitor the signal strength of calls in process. When the signal strength of a
call declines to a predetermined level, the MSC may "hand off" the call to
another BTS that can establish a stronger signal with the phone. If a phone
leaves the service area of the wireless service provider, the call is
disconnected unless an appropriate technical interface is established to hand
off the call to an adjacent service provider's system.
Operators of wireless networks frequently agree to provide service to
customers from other compatible networks who are temporarily located in or
traveling through the operator's service area. Such customers are called
"roamers." Agreements among network operators allocate revenues received from
roamers. With automatic roaming, wireless customers are preregistered in certain
networks outside their home service area and receive service automatically while
they are roaming. Other roaming features permit calls to a customer to follow
the customer into different networks, so that the customer will continue to
receive calls in a different network just as if the customer were within his or
her service area.
Wireless customers generally are charged separately for monthly access, air
time, long-distance calls and custom-calling features (although custom-calling
features may be included in monthly access charges in certain pricing plans).
Wireless network operators pay fees to local exchange and long-distance
telephone companies for access to their networks and toll charges based on
standard or negotiated rates. When wireless operators provide service to roamers
from other networks, they generally charge roamer air-time usage rates, which
usually are higher than standard air-time usage rates for their own customers,
and additionally may charge daily access fees. Special, discounted rate roaming
arrangements, often between neighboring operators who wish to stimulate usage in
their respective territories, provide for reduced roaming fees and no daily
access fees.
TECHNOLOGY
With GSM technology, Aerial offers easy-to-use, interactive menu-driven
phones, and advanced features such as caller identification and a smart card, as
well as more complex features such as text messaging, which allows the GSM
handset to function as a two-way messaging device. GSM is not compatible with
other PCS or cellular technologies. However, compatibility can be achieved
through the use of phones that support multiple technologies. Aerial launched
its dual-mode service in April 1999 that enables roaming between GSM and the
existing analog cellular systems through the use of dual-mode phones.
In addition, Aerial has established roaming arrangements with over 75
international operators in more than 40 countries. This enables Aerial
customers, using their own phone numbers, to place calls anywhere within the
country they are visiting as well as return calls to the U.S.
To date, seventeen North American PCS companies are providing commercial GSM
service. GSM systems are currently in commercial operation in approximately
4,000 North American cities with
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approximately 6 million customers. Aerial's customers are able to roam
substantially throughout the United States, either on other GSM-based PCS
networks or by using dual-mode phones that can also be used on existing cellular
networks.
Aerial is a member of the North American GSM Alliance LLC ("GSM Alliance"),
an all-digital wireless PCS network of U.S. and Canadian carriers. The GSM
Alliance was established to create a national network and develop seamless
wireless communications for customers, whether at home, away or abroad. The GSM
Alliance's collaborative efforts focus on serving the wireless customer
efficiently by addressing the areas of roaming, customer care, national
distribution and data communications. Aerial is also a limited partner of the
GSM Capital Limited Partnership. The partnership was formed to make investments
in companies mainly engaged in the wireless communications industry using the
GSM platform, that are in a development or expansion stage, or whose securities
trade in an organized market. Aerial is also a part of GSM North America, which
is the North American interest group for the GSM Association. Formed in 1995,
GSM North America brings together service providers and equipment manufacturers
to identify and resolve issues related to making GSM the premier PCS digital
technology.
SOURCES OF EQUIPMENT
Aerial does not manufacture any of the GSM network equipment, phones or
accessories ("equipment") used or anticipated to be used in its operations. The
equipment Aerial uses or anticipates to use is available from multiple sources,
and Aerial anticipates such equipment will continue to be available to Aerial in
the foreseeable future, consistent with normal manufacturing and delivery lead
times. As GSM uses an open system architecture, and due to the fact that GSM has
well-developed features, software systems and equipment that are available "off
the shelf", Aerial is able to design its GSM networks and systems without being
dependent upon any single manufacturing source. Nokia Telecommunications Inc.
has been Aerial's sole supplier of digital radio channel and switching
infrastructure equipment to date. Aerial's current phone vendors are Nokia
Mobile Phones, Inc., Ericsson Inc., Motorola Inc., and Mitsubishi Wireless
Communications, Inc.
PRODUCTS AND SERVICES
Aerial offers coverage in those areas of the PCS Markets where most of the
population lives and works. Continuing construction of its PCS networks will
provide coverage which, in combination with roaming services as described above,
is competitive with that of current cellular operators. Aerial provides roaming
capabilities through agreements with other GSM and cellular operators.
Aerial's two primary sources of revenues are similar to those available to
other cellular system providers. Service revenue primarily consists of charges
for access, airtime and value-added services provided to Aerial's retail
customers who use the network operated by Aerial, and charges for long-distance
calls made on Aerial's systems. Service revenue also consists of charges to
customers of other wireless carriers who use Aerial's PCS network when roaming
(outcollect roaming revenue). Equipment sales revenue consists of the sale of
phones and related accessories to retailers, independent agents and end user
customers. At December 31, 1999, Aerial had 422,900 customers. Service revenues
and equipment sales revenues totaled $195.1 million and $30.4 million,
respectively, for the year ended December 31, 1999.
Aerial provides the following services and features:
THE SMART CARD. GSM technology employs a Smart Card which contains a
microchip containing detailed information about a customer's service profile.
The Smart Card allows Aerial to initiate services or change a customer's service
package from a remote location. The Smart Card also allows customers to roam
onto other participating GSM-based networks by using their cards in phones
compatible with the local network.
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FEATURE-RICH PHONES. As part of its basic service package, Aerial provides
easy-to-use, interactive menu-driven phones that enable customers to utilize the
features available in a GSM network. These handsets primarily use words and
easy-to-use menus rather than numeric codes to operate handset functions such as
call-forwarding, call-waiting and text messaging.
SHORT TEXT MESSAGING. GSM technology allows for the capability to send and
receive short text messages, similar to two-way radio paging services. This
service allows Aerial to offer a quicker and less expensive form of wireless
communication when a full conversation is not necessary.
ENHANCED SECURITY. Aerial's service provides greater security from
eavesdropping and cloning than analog wireless service. Greater conversation
security is provided by the encryption code of the digital GSM signal. Greater
fraud protection is provided because GSM phones require the use of a Smart Card
with a sophisticated authentication scheme, the replication of which is
virtually impossible.
MARKETING AND DISTRIBUTION
Aerial's marketing objective is to create demand for its PCS service by
clearly differentiating its service offerings. Aerial believes the strength of
its marketing efforts is a key contributor to its success. Aerial's mass
marketing efforts emphasize the value of its services and its "fairness" to
customers and are supported by heavily promoting the Aerial brand name. This is
supported by a substantial advertising program.
Aerial offers its services and products through traditional cellular sales
channels as well as through new, lower cost channels which increase the quality
of the typical sale. Aerial utilizes traditional sales channels which include
mass merchandisers and retail outlets, company retail stores, sales agents and a
direct sales force. National distributors include Best Buy, Circuit City, Office
Depot, and Staples. Aerial currently also distributes its services and products
through over 100 company retail locations (mall stores, strip mall stores and
kiosks).
COMPETITION
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of digital upgrades to
existing analog cellular networks, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements, and changes in end-user
requirements and preferences. Accordingly, Aerial expects competition in the
wireless telecommunications business to be dynamic and intense as a result of
the entrance of new competitors and the development of new technologies,
products and services.
Aerial competes directly with up to five other PCS providers in each of its
PCS Markets. The other successful bidders in the FCC's broadband Block A and
Block B PCS auction in each of the six PCS Markets were PCS PrimeCo (Houston and
Tampa-St. Petersburg-Orlando), Sprint PCS (Minneapolis, Pittsburgh and Kansas
City) and AT&T Wireless Services, Inc. (Columbus). The existing cellular
providers in the PCS Markets, most of which have an infrastructure in place and
have been operational for a number of years, have in most cases, upgraded their
networks to provide comparable services in competition with Aerial. Principal
cellular providers in the PCS Markets are AT&T Wireless Services, Inc.,
BellSouth Mobility, Inc., GTE Mobile Communications Corporation, AirTouch
Communications, Inc., SBC Wireless, Bell Atlantic-NYNEX Mobile and Ameritech
Cellular. Additionally, Aerial competes with SMR provider Nextel
Communications, Inc. in each of its six PCS Markets.
Aerial also competes with other communications technologies that now exist,
such as paging and global satellite networks. In the future, cellular service
and PCS will also compete more directly with traditional landline telephone
service providers and with cable operators who expand into the offering of
traditional communications services over their cable systems.
All of such competition is intense. There can be no assurance that Aerial
will be able to compete successfully in this environment or that new
technologies and products that are more commercially effective than Aerial's
technologies and products will not be developed. In addition, many of Aerial's
competitors have substantially greater financial, technical, marketing, sales
and distribution resources
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than those of Aerial and have significantly greater experience than Aerial in
testing new or improved telecommunications products and services and obtaining
regulatory approvals. Some competitors are expected to market other services,
such as cable television access, with their wireless telecommunications service
offerings. Several of Aerial's competitors are operating, or planning to
operate, through joint ventures and affiliation arrangements, wireless
telecommunications networks that cover most of the United States.
Aerial anticipates that market prices for two-way wireless services
generally will continue to decline in the future based on increased competition.
Aerial will compete to attract and retain customers principally on the basis of
services and enhancements, its customer service, the size and location of its
service areas and pricing. Aerial's ability to compete successfully will also
depend, in part, on its ability to anticipate and respond to various competitive
factors affecting the industry, including new services that may be introduced,
changes in consumer preferences, demographic trends, economic conditions and
discount pricing strategies by competitors, which could adversely affect
Aerial's operating margins.
REGULATION
REGULATORY ENVIRONMENT. The FCC regulates the licensing, construction,
operation and acquisition of wireless telecommunications systems in the United
States pursuant to the Communications Act of 1934, as amended, and the rules,
regulations and policies promulgated by the FCC thereunder. Under the
Communications Act, the FCC is authorized to allocate, grant and deny licenses
for PCS frequencies, establish regulations governing the interconnection of
Commercial Mobile Radio Service networks with wireline and other wireless
carriers, grant or deny license renewals and applications for transfer of
control or assignment of Commercial Mobile Radio Service licenses, and impose
fines and forfeitures for any violations of FCC regulations.
In addition, the Telecommunications Act, which amended the Communications
Act, mandates significant changes in existing telecommunications rules and
policies to promote competition, ensure the availability of telecommunications
services to all parts of the nation and to streamline regulation of the
telecommunications industry to remove regulatory burdens, as competition
develops, and makes regulation less necessary. The FCC promulgated and continues
to promulgate regulations governing construction and operation of wireless
carriers, licensing (including renewal of licenses) and technical standards for
the provision of PCS services under the Communications Act, and is implementing
the legislative objectives of the Telecommunications Act, as discussed below.
PCS LICENSING. The FCC established PCS service areas in the United States
and its possessions and territories based upon Rand McNally's market definition
of 51 MTAs comprised of 493 smaller BTAs. Each MTA consists of at least two
BTAs.
The FCC has allocated 120 MHz of radio spectrum in the 2 GHz band for
licensed broadband PCS services. The FCC divided the 120 MHz of spectrum into
six individual blocks, each of which is allocated to serve either MTAs or BTAs.
The spectrum allocation includes two 30 MHz blocks ("A" and "B" Blocks) licensed
for each of the 51 MTAs, one 30 MHz block ("C" Block) licensed for each of the
493 BTAs, and three 10 MHz blocks ("D," "E" and "F" Blocks) licensed for each of
the 493 BTAs. A PCS license has been awarded for each MTA and substantially all
of the BTAs in every block, for a total of more than 1,500 licenses. This means
that in any PCS service area as many as six licensees could be operating
separate PCS networks. Under the FCC's rules, a broadband PCS licensee may own
combinations of licenses with total aggregate spectrum coverage of up to 45 MHz
in a single geographic area, except for rural areas where the limit is 55 MHz.
The FCC adopted comprehensive rules that outlined the bidding process, described
the bidding application and payment process, established penalties for certain
bid withdrawals, default or disqualification and established regulatory
safeguards.
The grants of licenses to Aerial are conditioned upon timely compliance with
the FCC's build-out requirements, I.E., coverage of one-third of the population
of a PCS market within five years of initial license grant and coverage of
two-thirds of that population within ten years. Aerial has exceeded the buildout
requirements for both the five year and ten year stages for each of its MTAs.
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The FCC also imposes a requirement that all licensees register and obtain
FCC registration numbers for all of their antenna towers which require prior FAA
clearance. All broadband PCS transmitting facilities of Aerial also must comply
with federal "radio frequency" radiation requirements. Aerial has complied with
and continues to comply with the antenna registration and radio frequency
radiation requirements.
The FCC enhanced 911 regulations require broadband PCS operators to be
capable of transmitting 911 calls from individuals with speech or hearing
disabilities through the use of "text telephone devices." Text telephone devices
currently, however, are not compatible with digital wireless systems such as
Aerial's. Consequently, on December 4, 1998, Aerial filed a petition with the
FCC requesting a waiver of the applicability of the text telephone devices
connectivity requirement to Aerial's digital system. On December 30, 1998, the
FCC granted Aerial, along with over 100 other wireless operators, a temporary
waiver of the regulation. Equipment manufacturers are developing hardware and
software that will make text telephone devices compatible with the digital
wireless technologies used by Aerial and other wireless service providers.
Aerial is working with manufacturers and other members of the wireless industry
in developing solutions for users of text telephone devices.
The enhanced 911 regulations also require broadband PCS operators to
determine the approximate location of persons making emergency calls. On
February 5, 1999, Aerial filed a petition requesting a waiver to clarify that
handset based location technology will meet the FCC's enhanced 911 location
requirements. A waiver will enable Aerial to be compliant with the location
requirements by introducing new handsets that have the capability of being
located rather than installing very expensive upgraded equipment throughout
Aerial's entire network. Aerial's waiver request and dozens of other wireless
operators' waiver requests were dismissed as moot by the FCC's Third Report and
Order in light of rules changes which require PCS systems to improve their
ability to locate wireless 911 callers during 2001 and 2002. On December 6,
1999, Aerial filed a Petition for Reconsideration of the FCC's Third Report and
Order. The Petition for Reconsideration is pending at the FCC.
The FCC licenses granted to Aerial are issued for a ten-year period expiring
June 23, 2005 and may be renewed. In the event challengers file competing
applications in response to any of Aerial's renewal filings, the FCC has rules
and policies providing that the application of the licensee seeking renewal will
be granted and the application of the challenger will not be considered in the
event that the broadband PCS licensee involved has (i) provided "substantial"
service, which is defined as "sound, favorable and substantially above a level
of mediocre service just minimally justifying renewal" and (ii) substantially
complied with FCC rules, policies and the Communications Act. Although Aerial is
unaware of any circumstances which would prevent the approval of any future
renewal applications, there can be no assurance that Aerial's licenses will be
renewed by the FCC in the future. Moreover, although revocation and involuntary
modification of licenses are extraordinary regulatory measures, the FCC has the
authority to restrict the operation of licensed facilities or revoke or modify
licenses.
The FCC has proceedings in process which could lead to the re-auction of PCS
licenses previously granted to auction winners who filed for bankruptcy and
could open up other frequency bands for wireless telecommunications and PCS-like
services. Such proceedings could result in additional wireless competition.
In addition, there are citizenship requirements, assignment requirements and
other federal regulations and requirements which may affect the business of
Aerial.
RECENT EVENTS. There are certain regulatory proceedings currently pending
before the FCC which are of particular importance to the broadband PCS industry.
The FCC has adopted a limited expansion of the obligation of cellular
carriers to serve the subscribers of broadband PCS providers, among others, even
though neither the subscribers or the PCS providers involved have a pre-existing
service relationship with such cellular carrier. Under these new policies,
broadband PCS providers may offer their subscribers phones which are capable of
operating over broadband PCS and cellular networks so that when their
subscribers are out of range of broadband PCS networks, they will be able to
obtain non-automatic access to cellular networks. The FCC expects that
implementation of these roaming capabilities will promote competition between
43
<PAGE>
broadband PCS and cellular service providers. The FCC is considering whether
cellular, broadband PCS and certain specialized mobile radio providers instead
should be required to provide "automatic" roaming service to other providers
(i.e., carrier-to-carrier roaming service).
The FCC has adopted requirements which will make it possible for subscribers
to retain, subject to certain geographic and other limitations, their existing
telephone numbers when they switch from one service provider to another. This
numbering portability will include switching between LEC and other wireline
providers, between wireless service providers and between LEC/wireline and
wireless providers. LECs, in the 100 largest MSAs, had implementation deadlines
by the end of 1998 at those switches which received specific requests for
numbering portability. The FCC has extended the compliance date for cellular,
broadband PCS, and certain other wireless providers to November 2002.
Also, in August 1999, the FCC added certain additional capabilities
necessary to meet requirements under the Communications Assistance for Law
Enforcement Act, which are to become applicable by September 2001. Also, issues
remain as to when carriers may obtain reimbursement from the federal government
for upgrades related to such requirements. Aerial will work diligently to comply
with all such related requirements in cooperation with industry groups and
standard setting bodies.
The FCC has recently taken action in proceedings:
- To ensure that the customers of wireless providers, among other carriers,
will receive complete, accurate, and understandable bills.
- To establish safeguards to protect against unauthorized access to customer
information (though these rules have been overturned, at least
temporarily, by court order).
- To increase to 55 megahertz ("MHz") in rural areas its 45 MHz "cap" on the
amount of spectrum which entities under common ownership and control may
hold in a single wireless market and to relax its related cellular cross
ownership restriction.
- To require improved access to telecommunications facilities by persons
with disabilities.
The FCC also has pending proceedings:
- To implement a wireless billing option under which wireline customers who
call wireless customers could be charged for the wireless "airtime" as
opposed to the wireless customer receiving the call, as is the case at
present ("calling party pays").
- To implement requirements for wireless providers to set interstate
interexchange rates in each state at levels no higher than the rates
charged to subscribers in any other state.
- To set national policy for the allocation by state public utilities
commissions of telephone numbers to wireline and wireless carriers.
Aerial intends to monitor such proceedings and comply with new federal
requirements as they become applicable.
In January 2000, the FCC took an action which may have an impact on both
cellular and PCS licensees. Pursuant to a congressional directive, the FCC
adopted service rules for licensing the commercial use of 30 MHz of spectrum in
the 746-764 MHz and 776-794 MHz spectrum bands. The spectrum is to be auctioned,
beginning in June 2000, for six regional service areas, in 20 and 10 MHz blocks,
to provide a wide range of wireless services. There will be no eligibility
restrictions on participation in the auctions for this spectrum. Cellular and
PCS carriers and other entities will be eligible to bid in the auction. Use of
the spectrum by licensees selected in the auction may be affected by the
presence of incumbent broadcast licensees on some of the auctioned frequencies
through at least December 31, 2006.
The FCC is also continuing to implement the Telecommunications Act. The
Telecommunications Act provides that implementing its legislative objectives
will be the task of the FCC, the state public utilities commissions and a
Federal-State Joint Board. Much of this implementation has and continues to be
44
<PAGE>
proceeding in numerous, concurrent proceedings with aggressive deadlines. Aerial
cannot predict the full extent and nature of developments of the
Telecommunications Act, which will depend, in part, upon interrelationships
among state and federal regulators.
The primary purpose and effect of the Telecommunications Act is to open all
telecommunications markets to competition, including local telephone service.
The Telecommunications Act makes most direct or indirect state and local
barriers to competition unlawful. It directs the FCC to preempt all inconsistent
state and local laws and regulations, after notice and comment proceedings. It
also enables electric and other utilities to engage in telecommunications
service through qualifying subsidiaries.
Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the Telecommunications Act's universal
service provision and necessary for universal services, public safety and
welfare, continued service quality and consumer rights.
The Telecommunications Act establishes principles and a process for
implementing a modified "universal service" policy. This policy seeks
nationwide, affordable service and access to advanced telecommunications and
information services. It calls for reasonably comparable urban and rural rates
and services. The Telecommunications Act also requires universal service to
schools, libraries and rural health facilities at discounted rates. In a series
of orders adopted in 1997, the FCC established universal service support
mechanisms which require telecommunications providers, including all wireless
carriers, to contribute. Aerial has made the required universal service
worksheet filings and makes the required periodic payments.
Since enactment, the FCC has adopted orders implementing the local
competition provisions of the Telecommunications Act. The FCC found that
broadband PCS and certain other wireless providers that are entitled to
reciprocal compensation, may not be charged for LEC-originated traffic or for
code opening/per-number fees, and may obtain LEC interconnection subject to the
terms of the Telecommunications Act. Appeals were taken to the United States
Supreme Court from these FCC orders by numerous parties alleging that the FCC
has exceeded its statutory mandate, among other matters. On January 25, 1999,
the U.S. Supreme Court upheld the FCC's general jurisdiction to implement the
local competition provisions of the Telecommunications Act.
STATE AND LOCAL REGULATION. The scope of state and local regulatory
authority covers such matters as the terms and conditions of interconnection
between LECs and wireless carriers with respect to intrastate services, customer
billing information and practices, billing disputes, other consumer protection
matters, facilities construction issues and transfers of control, among other
matters. In these areas, particularly the terms and conditions of
interconnection between LECs and wireless providers, the FCC and state
regulatory authorities share regulatory responsibilities with respect to
interstate and intrastate issues, respectively.
The FCC has pending numerous petitions for preemption of state and local
regulations which allege such regulations prohibit or impair the provision of
interstate or intrastate telecommunications services. It has also requested
public comment on a petition requesting preemption of moratoria imposed by state
and local governments on siting of telecommunications facilities, the imposition
of state taxes on the gross receipts of Commercial Mobile Radio Service
providers and other proposed state taxes based on the asset value of Commercial
Mobile Radio Service licenses awarded by the FCC. The FCC has been actively
involved in educating state and local regulatory and zoning authorities as to
the prohibitions in the Telecommunications Act against the creation of
unreasonable and discriminatory zoning, taxation or other barriers to new
wireless providers.
The FCC is required to forbear from applying any statutory or regulatory
provision that is not necessary to keep telecommunications rates and terms
reasonable or to protect consumers. A state may not apply a statutory or
regulatory provision that the FCC decides to forbear from applying. In addition,
the FCC must review its telecommunications regulations every two years and
change any that are no longer necessary.
Aerial and its subsidiaries have been and intend to remain active
participants in proceedings before the FCC and before state regulatory and
zoning authorities. Proceedings with respect to the foregoing
45
<PAGE>
policy issues before the FCC and state regulatory authorities could have
significant impacts on the competitive market structure among wireless providers
and the relationships between wireless providers and other carriers. Aerial is
unable to predict the scope, pace, or financial impact of policy changes which
could be adopted in these proceedings.
EMPLOYEES
TDS enjoys satisfactory employee relations. As of December 31, 1999,
10,150 persons were employed by TDS (2,000 of whom were employed at Aerial), 162
of whom are represented by unions.
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
The property of TDS consists principally of switching and cell site
equipment related to cellular telephone operations; telephone lines, central
office equipment, telephone instruments and related equipment, and land and
buildings related to telephone operations. As of December 31, 1999, TDS's
property, plant and equipment, net of accumulated depreciation, totaled
approximately $2.1 billion, $1.2 billion at U.S. Cellular and $0.9 billion at
TDS Telecom.
The plant and equipment of TDS is maintained in good operating condition and
is suitable and adequate for TDS's business operations. The properties of the
operating telephone subsidiaries are subject to the lien of the mortgages
securing the funded debt of such companies. TDS leases many of its offices and
transmitter sites used in its cellular business and owns substantially all of
its central office buildings, local administrative buildings, warehouses, and
storage facilities used in its telephone operations. All of TDS's cell and
transmitter sites and telephone lines are located either on private or public
property. Locations on private land are by virtue of easements or other
arrangements.
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
TDS is involved in a number of legal proceedings before the FCC and various
state and federal courts. Management does not believe that any such proceeding
should have a material adverse impact on the financial position or results of
operations of TDS. See Item 1. Business--"Discontinued Operations."
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1999.
46
<PAGE>
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from Exhibit 13, Annual Report sections entitled
"TDS Stock and Dividend Information" and "Market Price per Common Share by
Quarter."
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference from Exhibit 13, Annual Report section entitled
"Selected Consolidated Financial Data," except for ratios of earnings to fixed
charges, which are incorporated herein by reference from Exhibit 12 to this
Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference from Exhibit 13, Annual Report section entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
- --------------------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference from Exhibit 13, Annual Report section entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" under the caption "Market Risk."
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from Exhibit 13, Annual Report sections entitled
"Consolidated Statements of Operations," "Consolidated Statements of Cash
Flows," "Consolidated Balance Sheets," "Consolidated Statements of Common
Stockholders' Equity," "Notes to Consolidated Financial Statements,"
"Consolidated Quarterly Income Information (Unaudited)," and "Report of
Independent Public Accountants."
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
47
<PAGE>
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from Proxy Statement sections entitled "Election
of Directors" and "Executive Officers."
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from Proxy Statement section entitled "Executive
Compensation" except for the information specified in Item 402(a)(8) of
Regulation S-K under the Securities Exchange Act of 1934, as amended.
- --------------------------------------------------------------------------------
ITEM 12. BENEFICIAL OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from Proxy Statement sections entitled "Security
Ownership of Management" and "Principal Shareholders."
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from Proxy Statement section entitled "Certain
Relationships and Related Transactions."
48
<PAGE>
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a) (1) Financial Statements
<TABLE>
<S> <C>
Consolidated Statements of Operations....................... Annual Report*
Consolidated Statements of Cash Flows....................... Annual Report*
Consolidated Balance Sheets................................. Annual Report*
Consolidated Statements of Common Stockholders' Equity...... Annual Report*
Notes to Consolidated Financial Statements.................. Annual Report*
Consolidated Quarterly Income Information (Unaudited)....... Annual Report*
Report of Independent Public Accountants.................... Annual Report*
</TABLE>
- ------------------------
* Incorporated by reference from Exhibit 13.
(2) Schedules
<TABLE>
<CAPTION>
LOCATION
---------
<S> <C> <C>
Report of Independent Public Accountants on Financial Statement Schedules........... page S-1
I. Condensed Financial Information of Registrant-Balance Sheets
as of December 31, 1999 and 1998 and Statements of
Operations and Statements of Cash Flows for each of the
Three Years in the Period Ended December 31, 1999........... page S-2
II. Valuation and Qualifying Accounts for each of the Three
Years in the Period Ended December 31, 1999................. page S-7
</TABLE>
All other schedules have been omitted because they are not applicable or not
required because the required information is shown in the financial statements
or notes thereto.
(3) Exhibits
The exhibits set forth in the accompanying Index to Exhibits are filed as a
part of this Report. The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this form
pursuant to Item 14(c) of this Report.
49
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<S> <C>
10.1 Salary Continuation Agreement for LeRoy T. Carlson dated
May 20, 1977, as amended May 22, 1981 and May 25, 1984 is
hereby incorporated by reference to TDS's Registration
Statement on Form S-2, No. 2-92307.
10.2(a) Supplemental Benefit Agreement for LeRoy T. Carlson dated
March 21, 1980, as amended March 20, 1981 is hereby
incorporated by reference to an exhibit to TDS's
Registration Statement on Form S-7, No. 2-74615.
10.2(b) Memorandum of Amendment to Supplemental Benefit Agreement
dated May 28, 1991 is hereby incorporated by reference to
Exhibit 10.2(b) to TDS's Annual Report Form 10-K for the
year ended December 31, 1991.
10.3 Description of Terms of Letter Agreement with Sandra L.
Helton dated August 7, 1998 is hereby incorporated by
reference to Exhibit 10.3 to TDS's Annual Report on
Form 10-K for the year ended December 31, 1998.
10.4(a) 1988 Stock Option and Stock Appreciation Rights Plan of TDS
is hereby incorporated by reference to Exhibit A to TDS's
definitive Notice of Annual Meeting and Proxy Statement
dated March 31, 1988.
10.4(b) Amendment #1 to 1988 Stock Option and Stock Appreciation
Rights Plan of TDS is hereby incorporated by reference to
Exhibit 10.7(b) to TDS's Annual Report on Form 10-K for the
year ended December 31, 1993.
10.4(c) Amendment #2 to 1988 Stock Option and Stock Appreciation
Rights Plan of TDS is hereby incorporated by reference to
Exhibit 10.7(c) to TDS's Annual Report on Form 10-K for the
year ended December 31, 1993.
10.5 Telephone and Data Systems, Inc. 1994 Long-Term Incentive
Plan is hereby incorporated by reference to Exhibit 99.1 to
TDS's Registration Statement on Form S-8 (Registration
No. 33-57257).
10.6(a) Telephone and Data Systems, Inc. 1998 Long-Term Incentive
Plan is hereby incorporated by reference to Exhibit D to
TDS's Proxy Statement/Prospectus dated March 24, 1998, which
was part of TDS's Registration Statement on Form S-4
(Registration No. 333-42535).
10.6(b) Amendment No. 1 to Telephone and Data Systems, Inc. 1998
Long Term Incentive Plan, filed herewith.
10.7 Amended and Restated Supplemental Executive Retirement Plan
of TDS is hereby incorporated by reference to Exhibit 10.7
to TDS's Annual Report on Form 10-K for the year ended
December 31, 1998.
10.11 Supplemental Benefit Agreement between United States
Cellular Corporation and H. Donald Nelson is hereby
incorporated by reference to an exhibit to United States
Cellular Corporation's Registration Statement on Form S-1
(Registration No. 33-16975).
10.12 Deferred Compensation Agreement for H. Donald Nelson dated
July 15, 1996, is hereby incorporated by reference to
Exhibit 10.1 to TDS's Quarterly Report in Form 10-Q for the
quarterly period ended September 30, 1996.
10.13 Stock Option and Stock Appreciation Rights Plan, is hereby
incorporated by reference to Exhibit B to United States
Cellular Corporation's definitive Notice of Annual Meeting
and Proxy Statement dated April 15, 1991, as filed with the
Commission on April 16, 1991.
10.14 Summary of 1999 Bonus Program for the Senior Corporate Staff
on United States Cellular Corporation is hereby incorporated
by reference to Exhibit 10.11 to United States Cellular
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1999.
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<S> <C>
10.15 United States Cellular Corporation 1994 Long-Term Incentive
Plan is hereby incorporated by reference to Exhibit 99.1 to
United States Cellular Corporation's Registration Statement
on Form S-8 (Registration No. 33-57255).
10.16 United States Cellular Corporation 1996 Senior Executive
Stock Bonus and Restricted Stock Award Plan is hereby
incorporated by reference to Exhibit 99.1 to United States
Cellular Corporation's Registration Statement on Form S-8
(Registration No. 333-19405).
10.17 United States Cellular Corporation Special Retention
Restricted Stock Award Plan is hereby incorporated by
reference to Exhibit 99.1 to United States Cellular
Corporation's Registration Statement on Form S-8
(Registration No. 333-23861).
10.18 United States Cellular Corporation 1998 Long-Term Incentive
Plan is hereby incorporated by reference to Exhibit 99.4 to
United States Cellular Corporation's Registration Statement
on Form S-8 (Registration No. 333-57063).
10.19 Form of 1997 Special Retention Restricted Stock Awards is
hereby incorporated by reference to Exhibit 99.2 to United
States Cellular Corporation's Registration Statement on
Form S-8 (Registration No. 333-57063).
10.20 TDS Compensation Plan for Non-Employee Directors is hereby
incorporated by reference to Exhibit 99.1 of TDS's
Registration Statement on Form S-8 (Registration
No. 333-23947).
10.21 Executive Deferred Compensation Agreement for James
Barr III dated January 1, 1998, is hereby incorporated by
reference to Exhibit 10.15 to TDS's Annual Report on
Form 10-K for the year ended December 31, 1997.
10.22 Form of TDS Telecommunications Corporation Phantom Stock
Option Incentive Agreement between TDS Telecommunications
Corporation and James Barr III is hereby incorporated by
reference to Exhibit 10.16 to TDS's Annual Report on
Form 10-K for the year ended December 31, 1997.
</TABLE>
(b) Reports on Form 8-K filed during the quarter ended December 31, 1999.
None
51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Stockholders and Board of Directors of Telephone and Data Systems, Inc.:
We have audited, in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements included in Telephone
and Data Systems, Inc. and Subsidiaries Annual Report incorporated by reference
in this Form 10-K, and have issued our report thereon dated January 26, 2000.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The financial statement
schedules listed in Item 14(a)(2) are the responsibility of TDS's management and
are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic consolidated financial
statements. These financial statement schedules have been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 26, 2000
S-1
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TELEPHONE AND DATA SYSTEMS, INC. (PARENT)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 32,910 $ 264
Temporary investments..................................... 166 --
Notes receivable from affiliates.......................... 80,341 91,354
Accounts receivable
Due from subsidiaries................................... 7,409 21,379
Other................................................... 7,445 3,838
Prepaid income taxes...................................... 26,114 5,064
Other current assets...................................... 5,622 2,621
---------- ----------
160,007 124,520
---------- ----------
INVESTMENT IN SUBSIDIARIES.................................. 2,933,405 2,588,893
---------- ----------
OTHER INVESTMENTS
Notes receivable from affiliates.......................... -- 6,050
Marketable equity securities.............................. 136,742 --
Minority interests and other investments.................. 33,152 27,724
---------- ----------
169,894 33,774
---------- ----------
PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated depreciation... 15,425 19,778
---------- ----------
OTHER ASSETS AND DEFERRED CHARGES
Net deferred income taxes................................. 155,944 165,752
Debt issuance expenses.................................... 12,685 13,350
Development and acquisition expenses...................... 143 426
Other..................................................... 388 483
---------- ----------
169,160 180,011
---------- ----------
NET ASSETS OF DISCONTINUED OPERATIONS....................... 246,801 471,990
---------- ----------
$3,694,692 $3,418,966
========== ==========
</TABLE>
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
S-2
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TELEPHONE AND DATA SYSTEMS, INC. (PARENT)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt......................... $ 258 $ 248
Notes payable............................................. -- 170,889
Notes payable to affiliates............................... 373,744 179,606
Accounts payable
Due to subsidiaries--Income Taxes....................... 25,043 12,854
Due to subsidiaries--Other.............................. 4,544 3,037
Other................................................... 14,924 7,637
Accrued interest.......................................... 15,895 16,527
Other..................................................... 4,445 5,346
---------- ----------
438,853 396,144
---------- ----------
DEFERRED LIABILITIES AND CREDITS
Postretirement benefits obligation other than pensions.... 844 779
Other..................................................... 12,714 7,717
---------- ----------
13,558 8,496
---------- ----------
LONG-TERM DEBT, excluding current portion (Note A).......... 440,895 441,153
LONG-TERM DEBT, due to affiliates (Note B).................. 309,280 309,280
---------- ----------
750,175 750,433
---------- ----------
PREFERRED SHARES............................................ 9,005 25,985
---------- ----------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $.01 per share, respectively;
authorized 100,000,000 shares; issued and outstanding
55,411,746 and 54,988,498 shares, respectively........... 554 550
Series A Common Shares, par value $.01 per share,
respectively; authorized 25,000,000 shares; issued and
outstanding 6,958,691 and 6,949,904 shares,
respectively............................................. 70 69
Capital in excess of par value............................ 1,897,402 1,882,710
Accumulated other comprehensive income from
subsidiaries............................................. 179,071 75,609
Treasury Shares, at cost, 1,237,207 and 761,220 shares,
respectively............................................. (102,975) (29,439)
Retained earnings......................................... 508,979 308,409
---------- ----------
2,483,101 2,237,908
---------- ----------
$3,694,692 $3,418,966
========== ==========
</TABLE>
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
S-3
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TELEPHONE AND DATA SYSTEMS, INC. (PARENT)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating service revenues................................ $ 66,600 $ 69,768 $ 67,349
Cost of sales and operating expenses...................... 75,103 76,238 72,249
--------- --------- ---------
Net operations.......................................... (8,503) (6,470) (4,900)
--------- --------- ---------
Other income
Interest income received from affiliates................ 23,343 19,344 14,321
Gain on sale of investments............................. -- 7,164 10,307
Other, net.............................................. (2,658) (10,182) (4,612)
--------- --------- ---------
20,685 16,326 20,016
--------- --------- ---------
Income before interest and income taxes................... 12,182 9,856 15,116
Interest expense.......................................... 84,965 78,002 49,422
Income tax credit......................................... (66,796) (79,394) (39,423)
--------- --------- ---------
Corporate operations...................................... (5,987) 11,248 5,117
Equity in net income of subsidiaries and other
investments............................................. 320,138 190,151 94,628
--------- --------- ---------
Net income from continuing operations..................... 314,151 201,399 99,745
--------- --------- ---------
Discontinued operations, net of tax....................... (84,190) (136,991) (109,294)
--------- --------- ---------
Net income (loss)......................................... $ 229,961 $ 64,408 $ (9,549)
========= ========= =========
</TABLE>
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
Note A: The annual requirements for principal payments on long-term debt are
$258,000, $270,000, $283,000, $32.1 million, and $7.5 million for the years
2000 through 2004, respectively.
Note B: In 1998, TDS Capital II, a subsidiary trust ("Capital II") of TDS,
issued 6,000,000 of its 8.04% Company-Obligated Mandatorily Redeemable
Preferred Securities (the "1998 Preferred Securities") at $25 per Preferred
Security. Net proceeds totaled $144.9 million and were used to reduce
short-term debt. The sole asset of TDS Capital II is $154.6 million
principal amount of TDS's 8.04% Subordinated Debentures due March 31, 2038.
In 1997, TDS Capital I, a subsidiary trust ("Capital I") of TDS, issued
6,000,000 of its 8.5% Company-Obligated Mandatorily Redeemable Preferred
Securities (the "1997 Preferred Securities") at $25 per Preferred Security.
Net proceeds totaled $144.8 million and were used to reduce short-term
debt. The sole asset of TDS Capital I is $154.6 million principal amount of
TDS's 8.5% Subordinated Debentures due December 31, 2037.
The obligations of TDS Capital I and II under the 1998 Preferred Securities
and 1997 Preferred Securities (the "Preferred Securities") issued by TDS
Capital I and II are fully and unconditionally guaranteed by TDS. However,
TDS's obligations are subordinate and junior in right of payment to certain
other indebtedness of TDS. TDS has the right to defer payments of interest
on the Subordinated Debentures by extending the interest payment period, at
any time, for up to 20 consecutive quarters. If interest payments on the
Subordinated Debentures are so deferred, distributions on the Preferred
Securities will also be deferred. During any deferral, distributions will
continue to accrue with interest thereon. In addition, during any such
deferral, TDS may not declare or pay any dividend or other distribution on,
or redeem or purchase, any of its common stock.
S-4
<PAGE>
The 8.04% and 8.5% Subordinated Debentures are redeemable by TDS, in whole
or in part, from time to time, on or after March 31, 2003, and
November 18, 2002, respectively, or, in whole but not in part, at any time
in the event of certain income tax circumstances. If the Subordinated
Debentures are redeemed, TDS Capital I and II must redeem Preferred
Securities on a pro rata basis having an aggregate liquidation amount equal
to the aggregate principal amount of the Subordinated Debentures so
redeemed. In the event of the dissolution, winding up or termination of TDS
Capital I and II, the holders of Preferred Securities will be entitled to
receive, for each Preferred Security, a liquidation amount of $25 plus
accrued and unpaid distributions thereon to the date of payment, unless, in
connection with the dissolution, winding up or termination, Subordinated
Debentures are distributed to the holders of the Preferred Securities.
Note C: On September 17, 1999, the Board of Directors of Telephone and Data
Systems, Inc. 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, subject
to adjustment in certain circumstances. 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. This merger is
subject to the approval of the Federal Communications Commission. The
merger is expected to close in the second quarter of 2000.
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. 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 $44.2 million from September 18, 1999
through December 31, 1999.
S-5
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TELEPHONE AND DATA SYSTEMS, INC. (PARENT)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income from continuing operations..................... $ 314,151 $ 201,399 $ 99,745
Add (Deduct) adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization........................... 9,859 10,365 9,508
Gain on sale of investments............................. -- (7,164) (10,307)
Deferred taxes.......................................... (43,839) (126,354) (53,068)
Equity in net income of subsidiaries and other
investments............................................ (320,138) (190,151) (94,628)
Other noncash expense................................... 31 (394) (211)
Change in accounts receivable........................... (6,949) 27,352 (15,992)
Change in accounts payable.............................. 11,643 6,810 3,612
Change in accrued taxes................................. (4,106) 9,310 2,151
Change in other assets and liabilities.................. 3,401 6,058 677
--------- --------- ---------
(35,947) (62,769) (58,513)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings................................. -- 343,127 144,788
Repayment of long-term debt............................... (248) (239) (735)
Change in notes payable................................... (170,889) (354,996) 368,658
Change in notes payable to affiliates..................... 194,138 183,216 (47,990)
Change in notes receivable from affiliates................ (4,096) (130,152) (87,021)
Change in advances to affiliates.......................... -- -- 1,616
Common stock issued....................................... 7,991 3,391 5,225
Redemption of preferred shares............................ (531) (367) (359)
Dividends from subsidiaries............................... 7,973 38,391 22,022
Dividends paid............................................ (29,390) (28,488) (27,192)
Repurchase of Common Shares............................... (69,014) -- (69,942)
Purchase of subsidiary common stock....................... -- (9,107) (9,801)
--------- --------- ---------
(64,066) 44,776 299,269
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions
Value of assets acquired................................ (2,450) (14,425) (47,851)
Common Shares issued.................................... -- 10,028 42,685
Preferred Shares issued................................. -- -- 3,000
--------- --------- ---------
Net cash paid for acquisitions........................ (2,450) (4,397) (2,166)
Capital expenditures...................................... (6,703) 6,662 (20,957)
Payment to subsidiary under contract agreement............ -- (28,696) --
Proceeds from sale of investments......................... -- 5,382 20,886
Investments in subsidiaries............................... 179 262 (2,301)
Other investments......................................... (60) 184 2,851
Change in temporary investments........................... (166) 132 22
--------- --------- ---------
(9,200) (20,471) (1,665)
--------- --------- ---------
CASH FLOWS FROM DISCONTINUED OPERATIONS..................... 141,859 38,457 (238,961)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 32,646 (7) 130
CASH AND CASH EQUIVALENTS
Beginning of period....................................... 264 271 141
--------- --------- ---------
End of period............................................. $ 32,910 $ 264 $ 271
========= ========= =========
</TABLE>
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
S-6
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------------ ---------- ---------- ---------- ----------
COLUMN A COLUMN B COLUMN C-1 COLUMN C-2 COLUMN D COLUMN E
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1999
Deducted from deferred state tax
asset:
For unrealized net operating
losses............................ $(27,779) $ 2,778 $ (78) $ -- $(25,079)
Deducted from accounts receivable:
For doubtful accounts............ (6,732) (26,938) -- 23,145 (10,525)
FOR THE YEAR ENDED DECEMBER 31, 1998
Deducted from deferred state tax
asset:
For unrealized net operating
losses............................ (15,602) (1,023) (11,154) -- (27,779)
Deducted from accounts receivable:
For doubtful accounts............ (7,850) (21,254) -- 22,372 (6,732)
FOR THE YEAR ENDED DECEMBER 31, 1997
Deducted from deferred state tax
asset:
For unrealized net operating
losses............................ (13,367) 877 (3,112) -- (15,602)
Deducted from accounts receivable:
For doubtful accounts............ $ (6,090) $(31,855) $ -- $30,095 $ (7,850)
</TABLE>
S-7
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C> <C>
TELEPHONE AND DATA SYSTEMS, INC.
By: /s/ LEROY T. CARLSON
-----------------------------------------
LeRoy T. Carlson
CHAIRMAN
By: /s/ LEROY T. CARLSON, JR.
-----------------------------------------
LeRoy T. Carlson, Jr.
PRESIDENT, (CHIEF EXECUTIVE OFFICER)
By: /s/ SANDRA L. HELTON
-----------------------------------------
Sandra L. Helton
EXECUTIVE VICE PRESIDENT--FINANCE
(CHIEF FINANCIAL OFFICER)
By: /s/ D. MICHAEL JACK
-----------------------------------------
D. Michael Jack
VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
Dated March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LEROY T. CARLSON
------------------------------------------- Director March 29, 2000
LeRoy T. Carlson
/s/ LEROY T. CARLSON, JR.
------------------------------------------- Director March 29, 2000
LeRoy T. Carlson, Jr.
/s/ SANDRA L. HELTON
------------------------------------------- Director March 29, 2000
Sandra L. Helton
/s/ JAMES BARR III
------------------------------------------- Director March 29, 2000
James Barr III
/s/ WALTER C.D. CARLSON
------------------------------------------- Director March 29, 2000
Walter C.D. Carlson
/s/ LETITIA G.C. CARLSON
------------------------------------------- Director March 29, 2000
Letitia G.C. Carlson
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ HERBERT S. WANDER
------------------------------------------- Director March 29, 2000
Herbert S. Wander
/s/ DONALD C. NEBERGALL
------------------------------------------- Director March 29, 2000
Donald C. Nebergall
/s/ GEORGE W. OFF
------------------------------------------- Director March 29, 2000
George W. Off
/s/ MARTIN L. SOLOMON
------------------------------------------- Director March 29, 2000
Martin L. Solomon
/s/ KEVIN A. MUNDT
------------------------------------------- Director March 29, 2000
Kevin A. Mundt
/s/ MURRAY L. SWANSON
------------------------------------------- Director March 29, 2000
Murray L. Swanson
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
3.1 Restated Certificate of Incorporation, as amended, are
hereby incorporated by reference to Exhibit 3.1 to TDS's
Report on Form 8-A/A filed on July 10, 1998.
3.2 Restated By-laws, as amended, filed herewith.
4.1 Restated Certificate of Incorporation, as amended, are
hereby incorporated by reference to Exhibit 3.1 to TDS's
Report on Form 8-A/A filed on July 10, 1998.
4.2 Restated By-laws, as amended, filed herewith as
Exhibit 3.2.
4.3(a) The Indenture between TDS and Harris Trust and Savings Bank,
Trustee, dated February 1, 1991, under which TDS's
Medium-Term Notes are issuable, is hereby incorporated by
reference to TDS's Current Report on Form 8-K filed on
February 19, 1991.
4.3(b) Form of First Supplemental Indenture with Harris Trust and
Savings Bank is hereby incorporated by reference to
Exhibit 4.1(b) of Post Effective Amendment No. 1 to
Form S-3 (Registration No. 33-68456).
4.4(a) Revolving Credit Agreement, dated as of June 7, 1996, among
TDS and the First National Bank of Boston, as agent and
LaSalle National Bank and Toronto Dominion (Texas), Inc. as
co-agents, is hereby incorporated by reference to the
registrant's Form 8-K dated July 1, 1996.
4.4(b) Amendment No. 1 to Revolving Credit Agreement, filed
herewith.
4.4(c) Assignment and Assumption Agreement with respect to
Revolving Credit Agreement, filed herewith.
4.5 The Trust Indenture dated as of November 4, 1996 between
Aerial Communications, Inc. as issuer, TDS as guarantor, and
The First National Bank of Chicago, as trustee for Aerial's
Series A Zero Coupon Notes, is hereby incorporated by
reference to Exhibit 4.1 to Aerial's Current Report on
Form 8-K filed on November 29, 1996.
4.6 The Trust Indenture, dated as of February 5, 1998, between
Aerial Communications, Inc. as issuer, TDS as guarantor, and
The First National Bank of Chicago, as trustee for Aerial's
Series B Zero Coupon Notes, is hereby incorporated by
reference to Exhibit 4.1 to Aerial's Current Report on
Form 8-K filed on April 29, 1998.
4.7(a) The Amended and Restated Declaration of Trust, dated
November 18, 1997, by and among TDS, as Sponsor, the Trust,
The First National Bank of Chicago, as Property Trustee,
First Chicago Delaware, Inc., as Delaware Trustee and the
Regular Trustees named therein, is hereby incorporated by
reference to Exhibit 4.1 to TDS's Current Report on
Form 8-K filed on December 2, 1997, dated November 18, 1997.
4.7(b) The Amended and Restated Declaration of Trust, dated
February 10, 1998, by and among TDS, as Sponsor, the Trust,
The First National Bank of Chicago, as Property Trustee,
First Chicago Delaware, Inc., as Delaware Trustee and the
Regular Trustees named therein, is hereby incorporated by
reference to Exhibit 4.1 to TDS's Current Report on
Form 8-K filed on April 28, 1998, dated February 10, 1998.
4.7(c) Form of First Supplemental Indenture to Amended and Restated
Declaration of Trust relating to assumption of TDS Delaware
is hereby incorporated by reference to Exhibit 4.7 of Post
Effective Amendment No. 1 to Form S-3 (Registration
No. 333-38355).
4.8(a) The Subordinated Indenture, dated October 15, 1997, by and
between TDS and the First National Bank of Chicago, as
Trustee under which the Trust Originated Preferred
Securities are issuable, is hereby incorporated by reference
to Exhibit 4.3 to TDS's Current Report on Form 8-K filed on
December 2, 1997, dated November 18, 1997.
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
4.8(b) The Supplemental Indenture dated November 18, 1997, by and
between TDS and the First National Bank of Chicago, as
Trustee under which the Trust Originated Preferred
Securities are issuable, is hereby incorporated by reference
to Exhibit 4.4 to TDS's Current Report on Form 8-K filed on
December 2, 1997, dated November 18, 1997.
4.8(c) The Second Supplemental Indenture, dated as of February 10,
1998, by and among TDS and The First National Bank of
Chicago, as Debt Trustees, is hereby incorporated by
reference to Exhibit 4.3 to TDS's Current Report on
Form 8-K filed on April 28, 1998, dated February 10, 1998.
4.8(d) Form of Third Supplemental Indenture to Subordinated
Indenture relating to assumption by TDS Delaware is hereby
incorporated by reference to Exhibit 4.9 of Post Effective
Amendment No. 1 to Form S-3 (Registration No. 333-38355).
4.9(a) The Preferred Securities Guarantee Agreement, dated as of
November 18, 1997, by and among TDS and The First National
Bank of Chicago, as Guarantee Trustee for the benefit of the
holders of Trust Preferred Securities of the Trust, is
hereby incorporated by reference to Exhibit 4.2 to TDS's
Current Report on Form 8-K filed on December 2, 1997, dated
November 18, 1997.
4.9(b) The Preferred Securities Guarantee Agreement, dated as of
February 10, 1998, by and among TDS and The First National
Bank of Chicago, as Guarantee Trustee for the benefit of the
holders of Trust Preferred Securities of the Trust, is
hereby incorporated by reference to Exhibit 4.2 to TDS's
Current Report on Form 8-K filed on April 28, 1998, dated
February 10, 1998.
4.9(c) Form of First Supplemental Indenture to Preferred Securities
Guarantee Agreement relating to assumption by TDS Delaware
is hereby incorporated by reference to Exhibit 4.8 of Post
Effective Amendment No. 1 to Form S-3 (Registration
No. 333-38355).
9.1(a) Voting Trust Agreement, dated as of June 30, 1989, is hereby
incorporated by reference to an exhibit to Post-Effective
Amendment No. 3 to TDS's Registration Statement on
Form S-1, No. 33-12943.
9.1(b) Amendment dated as of May 9, 1991 to the Voting Trust
Agreement dated as of June 30, 1989, is hereby incorporated
by reference to Exhibit 9.2 to TDS's Annual Report on
Form 10-K for the year ended December 31, 1991.
9.1(c) Amendment dated as of November 20, 1992, to the Voting Trust
Agreement dated as of June 30, 1989, as amended, is hereby
incorporated by reference to Exhibit 9.1(c) to TDS's Annual
Report on Form 10-K for the year ended December 31, 1992.
9.1(d) Amendment dated as of May 22, 1998, to the Voting Trust
Agreement dated as of June 30, 1989, as amended, is hereby
incorporated by reference to Exhibit 99.3 to TDS's Current
Report on Form 8-K filed on June 5, 1998.
10.1 Salary Continuation Agreement for LeRoy T. Carlson dated
May 20, 1977, as amended May 22, 1981 and May 25, 1984 is
hereby incorporated by reference to TDS's Registration
Statement on Form S-2, No. 2-92307.
10.2(a) Supplemental Benefit Agreement for LeRoy T. Carlson dated
March 21, 1980, as amended March 20, 1981, is hereby
incorporated by reference to an exhibit to TDS's
Registration Statement on Form S-7, No. 2-74615.
10.2(b) Memorandum of Amendment to Supplemental Benefit Agreement
dated as of May 28, 1991, is hereby incorporated by
reference to Exhibit 10.2(b) to TDS's Annual Report on
Form 10-K for the year ended December 31, 1991.
10.3 Description of Terms of Letter Agreement with Sandra L.
Helton dated August 7, 1998 is hereby incorporated by
reference to Exhibit 10.3 to TDS's Annual Report on
Form 10-K for the year ended December 31, 1998.
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
10.4(a) 1988 Stock Option and Stock Appreciation Rights Plan of TDS,
is hereby incorporated by reference to Exhibit A to TDS's
definitive Notice of Annual Meeting and Proxy Statement
dated March 31, 1988.
10.4(b) Amendment #1 to 1988 Stock Option and Stock Appreciation
Rights Plan of TDS, is hereby incorporated by reference to
Exhibit 10.7(b) to TDS's Annual Report on Form 10-K for the
year ended December 31, 1993.
10.4(c) Amendment #2 to 1988 Stock Option and Stock Appreciation
Rights Plan of TDS, is hereby incorporated by reference to
Exhibit 10.7(c) to TDS's Annual Report on Form 10-K for the
year ended December 31, 1993.
10.5 Telephone and Data Systems, Inc. 1994 Long-Term Incentive
Plan is hereby incorporated by reference to Exhibit 99.1 to
TDS's Registration Statement on Form S-8 (Registration
No. 33-57257).
10.6(a) Telephone and Data Systems, Inc. 1998 Long-Term Incentive
Plan is hereby incorporated by reference to Exhibit D to
TDS's Proxy Statement/Prospectus dated March 24, 1998 which
was part of TDS's Registration Statement on Form S-4
(Registration No. 333-42535).
10.6(b) Amendment No. 1 to Telephone and Data Systems, Inc. 1998
Long-term Incentive Plan, filed herewith.
10.7 Amended and Restated Supplemental Executive Retirement Plan
is hereby incorporated by reference to Exhibit 10.7 to TDS's
Annual Report on Form 10-K for the year ended December 31,
1998.
10.8 Securities Loan Agreement, dated June 13, 1995, between TDS
and Merrill Lynch & Co. is hereby incorporated by reference
to Exhibit 99.1 to the Form 8-K dated June 16, 1995 of
United States Cellular Corporation.
10.9 Registration Rights Agreement among TDS, Merrill Lynch & Co.
and United States Cellular Corporation is hereby
incorporated by reference to Exhibit 99.2 to the Form 8-K
dated June 16, 1995 of United States Cellular Corporation.
10.10 Common Share Delivery Arrangement Agreement among TDS,
Merrill Lynch & Co. and United States Cellular Corporation
is hereby incorporated by reference to Exhibit 99.3 to the
Form 8-K dated June 16, 1995 of United States Cellular
Corporation.
10.11 Supplemental Benefit Agreement between United States
Cellular Corporation and H. Donald Nelson is hereby
incorporated by reference to an exhibit to United States
Cellular Corporation's Registration Statement on Form S-1
(Registration No. 33-16975).
10.12 Deferred Compensation Agreement for H. Donald Nelson dated
July 15, 1996, is hereby incorporated by reference to
Exhibit 10.1 to TDS's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
10.13 Stock Option and Stock Appreciation Rights Plan, is hereby
incorporated by reference to Exhibit B to United States
Cellular Corporation's definitive Notice of Annual Meeting
and Proxy Statement dated April 15, 1991, as filed with the
Commission on April 16, 1991.
10.14 Summary of 1999 Bonus Program for the Senior Corporate Staff
on United States Cellular Corporation is hereby incorporated
by reference to Exhibit 10.11 to United States Cellular
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1999.
10.15 United States Cellular Corporation 1994 Long-Term Incentive
Plan is hereby incorporated by reference to Exhibit 99.1 to
United States Cellular Corporation's Registration Statement
on Form S-8 (Registration No. 33-57255).
</TABLE>
E-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
10.16 United States Cellular Corporation 1996 Senior Executive
Stock Bonus and Restricted Stock Award Plan is hereby
incorporated by reference to Exhibit 99.1 to United States
Cellular Corporation's Registration Statement on Form S-8
(Registration No. 333-19405).
10.17 United States Cellular Corporation Special Retention
Restricted Stock Award Plan is hereby incorporated by
reference to Exhibit 99.1 to United States Cellular
Corporation's Registration Statement on Form S-8
(Registration No. 333-23861).
10.18 United States Cellular Corporation 1998 Long-Term Incentive
Plan is hereby incorporated by reference to Exhibit 99.4 to
United States Cellular Corporation's Registration Statement
on Form S-8 (Registration No. 333-57063).
10.19 Form of 1997 Special Retention Restricted Stock Awards is
hereby incorporated by reference to Exhibit 99.2 to United
States Cellular Corporation's Registration Statement on
Form S-8 (Registration No. 333-57063).
10.20 TDS Compensation Plan for Non-Employee Directors is hereby
incorporated by reference to Exhibit 99.1 of TDS's
Registration Statement on Form S-8 (Registration
No. 333-23947).
10.21 Executive Deferred Compensation Agreement for James
Barr III dated January 1, 1998 is hereby incorporated by
reference to Exhibit 10.15 to TDS's Annual Report on
Form 10-K for the year ended December 31, 1997.
10.22 Form of TDS Telecommunications Corporation Phantom Stock
Option Incentive Agreement between TDS Telecommunications
Corporation and James Barr III is hereby incorporated by
reference to Exhibit 10.16 to TDS's Annual Report on
Form 10-K for the year ended December 31, 1997.
10.23 Credit Agreement dated June 30, 1998, by and between Nokia
Telecommunications Inc. and Aerial Communications, Inc., is
hereby incorporated by reference to Exhibit 99.1 of Aerial
Communications, Inc.'s Form 8-K dated June 30, 1998 and
filed on November 9, 1998.
10.24 Investment Agreement by and between Aerial Communications,
Inc., TDS, Aerial Operating Company, Inc. and Sonera Ltd. is
hereby incorporated by reference to Exhibit 99.2 of the
Aerial Form 8-K dated September 8, 1998 and filed on
September 17, 1998.
10.25 Registration Rights Agreement by and between Aerial
Communications, Inc. and Sonera Ltd. is hereby incorporated
by reference to Exhibit 99.3 of the Aerial Form 8-K dated
September 8, 1998 and filed on September 17, 1998.
10.26 Joint Venture Agreement by and between Aerial
Communications, Inc., Aerial Operating Company, Inc. and
Sonera Corporation U.S., is hereby incorporated by reference
to Exhibit 99.4 of the Aerial Form 8-K dated September 8,
1998 and filed on September 17, 1998.
10.27 Supplemental Agreement by and between Aerial Communications,
Inc., Aerial Operating Company, Inc. and Sonera Ltd., is
hereby incorporated by reference to Exhibit 99.5 of the
Aerial Form 8-K dated September 8, 1998 and filed on
September 17, 1998.
10.28 Agreement and Plan of Reorganization dated September 17,
1999 among VoiceStream Wireless Corporation, VoiceStream
Wireless Holding Corporation, VoiceStream Subsidiary III
Corporation, Aerial Communications, Inc., and TDS is hereby
incorporated by reference to Exhibit 99.2 of TDS's Form 8-K
dated September 17, 1999 and filed on September 28,1999.
10.29 Stockholder Agreement dated September 17, 1999 by and
between Telephone and Data Systems, Inc. and stockholder of
Aerial Communications, Inc., and VoiceStream Wireless
Corporation, and VoiceStream Wireless Holding Corporation is
hereby incorporated by reference to Exhibit 99.3 of TDS's
Form 8-K dated September 17, 1999 and filed on
September 28,1999.
</TABLE>
E-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
10.30 Indemnity Agreement dated September 17, 1999 among
VoiceStream Wireless Corporation, VoiceStream Wireless
Holding Corporation, Aerial Communications, Inc., Aerial
Operating Company, Inc., and TDS is hereby incorporated by
reference to Exhibit 99.4 of TDS's Form 8-K dated
September 17, 1999 and filed on September 28,1999.
10.31 Debt/Equity Replacement Agreement dated as of September 17,
1999 made by and among TDS, Aerial Communications, Inc.,
Aerial Operating Company, Inc., VoiceStream Wireless
Corporation and VoiceStream Wireless Holding Corporation is
hereby incorporated by reference to Exhibit 99.5 of TDS's
Form 8-K dated September 17, 1999 and filed on
September 28,1999.
10.32 Parent Stockholder Agreement dated as of September 17, 1999
by and among Aerial Communications, Inc., TDS, VoiceStream
Wireless Corporation, VoiceStream Wireless Holding
Corporation and certain individuals and entities set forth
therein, is hereby incorporated by reference to
Exhibit 99.6 of TDS's Form 8-K dated September 17, 1999 and
filed on September 28,1999.
10.33 Settlement Agreement and Release dated as of September 17,
1999 by and among Sonera Ltd., Sonera Corporation U.S., TDS,
Aerial Communications, Inc., and Aerial Operating Company,
Inc. is hereby incorporated by reference to Exhibit 99.7 of
TDS's Form 8-K dated September 17, 1999 and filed on
September 28,1999.
11 Statement regarding computation of per share earnings
(included in Footnote 4 to financial statements in
Exhibit 13).
12 Statements regarding computation of ratios.
13 Incorporated portions of 1999 Annual Report to Security
Holders.
21 List of Subsidiaries of TDS.
23 Consent of independent public accountants.
27.1 Financial Data Schedule for the year ended December 31, 1999
27.2 Financial Data Schedule for the three months ended
March 31, 1999 and the six months ended June 30, 1999, as
restated.
27.3 Financial Data Schedule for the three months ended
March 31, 1998, the six months ended June 30, 1998, the nine
months ended September 30, 1998 and the year ended
December 31, 1998, as restated.
27.4 Financial Data Schedule for the year ended December 31,
1997, as restated.
</TABLE>
E-5
<PAGE>
[LOGO]
TELEPHONE AND DATA SYSTEMS, INC.
30 North LaSalle Street
Chicago, Illinois 60602
312/630-1900
<PAGE>
EXHIBIT 3.2
BYLAWS*
OF
TELEPHONE AND DATA SYSTEMS, INC.
(a Delaware corporation)
ARTICLE I
STOCKHOLDERS
SECTION 1.1. ANNUAL MEETING. The annual meeting of stockholders
for the election of directors and the transaction of such other business as may
properly come before such meeting shall be held on the first Wednesday of May of
each year, or on such other date, and at such time and place, within or without
the State of Delaware, as shall be determined by resolution of the Board of
Directors. If the day fixed for the annual meeting is a legal holiday, such
meeting shall be held on the next succeeding business day. If the election of
directors shall not be held on the day designated herein for the annual meeting
of stockholders, or at any adjournment thereof, the Board of Directors shall
cause such election to be held at a meeting of stockholders to be called as soon
thereafter as is convenient.
SECTION 1.2. SPECIAL MEETINGS. Special meetings of stockholders
may be called by the Board of Directors, by the Chairman or President and shall
be called by the President or the Secretary at the request in writing, stating
the purpose or purposes thereof, of holders of at least fifty percent of the
voting power of the capital stock of the Corporation issued and outstanding and
entitled to vote thereat. Special meetings of stockholders may be held at such
time and place, within or without the State of Delaware, as shall be determined
by resolution of the Board of Directors or as may be specified in the call of
any such special meeting. If not otherwise designated, the place of any special
meeting shall be the principal office of the Corporation in the State of
Illinois.
SECTION 1.3. NOTICE OF MEETINGS AND ADJOURNED MEETINGS. Written
notice of every meeting of stockholders, stating the place, date, time and
purposes thereof, shall, except when otherwise required by the Restated
Certificate of Incorporation of the Corporation, as it may be amended from time
to time (the "Restated Certificate of Incorporation"), or the laws of the State
of Delaware, be given at least 10 but not more than 60 days prior to such
meeting to each stockholder of record entitled to vote thereat, in the manner
set forth in Section 9.1 of these Bylaws, by
- --------
*As amended November 3, 1999
<PAGE>
or at the direction of the President or the Secretary or the persons calling
such meeting. Any meeting at which a quorum of stockholders is present, in
person or by proxy, may be adjourned from time to time without notice, other
than by announcement at such meeting, until its business shall be completed.
At such adjourned meeting, any business may be transacted which might have
been transacted at the original meeting. If the adjournment is for more than
30 days, or if after the adjournment a new record date is fixed for the
adjourned meeting, written notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote thereat as above provided.
SECTION 1.4. QUORUM. Except as otherwise provided by the laws of
the State of Delaware or the Restated Certificate of Incorporation, a majority
of the voting power of shares of capital stock of the Corporation entitled to
vote, represented in person or by proxy, shall constitute a quorum at any
meeting of stockholders, notwithstanding the subsequent withdrawal of enough
stockholders to leave less than a quorum. If at any meeting a quorum shall not
be present, the chairman of such meeting shall, if approved by the affirmative
vote of a majority of the voting power of shares of capital stock of the
Corporation so represented, adjourn such meeting to another time and/or place
without notice other than announcement at such meeting. If the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, written notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote thereat as above provided.
At such adjourned meeting, if a quorum shall be present or represented, any
business may be transacted which might have been transacted at the original
meeting, notwithstanding the subsequent withdrawal of enough stockholders to
leave less than a quorum.
SECTION 1.5. VOTING.
(a) Unless otherwise provided by law, the stockholders entitled
to vote at any meeting of stockholders and the number of votes to which such
stockholders are entitled shall be determined as provided in the Restated
Certificate of Incorporation. Unless otherwise provided by law or in the
Restated Certificate of Incorporation, directors shall be elected by a plurality
of the votes cast in the election of directors. Each other question shall,
unless otherwise provided by law, the Restated Certificate of Incorporation or
these By-laws, be decided by the vote of the holders of stock having a majority
of the votes which could be cast by the holders of all stock entitled to vote on
such question which are present in person or by proxy at the meeting.
(b) Where a separate vote by a class or group is required by the
laws of the State of Delaware, the Restated Certificate of Incorporation or by
these Bylaws, a majority of the voting power of the outstanding shares of each
such class or group present in person or represented by proxy, shall constitute
a
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quorum entitled to take action with respect to the vote on that matter and the
affirmative vote of a majority of the voting power of the outstanding shares of
each class or group present in person or represented by proxy at the meeting
shall be the act of each such class or group.
SECTION 1.6. PROXIES.
(a) At every meeting of stockholders, each stockholder having the
right to vote thereat shall be entitled to vote in person or by proxy. Such
proxy shall be filed with the Secretary before or at the time of the meeting. No
proxy shall be valid after eleven months from its date, unless such proxy
provides for a longer period.
(b) A stockholder may authorize another person or persons to act
for such stockholder as proxy (i) by executing a writing authorizing such person
or persons to act as such, which execution may be accomplished by such
stockholder or such stockholder's authorized officer, director, employee or
agent signing such writing or causing his or her signature to be affixed to such
writing by any reasonable means, including, but not limited to, facsimile
signature, or (ii) by transmitting or authorizing the transmission of a
telegram, cablegram or other means of electronic transmission (a "Transmission")
to the person who will be the holder of the proxy or to a proxy solicitation
firm, proxy support service organization or like agent duly authorized by the
person who will be the holder of the proxy to receive such Transmission;
PROVIDED, HOWEVER, that any such Transmission must either set forth or be
submitted with information from which it can be determined that such
Transmission was authorized by such stockholder. The inspector or inspectors
appointed pursuant to Section 1.10 of these Bylaws shall examine Transmissions
to determine if they are valid. If it is determined that a Transmission is
valid, the person or persons making that determination shall specify the
information upon which such person or persons relied. Any copy, facsimile
telecommunication or other reliable reproduction of such a writing or such a
Transmission may be substituted or used in lieu of the original writing or
Transmission for any and all purposes for which the original writing or
Transmission could be used; PROVIDED, HOWEVER, that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or Transmission.
SECTION 1.7. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF
RECORD.
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing such record
date shall be adopted by the Board of Directors, and which record date shall not
be more
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than 60 nor less than 10 days before the date of such meeting. If no such record
date shall have been fixed by the Board of Directors, such record date shall be
at the close of business on the day next preceding the day on which such notice
is given or, if such notice is waived, at the close of business on the day next
preceding the day on which such meeting shall be held. A determination of
stockholders of record entitled to notice of or to vote at any meeting of
stockholders shall apply to any adjournment of such meeting; PROVIDED, HOWEVER,
that the Board of Directors may fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing such record date shall be adopted by the Board
of Directors, and which record date shall not be more than 10 days after the
date upon which such resolution shall be adopted. If no such record date shall
have been fixed by the Board of Directors, such record date shall be, if no
prior action by the Board of Directors shall be required by the laws of the
State of Delaware, the first date on which a signed written consent setting
forth the action taken or proposed to be taken shall be delivered to the
Corporation at its registered office in the State of Delaware, at its principal
place of business or to the Secretary. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested. If no such record date shall have been fixed by the Board of
Directors and prior action by the Board of Directors shall be required by the
laws of the State of Delaware, such record date shall be at the close of
business on the day on which the Board of Directors shall adopt the resolution
taking such prior action.
(c) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or any
allotment of any rights or the stockholders entitled to exercise any rights in
respect of any change, conversion or exchange of any capital stock, or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing such record date shall be adopted by the Board of Directors, and which
record date shall not be more than 60 days prior to such payment, allotment or
other action. If no such record date shall have been fixed, such record date
shall be at the close of business on the day on which the Board of Directors
shall adopt the resolution relating to such payment, allotment or other action.
SECTION 1.8. STOCKHOLDER LIST. The Secretary or any other officer
who has charge of the stock ledger of the Corporation shall prepare, at least 10
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at such meeting, arranged in alphabetical order, and showing
the
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address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to such meeting, during ordinary business hours, for a
period of at least 10 days prior to such meeting, either at a place within the
city where such meeting is to be held, which place shall be specified in the
notice of such meeting, or, if not so specified, at the place where such meeting
is to be held. The list shall also be produced and kept at the time and place of
such meeting during the whole time thereof, and may be inspected by any
stockholder who is present. Such stock ledger shall be the only evidence as to
who are the stockholders entitled to examine such stock ledger, such list or the
books of the Corporation or to vote in person or by proxy at any meeting of
stockholders.
SECTION 1.9. VOTING OF SHARES BY CERTAIN HOLDERS. Shares of
capital stock of the Corporation standing in the name of another corporation,
domestic or foreign, and entitled to vote may be voted by such officer, agent or
proxy as the bylaws of such other corporation may prescribe or, in the absence
of such provision, as the Board of Directors of such other corporation may
determine.
Shares of capital stock of the Corporation standing in the name
of a deceased person, a minor, an incompetent or a corporation declared bankrupt
and entitled to vote may be voted by an administrator, executor, guardian,
conservator or trustee, as the case may be, either in person or by proxy,
without transfer of such shares into the name of the official so voting.
A stockholder whose shares of capital stock of the Corporation
are pledged shall be entitled to vote such shares unless on the transfer books
of the Corporation the pledgor has expressly empowered the pledgee to vote such
shares, in which case only the pledgee, or such pledgee's proxy, may represent
such shares and vote thereon.
Shares of capital stock of the Corporation belonging to the
Corporation, or to another corporation if a majority of the shares entitled to
vote in the election of directors of such other corporation shall be held by the
Corporation, shall not be voted at any meeting of stockholders and shall not be
counted in determining the total number of outstanding shares for the purpose of
determining whether a quorum is present. Nothing in this Section 1.9 shall be
construed to limit the right of the Corporation to vote shares of capital stock
of the Corporation held by it in a fiduciary capacity.
SECTION 1.10. VOTING PROCEDURES AND INSPECTORS OF ELECTIONS.
(a) The Board of Directors shall, in advance of any meeting of
stockholders, appoint one or more inspectors
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(individually an "Inspector," and collectively the "Inspectors") to act at such
meeting and make a written report thereof. The Board of Directors may designate
one or more persons as alternate Inspectors to replace any Inspector who shall
fail to act. If no Inspector or alternate shall be able to act at such meeting,
the person presiding at such meeting shall appoint one or more other persons to
act as Inspectors thereat. Each Inspector, before entering upon the discharge of
his or her duties, shall take and sign an oath faithfully to execute the duties
of Inspector with strict impartiality and according to the best of his or her
ability.
(b) The Inspectors shall (i) ascertain the number of shares of
capital stock of the Corporation outstanding and the voting power of each, (ii)
determine the shares of capital stock of the Corporation represented at such
meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the Inspectors and
(v) certify their determination of the number of such shares represented at such
meeting and their count of all votes and ballots. The Inspectors may appoint or
retain other persons or entities to assist them in the performance of their
duties.
(c) The date and time of the opening and the closing of the polls
for each matter upon which the stockholders will vote at such meeting shall be
announced at such meeting. No ballots, proxies or votes, nor any revocations
thereof or changes thereto, shall be accepted by the Inspectors after the
closing of the polls unless the Court of Chancery of the State of Delaware upon
application by any stockholder shall determine otherwise.
(d) In determining the validity and counting of proxies and
ballots, the Inspectors shall be limited to an examination of the proxies, any
envelopes submitted with such proxies, any information provided in accordance
with the second paragraph of Section 1.6 of these Bylaws, ballots and the
regular books and records of the Corporation, except that the Inspectors may
consider other reliable information for the limited purpose of reconciling
proxies and ballots submitted by or on behalf of banks, brokers, their nominees
or similar persons which represent more votes than the holder of a proxy is
authorized by a stockholder of record to cast or more votes than such
stockholder holds of record. If the Inspectors consider other reliable
information for the limited purpose permitted herein, the Inspectors, at the
time they make their certification pursuant to paragraph (b) of this Section
1.10, shall specify the precise information considered by them, including the
person or persons from whom they obtained such information, when the information
was obtained, the means by which such information was obtained and the basis for
the Inspectors' belief that such information is accurate and reliable.
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SECTION 1.11. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Any
action required to be taken or which may be taken at any annual or special
meeting of stockholders may be taken without a meeting, without prior notice and
without a vote if a consent or consents in writing, setting forth the action so
taken, shall be signed by persons entitled to vote capital stock of the
Corporation representing not less than 90% of the voting power of the shares
that would be necessary to authorize or take such action at a meeting at which
all shares of capital stock of the Corporation entitled to vote thereon were
present and voted. Every written consent shall bear the date of signature of
each stockholder (or his, her or its proxy) who shall sign such consent. Prompt
notice of the taking of corporate action without a meeting of stockholders by
less than unanimous written consent shall be given to those stockholders who
shall not have consented in writing. All such written consents shall be
delivered to the Corporation at its registered office in the State of Delaware,
at its principal place of business or to the Secretary. Delivery made to the
Corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. No written consent shall be effective to
authorize or take the corporate action referred to therein unless, within 60
days of the earliest dated written consent delivered in the manner required by
this Section 1.11 to the Corporation, written consents signed by a sufficient
number of persons to authorize or take such action shall be delivered to the
Corporation at its registered office in the State of Delaware, at its principal
place of business or to the Secretary as aforesaid. All such written consents
shall be filed with the minutes of proceedings of the stockholders and actions
authorized or taken under such written consents shall have the same force and
effect as those adopted by vote of the stockholders at any annual or special
meeting thereof.
SECTION 1.12. INTRODUCTION OF BUSINESS AT A MEETING OF
STOCKHOLDERS. At an annual or special meeting of stockholders, only such
business shall be conducted, and only such proposals shall be acted upon, as
shall have been properly brought before an annual or special meeting of
stockholders. To be properly brought before an annual or special meeting of
stockholders, business must be (a) in the case of a special meeting, specified
in the notice of the special meeting (or any supplement thereto) given by the
Corporation, or (b) in the case of an annual meeting, properly brought before
the meeting by or at the direction of the Board of Directors, or otherwise
properly brought before the annual meeting by a stockholder. For business to be
properly brought before an annual meeting of stockholders by a stockholder, the
stockholder must have given timely notice thereof in writing to the President or
Secretary of the Corporation. To be timely, a stockholder's notice must be
received at the principal executive offices of the Corporation not earlier than
120 calendar days nor later than 90 calendar days in advance of the anniversary
date of the date of the Corporation's proxy statement to stockholders in
connection with the most recent preceding annual meeting of stockholders, except
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that if the date of the current year's annual meeting has been changed by more
than 30 calendar days from the anniversary date of the most recent preceding
annual meeting, a stockholder proposal shall be received by the Corporation not
later than the close of business on the tenth day following the date of public
notice of the date of the current year's annual meeting; PROVIDED, HOWEVER,
that, notwithstanding the foregoing, for purposes of the annual meeting of
stockholders to be held in 1998, a stockholder's notice shall be timely if
received by the Corporation not later than the close of business on the tenth
day following the effective date of these Restated Bylaws.
A stockholder's notice shall set forth as to each matter the
stockholder proposes to bring before an annual meeting of stockholders (a) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business and any other stockholders known by such
stockholder to be supporting such proposal, (c) the class and number of shares
of the Corporation which are beneficially owned by such stockholder on the date
of such stockholder's notice and by any other stockholders known by such
stockholder to be supporting such proposal on the date of such stockholder's
notice and (d) any material interest of the stockholder in such proposal.
Notwithstanding anything in the Bylaws to the contrary, no
business shall be conducted at a meeting of stockholders except in accordance
with the procedures set forth in this Section 1.12. The chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that the
business was not properly brought before the meeting in accordance with the
procedures prescribed by the Bylaws, and if he should so determine, he shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be considered.
SECTION 1.13. NOMINATION OF DIRECTORS. Only persons nominated in
accordance with the procedures set forth in this section shall be eligible for
election as directors. Nominations of persons for election to the Board may be
made at a meeting of stockholders (a) by or at the direction of the Board of
Directors, or (b) by any stockholder of the Corporation entitled to vote for the
election of directors at such meeting who complies with the notice procedures
set forth in this Section 1.13. Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the President or Secretary of the Corporation. To be timely, a
stockholder's notice must be received at the principal executive offices of the
Corporation not earlier than 120 calendar days nor later than 90 calendar days
in advance of the anniversary date of the date of the Corporation's proxy
statement to stockholders in connection with the preceding year's annual meeting
of stockholders, except that if the date of the current year's
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annual meeting has been changed by more than 30 calendar days from the
anniversary date of the most recent preceding annual meeting, a nomination shall
be received by the Corporation not later than the close of business on the tenth
day following the date of public notice of the date of the current year's annual
meeting.
A stockholder's notice shall set forth (a) as to each person whom
the stockholder proposes to nominate for election or reelection as a director
(i) the name, age, business address and residence address of such person, (ii)
the principal occupation or employment of such person, (iii) the class and
number of shares of the Corporation which are beneficially owned by such person
on the date of such stockholder's notice and (iv) any other information relating
to such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including,
without limitation, such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); and (b) as to
the stockholder giving the notice (i) the name and address, as they appear on
the Corporation's books, of such stockholder and any other stockholders known by
such stockholder to be supporting such nominee and (ii) the class and number of
shares of the Corporation which are beneficially owned by such stockholder on
the date of such stockholder's notice and by any other stockholders known by
such stockholder to be supporting such nominee on the date of such stockholder's
notice.
No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
section. The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by the Bylaws, and if he should so determine, he shall so
declare to the meeting and the defective nomination shall be disregarded.
This Section 1.13 shall not apply to the election of a director
to a directorship which may be filled by the Board of Directors under the
Delaware General Corporation Law.
ARTICLE II
DIRECTORS
SECTION 2.1. GENERAL POWERS. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors.
SECTION 2.2. STAGGERED BOARD. The Board of Directors shall
consist of twelve members, to be divided into three classes
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and the number of directors of each class shall be as equal as possible. The
term of office of the second class shall expire at the annual meeting of the
stockholders in 1998; the third class shall expire at the annual meeting of the
stockholders in 1999 and the first class shall expire at the annual meeting of
the stockholders in 2000. At each annual election, commencing at the next annual
meeting of stockholders, the successors to the class of directors whose term
expires in that year shall be elected to hold office for the term of three years
to succeed those whose term expires so that the term of office of one class of
directors shall expire in each year. Each director elected or appointed shall
serve until his successor shall be elected and qualify, or until his earlier
death, resignation, removal or disqualification.
SECTION 2.3. RESIGNATION OR REMOVAL. Any director may resign by
giving written notice to the Board of Directors or the President. Any such
resignation shall take effect at the time of receipt of such notice or at any
later time specified therein; and, unless otherwise specified therein,
acceptance of such resignation shall not be necessary to make it effective.
Directors may be removed from office, either with or without cause, only as
provided in the Restated Certificate of Incorporation or the laws of the State
of Delaware.
SECTION 2.4. VACANCIES.
(a) Except as otherwise required by the Restated Certificate of
Incorporation or the laws of the State of Delaware or these Bylaws, any vacancy
occurring in the Board of Directors, including a vacancy created by an increase
in the number of directors provided in Section 2.2 of these Bylaws, may be
filled for the remainder of the unexpired term by the affirmative vote of a
majority of the directors then in office, although less than a quorum, by a sole
remaining director or by the stockholders.
(b) Except as otherwise required by the Restated Certificate of
Incorporation, when one or more directors shall resign from the Board of
Directors, effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have the power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office for the remainder of the unexpired term of such office.
SECTION 2.5. PLACE OF MEETINGS. Meetings of the Board of
Directors may be held at such places, within or without the State of Delaware,
as the Board of Directors may from time to time determine or as may be specified
in the call of any such meeting.
SECTION 2.6. REGULAR MEETINGS. A regular annual meeting of the
Board of Directors shall be held, without call or notice, immediately after and
at the same place as the annual
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meeting of stockholders, or at such other time and place as may be fixed by
resolution of the Board of Directors or specified by the Secretary at the
direction of the Chairman, for the purpose of organizing the Board of Directors,
electing officers and transacting any other business that may properly come
before such meeting. If the stockholders shall elect the directors by written
consent of stockholders as permitted by Section 1.11 of these Bylaws, a special
meeting of the Board of Directors shall be called as soon as practicable after
such election for the purposes described in the preceding sentence. Additional
regular meetings of the Board of Directors may be held without call or notice at
such times as shall be fixed by resolution of the Board of Directors or
specified by the Secretary at the direction of the Chairman.
SECTION 2.7. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman, the President or by a majority of the
directors then in office. Notice of each special meeting shall be mailed by the
Secretary to each director at least three days before such meeting, or be given
by the Secretary personally or by telegraph or telecopy or by electronic mail at
least four hours before such meeting, in the manner set forth in Section 9.1 of
these Bylaws. Such notice shall set forth the date, time and place of such
meeting but need not, unless otherwise required by the laws of the State of
Delaware, state the purpose of such meeting.
SECTION 2.8. QUORUM AND VOTING. A majority of the entire Board
of Directors shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors. The act of the majority of the directors
present at any meeting at which a quorum is present shall be the act of the
Board of Directors, unless otherwise provided by the laws of the State of
Delaware, the Restated Certificate of Incorporation or these Bylaws. A majority
of the directors present at any meeting at which a quorum shall be present may
adjourn such meeting to any other date, time or place without further notice
other than announcement at such meeting. If at any meeting a quorum shall not be
present, a majority of the directors present may adjourn such meeting to any
other date, time or place upon notice to all directors pursuant to Section 2.7.
SECTION 2.9. TELEPHONIC MEETINGS. Members of the Board of
Directors or of any committee designated by the Board of Directors may
participate in a meeting of the Board of Directors or such committee through
conference telephone or similar communications equipment by means of which all
persons participating in such meeting can hear each other, and participation in
any meeting conducted pursuant to this Section 2.9 shall constitute presence in
person at such meeting.
SECTION 2.10. COMPENSATION. Unless otherwise restricted by the
laws of the State of Delaware or the Restated Certificate of
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Incorporation, the Board of Directors shall have the authority to fix the
compensation of directors. The directors shall be paid their reasonable
expenses, if any, of attendance at each meeting of the Board of Directors or a
committee thereof and may be paid a fixed sum for attendance at each such
meeting and an annual retainer or salary for services as a director or committee
member. No such payment shall preclude any director from serving the Corporation
in any other capacity and receiving compensation therefor.
SECTION 2.11. PRESUMPTION OF ASSENT. Unless otherwise provided
by the laws of the State of Delaware, a director who is present at a meeting of
the Board of Directors or a committee thereof at which action is taken on any
corporate matter shall be presumed to have assented to the action taken unless
his or her dissent shall be entered in the minutes of such meeting or unless he
or she shall file his or her written dissent to such action with the person
acting as secretary of such meeting before the adjournment thereof or shall
forward such dissent by registered mail to the Secretary immediately after the
adjournment of such meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
SECTION 2.12. ACTION WITHOUT MEETING. Unless otherwise
restricted by the laws of the State of Delaware, the Restated Certificate of
Incorporation or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors, or any committee thereof, may be taken
without a meeting if a written consent thereto is signed by all members of the
Board of Directors or of such committee, as the case may be, and such written
consent is filed with the minutes of proceedings of the Board of Directors or
such committee.
SECTION 2.13. PRESIDING OFFICER. The presiding officer at any
meeting of the Board of Directors shall be the Chairman or, in his or her
absence, the President, or in his or her absence, any other director elected
chairman by vote of a majority of the directors present at such meeting.
SECTION 2.14. EXECUTIVE COMMITTEE. The Board of Directors may,
in its discretion, by resolution passed by a majority of the entire Board of
Directors, designate an Executive Committee consisting of such number of
directors as the Board of Directors shall determine. The Executive Committee
shall have and may exercise all of the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation with
respect to any matter which may require action prior to, or which in the opinion
of the Executive Committee may be inconvenient, inappropriate or undesirable to
be postponed until, the next meeting of the Board of Directors; PROVIDED,
HOWEVER, that the Executive Committee shall not have the power or authority of
the Board of Directors in reference to (a) approving or adopting, or
recommending to the stockholders any action or matter expressly
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required by Delaware law to be submitted to the stockholders for approval or (b)
adopting, amending or repealing these Bylaws.
SECTION 2.15. OTHER COMMITTEES. The Board of Directors may from
time to time, in its discretion, by resolution passed by a majority of the
entire Board of Directors, designate other committees of the Board of Directors
consisting of such number of directors as the Board of Directors shall
determine, which shall have and may exercise such lawfully delegable powers and
duties of the Board of Directors as shall be conferred or authorized by such
resolution. The Board of Directors shall have the power to change at any time
the members of any such committee, to fill vacancies and to dissolve any such
committee.
SECTION 2.16. ALTERNATES. The Board of Directors may from time
to time designate from among the directors alternates to serve on any committee
of the Board of Directors to replace any absent or disqualified member at any
meeting of such committee. Whenever a quorum cannot be secured for any meeting
of any committee from among the regular members thereof and designated
alternates, the member or members, including alternates, of such committee
present at such meeting and not disqualified from voting, whether or not
constituting a quorum, may unanimously appoint another director to act at such
meeting in place of any absent or disqualified member.
SECTION 2.17. QUORUM AND MANNER OF ACTING OF COMMITTEES. A
majority of the members of any committee of the Board of Directors shall
constitute a quorum for the transaction of business at any meeting of such
committee, and the act of a majority of the members present at any meeting at
which a quorum is present shall be the act of such committee.
SECTION 2.18. COMMITTEE CHAIRMAN, BOOKS AND RECORDS, ETC. The
chairman of each committee of the Board of Directors shall be selected from
among the members of such committee by the Board of Directors.
Each committee shall keep a record of its acts and proceedings,
and all actions of each committee shall be reported to the Board of Directors at
its next meeting.
Each committee shall fix its own rules of procedure not
inconsistent with these Bylaws or the resolution of the Board of Directors
designating such committee and shall meet at such times and places and upon such
call or notice as shall be provided by such rules.
SECTION 2.19. RELIANCE UPON RECORDS. Every director, and every
member of any committee of the Board of Directors, shall, in the performance of
his or her duties, be fully protected in relying in good faith upon the records
of the Corporation and upon
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such information, opinions, reports or statements presented to the Corporation
by any of the Corporation's officers or employees, or committees of the Board of
Directors, or by any other person as to matters the director or member
reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Corporation, including, but not limited to, such records, information, opinions,
reports or statements as to the value and amount of the assets, liabilities
and/or net profits of the Corporation, or any other facts pertinent to the
existence and amount of surplus or other funds from which dividends might
properly be declared and paid, or with which the Corporation's capital stock
might properly be purchased or redeemed.
SECTION 2.20. INTERESTED DIRECTORS. The presence of a director,
who is directly or indirectly a party in a contract or transaction with the
Corporation, or between the Corporation and any other corporation, partnership,
association or other organization in which such director is a director or
officer or has a financial interest, may be counted in determining whether a
quorum is present at any meeting of the Board of Directors or a committee
thereof at which such contract or transaction is discussed or authorized, and
such director may participate in such meeting to the extent permitted by
applicable law, including Section 144 of the General Corporation Law of the
State of Delaware.
ARTICLE III
OFFICERS
SECTION 3.1. NUMBER AND DESIGNATION. The officers of the
Corporation shall be a Chairman, a President, one or more Vice Presidents, a
General Counsel, a Secretary, a Treasurer and a Controller, and such Assistant
Secretaries, Assistant Treasurers or other officers or agents as may be elected
or appointed by the Board of Directors. Any two or more offices may be held by
the same person unless the Restated Certificate of Incorporation or these Bylaws
provide otherwise.
SECTION 3.2. ELECTION AND TERM OF OFFICE. The officers of the
Corporation shall be elected by the Board of Directors at the first meeting of
the Board of Directors held after the election of directors. If the election of
officers shall not be held at such meeting, such election shall be held as soon
thereafter as may be convenient. Vacancies may be filled or new offices created
and filled at any meeting of the Board of Directors. Each officer shall hold
office until his or her successor shall have been duly elected and shall have
qualified or until his or her earlier death, resignation, removal or
disqualification.
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SECTION 3.3. REMOVAL AND RESIGNATION. Any officer or agent
elected or appointed by the Board of Directors may be removed by the Board of
Directors whenever in its judgment the best interests of the Corporation would
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Any officer or agent may resign at any
time by giving written notice to the Board of Directors, to the Chairman or to
the Secretary. Any such resignation shall take effect at the time of receipt of
such notice or at any later time specified therein; and, unless otherwise
specified therein, acceptance of such resignation shall not be necessary to make
it effective.
SECTION 3.4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise may be filled by the Board
of Directors for the unexpired portion of the term.
SECTION 3.5. CHAIRMAN. The Chairman shall be the principal
officer of the Corporation. The Chairman may execute, alone or with the
Secretary or any other officer of the Corporation authorized by the Board of
Directors, any deeds, mortgages, bonds, contracts or other instruments which the
Board of Directors or a committee thereof has authorized to be executed, except
in cases where the execution thereof shall be expressly delegated by the Board
of Directors or a committee thereof or by these Bylaws to some other officer or
agent of the Corporation, or shall be required by law to be otherwise executed,
and in general he or she shall perform all duties incident to the office of
Chairman and such other duties as from time to time may be prescribed by the
Board of Directors or a committee thereof. When present, he or she shall preside
at all meetings of the stockholders and of the Board of Directors.
SECTION 3.6. PRESIDENT. The President shall be the chief
executive officer of the Corporation and shall in general supervise and control
all of the business and affairs of the Corporation. In the absence of the
Chairman or in the event of his or her inability or refusal to act as Chairman,
the President shall perform the duties of the Chairman and, when so acting,
shall have all the powers of, and be subject to all the restrictions placed upon
the Chairman. He or she may execute, alone or with the Secretary or any other
officer of the Corporation authorized by the Board of Directors, any deeds,
mortgages, bonds, contracts or other instruments which the Board of Directors or
a committee thereof has authorized to be executed, except in cases where the
execution thereof shall be expressly delegated by the Board of Directors or a
committee thereof or by these Bylaws to some other officer or agent of the
Corporation, or shall be required by law to be otherwise executed, and in
general he or she shall perform all duties incident to the office of President
and such other duties as from time to time may be prescribed by the Chairman,
the Board of Directors or a committee thereof.
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SECTION 3.7. THE VICE PRESIDENTS. In the absence of the President
or in the event of his or her inability or refusal to act, the Chairman, or in
the event of his or her inability or refusal to act, the Vice President (or in
the event there shall be more than one Vice President, the Vice President
determined or elected by the Board of Directors at the time) shall perform the
duties of the President and, when so acting, shall have all the powers of and be
subject to all the restrictions upon the President. The Board of Directors may
also designate certain Vice Presidents as being in charge of designated
divisions, plants or functions of the Corporation's business and add appropriate
descriptions to their titles. In addition, any Vice President shall perform such
duties as from time to time may be assigned to him or her by the Chairman, the
President or the Board of Directors.
SECTION 3.8. GENERAL COUNSEL. The General Counsel shall be the
principal legal officer of the Corporation and shall be responsible for and have
charge of all legal matters affecting the Corporation, its subsidiaries, and
those affiliated entities which it controls. The General Counsel shall perform
or supervise the performance of all duties incident to such legal matters,
together with such other duties as from time to time may be assigned to him by
the Chairman, the President or the Board of Directors. The duties and powers of
the General Counsel shall extend to all subsidiaries of the Corporation and,
insofar as the Chairman or President may deem appropriate and practicable, to
all affiliated entities.
SECTION 3.9. THE SECRETARY. The Secretary shall (a) keep the
minutes of proceedings of the stockholders, the Board of Directors and any
committee of the Board of Directors in one or more books provided for that
purpose; (b) see that all notices are duly given in accordance with the
provisions of these Bylaws or as required by law; (c) be custodian of the
corporate records and of the seal of the Corporation; (d) affix the seal of the
Corporation or a facsimile thereof, or cause it to be affixed, and, when so
affixed, attest the seal by his or her signature, to all Certificates for shares
of capital stock of the Corporation prior to the issue thereof and to all other
documents the execution of which on behalf of the Corporation under its seal is
duly authorized by the Board of Directors or otherwise in accordance with the
provisions of these Bylaws; (e) keep a register of the post office address of
each stockholder, director or committee member, which shall be furnished to the
Secretary by such stockholder, director or member; (f) have general charge of
the stock transfer books of the Corporation; and (g) in general perform all
duties incident to the office of Secretary and such other duties as from time to
time may be assigned to him or her by the Chairman, the President or the Board
of Directors.
SECTION 3.10. THE TREASURER. The Treasurer shall have charge and
custody of and be responsible for all funds and
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securities of the Corporation, receive and give receipts for moneys due and
payable to the Corporation from any source whatsoever, deposit all such moneys
in the name of the Corporation in such banks, trust companies or other
depositories as shall be selected in accordance with the provisions of Article
IV of these Bylaws, disburse the funds of the Corporation as ordered by the
Board of Directors, the Chairman or the President or as otherwise required in
the conduct of the business of the Corporation and render to the Chairman,
President or the Board of Directors, upon request, an accounting of all his or
her transactions as Treasurer and a report on the financial condition of the
Corporation. The Treasurer shall in general perform all the duties incident to
the office of Treasurer and such other duties as from time to time may be
assigned to him or her by the Chairman, President or the Board of Directors. If
required by the Board of Directors, the Treasurer shall give a bond (which shall
be renewed regularly), in such sum and with such surety or sureties as the Board
of Directors shall determine, for the faithful discharge of his or her duties
and for the restoration to the Corporation, in case of his or her death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his or her possession or under his
or her control belonging to the Corporation.
SECTION 3.11. CONTROLLER. The Controller shall be the chief
accounting officer of the Corporation. The duties of the Controller shall be to
maintain adequate records of all assets, liabilities and transactions of the
Corporation; to see that adequate audits are currently and regularly performed;
and, in conjunction with other officers and department heads, to initiate and
enforce measures and procedures whereby the business of the Corporation shall be
conducted with the maximum safety, efficiency and economy. The Controller shall
establish and administer an adequate plan for the control of operations,
including systems and procedures required to properly maintain internal controls
on all financial transactions of the Corporation. The Controller shall perform
all duties as from time to time may be assigned to him or her by the chief
financial officer or the Board of Directors. The duties and powers of the
Controller shall extend to all subsidiaries of the Corporation and, insofar as
the chief financial officer may deem appropriate and practicable, to all
affiliated entities.
SECTION 3.12. ASSISTANT TREASURERS AND SECRETARIES. In the
absence of the Secretary or the Treasurer, as the case may be, or in the event
of his or her inability or refusal to act, the Assistant Secretaries and the
Assistant Treasurers, respectively, in the order determined by the Board of
Directors (or if there shall have been no such determination, then in the order
of their election), shall perform the duties and exercise the powers of the
Secretary or the Treasurer, as the case may be. In addition, the Assistant
Secretaries and the Assistant Treasurers shall, in general, perform such duties
as may be assigned to them by the
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Chairman, the President, the Secretary, the Treasurer or the Board of Directors.
Each Assistant Treasurer shall, if required by the Board of Directors, give a
bond (which shall be renewed regularly), in such sum and with such surety or
sureties as the Board of Directors shall determine, for the faithful discharge
of his or her duties.
SECTION 3.13. SALARIES. The salaries of the officers and agents
of the Corporation shall be fixed from time to time by the Board of Directors or
by such committee or officer as it shall designate for such purpose. No officer
shall be prevented from receiving such salary by reason of the fact that he or
she is also a director of the Corporation.
ARTICLE IV
CONTRACTS, LOANS, CHECKS, AND DEPOSITS
SECTION 4.1. CONTRACTS. The Board of Directors may authorize any
officer or officers, or agent or agents, to enter into any contract or execute
and deliver any instrument in the name of and on behalf of the Corporation, and
such authority may be general or confined to specific instances.
SECTION 4.2. LOANS. No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in the name of the
Corporation unless authorized by or pursuant to a resolution adopted by the
Board of Directors. Such authority may be general or confined to specific
instances.
SECTION 4.3. CHECKS, DRAFTS, ETC. All checks, drafts or other
orders for payment of money issued in the name of the Corporation shall be
signed by such officers, employees or agents of the Corporation as shall from
time to time be designated by the Board of Directors, the Chairman, the
President or the Treasurer.
SECTION 4.4. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as shall be designated from
time to time by the Board of Directors, the Chairman, the President or the
Treasurer; and such officers may designate any type of depository arrangement
(including, but not limited to, depository arrangements resulting in net debits
against the Corporation) as may from time to time be offered or made available.
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ARTICLE V
CERTIFICATES OF STOCK AND THEIR TRANSFER
SECTION 5.1. CERTIFICATES OF STOCK. Shares of capital stock of
the Corporation shall be represented by Certificates which shall be in such form
as may be determined by the Board of Directors, shall be numbered and shall be
entered on the books of the Corporation as they are issued. Such Certificates
shall indicate the holder's name and the number of shares evidenced thereby and
shall be signed by the Chairman, the President or a Vice President and by the
Secretary or an Assistant Secretary. If any stock Certificate shall be manually
signed (a) by a transfer agent or an assistant transfer agent or (b) by a
transfer clerk acting on behalf of the Corporation and a registrar, the
signature of any officer of the Corporation may be facsimile. In case any such
officer whose facsimile signature has been used on any such stock Certificate
shall cease to be such officer, whether because of death, resignation, removal
or otherwise, before such stock Certificate shall have been delivered by the
Corporation, such stock Certificate may nevertheless be delivered by the
Corporation as though the person whose facsimile signature has been used thereon
had not ceased to be such officer.
SECTION 5.2. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of
Directors in individual cases, or by general resolution or by delegation to the
transfer agent for the Corporation, may direct that a new stock Certificate or
Certificates for shares of capital stock of the Corporation be issued in place
of any stock Certificate or Certificates theretofore issued by the Corporation
claimed to have been lost, stolen or destroyed, upon the filing of an affidavit
to that effect by the person claiming such loss, theft or destruction. When
authorizing such an issuance of a new stock Certificate or Certificates, the
Board of Directors may, in its discretion and as a condition precedent to such
issuance, require the owner of such lost, stolen or destroyed stock Certificate
or Certificates to advertise the same in such manner as the Corporation shall
require and/or to give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the stock Certificate or Certificates claimed to have been lost,
stolen or destroyed.
SECTION 5.3. TRANSFERS OF STOCK. Upon surrender to the
Corporation or the transfer agent of the Corporation of a stock Certificate for
shares of capital stock of the Corporation duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer or, if the
relevant stock Certificate for shares of capital stock of the Corporation is
claimed to have been lost, stolen or destroyed, upon compliance with the
provisions of Section 5.2 of these Bylaws, and upon payment of applicable taxes
with respect to such transfer, and in compliance with any restrictions on
transfer applicable to such stock Certificate or the shares represented thereby
of which the Corporation shall have notice and subject to such rules and
regulations as the Board of Directors may from time to time deem advisable
concerning the transfer and registration of stock
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Certificates for shares of capital stock of the Corporation, the Corporation
shall issue a new stock Certificate or Certificates for such shares to the
person entitled thereto, cancel the old stock Certificate and record the
transaction upon its books. Transfers of shares shall be made only on the books
of the Corporation by the registered holder thereof or by such holder's attorney
or successor duly authorized as evidenced by documents filed with the Secretary
or transfer agent of the Corporation. Whenever any transfer of shares of capital
stock of the Corporation shall be made for collateral security, and not
absolutely, it shall be so expressed in the entry of transfer if, when the stock
Certificate or Certificates representing such shares are presented to the
Corporation for transfer, both the transferor and transferee request the
Corporation to do so.
SECTION 5.4. STOCKHOLDERS OF RECORD. The Corporation shall be
entitled to treat the holder of record of any share of capital stock of the
Corporation as the holder thereof and shall not be bound to recognize any
equitable or other claim to or interest in such share on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of the State of Delaware.
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.1. FISCAL YEAR. The fiscal year of the Corporation
shall be the same as the calendar year.
SECTION 6.2. SEAL. The corporate seal of the Corporation shall
have inscribed thereon the name of the Corporation and the words "CORPORATE
SEAL" and "DELAWARE"; and it shall otherwise be in the form approved by the
Board of Directors. Such seal may be used by causing it, or a facsimile thereof,
to be impressed or affixed or otherwise reproduced.
ARTICLE VII
OFFICES
SECTION 7.1. REGISTERED OFFICE. The registered office of the
Corporation in the State of Delaware shall be located at 1209 Orange Street in
the City of Wilmington, County of New Castle, and the name of its registered
agent is Corporation Trust Company.
SECTION 7.2. OTHER OFFICES. The Corporation may have offices at
such other places, both within or without the State of
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Delaware, as shall be determined from time to time by the Board of Directors or
as the business of the Corporation may require.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1. GENERAL.
(a) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he or she is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such action, suit or proceeding if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement or conviction, or upon a plea of NOLO CONTENDERE or
its equivalent, shall not, of itself, create a presumption that such person did
not act in good faith and in a manner which he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
(b) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he or she is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) actually and reasonably incurred by him or
her in connection with the defense or settlement of such action or suit if he or
she acted in good faith and in a manner he or she reasonably believed to be in
or not opposed to the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application
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that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which such Court of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of
the Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in paragraphs (a) and (b) of this Section
8.1, or in defense of any claim, issue or matter therein, he or she shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection therewith.
(d) Any indemnification under paragraphs (a) and (b) of this
Section 8.1 (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
or she has met the applicable standard of conduct set forth in paragraphs (a)
and (b) of this Section 8.1. Such determination shall be made (i) by the Board
of Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, (ii) if such a quorum is not
obtainable or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion or (iii) by the
stockholders.
(e) Subject to compliance with the other terms and conditions of
this Section 8.1, expenses (including attorneys' fees) incurred by a director or
officer in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation pursuant to this Section 8.1. Such expenses
(including attorneys' fees) incurred by other employees and agents may be so
paid upon compliance with the terms and conditions set forth in this Section 8.1
or such other terms and conditions as the Board of Directors deems appropriate.
(f) The indemnification and advancement of expenses provided by,
or granted pursuant to, this Article VIII shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in an official capacity
and as to action in another capacity while holding such office.
(g) For purposes of this Article VIII, any reference to the
"Corporation" shall include, in addition to the resulting or surviving
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger
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which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or agents, so that any
person who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Article VIII with respect to the resulting or surviving
corporation as he or she would have with respect to such constituent corporation
if its separate existence had continued.
(h) For purposes of this Article VIII, any reference to "other
enterprise" shall include employee benefit plans; any reference to "fines" shall
include any excise taxes assessed on a person with respect to any employee
benefit plan; and any reference to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he or she reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article VIII.
(i) The indemnification and advancement of expenses provided by,
or granted pursuant to, this Article VIII shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such person.
(j) Notwithstanding any other provisions of this Section 8.1, the
Corporation shall not make any payments pursuant to this Section 8.1 unless the
Corporation shall have first received adequate documentation demonstrating that
such amounts for which payment is requested were actually and reasonably
incurred for the purposes permitted to be reimbursed pursuant to this Section
8.1. Such documentation may include time records, fee and disbursement records
(including hourly rates), description of the work performed, periodic litigation
status reports, the legal basis for the indemnification claim, and other
information reasonably requested by the Corporation. If a written claim has been
made for payment or reimbursement of expenses, the Corporation may require
periodic status reports from the claimant or the counsel handling the defense of
such proceeding as to the status of such proceeding, the matters presented in
the proceeding for which indemnification is sought, the names of any expert
witnesses to be retained, the projected costs for such proceeding and any other
information which is customary to obtain in order to determine whether such
expenses were actually and reasonably incurred for the purposes permitted to be
reimbursed pursuant to this Section 8.1. In the event that the
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party requesting indemnification or advancement of expenses has incurred costs
in multiple proceedings, or shared legal counsel with other claimants, or
circumstances exist where some costs are permitted or required to be reimbursed
and some are not, the party submitting the request for payment shall allocate
such costs and explain in sufficient detail a reasonable basis for the
allocation of costs. If the party requesting payment fails to make an allocation
when necessary, or to provide an adequate explanation for any such allocation,
the Corporation shall determine a reasonable basis for allocation based on the
written information furnished to it. If any information relating to the
allocation of expenses or any other matter is not properly supplied, the
Corporation shall not be required to make payment until such information is
fully supplied. If a claim under this Section 8.1 is not paid in full by the
Corporation within ninety days after a written claim meeting the requirements of
this Section 8.1 has been received by the Corporation, the claimant may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim, plus any interest required by law to be paid. Such suit may only
be filed in the Circuit Court of Cook County, Illinois, the federal district
court for the Northern District of Illinois, the Superior Court of Delaware, New
Castle County, or the federal district court for Delaware. It shall be a defense
to any such action that the claimant has not met the requirements of this
Section 8.1, including the provisions of this paragraph (j), or the standards of
conduct which make it permissible under the Delaware General Corporation Law for
the Corporation to pay the claimant for the amount claimed.
(k) Notwithstanding any other provisions of this Section 8.1,
nothing herein shall require the Corporation to make an advance of expenses at
any time. In the event that any written claim for advancement of expenses is
submitted to the Corporation, this Section 8.1 shall apply to such written claim
for advancement of expenses except to the extent expressly required by the
General Corporation Law of the State of Delaware or applicable law. Any
undertaking shall comply with the requirements of paragraph (l) of this Section
8.1.
(l) If any undertaking is permitted to be delivered by a person
pursuant to this Section 8.1 or the General Corporation Law of the State of
Delaware, the Corporation shall prescribe the form of undertaking. The
Corporation shall be a party to the instrument evidencing the undertaking. In
the event that there is doubt as to the collectibility of any amounts to be
advanced to a claimant which may be required to be repaid, or for other good and
sufficient reason, the Corporation may require adequate security for the
undertaking.
(m) Except to the extent expressly required by the General
Corporation law of the State of Delaware or applicable law or except as
otherwise approved by the Board of Directors, the Corporation does not intend to
provide indemnification or
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advancement of expenses to any person who (i) has not acted in good faith or has
acted in a manner opposed to the best interests of the Corporation; (ii) has
initiated any action, suit or proceeding against the Corporation which was not
authorized by the Board of Directors of the Corporation; (iii) has breached any
agreement with the Corporation in any material respect; (iv) has tortiously
induced any director, officer, employee, agent, customer or supplier of the
Corporation or other person or entity to breach his, her or its contractual
obligations to the Corporation; (v) has tortiously interfered with the
Corporation's customers or business relationships; (vi) has committed,
threatened or conspired to commit any acts of dishonesty, embezzlement,
misappropriation of funds, theft of trade secrets, fraud, breach of fiduciary
duty or other crime or tort against the Corporation; or (vii) has engaged in any
other unlawful or tortious conduct against the Corporation or its interests. To
the extent permitted by the General Corporation Law of the State of Delaware and
applicable law, these rules of interpretation shall be applied in construing all
provisions of this Section 8.1.
(n) Notwithstanding anything to the contrary in this Section 8.1,
the Corporation may provide indemnification to a person consistent with the
requirements of Section 145(a) and Section 145(b) of the General Corporation Law
of the State of Delaware and this Section 8.1, and the Corporation shall provide
indemnification to the extent required by Section 145(c) of the General
Corporation Law of the State of Delaware. The provisions of this Section 8.1 are
severable, and if any one or more provisions may be determined to be illegal or
otherwise unenforceable, in whole or in part, the remaining provisions and any
partially enforceable provisions, to the extent so enforceable, shall
nevertheless be binding and enforceable.
SECTION 8.2. INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted against
him or her and incurred by him or her in any such capacity, or arising out of
his or her status as such, whether or not the Corporation would have the power
to indemnify him or her against such liability under the provisions of Section
145 of the General Corporation Law of the State of Delaware.
ARTICLE IX
NOTICES
SECTION 9.1. MANNER OF NOTICE. Except as otherwise provided by
law, whenever under the provisions of the laws of the
-25-
<PAGE>
State of Delaware, the Restated Certificate of Incorporation or these Bylaws
notice is required to be given to any stockholder, director or member of any
committee of the Board of Directors, such notice may be given by personal
delivery or by depositing it, in a sealed envelope, in the United States mails,
air mail or first class, postage prepaid, addressed, or by delivering it to a
telegraph company, charges prepaid, for transmission, or by transmitting it via
telecopier or by electronic mail via the Internet or similar system, to such
stockholder, director or member either at the address of such stockholder,
director or member as it appears on the books of the Corporation or, in the case
of such a director or member, at his or her business address; and such notice
shall be deemed to be given at the time when it is thus personally delivered,
deposited, delivered or transmitted, as the case may be. Such requirement for
notice shall also be deemed satisfied, except in the case of stockholder
meetings with respect to which written notice is required by law, if actual
notice is received orally or by other writing by the person entitled thereto as
far in advance of the event with respect to which notice is being given as the
minimum notice period required by the laws of the State of Delaware or these
Bylaws.
Whenever notice is required to be given under any provision of
the laws of the State of Delaware, the Restated Certificate of Incorporation or
these Bylaws to any stockholder to whom (a) notice of two consecutive annual
meetings of stockholders, and all notices of meetings of stockholders or of the
taking of action by stockholders by written consent without a meeting to such
stockholder during the period between such two consecutive annual meetings, or
(b) all, and at least two, payments (if sent by first class mail) of dividends
or interest on securities of the Corporation during a 12-month period, have been
mailed addressed to such stockholder at the address of such stockholder as shown
on the records of the Corporation and have been returned undeliverable, the
giving of such notice to such stockholder shall not be required. Any action or
meeting which shall be taken or held without notice to such stockholder shall
have the same force and effect as if such notice had been duly given. If any
such stockholder shall deliver to the Corporation a written notice setting forth
the then current address of such stockholder, the requirement that notice be
given to such stockholder shall be reinstated.
SECTION 9.2. WAIVER OF NOTICE. Whenever any notice is required to
be given under any provision of the laws of the State of Delaware, the Restated
Certificate of Incorporation or these Bylaws, a written waiver thereof, signed
by the person or persons entitled to such notice, whether before or after the
time stated therein, shall be deemed equivalent to such notice. Attendance by a
person at a meeting shall constitute a waiver of notice of such meeting, except
when such person attends such meeting for the express purpose of objecting, at
the beginning of such meeting, to the transaction of any business because such
meeting has not been
-26-
<PAGE>
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of stockholders, the Board of
Directors or a committee of the Board of Directors need be specified in any
written waiver of notice unless so required by the laws of the State of
Delaware, the Restated Certificate of Incorporation or these Bylaws.
ARTICLE X
DIVIDENDS
The Board of Directors may from time to time declare, and the
Corporation may pay, dividends, in cash, in property or in shares of capital
stock of the Corporation, on its outstanding shares of capital stock in the
manner and upon the terms and conditions provided by law and by the Restated
Certificate of Incorporation.
ARTICLE XI
AMENDMENTS
Except to the extent otherwise provided in the Restated
Certificate of Incorporation or these Bylaws, these Bylaws shall be subject to
alteration, amendment or repeal, and new Bylaws may be adopted (a) by the
affirmative vote of the holders of not less than a majority of the voting power
of all outstanding shares of capital stock of the Corporation entitled to vote
for matters other than the election of directors or (b) by the affirmative vote
of not less than a majority of the entire Board of Directors at any meeting of
the Board of Directors at which there is a quorum present and voting; PROVIDED,
HOWEVER, that the right to call a special meeting by holders of at least fifty
percent of the voting power of the capital stock of the Corporation issued and
outstanding and entitled to vote at a special meeting, as provided in Section
1.2 of these Bylaws, shall not be altered, amended or repealed with respect to
any group of shareholders entitled to call a special meeting, without the
approval by the affirmative vote of the holders of not less than a majority of
the voting power of the shares of capital stock which are held by such
shareholders and which are entitled to vote in such group at such special
meeting.
-27-
<PAGE>
Exhibit 4.4(b)
AMENDMENT NO. 1
Dated as of June 2, 1997
to that certain
REVOLVING CREDIT AGREEMENT
This AMENDMENT NO. 1 (the "AMENDMENT"), is made as of June 2, 1997, by and
among TELEPHONE AND DATA SYSTEMS, INC. (THE "BORROWER"), an Iowa corporation
having its principal place of business at 30 N. LaSalle Street, Chicago,
Illinois 60602, the financial institutions listed on SCHEDULE 1.1(a) to the
Credit Agreement (as defined below) (the "BANKS"), BANKBOSTON, N.A., f/k/a THE
FIRST NATIONAL BANK OF BOSTON, as agent for the Banks (the "AGENT") and as
Arranger and LASALLE NATIONAL BANK and TORONTO DOMINION (TEXAS), INC., as
Co-Agents.
WHEREAS, the Borrower, the Banks, the Agent and the Co-Agents are parties
to that certain Revolving Credit Agreement dated as of June 7, 1996 (the "CREDIT
AGREEMENT"), pursuant to which the Banks, upon certain terms and conditions,
have made and agree to make loans to the Borrower; and
WHEREAS, the Borrower has requested and the Banks have agreed, on the terms
and subject to the conditions set forth herein, to amend the Credit Agreement to
(a) modify the Maturity Date and the provisions regarding the extension of the
Maturity Date therein, and (b) modify SCHEDULE 1.2 thereof;
NOW, THEREFORE, the parties hereto hereby agree as follows:
Section 1. DEFINED TERMS. Capitalized terms which are used herein without
definition and which are defined in the Credit Agreement shall have the same
meanings herein as in the Credit Agreement.
Section 2. AMENDMENT OF CREDIT AGREEMENT.
(a) SCHEDULE 1.1(a) to the Credit Agreement is hereby amended by
substituting therefor the SCHEDULE 1.1(a) annexed hereto.
(b) SCHEDULE 1.2 to the Credit Agreement is hereby amended by
substituting therefor the SCHEDULE 1.2 annexed hereto.
<PAGE>
(c) The definition of Maturity Date is hereby amended by deleting the
date "June 7, 2001" therein and substituting therefor the date "June 7,
2002".
(d) Section 2.9 is hereby amended by (a) deleting the phrase "the
first anniversary of the Closing Date" in the first sentence thereof and
substituting therefor the date "June 7, 1998" and (b) deleting the date
"June 7, 2002" in the first sentence thereof and substituting therefor the
date "June 7, 2003".
Section 3. EFFECTIVENESS. The effectiveness of this Amendment shall be
subject to the satisfaction of the following conditions.
(a) DELIVERY. The Borrower and each of the Banks shall have executed
and delivered to the Agent this Amendment.
(b) PROCEEDINGS AND DOCUMENTS. All proceedings in connection with the
transactions contemplated by this Amendment and all documents incident
thereto shall be reasonably satisfactory in substance and form to the Banks
and the Agent, and the Agent shall have received all information and such
counterpart originals or certified or other copies of such documents as the
Agent may reasonably request.
(c) NO DEFAULT OR EVENT OF DEFAULT. No Default or Event of Default
shall exist under the Credit Agreement.
Section 4. REPRESENTATIONS AND WARRANTIES. The Borrower represents and
warrants to the Banks and the Agent as follows:
(a) REPRESENTATIONS AND WARRANTIES IN CREDIT AGREEMENT. The
representations and warranties of the Borrower contained in the Credit
Agreement, (i) were true and correct in all material respects when made,
and (ii) except to the extent such representations and warranties by their
terms are made solely as of a prior date, continue to be true and correct
in all material respects on the date hereof.
(b) AUTHORITY, ETC. The execution and delivery by the Borrower of this
Amendment and the performance by the Borrower of all of its agreements and
obligations under the Credit Agreement as amended by this Amendment (i) are
within the corporate proceedings by the Borrower, (ii) have
2
<PAGE>
been duly authorized by all necessary corporate proceedings by the
Borrower, (iii) do not conflict with or result in any breach or
contravention of any provision of law, statute, rule or regulation to which
the Borrower is subject or any judgment, order, writ, injunction, license
or permit applicable to the Borrower, and (iv) do not conflict with any
provision of the corporate charter or by-laws of, or any agreement or other
instrument binding upon, the Borrower.
(c) ENFORCEABILITY OF OBLIGATIONS. This Amendment, and the Credit
Agreement as amended hereby, constitute the legal, valid and binding
obligations of the Borrower enforceable against the Borrower in accordance
with their respective terms.
(d) ABSENCE OF DEFAULTS. Immediately prior to and after giving effect
to this Amendment, no Default or Event of Default exists under the Credit
Agreement.
Section 5. NO WAIVER. Except as otherwise expressly provided for in this
Amendment, nothing in this Amendment shall extend to or affect in any way any of
the Borrower's obligations or any of the rights and remedies of the Banks or the
Agent in respect of the Credit Agreement arising on account of the occurrence of
any Event of Default, all of which are expressly preserved.
Section 6. MISCELLANEOUS PROVISIONS.
(a) Except at otherwise expressly provided by this Amendment, all of
the terms, conditions and provisions of the Credit Agreement shall remain
the same. It is declared and agreed by each of the parties hereto that the
Credit Agreement, as amended hereby, shall continue in full force and
effect, and that this Amendment and the Credit Agreement shall be read and
construed as one instrument.
(b) THIS AMENDMENT IS INTENDED TO TAKE EFFECT AS AN AGREEMENT UNDER
SEAL AND SHALL BE CONSTRUED ACCORDING TO AND GOVERNED BY THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS.
(c) This Amendment may be executed in any number of counterparts, but
all such counterparts shall together constitute but one instrument. In
making proof of this Amendment it shall not be necessary to produce or
account
3
<PAGE>
for more than one counterpart signed by each party hereto by and against
which enforcement hereof is sought.
(d) The Borrower hereby agrees to pay to the Agent, on demand by the
Agent, all reasonable out-of-pocket costs and expenses incurred or
sustained in connection with the preparation of this amendment (including
reasonable legal fees).
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as an
agreement under seal of the date first written above.
TELEPHONE AND DATA SYSTEMS, INC.
By: /s/ RONALD D. WEBSTER
----------------------------------
Name: Ronald D. Webster
Title: Vice President and
Treasurer
BANKBOSTON, N.A.,
f/k/a THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By: /s/ JULIE V. JALELIAN
----------------------------------
Name: Julie V. Jalelian
Title: Vice President and
Treasurer
LASALLE NATIONAL BANK,
individually and as Co-Agent
By: /s/ ANN H. ELLINGSEN
----------------------------------
Title: Vice President
TORONTO DOMINION (TEXAS), INC.,
individually and as Co-Agent
By: /s/ NEVA NESBITT
----------------------------------
Title: Vice President
The signatures of the Banks are omitted.
Schedule 1.1(a) and 1.2 are not filed herewith. The registrant agrees to
file a copy of Schedule 1.1(a) and 1.2 upon request of the Commission.
4
<PAGE>
Exhibit 4.4(c)
ASSIGNMENT AND ASSUMPTION AGREEMENT
This ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of May 11, 1998
(the "Agreement"), is entered into between Telephone and Data Systems, Inc., an
Iowa corporation ("TDS Iowa") and Telephone and Data Systems, Inc., a Delaware
corporation ("TDS Delaware").
W I T N E S S E T H:
WHEREAS, TDS Iowa, BankBoston N.A. (formerly known as The First
National Bank of Boston), as Agent and Arranger, LaSalle National Bank and
Toronto Dominion (Texas), Inc., as Co-Agents, and the financial institutions
named therein (individually, a "Bank" and collectively, the "Banks") are parties
to a Revolving Credit Agreement, dated as of June 7, 1996, as amended on June 2,
1997 (the "Credit Agreement"), relating to the borrowing, repaying and
reborrowing from time to time by TDS Iowa of loans up to a maximum aggregate
principal amount outstanding at any one time equal to the aggregate amount of
the Banks' commitments (the "Loans"); and
WHEREAS, capitalized terms herein, not otherwise defined, shall have
the same meanings given them in the Credit Agreement; and
WHEREAS, Section 6.3(b) of the Credit Agreement provides that an
agreement may be entered into by TDS Iowa, to evidence the succession of another
corporation to the capacity of Borrower under the Credit Agreement and the
assumption by such successor corporation of the covenants, conditions and
obligations of TDS Iowa; and
WHEREAS, TDS Iowa and TDS Delaware are entering into this Agreement to
recognize the merger (the "Merger") of TDS Iowa with and into TDS Delaware, with
TDS Delaware as the surviving corporation; and
WHEREAS, the Merger will be consummated for the sole purpose of
reincorporating TDS Iowa from Iowa to Delaware, and will not result in any
change in its name, business, management, assets or liabilities; and
WHEREAS, all things necessary to make this Agreement a valid agreement
of TDS Iowa and TDS Delaware have been done.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants of the parties hereto, the parties hereto agree as follows:
<PAGE>
Section 1. SUCCESSION OF TDS IOWA BY TDS DELAWARE
Subject to the effectiveness of the Merger:
(a) TDS Delaware, as successor to TDS Iowa, hereby expressly assumes
the due and punctual payment of the principal of and interest on all of the
Loans and the due and punctual performance and observance of all of the
covenants, conditions and other obligations of the Credit Agreement and the
Notes to be performed or observed by TDS Iowa as Borrower; and
(b) TDS Delaware shall succeed to, and be substituted for, and may
exercise every right and power of, TDS Iowa under the Credit Agreement with the
same effect as if TDS Delaware had been originally named as the Borrower
therein.
Section 2. REPRESENTATIONS AND WARRANTIES.
TDS Iowa and TDS Delaware hereby jointly and severally represent and
warrant to the Banks and the Agent that, as of the date hereof and immediately
prior to and after giving effect to the Merger:
(a) Representations and Warranties in Credit Agreement. The
representations and warranties of the Borrower contained in the Credit
Agreement, (i) were true and correct in all material respects when made, and
(ii) except to the extent such representations and warranties by their terms are
made solely as of a prior date or by their terms relate specifically to the
Borrower's status as an Iowa corporation, continue to be true and correct in all
material respects.
(b) Authority, Etc. The execution and delivery by each of TDS Iowa and
TDS Delaware of this Assignment and Assumption Agreement, and the performance by
TDS Delaware, as the Borrower under the Credit Agreement after giving effect to
the Merger, of all of its agreements and obligations under the Credit Agreement
(i) are within the corporate authority of TDS Iowa and TDS Delaware,
respectively, (ii) have been duly authorized by all necessary corporate
proceedings by TDS Iowa and TDS Delaware, respectively, (iii) do not conflict
with or result in any breach or contravention of any provision of law, statute,
rule or regulation to which either TDS Iowa or TDS Delaware is subject, or any
judgment, order, writ, injunction, license or permit applicable to TDS Iowa or
TDS Delaware, and (iv) do not conflict with any provision of the corporate
charter or by-laws of, or any agreement or other instrument binding upon, TDS
Iowa or TDS Delaware.
(c) Enforceability of Obligations. The Credit
- 2 -
<PAGE>
Agreement constitutes the legal, valid and binding obligation of TDS Iowa as of
the date hereof and immediately prior to the Merger, and of TDS Delaware
immediately after giving effect to the Merger, in each case enforceable in
accordance with its terms against TDS Iowa or TDS Delaware, in their respective
capacities as the Borrower under the Credit Agreement, subject to the
qualifications as to enforceability set forth in Section 4.1(c) of the Credit
Agreement.
(d) Absence of Defaults. No Default or Event of Default exists under
the Credit Agreement.
Section 3. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT
(a) On and after the date of this Agreement, each reference in the
Credit Agreement to "hereunder," "hereof," or "herein" shall mean and be a
reference to the Credit Agreement as supplemented by this Agreement.
(b) The Credit Agreement shall remain in full force and effect and is
hereby ratified and confirmed.
(c) All capitalized terms used but not otherwise defined herein shall
have the respective meanings set forth in the Credit Agreement.
(d) This Agreement shall be effective at the time the Merger is
effective, subject to no Default or Event of Default existing under the Credit
Agreement at such time.
Section 4. GOVERNING LAW
This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the jurisdiction which govern the Credit Agreement
and its construction.
Section 5. COUNTERPARTS AND METHOD OF EXECUTION
This Agreement may be executed in several counterparts, all of which
together shall constitute one agreement binding on all parties hereto,
notwithstanding that all parties have not signed the same counterpart.
Section 6. SECTION TITLES
Section titles are for descriptive purposes only and shall not control
or alter the meaning of this Agreement as set forth in the text.
- 3 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and their respective seals to be affixed hereunto and duly
attested all as of the day and year first above written.
TELEPHONE AND DATA SYSTEMS, INC.,
an Iowa Corporation
[Corporate Seal]
By: /s/ LEROY T. CARLSON, JR.
----------------------------------
LeRoy T. Carlson, Jr.
President
Attest:
/s/ MICHAEL G. HRON
- -----------------------------
Michael G. Hron
Secretary
TELEPHONE AND DATA SYSTEMS, INC.,
a Delaware Corporation
[Corporate Seal]
By: /s/ LEROY T. CARLSON, JR.
----------------------------------
LeRoy T. Carlson, Jr.
President
Attest:
/s/ MICHAEL G. HRON
- -----------------------------
Michael G. Hron
Secretary
Accepted and Acknowledged:
BANKBOSTON, N.A., as Agent
for the Banks referred to herein
By: /s/ JULIE V. JALELIAN
------------------------
Name: Julie V. Jalelian
Title: Director
- 4 -
<PAGE>
EXHIBIT 10.6(b)
FIRST AMENDMENT
TO THE
TELEPHONE AND DATA SYSTEMS, INC.
1998 LONG-TERM INCENTIVE PLAN
WHEREAS, Telephone and Data Systems, Inc. (the "Corporation") has
adopted the Telephone and Data Systems, Inc. 1998 Long-Term Incentive Plan (the
"Plan") for the benefit of certain key executives and management personnel;
WHEREAS, pursuant to Section 8.2 of the Plan, the Board may amend the
Plan as it deems advisable;
WHEREAS, the Board desires to amend the Plan in certain respects.
NOW, THEREFORE, BE IT RESOLVED, pursuant to the power of amendment
contained in Section 8.2 of the Plan, the Plan is hereby amended in the
following respects, effective December 1, 1999:
1. Section 4.1(d) of the Plan is hereby amended to read as follows:
An option may be exercised (i) by giving written notice to the Vice
President-Human Resources of the Company specifying the number of whole
shares of Stock to be purchased and by accompanying such notice with
payment therefor (in full, unless another arrangement for such payment
which is satisfactory to the Company has been made) either (A) in cash, (B)
in Mature Shares having a Fair Market Value, determined as of the date of
exercise, equal to the aggregate purchase price payable by reason of such
exercise, (C) in cash by a broker-dealer acceptable to the Company to whom
the optionee has submitted an irrevocable notice of exercise or (D) a
combination of (A) and (B), in each case to the extent set forth in the
Agreement relating to the option, and (ii) by executing such documents and
taking any other actions as the Company may reasonably request. The
Committee shall have sole discretion to disapprove of an election pursuant
to any of clauses (B)-(D) of the preceding sentence. If the payment of the
purchase price is to be made pursuant to clause (B) of the first sentence
of this Section 4.1(d), then any fraction of a share of Stock which would
be required to pay such purchase price shall be disregarded and the
remaining amount due shall be paid in cash by the optionee. No share of
Stock shall be delivered until the full purchase price therefor has been
paid.
2. The first sentence of Section 7.2 of the Plan is hereby amended to
delete therefrom the phrase "to be made in accordance with the Agreement
evidencing such award".
3. Section 8.9(b)(3) is hereby amended to delete the phrase "approval by
the shareholders of the Company of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all the assets of the Company
(a "Corporate Transaction")" and
<PAGE>
to insert in its place the phrase "consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all the
assets of the Company (a "Corporate Transaction")".
IN WITNESS WHEREOF, the undersigned has executed this amendment as of
this 10th day of March, 2000.
TELEPHONE AND DATA SYSTEMS, INC.
BY: /s/ Leroy T. Carlson, Jr.
-------------------------
LEROY T. CARLSON, JR.
PRESIDENT
SIGNATURE PAGE TO FIRST AMENDMENT TO TELEPHONE AND DATA
SYSTEMS, INC. 1998 LONG-TERM INCENTIVE PLAN
* * * * *
2
<PAGE>
Exhibit 12
TELEPHONE AND DATA SYSTEMS, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
(Dollars In Thousands)
<TABLE>
<CAPTION>
12 Months Ended
12/30/99
-----------------
<S> <C>
EARNINGS:
Income from Continuing Operations before income taxes $542,327
Add (Deduct):
Minority Share of Losses (46)
Earnings on Equity Method (18,397)
Distributions from Minority Subsidiaries 26,061
Amortization of Non-Telephone Capitalized Interest 2
Minority interest in majority-owned subsidiaries that
have fixed charges 58,130
-----------------
608,077
Add fixed charges:
Consolidated interest expense 124,794
Interest Portion (1/3) of Consolidated Rent Expense 15,275
-----------------
$748,146
FIXED CHARGES:
Consolidated interest expense/TOPRS $124,794
Interest Portion (1/3) of Consolidated Rent Expense 15,275
-----------------
$140,069
RATIO OF EARNINGS TO FIXED CHARGES 5.34
=================
Tax-Effected Redeemable Preferred Dividends $ 114
Fixed Charges 140,069
-----------------
Fixed Charges and Redeemable Preferred Dividends $140,183
RATIO OF EARNINGS TO FIXED CHARGES
AND REDEEMABLE PREFERRED DIVIDENDS 5.34
=================
Tax-Effected Preferred Dividends $ 1,865
Fixed Charges 140,069
-----------------
Fixed Charges and Preferred Dividends $141,934
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED DIVIDENDS 5.27
=================
</TABLE>
<PAGE>
Exhibit 13
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 1,963,098 $ 1,650,571 $ 1,314,589 $ 1,075,127 $ 835,157
Operating Income from Ongoing Operations 370,393 270,487 229,686 190,015 140,995
Gain on Sale of Cellular and Other Investments 345,938 262,698 41,438 136,152 86,625
Net Income Available to Common from
Continuing Operations 313,004 199,748 97,853 136,647 95,974
From Operations 121,515 65,186 81,939 73,330 55,324
From Gains $ 191,489 $ 134,562 $ 15,914 $ 63,317 $ 40,650
Weighted Average Shares Outstanding 61,436 60,982 60,211 60,464 57,456
Basic Earnings per Share
from Continuing Operations $ 5.09 $ 3.28 $ 1.63 $ 2.26 $ 1.67
Diluted Earnings per Share
from Continuing Operations $ 5.02 $ 3.22 $ 1.59 $ 2.22 $ 1.63
Pretax Profit on Revenues 27.6% 21.0% 14.2% 24.4% 21.4%
Effective Income Tax Rate 42.1% 41.9% 46.7% 47.1% 44.9%
Dividends per Common and Series A
Common Share $ .46 $ .44 $ .42 $ .40 $ .38
Cash and Cash Equivalents
and Temporary Investments $ 115,993 $ 55,445 $ 70,357 $ 118,113 $ 80,586
Working Capital 138,336 (192,179) (448,958) (46,939) (159,594)
Property, Plant and Equipment, net 2,095,889 2,020,092 1,892,556 1,515,906 1,268,198
Total Assets 5,375,828 5,042,604 4,561,957 3,874,267 3,471,436
Notes Payable -- 170,889 527,587 160,537 184,320
Long-term Debt (including current portion) 1,294,844 1,291,032 1,082,594 915,108 894,584
Common Stockholders' Equity 2,483,101 2,237,908 1,968,119 2,032,941 1,684,365
Capital Expenditures $ 399,631 $ 463,543 $ 488,833 $ 425,081 $ 341,777
Current Ratio 1.4 .7 .4 .9 .6
Common Equity per Share $ 39.80 $ 36.12 $ 32.06 $ 33.23 $ 29.01
Return on Equity 13.3% 9.5% 4.9% 7.4% 6.1%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
Telephone and
Data Systems, Inc.
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 PROVIDED HIGH-QUALITY TELECOMMUNICATIONS
SERVICES TO APPROXIMATELY 3.2 MILLION CELLULAR TELEPHONE AND TELEPHONE CUSTOMERS
IN 35 STATES AT DECEMBER 31, 1999. THE COMPANY CONDUCTS SUBSTANTIALLY ALL OF ITS
CELLULAR TELEPHONE OPERATIONS THROUGH ITS 80.7%-OWNED SUBSIDIARY, UNITED STATES
CELLULAR CORPORATION ("U.S. CELLULAR") AND ITS TELEPHONE OPERATIONS THROUGH ITS
WHOLLY-OWNED SUBSIDIARY, TDS TELECOMMUNICATIONS CORPORATION ("TDS TELECOM").
Merger of Aerial Communications, Inc.
On September 17, 1999, the Board of Directors of TDS decided not to pursue a
spin-off of Aerial Communications, Inc. ("Aerial"), its 82.1%-owned personal
communications services company, and approved a plan of merger between Aerial
and VoiceStream Wireless Corporation ("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
OPERATING REVENUES increased 19% ($312.5 million) during 1999 and 26% ($336.0
million) during 1998 reflecting primarily the 17% and 24% growth in customer
units, respectively. U.S. Cellular revenues increased $254.7 million in 1999 and
$285.5 million in 1998 on 19% and 28% increases in customer units and 31% and
12% increases in inbound roaming revenues, respectively. The 1998 revenue
increase also reflects the effects of the October 1997 transaction where U.S.
Cellular added 195,000 customers as a result of exchanging certain markets with
another provider. TDS Telecom revenues increased $57.8 million in 1999 and $50.5
million in 1998 as a result of recovery of increased costs of providing
long-distance services, internal access line growth, increased network usage and
growth in the competitive local exchange operations.
OPERATING EXPENSES rose 15% ($212.6 million) in 1999 and 27% ($295.2 million)
in 1998. U.S. Cellular operating expenses increased $174.9 million during 1999
and $239.0 million during 1998 due to the expansion of the customer base as well
as the cost of providing service to the growing customer base. TDS Telecom
operating expenses increased $37.7 million during 1999 and $56.2 million during
1998 due to growth in telephone operations and the expansion into the
competitive local exchange business in 1998.
OPERATING INCOME increased 43% ($111.3 million) in 1999 and 33% ($64.7
million) in 1998, reflecting strong cellular telephone operations growth.
U.S. Cellular's operating income increased 45% ($79.8 million) in 1999 and
36% ($46.5 million) in 1998, reflecting the increase in customers and
revenues, as well as margin expansion. U.S. Cellular's operating margin, as a
percent of service revenues, improved to 18.7% in 1999 from 15.7% in 1998 and
15.2% in 1997. TDS Telecom's operating income increased 21% ($20.1 million)
in 1999 and decreased 6% ($5.7 million) in 1998. The increase in TDS
Telecom's 1999 operating income primarily reflects improved operations of the
local telephone business. The decrease in TDS Telecom's 1998 operating income
primarily reflects a $9.2 million operating loss resulting from the expansion
into the competitive local exchange business in the beginning of 1998. TDS
Telecom's operating margin was 21.0% in 1999 compared to 19.3% in 1998 and
22.9% in 1997.
2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Income
U.S. Cellular $255,842 $176,075 $ 129,543
TDS Telecom 114,551 94,412 100,143
---------------------------------------------------
Operating Income from
Ongoing Operations 370,393 270,487 229,686
American Paging
Operating (Loss) -- (11,406) (35,307)
---------------------------------------------------
$370,393 $259,081 $ 194,379
===================================================
</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 for the periods presented with the resulting operating loss reported as
American Paging Operating (Loss). American Paging's operating revenues totaled
$17.8 million and $94.4 million and operating expenses totaled $29.2 million and
$129.7 million for the three month period ended March 31, 1998 and the year
ended December 31, 1997, respectively. 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 $296.7 million in 1999, $219.3
million in 1998 and $86.3 million in 1997. Investment and other income (expense)
includes interest and dividend income, gain on sale of cellular and other
investments, investment income, other income and (expense), and minority share
of income.
GAIN ON SALE OF CELLULAR AND OTHER INVESTMENTS totaled $345.9 million in
1999, $262.7 million in 1998 and $41.4 million in 1997. The Company recognized a
$327.1 million gain in 1999 as a result of the AirTouch Communications, Inc.
("AirTouch") merger with Vodafone Group plc. TDS recognized a gain on the
difference between the historical basis in its investment in AirTouch common
shares and the value of Vodafone AirTouch plc American Depository Receipts and
cash received from the merger. The Company recognized a $198.6 million gain in
1998 as a result of the sale of certain minority cellular interests to AirTouch.
The sale of other non-strategic minority cellular interests and other
investments generated gains totaling $18.8 million in 1999, $64.1 million in
1998 and $41.4 million in 1997.
INVESTMENT INCOME, the Company's share of income in unconsolidated entities
in which the Company has a minority interest, totaled $31.3 million in 1999,
$40.8 million in 1998 and $83.7 million in 1997. The Company follows the equity
method of accounting, which recognizes TDS's proportionate share of the income
and losses accruing to it under the terms of its partnership or shareholder
agreements, where the Company's ownership interest equals or exceeds 20% for
corporations and 3% for partnerships. Investment income decreased in 1999 and
1998 as a result of paging equity losses subsequent to April 1, 1998, decreased
operating results of certain minority cellular interests, fewer unconsolidated
cellular entities as a result of the sale of certain cellular minority interests
in 1998 and the transfer of certain cellular minority interests in October of
1997. In 1999, TDS also recorded $7.8 million as its share of a one-time gain
reported by an equity-method investment.
As of December 31, 1999, the carrying value of the paging investment was
approximately $85 million. During 1999, the public market capitalization of
companies in the paging industry generally declined as the market price of the
companies' stock declined. The Company has evaluated the carrying value of the
paging investment and will continue to review the value considering the
operations of the investment and the general paging industry.
OTHER EXPENSE, NET totaled $11.2 million in 1999, $35.4 million in 1998 and
$8.7 million in 1997. Other expense, net in 1998 primarily includes additional
expenses relating to corporate restructuring ($10.6 million), a LAN wiring
business and the cost to exit that business ($11.9 million), and costs to exit
the paging business ($8.7 million).
MINORITY SHARE OF INCOME includes primarily the minority public shareholders'
share of U.S. Cellular's net income and the minority shareholders' or partners'
share of certain U.S. Cellular subsidiaries' net income or loss. Minority share
of income increased as U.S. Cellular's net income increased in 1999, 1998, and
1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Minority Share of Income
U.S. Cellular
Minority Public
Shareholders' $(57,411) $(41,083) $(21,264)
Subsidiaries' Minority
Interests (7,148) (6,039) (12,298)
--------------------------------------------------
(64,559) (47,122) (33,562)
Other Subsidiaries (558) (339) (1,160)
--------------------------------------------------
$(65,117) $(47,461) $(34,722)
==================================================
</TABLE>
INTEREST EXPENSE decreased 8% ($8.4 million) in 1999 and increased 18% ($16.4
million) in 1998. Interest expense decreased in 1999 due primarily to reduced
average short-term debt balances. Interest expense increased in 1998 due
primarily to larger, higher-cost long-term debt balances as long-term debt was
sold to replace short-term debt balances.
3
<PAGE>
MINORITY INTEREST IN INCOME OF SUBSIDIARY TRUST (Trust Preferred Securities
Distributions) totaled $24.8 million in 1999, $23.5 million in 1998 and $1.5
million in 1997. In February 1998, a subsidiary trust issued $150,000,000 of
8.04% Trust Originated Preferred Securities, and in November 1997, another
subsidiary trust issued $150,000,000 of 8.5% Trust Originated Preferred
Securities. The proceeds were used to reduce short-term debt balances.
INCOME TAX EXPENSE was $228.2 million in 1999, $145.1 million in 1998,
and $87.4 million in 1997. The period to period change reflects primarily the
changes in pretax income.
NET INCOME FROM CONTINUING OPERATIONS totaled $314.2 million in 1999, $201.4
million in 1998 and $99.7 million in 1997. DILUTED EARNINGS PER COMMON SHARE
FROM CONTINUING OPERATIONS totaled $5.02 in 1999, $3.22 in 1998 and $1.59 in
1997. Net income from continuing operations was significantly affected by gains
from the sale of cellular interests and other investments in 1999 and 1998. Net
income and diluted earnings per share from continuing operations and gains are
shown in the following table.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Income From Continuing Operations
Operations $122,662 $ 66,837 $ 83,831
Gains 191,489 134,562 15,914
-----------------------------------------------------
$314,151 $201,399 $ 99,745
=====================================================
Diluted Earnings Per Share From Continuing Operations
Operations $ 1.96 $ 1.05 $1.33
Gains 3.06 2.17 .26
-----------------------------------------------------
$ 5.02 $ 3.22 $1.59
================================================================================
</TABLE>
DISCONTINUED OPERATIONS, NET OF TAX totaled losses of $84.2 million in 1999,
$137.0 million in 1998 and $109.3 million in 1997. Discontinued operations, net
of tax reflects the 1999 results of operations of Aerial prior to September 17,
1999, and for the years 1998 and 1997. On September 17, 1999, the Board of
Directors approved a plan of merger between Aerial and VoiceStream. Since TDS
expects to recognize a net gain on the ultimate disposition of Aerial, TDS has
deferred recognition of Aerial's net operating losses of $44.2 million from
September 18, 1999 through December 31, 1999.
Cellular Telephone Operations
The Company provides cellular telephone service through United States Cellular
Corporation ("U.S. Cellular"), an 80.7%-owned subsidiary. U.S. Cellular owns,
manages and invests in cellular markets throughout the United States. Rapid
growth in the customer base and increased inbound roaming activity are the
primary reasons for the growth in U.S. Cellular's results of operations in 1999
and 1998. The number of customer units increased 19% to 2,602,000 at December
31, 1999, and increased 28% to 2,183,000 at December 31, 1998. U.S. Cellular
added 404,000 net new customer units from its marketing efforts and 15,000
customer units from acquisitions in 1999 compared to 454,000 net new customer
units from its marketing efforts and 19,000 customer units from acquisitions in
1998.
4
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER CUSTOMER AMOUNTS)
<S> <C> <C> <C>
Operating Revenues
Local retail $ 930,001 $ 772,803 $ 568,578
Inbound roaming 318,659 242,605 217,499
Long-distance and Other 117,752 108,046 66,914
----------------------------------------------------
Service Revenues 1,366,412 1,123,454 852,991
Equipment sales 50,769 39,013 23,974
----------------------------------------------------
1,417,181 1,162,467 876,965
----------------------------------------------------
Operating Expenses
System operations 208,822 193,625 153,137
Marketing and selling 272,729 228,844 178,984
Cost of equipment sold 124,058 94,378 82,302
General and administrative 325,758 262,766 200,620
Depreciation and
amortization 229,972 206,779 132,379
----------------------------------------------------
1,161,339 986,392 747,422
----------------------------------------------------
Operating Income $ 255,842 $ 176,075 $ 129,543
================================================================================
Consolidated Markets:
Markets 139 138 134
Market penetration 10.39% 8.84% 7.11%
Cell sites in service 2,300 2,065 1,748
Average monthly
service revenue
per customer unit $ 48.11 $ 48.61 $ 54.18
Churn rate per month 2.1% 1.9% 1.9%
Marketing cost per gross
customer addition $ 346 $ 317 $ 318
Employees 4,810 4,790 4,620
================================================================================
</TABLE>
OPERATING REVENUES increased 22% ($254.7 million) in 1999 and 33% ($285.5
million) in 1998. The revenue increases were driven by the 19% and 28% growth in
customer units, and the 31% and 12% growth in inbound roaming revenues in 1999
and 1998, respectively. Increased promotional activity and improved consumer
awareness of wireless communications were key factors contributing to customer
growth. Lower revenue per customer, due to competitive pricing pressures,
incentive plans and consumer market penetration, has partially offset the
revenue growth resulting from the increase in the customer base. The 1998
revenue increase and growth rate and average monthly service revenue per
customer unit reflect the effects of the October 1997 transaction where U.S.
Cellular added 195,000 customers as a result of exchanging certain markets with
another provider. Average monthly service revenue per customer was $48.11 in
1999, $48.61 in 1998 and $54.18 in 1997. Management anticipates that average
monthly service revenue per customer will continue to decrease as local retail
and inbound roaming revenue per minute of use decline.
LOCAL RETAIL REVENUES (charges to U.S. Cellular's customers for local system
usage) increased 20% ($157.2 million) in 1999 and 36% ($204.2 million) in 1998
due primarily to the growth in customers. Average monthly local retail revenue
per customer was $32.74 in 1999, $33.44 in 1998 and $36.11 in 1997. Local
minutes of use averaged 115 per month in 1999, 105 per month in 1998 and 103 per
month in 1997. Average revenue per minute was $.29 in 1999, $.32 in 1998 and
$.35 in 1997. Competitive pressures and use of pricing and other incentive
programs to stimulate overall usage resulted in the decrease in average monthly
local retail revenue per minute of use. The decrease in average monthly retail
revenue per customer primarily reflects the increasing level of competition for
wireless services and the continued penetration of the consumer market.
5
<PAGE>
INBOUND ROAMING REVENUES (charges to other cellular service providers whose
customers use U.S. Cellular's cellular systems when roaming) increased 31%
($76.1 million) in 1999 and 12% ($25.1 million) in 1998. Increases in minutes of
use have more than offset lower negotiated roaming rates, resulting in increased
roaming revenues in 1999. The increase in minutes of use and the decrease in
revenue per minute of use were significantly affected by certain pricing
programs introduced 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 2000 as the effect of
these pricing programs becomes present in all periods of comparison. Average
monthly inbound roaming revenue per U.S. Cellular customer was $11.22 in 1999,
$10.50 in 1998 and $13.81 in 1997. The increase in average monthly inbound
roaming revenue per U.S. Cellular customer in 1999 was attributable to a larger
increase in roaming revenue compared to the U.S. Cellular customer base; the
reverse was true in 1998, resulting in a decline in average monthly inbound
roaming revenue per U.S. Cellular customer.
LONG-DISTANCE AND OTHER SERVICE REVENUES increased 9% ($9.7 million) in 1999
and 61% ($41.1 million) in 1998 primarily due to increased long-distance revenue
from the growth in the volume of long-distance calls billed by U.S. Cellular.
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 was $4.15 in 1999, $4.68 in
1998 and $4.25 in 1997.
OPERATING EXPENSES increased 18% ($174.9 million) in 1999 and 32% ($239.0
million) in 1998. Operating expenses as a percent of service revenue were 85.0%
in 1999, 87.8% in 1998 and 87.6% in 1997. The overall increase in operating
expenses is primarily due to the increased costs of expanding the customer base
($73.6 million in 1999 and $61.9 million in 1998), general and administrative
expenses ($63.0 million in 1999 and $62.1 million in 1998), costs of providing
service to the expanding customer base ($15.2 million in 1999 and $40.5 million
in 1998), and additional depreciation and amortization on the increased
investment in cell sites and equipment ($23.2 million in 1999 and $74.4 million
in 1998). The increase in expenses in 1998 also reflects the October 1997
exchange where U.S. Cellular added 195,000 customers.
Costs to expand the customer base consists of marketing and selling expenses
and the cost of equipment sold. These expenses less equipment sales revenue
represent the cost to add a new customer. The cost to add a new cellular
customer was $346 in 1999, $317 in 1998 and $318 in 1997. Gross customer
activations (excluding acquisitions) rose 12% in 1999 to 1,000,000 and 20% in
1998 to 896,000 from 746,000 in 1997. The increase in cost per gross customer
activation in 1999 was primarily driven by increased commissions and additional
advertising expenses incurred to promote U.S. Cellular and to distinguish U.S.
Cellular's service offerings from those of competitors. Another contributing
factor was the 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, enabling U.S. Cellular to offer its customers more features, better
clarity, and increased roaming capabilities.
General and administrative expenses (costs of local business offices and
corporate expenses) as a percent of service revenues were 23.8% in 1999, 23.4%
in 1998 and 23.5% in 1997. The overall increases in administrative expenses
include the effects of an increase in expenses required to serve the growing
customer base and other expenses incurred related to the growth in U.S.
Cellular's business. Employee related expenses increased primarily due to an
increase in deferred compensation expense related to stock options in 1999 and
an increase in the number of customer service and administrative employees in
1998.
Costs of providing service (system operations expenses) as a percent of
service revenues were 15.3% in 1999, 17.2% in 1998 and 18.0% in 1997. System
operations expenses include customer usage expenses (charges from other service
providers for landline connection, toll and roaming costs incurred by customers'
use of systems other than their local systems), and maintenance, utility and
cell site expenses.
6
<PAGE>
Customer usage expenses were 9.8% of service revenues in 1999, 11.6% in 1998
and 11.7% in 1997. In 1999, customer usage expense increased primarily due to
the $13.6 million increase in costs related to both increased local and inbound
minutes of use and increased roaming usage. This increase was offset by a $10.7
million decrease in net outbound roaming expense reflecting growth in roaming
minutes used by U.S. Cellular's customers, which was more than offset by lower
costs per roaming minute of use. These lower costs are related to lower roaming
prices in the industry. In 1998, customer usage expense increased primarily due
to a $28.8 million increase in net roaming expense. This increase was driven by
the substantial increase in outbound roaming charges incurred when U.S.
Cellular's customers use other operators' service areas which were included in
the customer's "home" territory. These calls were billed at the customer's local
rate, but U.S. Cellular was charged a roaming rate by the other operators which
was usually higher than that local rate.
Maintenance, utility and cell site expenses were 5.5% of service revenues
in 1999, 5.7% in 1998 and 6.3% in 1997. The number of cell sites operated
increased to 2,300 in 1999 from 2,065 in 1998 and 1,748 in 1997.
Depreciation and amortization expense as a percent of service revenues was
16.8% in 1999, 18.4% in 1998 and 15.5% in 1997. Depreciation expense
increased 11% ($17.7 million) in 1999 and 71% ($69.6 million) in 1998,
reflecting increases in average fixed asset balances of 14% and 27%,
respectively. Increased fixed asset balances in both years resulted from the
addition of new cell sites built to improve coverage and capacity, from
upgrades to provide digital service, and from the acquisition of markets in
late 1997. The increase in 1998 also reflects reduction in useful lives of
certain assets beginning in 1998 which increased depreciation expense by
$23.2 million. Annual amortization expense is expected to increase by
approximately $17 million as the development costs related to U.S. Cellular's
new billing and information system, totaling $118 million, are amortized over
a seven-year period beginning in the fourth quarter of 1999.
OPERATING INCOME increased 45% ($79.8 million) to $255.8 million in 1999 from
$176.1 million in 1998 and $129.5 million in 1997. The improvement was primarily
driven by the substantial growth in customers and revenue. Operating margin, as
a percent of service revenue, improved to 18.7% in 1999 from 15.7% in 1998 and
15.2% in 1997.
Management expects service revenues to continue to grow during 2000. However,
management anticipates that service revenues will grow at a slower rate than the
customer base. In addition, management expects average monthly revenue per
customer will decrease in 2000 as local retail and inbound roaming revenue per
minute of use decline and as U.S. Cellular further penetrates the consumer
market.
Management believes U.S. Cellular's operating results reflect seasonality in
both service revenues, which tend to increase more slowly in the first and
fourth quarters, and operating expenses, which tend to be higher in the fourth
quarter due to increased marketing activities and customer growth. This
seasonality may cause operating income to vary from quarter to quarter.
Competitors licensed to provide PCS services have initiated service in
certain U.S. Cellular markets in the past three and one half years. U.S.
Cellular expects PCS operators to continue deployment of PCS in portions of all
its market clusters through 2000. U.S. Cellular has increased its advertising to
promote the U.S. Cellular brand and 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 its markets.
7
<PAGE>
Telephone Operations
The Company operates its landline telephone business through TDS
Telecommunications Corporation ("TDS Telecom"), a wholly-owned subsidiary. Prior
to the Telecommunications Act of 1996, local telephone companies, referred to as
incumbent local exchange companies ("ILEC"), had the exclusive right and
responsibility for providing local telephone service in their designated service
territories. TDS Telecom's local telephone companies served 571,700 access lines
at the end of 1999 compared to 547,500 at the end of 1998 and 515,500 at the end
of 1997.
As a result of the Telecommunications Act of 1996, companies referred to as
competitive local exchange carriers ("CLEC") have been allowed to compete with
the local telephone companies in providing local exchange service. In early
1998, TDS Telecom began to compete with local telephone companies in certain
markets in Wisconsin not previously served by TDS Telecom. TDS Telecom also
entered into certain markets in Minnesota through a subsidiary that was
primarily a long-distance provider prior to competing with local telephone
companies in 1998. TDS Telecom's competitive local exchange companies served
74,100 access lines at the end of 1999 compared to 34,100 access lines at the
end of 1998. TDS Telecom plans to slowly expand its competitive local exchange
operations into certain midsized cities which are geographically proximate to
existing TDS Telecom markets.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER ACCESS LINE AMOUNTS)
<S> <C> <C> <C>
Local Telephone Operations
Operating Revenues
Local service $152,290 $136,656 $ 122,826
Network access
and long-distance 269,188 256,272 235,725
Miscellaneous 71,052 68,432 57,759
----------------------------------------------------
492,530 461,360 416,310
----------------------------------------------------
Operating Expenses
Operating expenses 250,994 249,312 219,451
Depreciation and
amortization 117,443 108,173 96,488
----------------------------------------------------
368,437 357,485 315,939
----------------------------------------------------
Local Telephone
Operating Income $124,093 $103,875 $ 100,371
----------------------------------------------------
Competitive Local Exchange Operations
Operating Revenues
Local service $22,279 $ 6,484 $ --
Network access and
long-distance 25,850 17,308 17,021
Miscellaneous 7,044 5,951 5,986
----------------------------------------------------
55,173 29,743 23,007
----------------------------------------------------
Operating Expenses
Operating expenses 58,808 35,977 21,702
Depreciation and
amortization 5,907 3,229 1,533
----------------------------------------------------
64,715 39,206 23,235
----------------------------------------------------
Competitive
Local Exchange
Operating (Loss) $(9,542) $(9,463) $ (228)
----------------------------------------------------
Intercompany revenues (1,786) (2,999) (1,693)
Intercompany expenses (1,786) (2,999) (1,693)
----------------------------------------------------
Operating Income $114,551 $94,412 $100,143
================================================================================
Access lines (ILEC) 571,700 547,500 515,500
Access lines (CLEC) 74,100 34,100 --
Growth in ILEC access lines:
Internal growth 23,700 25,500 27,800
Acquisitions 500 6,500 3,200
Average monthly revenue
per ILEC access line $ 73.00 $ 71.85 $69.43
Employees 2,590 2,480 2,390
================================================================================
</TABLE>
8
<PAGE>
OPERATING REVENUES totaled $545.9 million in 1999, up 12% ($57.8 million)
from 1998 which totaled $488.1 million and was up 12% ($50.5 million) from 1997.
The increase was due to the growth in local telephone operations and the
expansion into competitive local exchange activities.
LOCAL TELEPHONE OPERATING REVENUES increased 7% ($31.2 million) to $492.5
million in 1999 and 11% ($45.0 million) to $461.4 million in 1998. Acquisitions
increased local telephone operating revenues by $9.0 million in 1998. Average
monthly revenue per local telephone access line was $73.00 in 1999, $71.85 in
1998 and $69.43 in 1997, reflecting primarily growth in local service revenues.
Local telephone operating revenues are expected to continue their pattern of
moderate growth.
LOCAL SERVICE REVENUES (provision of local telephone exchange service within
the franchise serving area of TDS Telecom's local telephone companies) increased
11% ($15.6 million) in 1999 and 11% ($13.8 million) in 1998. Average monthly
local service revenue per customer was $22.57 in 1999, $21.28 in 1998 and $20.49
in 1997. Access line growth, excluding acquisitions, of 4.3% in 1999 and 4.9% in
1998 resulted in increases in revenues of $7.4 million and $6.0 million,
respectively. The sale of custom-calling and advanced features increased
revenues by $5.6 million in 1999 and $4.4 million in 1998.
NETWORK ACCESS AND LONG-DISTANCE REVENUES (compensation for carrying
interstate and intrastate long-distance traffic on TDS Telecom's local telephone
networks) increased 5% ($12.9 million) in 1999 and 9% ($20.5 million) in 1998.
Average monthly network access and long-distance revenue per customer was $39.90
in 1999, $39.91 in 1998 and $39.31 in 1997. Revenue generated from access minute
growth due to increased network usage increased $9.1 million in 1999 and $8.2
million in 1998. Recovery of increased costs of providing long-distance services
resulted in increases in revenue of $7.0 million in 1999 and $5.9 million in
1998. Acquisitions and additional cost recovery as a result of ice storm damage
in the Northeast increased revenues in 1998 by $4.2 million and $2.2 million,
respectively.
MISCELLANEOUS REVENUES (charges for (i) leasing, selling, installing and
maintaining customer premise equipment, (ii) providing billing and collection
services, (iii) providing Internet services and (iv) selling of digital
broadcast satellite receivers) increased 4% ($2.6 million) in 1999 and 18%
($10.7 million) in 1998. Average monthly miscellaneous revenue per customer was
$10.53 in 1999, $10.66 in 1998 and $9.63 in 1997. Revenues from providing
Internet service increased by $3.9 million in 1999 and $3.6 million in 1998.
Increased sales of customer premise equipment, including digital broadcast
satellites, increased revenues by $5.8 million in 1998.
COMPETITIVE LOCAL EXCHANGE OPERATING REVENUES (revenue from the provision of
local and long-distance telephone service and revenue from a long-distance
provider) increased 85% ($25.4 million) to $55.2 million in 1999 and 29% ($6.7
million) to $29.7 million in 1998. The increase in local service revenues in
1999 was primarily due to the 117% increase in access lines. The increase in
1998 was significantly less as TDS Telecom began providing competitive local
exchange services early in the year. Long-distance revenues increased primarily
as a result of the increase in access lines. Long-distance revenues include the
revenues from an existing long-distance business prior to becoming a competitive
local exchange company in 1998.
OPERATING EXPENSES totaled $431.4 million in 1999, up 10% ($37.7 million)
from 1998 and totaled $393.7 million in 1998, up 17% ($56.2 million) from 1997.
9
<PAGE>
Local telephone operating expenses increased 3% ($11.0 million) in 1999
and 13% ($41.5 million) in 1998. Local telephone operating expenses as a
percent of local telephone revenues were 74.8% in 1999, 77.5% in 1998 and
75.9% in 1997. Local telephone operating expenses are expected to increase
due to inflation and new revenue-producing programs, and to continue to
decline slightly as a percent of operating revenues.
The 1999 increase in local telephone operating expenses primarily related to
the cost of providing Internet service and wage and benefit increases as TDS
Telecom emphasized cost controls during the year. The 1998 increase in local
telephone operating expenses primarily resulted from increases in information
systems and support, acquisitions, cost of goods sold for customer premise
equipment, support payments to the Federal high cost pool, and emergency storm
damage in the Northeast. Depreciation and amortization expenses increased 9%
($9.3 million) in 1999 and 12% ($11.7 million) in 1998 as a result of increased
investment in plant and equipment.
Competitive local exchange operating expenses increased 65% ($25.5 million)
in 1999 and 69% ($16.0 million) in 1998 due primarily to the costs incurred to
grow the customer base and provide competitive local exchange services.
Depreciation and amortization expense increased 83% ($2.7 million) in 1999 and
111% ($1.7 million) in 1998 as TDS Telecom added plant and equipment to expand
competitive local exchange operations.
OPERATING INCOME increased 21% ($20.1 million) in 1999 and decreased 6% ($5.7
million) in 1998.
Operating income from local telephone operations increased 19% ($20.2
million) to $124.1 million in 1999 and 3% ($3.5 million) to $103.9 million in
1998 from $100.4 million in 1997. The local telephone operating margin was 25.2%
in 1999, 22.5% in 1998 and 24.1% in 1997. The increase in operating margin in
1999 was caused by the growth in revenue along with the emphasis on controlling
costs. The reduction in operating margin in 1998 was caused by slightly higher
operating costs, improvements to the telephone network, expenditures to develop
programs aimed at improving customer satisfaction, and resale of lower-margin
services. TDS Telecom's overall operating margin was 21.0% in 1999 compared to
19.3% in 1998 and 22.9% in 1997.
Operating loss from competitive local exchange operations was $9.5 million in
1999 and 1998, and $200,000 in 1997. The competitive local exchange operating
losses in 1999 and 1998 reflect the expenses associated with the expansion into
the competitive local exchange business. TDS Telecom expects to continue to grow
the competitive local exchange business with a controlled entry strategy.
TDS Telecom is subject to the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of
Regulation." TDS Telecom periodically reviews the criteria for applying these
provisions to determine whether continuing application of SFAS No. 71 is
appropriate. TDS Telecom believes that such criteria are still being met and
therefore has no current plans to change its method of accounting.
In analyzing the effects of discontinuing the application of SFAS No. 71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles, and therefore, any adjustments to
telecommunications plant would be immaterial, as would be any write-off of
regulatory assets and liabilities.
Inflation
Management believes that inflation affects TDS's business to no greater extent
than the general economy.
10
<PAGE>
Accounting for Derivative Instruments
and Hedging Activities
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Management
believes that this statement will not have a material effect on results of
operations and financial position of the Company.
Revenue Recognition
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition" is effective
beginning in the first quarter of 2000. SAB No. 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
Management believes that this bulletin will not have a material effect on
results of operations and financial position of the Company.
FINANCIAL RESOURCES
TDS and its subsidiaries operate relatively capital- and marketing-intensive
businesses. Increasing internal cash flow and cash received from the sale of
cellular interests and other investments have reduced the overall need for
external financing. 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 operations of U.S. Cellular and TDS Telecom.
Cash flows from operating activities totaled $479.8 million in 1999, $466.3
million in 1998 and $309.2 million in 1997.
Net income from continuing operations excluding all noncash items increased
40% ($157.2 million) to $554.9 million in 1999 and 31% ($93.8 million) to $397.7
million in 1998. The increase primarily reflects the 24% ($138.6 million) and
28% ($128.3 million) growth in aggregate operating cash flow (operating income
plus depreciation and amortization). Changes in assets and liabilities from
operations required $75.0 million in 1999 and provided $68.6 million in 1998 and
$5.3 million in 1997. The primary reason for the change in assets and
liabilities is due to the reduction of accounts payable in 1999.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Income from
continuing operations $314,151 $201,399 $ 99,745
Noncash items included
in Net Income from
continuing operations 240,707 196,273 204,169
-----------------------------------------------------
Net Income from
continuing operations
excluding all noncash
items 554,858 397,672 303,914
Changes in assets and
liabilities from
operations (75,026) 68,596 5,271
-----------------------------------------------------
$479,832 $466,268 $ 309,185
================================================================================
</TABLE>
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. In recent years, rapid changes in technology
and new opportunities have required substantial investments in revenue enhancing
and cost reducing upgrades of the Company's networks.
Cash flows used for investing activities totaled $285.4 million in 1999,
$414.3 million in 1998 and $482.3 million in 1997 primarily for capital
expenditures and acquisitions offset somewhat by proceeds from the sales of
non-strategic assets. Cash expenditures for capital additions totaled $399.6
million in 1999, $463.5 million in 1998 and $488.8 million in 1997. Cash used
for acquisitions, excluding cash acquired, totaled $31.3 million in 1999, $120.5
million in 1998 and $138.5 million in 1997. The sale of non-strategic cellular
assets and other investments and cash received from the merger of AirTouch and
Vodafone provided $120.0 million in 1999, $131.0 million in 1998 and $84.2
million in 1997. Other cash flows from investing activities include
distributions from unconsolidated investments which provided $26.1 million in
1999, $28.9 million in 1998 and $56.4 million in 1997, and changes in temporary
investments and marketable non-equity securities which provided $9.5 million in
1999, $34.7 million in 1998 and $36.5 million in 1997.
11
<PAGE>
Capital Expenditures
The primary purpose of TDS's construction and expansion strategy is to provide
for significant customer growth, to upgrade service, and to take advantage of
service-enhancing and cost-reducing technological developments. The following
table summarizes the Company's investments in its communications networks and
related facilities during the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Cellular
Cell sites and equipment $167,651 $184,032 $238,797
Switching equipment
and other 81,071 90,343 39,002
Systems development 28,728 46,042 40,949
----------------------------------------------------
277,450 320,417 318,748
----------------------------------------------------
TDS Telecom
Local telephone
operations
Central office 31,049 38,117 49,049
Outside plant 41,043 43,353 53,184
Other 27,062 38,229 36,163
Competitive local
exchange 23,027 23,427 13,064
----------------------------------------------------
122,181 143,126 151,460
----------------------------------------------------
American Paging -- -- 18,625
----------------------------------------------------
$399,631 $463,543 $488,833
================================================================================
</TABLE>
U.S. Cellular's capital additions include expenditures to build 225 cell
sites in 1999, 281 in 1998 and 331 in 1997 and to improve business systems,
primarily its customer information system. In 1999 and 1998, significant amounts
were expended to change out analog radio equipment for digital radio equipment.
TDS Telecom's capital additions include expenditures for switch modernization
and outside plant facilities to maintain and enhance the quality of service and
offer new revenue opportunities. TDS Telecom has also invested in switching and
other network facilities for its competitive local exchange business in the past
three years.
Acquisitions and Exchanges
TDS reviews attractive opportunities to acquire additional telecommunications
companies which add value to the organization. TDS and U.S. Cellular continue to
assess the makeup of cellular holdings in order to maximize the benefits derived
from clustering U.S. Cellular's markets.
Cash expenditures (excluding cash acquired) for acquisitions totaled $31.3
million in 1999, $120.5 million in 1998 and $138.5 million in 1997. Aggregate
consideration for acquisitions (consisting of cash, TDS Common Shares, TDS
Preferred Shares, and U.S. Cellular Common Shares) totaled $31.4 million, $133.9
million and $184.2 million, respectively. The Company's acquisitions include
primarily the purchase of controlling interests in cellular telephone and
telephone entities, and minority interests which increased the ownership of
majority-owned markets. These acquisitions and exchanges added 245,000
population equivalents, 15,000 customer units and 500 access lines in 1999,
1,308,000 population equivalents, 19,000 customer units and 6,500 access lines
in 1998, and 1,348,000 population equivalents, 195,000 customer units and 3,200
access lines in 1997.
CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES. Cash flows from continuing
financing activities required $272.5 million in 1999 and $63.8 million in 1998,
and provided $545.9 million in 1997. Cash flows from financing activities
primarily reflect changes in short-term debt balances during the last three
years, proceeds from sales of long-term debt and equity securities in 1998 and
1997, and stock repurchases in 1999 and 1997.
12
<PAGE>
Changes in short-term debt balances required $170.9 million in 1999 and
$356.7 million in 1998, and provided $368.9 million in 1997. TDS has used
short-term debt for acquisitions and for general corporate purposes and to
finance Aerial's construction, development and operations. TDS has taken
advantage of attractive opportunities 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. In addition, increasing internally
generated funds as well as proceeds from the sale of non-strategic cellular and
other investments from time to time have also been used to reduce short-term
debt. During 1999, TDS reduced notes payable balances by $170.9 million,
primarily through internally generated cash and improved cash management. In
addition, in November 1999, Aerial and one of its subsidiaries received capital
contributions of $230 million from Sonera Corporation ("Sonera"). Aerial used
the proceeds to repay indebtedness to TDS and placed any remaining cash in the
TDS cash management program. TDS has cash management arrangements with its
subsidiaries under which the subsidiaries may from time to time deposit excess
cash with TDS for investment under TDS's cash management program.
TDS reduced notes payable balances by $356.7 million in 1998, primarily
through refinancing short-term debt by the sale of long-term debt and equity
securities. In 1998, the Company received net proceeds of $144.9 million on the
sale of 8.04% Trust Originated Preferred Securities and $198.2 million on the
sale of eight-year, 7% notes. In September 1998, Aerial received an equity
investment of $200 million from Sonera, which was used to repay amounts owed to
TDS. Notes payable balances increased by $368.9 million in 1997, reflecting
primarily financing for Aerial's construction and operating needs. In 1997, TDS
received net proceeds of $144.8 million on the sale of 8.5% Trust Originated
Preferred Securities, and U.S. Cellular received $247.0 million on the sale of
10-year, 7.25% notes. U.S. Cellular used the proceeds to repay existing balances
on its vendor financing arrangements, to finance the cash requirements for
acquisitions, and for general corporate purposes.
TDS Telecom has also used long-term debt to finance its construction
activities. TDS Telecom's telephone subsidiaries borrowed $5.0 million in 1999,
$4.1 million in 1998 and $15.0 million in 1997 under the Rural Utility Service
and the Rural Telephone Bank long-term federal government loan programs to
finance their telephone construction programs.
Other cash flows for financing activities include the repurchase of common
shares and dividend payments. TDS paid $69.0 million in 1999 and $69.9
million in 1997 to repurchase TDS Common Shares. An additional $11.5 million
was paid in January 2000 to settle purchases of TDS Common Shares that
occurred at the end of December 1999. Aggregate dividends paid on Common and
Preferred Shares, excluding dividends reinvested, totaled $29.4 million in
1999, $28.5 million in 1998 and $27.2 million in 1997.
CASH FLOWS FROM DISCONTINUED OPERATIONS. Cash flows from discontinued
operations provided $143.9 million in 1999 and $10.9 million in 1998, and
required $349.1 million in 1997. The cash provided in 1999 and 1998 primarily
reflects the $230 million and $200 million investments, respectively, in
Aerial and one of its subsidiaries by Sonera. The cash provided by these
investments was used to reduce intercompany debt incurred to fund the
construction and operating activities of Aerial. The cash required in 1997
primarily reflects the costs of construction and the costs to begin
operations.
13
<PAGE>
Liquidity
The Company anticipates that the aggregate resources required in 2000 will
include approximately $455 million for capital additions and, under certain
circumstances, up to $280 million to finance Aerial's operations and to provide
Aerial with liquidity at the time of the merger with VoiceStream.
TDS and its subsidiaries had cash and temporary investments totaling $116.0
million at December 31, 1999. TDS also had $587 million of bank lines of credit
for general corporate purposes at December 31, 1999, all of which was unused.
These line of credit agreements provide for borrowings at negotiated rates up to
the prime rate.
U.S. Cellular's capital additions budget totals approximately $330 million,
primarily to add additional cell sites to expand and enhance coverage, including
adding digital service capabilities to its systems. U.S. Cellular plans to
finance its construction expenditures primarily with internally generated cash.
U.S. Cellular's operating cash flow (operating income plus depreciation and
amortization) totaled $485.8 million in 1999, up 27% ($103.0 million) from 1998.
In addition, at December 31, 1999, U.S. Cellular had $500 million of bank lines
of credit for general corporate purposes, all of which was unused.
U.S. Cellular's LYONs are convertible, at the option of the holders, at any
time prior to maturity, redemption or purchase, into U.S. Cellular Common Shares
at a conversion rate of 9.475 U.S. Cellular Common Shares per LYON. Upon
conversion, U.S. Cellular has the option to deliver to holders either U.S.
Cellular Common Shares or cash equal to the market value of the U.S. Cellular
Common Shares into which the LYONs are convertible.
Under the terms of the LYONs, on June 15, 2000, each holder of LYONs has the
option to require U.S. Cellular to purchase the LYONs for a purchase price of
$411.99 for each LYON (the "Put Value"). Each LYON has a face value of $1,000 at
maturity. U.S. Cellular may elect to pay this purchase price either in (a) cash,
(b) U.S. Cellular Common Shares, (c) shares of publicly traded common equity
securities of TDS or (d) any combination thereof. Based on current market prices
for U.S. Cellular Common Shares, the conversion value of the LYONs is greater
than the Put Value. Accordingly, U.S. Cellular's management believes it is
unlikely that holders of LYONs will exercise their put rights on June 15, 2000.
However, there can be no assurance that the conversion value of the LYONs will
exceed the Put Value on or shortly prior to that date. If the conversion value
declines so that it is near or below the Put Value, it is possible that some or
all holders of LYONs may exercise their option to require U.S. Cellular to
purchase the LYONs. In such event, U.S. Cellular will determine, based upon
market conditions and other factors, which option it will exercise to satisfy
such requirement.
In addition, U.S. Cellular may, at any time on or after June 15, 2000, redeem
LYONs for cash at a price equal to the issue price plus accrued original issue
discount through the date of redemption. However, holders of the LYONs may
exercise their conversion rights prior to the date of redemption.
TDS Telecom's capital additions budget totals approximately $125 million.
TDS Telecom expects the local telephone companies to spend approximately $95
million to provide for normal growth, and to upgrade plant and equipment to
provide enhanced services, and the competitive local exchange companies to spend
approximately $30 million to build switching and other network facilities to
expand current markets and enter new markets. TDS Telecom plans to finance its
construction expenditures using internally generated cash supplemented by
long-term financing from federal government programs. Operating cash flow
totaled $237.9 million in 1999, up 16% ($32.1 million) from 1998. At December
31, 1999, TDS Telecom's telephone subsidiaries had $124.3 million in unadvanced
loan funds from federal government programs to finance the telephone
construction program. These loan commitments have a weighted average annual
interest rate of 6.01%.
14
<PAGE>
TDS has agreed to advance approximately $280 million to Aerial under the
revolving credit agreement between TDS and a subsidiary of Aerial. At December
31, 1999, TDS had loaned a total of $37.8 million to Aerial. At the time of the
merger, under certain circumstances, TDS is required to advance funds to a
subsidiary of Aerial to bring the amount outstanding under the revolving credit
agreement to $315 million. The $315 million outstanding will be repaid by
VoiceStream one year from the date of the merger, or earlier at VoiceStream's
option.
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. As a result of the merger, Aerial shareholders will receive 0.455
VoiceStream common shares for each share of Aerial stock they own, subject to
adjustment in certain circumstances. 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. This merger is subject to the approval of
the Federal Communications Commission. The merger is expected to close in the
second 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 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, or earlier under certain circumstances.
The merger agreement also provides for TDS to be released from its guarantees of
Aerial's long-term debt and vendor financing at the closing of the merger.
Also on November 1, 1999, Sonera invested an additional $230 million into the
equity of Aerial and one of its subsidiaries, also at an equivalent price of $22
per Aerial share. 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 of 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
$44.2 million from September 18, 1999 through December 31, 1999.
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, convertible debt, debentures and trust securities
with original maturities ranging up to 40 years. Accordingly, fluctuations in
interest rates can lead to significant fluctuations in the fair value of such
instruments. TDS has not entered into financial derivatives to reduce its
exposure to interest rate risks. The annual requirements for principal payments
on long-term debt are approximately $15.0 million, $15.6 million, $16.0 million,
$48.1 million and $23.9 million for the years 2000 through 2004 and $1.623
billion in years after 2004. The average interest rates of this debt are 7.32%,
7.32%, 7.32%, 8.44% and 7.81% for the years 2000 through 2004 and 6.86%
thereafter. The total aggregate principal payments, including the fully accreted
value of the U.S. Cellular LYONs at maturity, at December 31, 1999 and 1998 was
$1.742 billion and $1.749 billion, respectively, the estimated fair value was
$1.647 billion and $1.333 billion, respectively, and the average interest rate
on the debt was 6.93% and 7.27%, respectively. The fair value was estimated
using market price for the U.S. Cellular LYONs and discounted cash flow analysis
for the remaining debt. The trust securities instruments totaling $300 million,
with an average interest rate of 8.27%, are due in 2037 and 2038. The fair value
of the trust securities was $246.8 million and $297.8 million based upon the
market price at December 31, 1999 and 1998, respectively.
15
<PAGE>
TDS maintains a portfolio of available for sale marketable equity securities.
The market value of these investments amounted to $843.3 million at December 31,
1999 and $382.7 million at December 31, 1998. A hypothetical 10% decrease in the
share prices of these investments would result in an $84.3 million and $38.3
million decline in the market value of the investments in 1999 and 1998,
respectively.
Year 2000 Issue
The Year 2000 Issue existed because certain computer systems and applications
abbreviate dates using only two digits rather than four digits, e.g., "98"
rather than "1998". Unless corrected, this shortcut could have caused problems
when the century date "2000" occurred. On that date, some computer operating
systems and applications and embedded technology may have recognized the date as
January 1, 1900 instead of January 1, 2000.
The Company's management established Year 2000 project teams in 1998 to
address Year 2000 issues. The project teams identified those mission critical
hardware, systems and applications that were not Year 2000 ready. These mission
critical hardware, systems and applications were then renovated, validated and
implemented prior to December 31, 1999. No significant problems were encountered
in January, 2000. The total costs associated with the Year 2000 Issue were $31.1
million.
The Company expects to incur minimal expenditures for final project wrap-up
activities. While the Company believes its mission critical hardware, systems
and applications are Year 2000 ready, it will continue to monitor information
systems, facilities, equipment and relationships with third parties.
Contingency plans have been developed to address any interruptions in essential
services.
Private Securities Litigation Reform Act of 1995
Safe Harbor Cautionary Statement
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION AND OTHER SECTIONS OF THIS ANNUAL REPORT CONTAIN STATEMENTS THAT ARE
NOT BASED ON HISTORICAL FACT, INCLUDING THE WORDS "BELIEVES," "ANTICIPATES,"
"INTENDS," "EXPECTS," AND SIMILAR WORDS. THESE STATEMENTS CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL
RESULTS, EVENTS OR DEVELOPMENTS TO BE SIGNIFICANTLY DIFFERENT FROM ANY FUTURE
RESULTS, EVENTS OR DEVELOPMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FACTORS INCLUDE:
- - GENERAL ECONOMIC AND BUSINESS CONDITIONS, BOTH NATIONALLY AND IN THE REGIONS
IN WHICH TDS OPERATES,
- - TECHNOLOGY CHANGES,
- - COMPETITION,
- - CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS,
- - CHANGES IN GOVERNMENTAL REGULATION,
- - TDS'S ABILITY AND THE ABILITY OF THIRD-PARTY SUPPLIERS TO TAKE CORRECTIVE
ACTION IN A TIMELY MANNER WITH RESPECT TO THE YEAR 2000 ISSUE,
- - AVAILABILITY OF FUTURE FINANCING,
- - CHANGES IN GROWTH IN CELLULAR CUSTOMERS, PENETRATION RATES AND CHURN RATES,
AND
- - COMPLETION AND TIMING OF THE MERGER BETWEEN AERIAL AND VOICESTREAM.
TDS UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF THESE IMPORTANT FACTORS.
16
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Operating Revenues
U.S. Cellular $ 1,417,181 $ 1,162,467 $ 876,965
TDS Telecom 545,917 488,104 437,624
---------------------------------------------------
1,963,098 1,650,571 1,314,589
---------------------------------------------------
Operating Expenses
U.S. Cellular 1,161,339 986,392 747,422
TDS Telecom 431,366 393,692 337,481
---------------------------------------------------
1,592,705 1,380,084 1,084,903
---------------------------------------------------
Operating Income from Ongoing Operations 370,393 270,487 229,686
American Paging Operating (Loss) -- (11,406) (35,307)
---------------------------------------------------
Operating Income 370,393 259,081 194,379
---------------------------------------------------
Investment and Other Income (Expense)
Interest and dividend income 8,708 10,070 11,526
Investment income 31,324 40,774 83,668
Amortization of costs related to minority investments (12,927) (11,395) (6,857)
Gain on sale of cellular and other investments 345,938 262,698 41,438
Other (expense), net (11,198) (35,435) (8,749)
Minority share of income (65,117) (47,461) (34,722)
---------------------------------------------------
296,728 219,251 86,304
---------------------------------------------------
Income Before Interest and Income Taxes 667,121 478,332 280,683
Interest expense 99,984 108,371 92,010
Minority interest in income of subsidiary trust 24,810 23,504 1,523
---------------------------------------------------
Income From Continuing Operations Before Income Taxes 542,327 346,457 187,150
Income tax expense 228,176 145,058 87,405
---------------------------------------------------
Net Income From Continuing Operations 314,151 201,399 99,745
---------------------------------------------------
Discontinued Operations, net of tax
Discontinued operations (142,250) (212,752) (168,140)
Tax effect of discontinued operations (58,060) (75,761) (58,846)
---------------------------------------------------
(84,190) (136,991) (109,294)
---------------------------------------------------
Net Income (Loss) 229,961 64,408 (9,549)
Preferred Dividend Requirement (1,147) (1,651) (1,892)
---------------------------------------------------
Net Income (Loss) Available to Common $ 228,814 $ 62,757 $ (11,441)
====================================================================================================================================
Weighted Average Shares Outstanding (000s) 61,436 60,982 60,211
Basic Earnings per Share
Continuing Operations $ 5.09 $ 3.28 $ 1.63
Discontinued Operations (1.37) (2.25) (1.82)
---------------------------------------------------
$ 3.72 $ 1.03 $ (0.19)
====================================================================================================================================
Diluted Earnings per Share
Continuing Operations $ 5.02 $ 3.22 $ 1.59
Discontinued Operations (1.35) (2.21) (1.80)
---------------------------------------------------
$ 3.67 $ 1.01 $ (.21)
---------------------------------------------------
Dividends per Share $ .46 $ .44 $ .42
====================================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
17
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
Net income from continuing operations $ 314,151 $ 201,399 $ 99,745
Add (Deduct) adjustments to reconcile net income from continuing
operations to net cash provided by operating activities
Depreciation and amortization 353,322 326,077 262,440
Deferred income taxes and investment tax credit, net 152,222 75,928 1,972
Investment income (31,324) (40,774) (83,668)
Minority share of income 65,117 47,461 34,722
Gain on sale of cellular and other investments (345,938) (262,698) (41,438)
Noncash interest expense 18,297 20,189 15,948
Other noncash expense 29,011 30,090 14,193
Changes in assets and liabilities from operations
Change in accounts receivable (50,417) (37,840) (18,236)
Change in materials and supplies (13,436) (3,897) 122
Change in accounts payable (22,421) 75,940 1,892
Change in accrued taxes (17,051) 19,017 6,096
Change in other assets and liabilities 28,299 15,376 15,397
----------------------------------------------------
479,832 466,268 309,185
----------------------------------------------------
CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES
Capital expenditures (399,631) (463,543) (488,833)
Acquisitions, net of cash acquired (31,323) (120,455) (138,527)
Proceeds from investment sales 120,000 130,957 84,230
Distributions from unconsolidated entities 26,061 28,912 56,413
Change in temporary investments and marketable non-equity securities 9,484 34,740 36,470
Investments in and advances to investment entities and license costs 5,497 (185) (10,535)
Other investing activities (15,438) (24,692) (21,560)
----------------------------------------------------
(285,350) (414,266) (482,342)
----------------------------------------------------
CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES
Issuance of long-term debt 9,902 202,277 260,099
Repayments of long-term debt (22,131) (16,454) (121,958)
Change in notes payable (170,889) (356,698) 368,858
Trust preferred securities -- 144,880 144,788
Dividends paid (29,391) (28,490) (27,193)
Repurchase of Common Shares (69,014) -- (69,942)
Other financing activities 9,001 (9,284) (8,762)
----------------------------------------------------
(272,522) (63,769) 545,890
----------------------------------------------------
Cash Flows from Discontinued Operations 143,911 10,910 (349,086)
----------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 65,871 (857) 23,647
Cash and Cash Equivalents
Beginning of period 45,139 45,996 22,349
----------------------------------------------------
End of period $ 111,010 $ 45,139 $ 45,996
====================================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
18
<PAGE>
Consolidated Balance Sheets -- Assets
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 111,010 $ 45,139
Temporary investments 4,983 10,306
Accounts receivable
Due from customers, less allowance of $10,525 and $6,732, respectively 175,623 139,706
Other, principally connecting companies 141,402 117,127
Materials and supplies, at average cost 39,880 25,243
Other current assets 35,110 19,222
---------------------------------------------------
508,008 356,743
---------------------------------------------------
Investments
Intangible Assets
Cellular license costs, net of amortization 1,156,175 1,200,653
Franchise and other costs in excess of the underlying
book value of subsidiaries, net of amortization 177,677 181,517
Marketable equity securities 843,280 382,706
Investments in unconsolidated entities 272,601 301,921
Other investments 28,837 33,870
---------------------------------------------------
2,478,570 2,100,667
---------------------------------------------------
Property, Plant and Equipment, net
U.S. Cellular 1,206,467 1,138,585
TDS Telecom 889,422 881,507
---------------------------------------------------
2,095,889 2,020,092
---------------------------------------------------
Other Assets and Deferred Charges 56,216 66,297
---------------------------------------------------
Net Assets of Discontinued Operations 237,145 498,805
---------------------------------------------------
$5,375,828 $ 5,042,604
===================================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
19
<PAGE>
Consolidated Balance Sheets --
Liabilities and Stockholders'
Equity
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current Liabilities
Current portion of long-term debt $ 14,967 $ 15,946
Notes payable -- 170,889
Accounts payable 206,937 232,320
Advance billings and customer deposits 43,965 33,283
Accrued interest 23,492 24,133
Accrued taxes 19,773 23,434
Accrued compensation 35,939 24,415
Other current liabilities 24,599 24,502
---------------------------------------------------
369,672 548,922
---------------------------------------------------
Deferred Liabilities and Credits
Net deferred income tax liability 382,468 191,748
Postretirement benefits obligation other than pensions 8,611 9,463
Other 33,436 22,666
---------------------------------------------------
424,515 223,877
---------------------------------------------------
Long-term Debt, excluding current portion 1,279,877 1,275,086
---------------------------------------------------
Minority Interest in subsidiaries 509,658 430,826
---------------------------------------------------
Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Company Subordinated Debentures (a) 300,000 300,000
---------------------------------------------------
Preferred Shares 9,005 25,985
---------------------------------------------------
Common Stockholders' Equity
Common Shares, par value $.01 per share;
authorized 100,000,000 shares; issued and outstanding
55,411,746 and 54,988,498 shares, respectively 554 550
Series A Common Shares, par value $.01 per share;
authorized 25,000,000 shares; issued and outstanding
6,958,691 and 6,949,904 shares, respectively 70 69
Capital in excess of par value 1,897,402 1,882,710
Treasury Shares, at cost, 1,237,207 and 761,220 shares, respectively (102,975) (29,439)
Accumulated other comprehensive income 179,071 75,609
Retained earnings 508,979 308,409
---------------------------------------------------
2,483,101 2,237,908
---------------------------------------------------
$5,375,828 $ 5,042,604
====================================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
(a) AS DESCRIBED IN NOTE 14, THE SOLE ASSET OF TDS CAPITAL I IS $154.6 MILLION
PRINCIPAL AMOUNT OF 8.5% SUBORDINATED DEBENTURES DUE 2037 FROM TDS, AND THE SOLE
ASSET OF TDS CAPITAL II IS $154.6 MILLION PRINCIPAL AMOUNT OF 8.04% SUBORDINATED
DEBENTURES DUE 2038 FROM TDS.
20
<PAGE>
Consolidated Statements of Common Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Series A Capital in Compre- Other Com-
Common Common Excess of Treasury hensive prehensive Retained
Shares Shares Par Value Shares Income Income Earnings
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 54,237 $ 6,917 $1,662,041 $ -- $ 513 $ 309,233
Comprehensive Income
Net (Loss) -- -- -- -- $ (9,549) -- (9,549)
Net unrealized gains on securities -- -- -- -- 170 170 --
-----------
Comprehensive (Loss) $ (9,379)
===========
Dividends
Common and Series A
Common Shares -- -- -- -- -- (25,300)
Preferred Shares -- -- -- -- -- (1,893)
Acquisitions 16 -- 3,585 39,084 -- --
Repurchase Common Shares -- -- -- (69,942) -- --
Dividend reinvestment, incentive
and compensation plans 122 19 4,707 176 -- --
Conversion of Preferred Shares 68 -- 1,419 -- -- --
Other -- -- (7,504) -- -- --
-------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 54,443 6,936 1,664,248 (30,682) 683 272,491
Comprehensive Income
Net Income -- -- -- -- $ 64,408 -- 64,408
Net unrealized gains on securities -- -- -- -- 74,926 74,926 --
----------
Comprehensive Income $ 139,334
==========
Dividends
Common and Series A
Common Shares -- -- -- -- -- (26,850)
Preferred Shares -- -- -- -- -- (1,640)
Recapitalization (53,899) (6,867) 60,766 -- -- --
Acquisitions 2 -- 10,025 -- -- --
Dividend reinvestment, incentive
and compensation plans 1 -- 2,029 1,243 -- --
Conversion of Preferred Shares 3 -- 6,284 -- -- --
Gain on sale of subsidiary stock -- -- 148,357 -- -- --
Other -- -- (8,999) -- -- --
-------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 550 69 1,882,710 (29,439) 75,609 308,409
Comprehensive Income
Net Income -- -- -- -- $ 229,961 -- 229,961
Net unrealized gains on securities -- -- -- -- 103,462 103,462 --
-----------
Comprehensive Income $ 333,423
===========
Dividends
Common and Series A
Common Shares -- -- -- -- -- (28,290)
Preferred Shares -- -- -- -- -- (1,101)
Repurchase Common Shares -- -- -- (80,457) -- --
Dividend reinvestment, incentive
and compensation plans 1 1 177 6,921 -- --
Conversion of Preferred Shares 3 -- 17,273 -- -- --
Other -- -- (2,758) -- -- --
--------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 554 $ 70 $1,897,402 $ (102,975) $ 179,071 $ 508,979
====================================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
21
<PAGE>
Notes to Consolidated Financial Statements
Note 1
Discontinued Operations
On September 17, 1999, the Board of Directors of Telephone and Data Systems,
Inc. ("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, subject to adjustment in certain
circumstances. 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. This merger is subject to the approval of the Federal Communications
Commission. The merger is expected to close in the second 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 per share. TDS has agreed to
advance approximately $280 million to Aerial under the revolving credit
agreement between TDS and a subsidiary of Aerial. At December 31, 1999, TDS had
loaned a total of $37.8 million to Aerial. At the time of the merger, under
certain circumstances, TDS is required to advance funds to a subsidiary of
Aerial to bring the amount outstanding under the revolving credit agreement to
$315 million. The $315 million outstanding will be repaid by VoiceStream one
year from the date of the merger, or earlier at VoiceStream's option. The merger
agreement also provides for TDS to be released from its guarantees of Aerial's
long-term debt and vendor financing at the closing of the merger.
Also on November 1, 1999, Sonera Corporation ("Sonera"), a Finnish
telecommunications company, invested an additional $230 million into the equity
of Aerial and one of its subsidiaries, also at an equivalent price of $22 per
Aerial share. 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 of their disputes relating to Sonera's
earlier investment in the Aerial subsidiary, effective at the closing of the
merger.
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.
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
$44.2 million from September 18, 1999 through December 31, 1999.
Net assets of discontinued operations are as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current Assets
Cash and temporary investments $ 5,261 $ 4,978
Accounts receivable 32,223 27,776
Inventory 8,336 11,378
Other current assets 5,565 4,564
Investments
Broadband PCS license costs, net 303,913 311,915
Other investments 3,263 1,443
Property, plant and equipment 619,913 621,281
Other assets and deferred charges 204 411
Current Liabilities
Current portion vendor credit
agreement (103,765) --
Accounts payable (35,230) (56,097)
Accrued taxes (7,419) (7,015)
Accrued compensation (9,732) (5,169)
Other accrued expenses (4,676) (6,177)
Deferred income tax liability (147,696) (123,110)
Long-term debt (250,846) (278,010)
Minority interest in subsidiaries (226,348) (9,363)
Losses deferred after measurement date 44,179 --
- --------------------------------------------------------------------------------
$237,145 $498,805
================================================================================
</TABLE>
22
<PAGE>
Notes to Consolidated Financial Statements
Summarized income statement information relating to
discontinued operations, excluding any corporate charges and intercompany
interest expense, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues $225,501 $155,154 $ 55,952
Expenses 435,509 435,139 252,503
------------------------------------------------------
Operating (Loss) (210,008) (279,985) (196,551)
Minority share of loss 21,369 75,974 43,038
Other income (expense) (6,504) 9,248 (16,799)
Interest expense (22,119) (17,989) 2,172
------------------------------------------------------
(Loss) Before Income
Taxes (217,262) (212,752) (168,140)
Income tax (benefit) (88,893) (75,761) (58,846)
------------------------------------------------------
Net (Loss) (128,369) (136,991) (109,294)
Losses deferred after
measurement date 44,179 -- --
------------------------------------------------------
Net (Loss) from
Discontinued Operations $(84,190) $(136,991) $(109,294)
================================================================================
</TABLE>
Summarized cash flow statement information relating to discontinued
operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from
operating activities $ (62,633) $(110,106) $(102,678)
Cash flows from
investing activities (32,351) (80,054) (278,378)
Cash flows from
financing activities 239,213 201,001 1,698
- --------------------------------------------------------------------------------
Cash provided (used) by
discontinued operations 144,229 10,841 (379,358)
(Increase) decrease in cash
included in Net Assets of
Discontinued Operations (318) 69 30,272
- --------------------------------------------------------------------------------
Cash flows from
discontinued operations $ 143,911 $ 10,910 $(349,086)
================================================================================
</TABLE>
Note 2
Summary of Significant Accounting Policies
Nature of Operations
TDS is a diversified telecommunications company which provided high-quality
telecommunications services to approximately 3.2 million cellular telephone and
telephone customers in 35 states at December 31, 1999. The Company conducts
substantially all of its cellular telephone operations through its 80.7%-owned
subsidiary, United States Cellular Corporation ("U.S. Cellular") and its
telephone operations through its wholly-owned subsidiary, TDS Telecommunications
Corporation ("TDS Telecom").
In September 1999, TDS approved a plan of merger between Aerial and
VoiceStream. See Note 1 -- Discontinued Operations.
Effective March 31, 1998, TDS contributed substantially all of the assets and
certain, limited liabilities of American Paging, Inc. to a previously unrelated
limited liability corporation for a 30% interest in that corporation. American
Paging's revenues are netted against its expenses in the Consolidated Statements
of Operations 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 month period ended March 31, 1998,
and revenues totaled $94.4 million and operating expenses totaled $129.7 million
for the year ended December 31, 1997. Beginning April 1, 1998, TDS followed the
equity method of accounting for this investment and reported these results as a
component of Investment income.
See Note 20 -- Business Segment Information for summary financial information
on each business segment.
23
<PAGE>
Notes to Consolidated Financial Statements
Principles of Consolidation
The accounting policies of TDS conform to generally accepted accounting
principles. The consolidated financial statements include the accounts of TDS,
its majority-owned subsidiaries since acquisition and the cellular partnerships
in which TDS has a majority general partnership interest. All material
intercompany items have been eliminated.
TDS includes as investments in subsidiaries the value of the consideration
given and all direct and incremental costs relating to acquisitions accounted
for as purchases. All costs relating to unsuccessful negotiations for
acquisitions are expensed.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain amounts reported in prior years have been reclassified to conform to
current period presentation.
Cash and Cash Equivalents and Temporary Investments
Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. Those
investments with original maturities of more than three months to 12 months
are classified as Temporary investments. Temporary investments are stated at
cost. The carrying amounts of Cash and cash equivalents and Temporary
investments approximate fair value due to the short-term nature of these
investments.
Outstanding checks in excess of cash balances totaled $37.6 million and $28.7
million at December 31, 1999 and 1998, respectively, and are classified as
Accounts payable in the Consolidated Balance Sheets. Sufficient funds were
available to fund these outstanding checks when presented for payment.
TDS has cash management arrangements with its subsidiaries under which the
subsidiaries may from time to time deposit excess cash with TDS for investment
under TDS's cash management program.
Revenue Recognition
Revenues from cellular operations primarily consist of charges to customers for
monthly access, airtime, data usage, vertical services, roaming charges,
long-distance charges and equipment sales. Revenues are recognized as services
are rendered. Unbilled revenues, resulting from service provided from the
billing cycle date to the end of each month and from other cellular carriers'
customers using U.S. Cellular's cellular systems for the last half of each
month, are estimated and recorded. Equipment sales are recognized upon delivery
to the customer.
TDS's telephone subsidiaries participate in revenue pools with other
telephone companies for interstate revenue and for certain intrastate revenue.
Such pools are funded by toll revenue and/or access charges within state
jurisdiction and by access charges in the interstate market. Revenues earned
through the various pooling processes are initially recorded based on TDS
Telecom's estimates.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense totaled
$69.0 million, $58.0 million and $44.3 million in 1999, 1998 and 1997,
respectively.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and hedging activities by
requiring that entities recognize all derivatives as either assets or
liabilities at fair market value on the balance sheet. Management believes that
this statement will not have a material effect on results of operations and
financial position of the Company.
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition" is
effective beginning in the first quarter of 2000. SAB No. 101 provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements. Management believes that this bulletin will not have a material
effect on results of operations and financial position of the Company.
24
<PAGE>
Notes to Consolidated Financial Statements
Note 3
Income Taxes
TDS files a consolidated federal income tax return. Income tax provisions
charged to net income from continuing operations are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ 61,261 $ 57,717 $ 72,039
State 14,693 14,413 13,394
Deferred:
Federal 130,692 64,282 1,595
State 21,530 12,496 896
Amortization of deferred
investment tax credits -- (850) (519)
--------------------------------------------------
Total income tax expense
for continuing operations $ 228,176 $ 145,058 $ 87,405
================================================================================
</TABLE>
Investment tax credits resulting from investments in telephone plant and
equipment were deferred and were amortized over the service lives of the related
property.
A reconciliation of TDS's effective income tax rate for continuing operations
and the statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal
income tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 4.3 4.9 4.8
Amortization of license
acquisition costs and costs
in excess of book value .8 1.1 2.8
Amortization of deferred
investment tax credits -- (.2) (.3)
Effects of corporations
not included in consolidated
federal tax return .4 .5 .8
Sale of cellular interests -- .7 3.0
Resolution of prior
period tax issues 1.6 -- --
Other differences, net -- (.1) .6
--------------------------------------------------
Effective income tax rate
for continuing operations 42.1% 41.9% 46.7%
================================================================================
</TABLE>
Income tax provisions charged to net income are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ 3,312 $9,872 $4,532
State 6,060 10,076 6,790
Deferred:
Federal 137,528 36,827 13,302
State 23,216 13,372 4,454
Amortization of deferred
investment tax credits -- (850) (519)
------------------------------------------------------
Total income tax expense $170,116 $69,297 $28,559
================================================================================
</TABLE>
Deferred income taxes are provided for the temporary differences between
the amount of the Company's assets and liabilities for financial reporting
purposes and their tax bases.
The Company's current net deferred tax assets totaled $2.8 million and $1.2
million as of December 31, 1999 and 1998, respectively. The net current deferred
tax asset primarily represents the deferred tax effects of the allowance for
customer receivables.
The temporary differences that gave rise to the noncurrent deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred Tax Asset:
Net operating loss carryforwards $ 132,131 $ 116,608
Minority share of income 56,488 30,532
Partnership investments 36,335 19,557
Alternative minimum tax
credit carryforward 33,745 27,230
Taxes on acquisitions 32,782 27,066
Postretirement benefits 3,400 3,673
Other 7,232 78
----------------------
302,113 224,744
Less valuation allowance (25,079) (27,779)
----------------------
Total Deferred Tax Asset 277,034 196,965
Deferred Tax Liability:
Marketable equity securities 313,772 133,333
Property, plant and equipment 190,294 136,611
Licenses 79,821 39,408
Equity investments 75,615 78,179
Other -- 1,182
----------------------
Total Deferred Tax Liability 659,502 388,713
Net Deferred Income Tax Liability $ 382,468 $ 191,748
============================================================
</TABLE>
25
<PAGE>
Notes to Consolidated Financial Statements
TDS had $302.1 million of federal net operating loss carryforward (generating
a $99.7 million deferred tax asset) at December 31, 1999, expiring between 2012
and 2014 which is available to offset future consolidated taxable income. In
addition, TDS had $517.6 million of state net operating loss carryforward
(generating a $32.4 million deferred tax asset) at December 31, 1999, expiring
between 2000 and 2014 which is available to offset future taxable income
primarily of the individual subsidiaries which generated the loss. A valuation
allowance was established for the state operating loss carryforwards since it is
more likely than not that a portion will expire before such carryforwards can be
utilized. At December 31, 1999, TDS had $33.7 million of federal alternative
minimum tax credit carryforward available to offset regular income tax payable
in future years.
The financial reporting basis of the marketable equity securities was greater
than the tax basis at the date of acquisition, generating $183.2 million of
deferred taxes. Additionally, the value of the marketable equity securities has
appreciated since acquisition, generating $130.6 million of deferred taxes.
Included in Cellular license cost, Franchise and other cost and Investment in
unconsolidated entities is goodwill related to various acquisitions structured
to be tax-free of $232 million, $123 million, and $20 million, respectively, at
December 31, 1999 and $240 million, $124 million, and $23 million, respectively,
at December 31, 1998. No deferred taxes have been provided on this goodwill.
Note 4
Earnings Per Share
The amounts used in computing Earnings per Share from Continuing Operations and
the effect on income and the weighted average number of Common and Series A
Common Shares of dilutive potential common stock are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS AND SHARES IN THOUSANDS)
<S> <C> <C> <C>
Net Income from
Continuing Operations $314,151 $201,399 $ 99,745
Preferred Dividend
Requirement (1,147) (1,651) (1,892)
-----------------------------------------------------
Net Income from
Continuing Operations
Available to Common
used in Basic Earnings
per Share 313,004 199,748 97,853
Reduction in preferred
dividends if Preferred
Shares converted
into Common Shares 1,031 1,513 585
Minority income adjustment (938) (1,806) (1,765)
-----------------------------------------------------
Net Income from
Continuing Operations
Available to Common
used in Diluted
Earnings per Share $313,097 $199,455 $ 96,673
================================================================================
Weighted Average Number
of Common Shares used in
Basic Earnings per Share 61,436 60,982 60,211
Effect of Dilutive Securities:
Common Shares
outstanding if Preferred
Shares converted 550 820 481
Stock options and stock
appreciation rights 377 122 130
Common Shares issuable 13 13 15
- --------------------------------------------------------------------------------
Weighted Average Number
of Common Shares
used in Diluted
Earnings per Share 62,376 61,937 60,837
================================================================================
</TABLE>
Preferred Shares convertible into 436,000 Common Shares in 1997 were not
included in computing Diluted Earnings per Share because their effects were
antidilutive.
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.
26
<PAGE>
Notes to Consolidated Financial Statements
Note 5
Intangible Assets
Cellular license costs consist of costs incurred in acquiring Federal
Communications Commission licenses to provide cellular service. These costs
include amounts paid to license applicants and owners of interests in cellular
entities awarded licenses and all direct and incremental costs relating to
acquiring the licenses. These costs are capitalized and amortized through
charges to expense over 40 years upon commencement of operations. Amortization
amounted to $33.8 million, $32.7 million and $27.2 million in 1999, 1998 and
1997, respectively. Accumulated amortization of cellular license costs was
$188.1 million and $153.9 million at December 31, 1999 and 1998, respectively.
Franchise and other costs include the costs in excess of the underlying book
value of acquired telephone companies. Costs aggregating $216.8 million and
$215.3 million at December 31, 1999 and 1998, respectively, relating to
acquisitions since November 1, 1970, are being amortized on a straight-line
basis over a 40-year period. Amortization amounted to $5.3 million, $5.3 million
and $5.2 million in 1999, 1998 and 1997, respectively. Accumulated amortization
of excess cost was $45.6 million and $40.2 million at December 31, 1999 and
1998, respectively. Costs in excess of the underlying book value relating to
acquisitions initiated before November 1, 1970, aggregating $6.5 million, are
not being amortized.
Note 6
Marketable Equity Securities
Marketable equity securities are classified as available-for-sale, are stated at
fair market value and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Vodafone AirTouch plc
Value $ 640,824 $ --
ADRs 12,945,920 --
AirTouch Communications, Inc.
Value $ -- $ 375,108
Common Shares -- 5,178,368
Illuminet Holdings, Inc.
Value $ 136,742 --
Common Shares 2,486,224 --
Rural Cellular Corporation
Value $ 65,105 $ 7,598
Common Shares 719,396 719,396
Other $ 609 $ --
================================================================================
</TABLE>
In 1999, the Company received 12.9 million (adjusted for a five-for-one stock
split) Vodafone AirTouch plc American Depository Receipts ("ADRs") and $46.6
million in cash in exchange for its 5.2 million AirTouch common shares as a
result of the AirTouch Communications, Inc. merger with Vodafone Group plc. The
Company received the AirTouch common shares in 1998 as a result of the sale of
certain minority cellular interests to AirTouch.
In October 1999, Illuminet Holdings, Inc. ("Illuminet") completed its initial
public offering. At December 31, 1999, TDS's investment in Illuminet is included
in Marketable Equity Securities and stated at fair market value.
Information regarding the Company's marketable equity securities is
summarized below.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Available-for-sale Equity Securities
Aggregate Fair Value $843,280 $382,706
Original Cost 517,870 234,238
-------------------
Gross Unrealized Holding Gains 325,410 148,468
Tax Effect 130,616 59,661
-------------------
Unrealized Holding Gains, net of tax 194,794 88,807
Minority Share of Unrealized
Holding Gains 15,723 13,198
-------------------
Net Unrealized Holding Gains $179,071 $ 75,609
==========================================================
</TABLE>
The Company's net unrealized holding gains are included as an increase to
Accumulated other comprehensive income. Realized gains and losses are determined
on the basis of specific identification. During 1999, cash proceeds from the
exchange of available-for-sale securities totaled $46.6 million and gross
realized gains totaled $327.1 million. During 1998, proceeds from the sale of
available-for-sale securities totaled $613,000 and gross realized gains totaled
$300,000. During 1997, proceeds from the sale of available-for-sale securities
totaled $1.5 million and gross realized gains totaled $154,000.
27
<PAGE>
Notes to Consolidated Financial Statements
Note 7
Investment in Unconsolidated Entities
Investments in unconsolidated entities consists of investments in which the
Company holds a minority interest. The Company follows the equity method of
accounting, which recognizes TDS's proportionate share of the income and losses
accruing to it under the terms of its partnership or shareholder agreements,
where the Company's ownership interest equals or exceeds 20% for corporations
and 3% for partnerships ($262.4 million and $286.1 million at December 31, 1999
and 1998, respectively). Income and losses from these entities are reflected in
the Consolidated Statements of Operations on a pretax basis as Investment
income. Investment income totaled $31.3 million, $40.8 million and $83.7 million
in 1999, 1998 and 1997, respectively. At December 31, 1999, the cumulative share
of income from minority investments accounted for under the equity method was
$217.5 million, of which $64.6 million was undistributed. The cost method of
accounting is followed for certain minority interests where the Company's
ownership interest is less than 20% for corporations and 3% for partnerships
($10.2 million and $15.8 million at December 31, 1999 and 1998, respectively).
Investments in unconsolidated entities include cellular license costs and
costs in excess of the underlying book value of certain non-cellular minority
investments. These costs are being amortized from 10 to 40 years. Amortization
amounted to $12.6 million, $9.7 million and $3.0 million in 1999, 1998 and 1997,
respectively.
The Company's more significant investments in unconsolidated entities consist
of the following:
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Cellular investments
Los Angeles SMSA Limited Partnership 5.5% 5.5%
Raleigh-Durham MSA Limited Partnership 8.0% 8.0%
Midwest Wireless Communication, LLC 14.7% 14.7%
North Carolina RSA 1 Partnership 50.0% 50.0%
Oklahoma City SMSA Limited Partnership 14.6% 14.6%
Other investments
TSR Wireless Holdings, LLC 30.0% 30.0%
Volcano Communications Company 45.0% 45.0%
================================================================================
</TABLE>
As of December 31, 1999, the carrying value of the investment in TSR
Wireless Holdings, LLC was approximately $85 million. During 1999, the public
market capitalization of companies in the paging industry generally declined as
the market price of the companies' stock declined. The Company has evaluated the
carrying value of the investment in TSR Wireless and will continue to review the
value considering the operations of TSR Wireless and the general paging
industry.
The following summarizes the unaudited combined assets, liabilities
and equity, and the unaudited combined results of operations of the entities for
which TDS's investments are accounted for by the equity method.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
(UNAUDITED, DOLLARS IN MILLIONS)
<S> <C> <C>
Assets
Current assets $ 338 $ 299
Due from affiliates 3 7
Property and other 1,106 1,140
----------------------------------------
$1,447 $1,446
================================================================================
Liabilities and Equity
Current liabilities $ 278 $ 268
Due to affiliates 16 26
Deferred credits 7 3
Long-term debt 210 143
Partners' capital and
stockholders' equity 936 1,006
----------------------------------------
$1,447 $1,446
================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(UNAUDITED, DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Results of Operations
Revenues $ 1,794 $ 1,624 $ 1,732
Costs and expenses 1,492 1,141 1,242
-----------------------------------------------------
Operating Income 302 483 490
-----------------------------------------------------
Other income (expense) 29 7 5
Interest expense (15) (10) (9)
Income taxes (19) (4) (6)
-----------------------------------------------------
Net income $ 297 $ 476 $ 480
================================================================================
</TABLE>
28
<PAGE>
Notes to Consolidated Financial Statements
Note 8
Property, Plant and Equipment
U.S. Cellular
U.S. Cellular property, plant and equipment is stated at the original cost of
construction including capitalized costs of certain taxes and payroll-related
expenses and consists of:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cell site-related equipment $ 939,797 $ 790,292
Land, buildings and leasehold improvements 280,306 237,361
Switching-related equipment 153,984 116,198
Office furniture and equipment 104,901 127,397
System development 153,041 134,225
Other operating equipment 67,021 59,152
Work in process 33,269 70,197
----------------------
1,732,319 1,534,822
Accumulated depreciation 525,852 396,237
----------------------
$1,206,467 $1,138,585
===========================================================================
</TABLE>
Renewals and betterments of units of property are recorded as additions to
cellular plant in service. The original cost of depreciable property (and
related accumulated depreciation) retired is removed from plant in service and,
together with removal cost less any salvage realized, is charged to depreciation
expense. Repairs and renewals of minor units of property are charged to system
operations expense.
TDS Telecom
TDS Telecom property, plant and equipment is stated at the original cost of
construction including the capitalized costs of certain taxes, payroll-related
expenses, and an allowance for funds used during construction and consists of:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cable and wire $ 812,752 $ 772,749
Central office equipment 498,730 460,323
Office furniture and equipment 166,013 145,851
Land and buildings 68,193 68,274
Other equipment 65,282 67,338
Work in process 29,920 28,696
--------------------------------------------
1,640,890 1,543,231
Accumulated depreciation 751,468 661,724
--------------------------------------------
$ 889,422 $ 881,507
================================================================================
</TABLE>
Renewals and betterments of units of property are recorded as additions to
telephone plant in service. The original cost of depreciable property (and
related accumulated depreciation) retired is removed from plant in service and,
together with removal cost less any salvage realized, is charged to accumulated
depreciation. No gain or loss is recognized on ordinary retirements of
depreciable telephone property. Repairs and renewals of minor units of property
are charged to plant operations expense.
The Company's telephone operations follow accounting for regulated
enterprises prescribed by SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation." Management periodically reviews the criteria for applying
these provisions to determine whether continuing application of SFAS No. 71 is
appropriate. Management believes that such criteria are still being met and
therefore has no current plans to change its method of accounting.
In analyzing the effects of discontinuing the application of SFAS No. 71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles and therefore, any adjustments to
telecommunications plant would be immaterial, as would be any write-off of
regulatory assets and liabilities.
Depreciation
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. The provision for depreciation as a percentage of
depreciable property was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Cellular 12.4% 13.0% 10.3%
TDS Telecom 7.8% 7.5% 7.4%
- --------------------------------------------------------------------------------
</TABLE>
Cellular depreciation as a percentage of depreciable property increased in
1998 due to the reduction in useful lives of certain assets in 1998, increasing
the provision for depreciation.
29
<PAGE>
Notes to Consolidated Financial Statements
Note 9
Supplemental Cash Flow Disclosures
Following are supplemental cash flow disclosures for interest and income taxes
paid and certain noncash transactions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest paid $81,629 $81,612 $69,568
Income taxes paid 19,976 9,936 17,362
Common Shares issued for
conversion of Preferred Shares 16,465 6,114 1,031
Additions to property, plant
and equipment financed
through accounts payable
and accrued expenses $22,984 $28,895 $11,280
- --------------------------------------------------------------------------------
</TABLE>
TDS has acquired certain cellular licenses and operating companies, operating
telephone companies and certain other assets since January 1, 1997. In
conjunction with these acquisitions, the following assets were acquired and
liabilities assumed, and Common Shares and Preferred Shares issued:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Property, plant
and equipment $ 4,248 $ 26,560 $ 120,365
Cellular licenses 22,568 97,228 146,957
Decrease in investment
in unconsolidated entities (546) (2,317) (89,205)
Franchise and other costs 1,006 5,983 2,452
Long-term debt (987) (4,450) (4,857)
Deferred credits (226) (3,905) 1,104
Other assets and
liabilities, excluding
cash and cash equivalents 5,260 10,835 7,396
Common Shares issued
and issuable -- (9,479) (42,685)
Preferred Shares issued -- -- (3,000)
-------------------------------------------------
Decrease in cash due
to acquisitions $ 31,323 $ 120,455 $ 138,527
================================================================================
</TABLE>
Note 10
Acquisitions and Sales
During 1999 and 1998, TDS and its subsidiaries completed the following business
combinations:
30
<PAGE>
<TABLE>
<CAPTION>
Consideration
-------------------------
TDS and U.S. Cellular
Cash Common Stock
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Acquisitions During 1999
Cellular interests
(245,000 population equivalents) $ 29,841 $ --
Telephone interests
(500 access lines) 1,482 --
Acquisitions During 1998
Cellular interests
(1,308,000 population equivalents) $119,957 $ 4,750
Telephone interests
(6,500 access lines) 498 8,725
- --------------------------------------------------------------------------------
</TABLE>
Sales of Cellular and Other Investments
During 1999, the Company recognized a $327.1 million gain as a result of the
AirTouch Communications Inc. merger with Vodafone Group plc. The Company
recognized a gain on the difference between the historical basis of its
investment in AirTouch common shares and the value of the Vodafone AirTouch plc
ADRs and cash received from the merger. During 1998, the Company recognized a
$198.6 million gain on the sale of certain minority cellular interests to
AirTouch for 5.2 million AirTouch shares and cash.
The sale of other non-strategic minority cellular interests and other
investments generated gains in 1999, 1998 and 1997 totaling $18.8 million, $64.1
million and $41.4 million, respectively.
These transactions generated net cash proceeds of $120.0 million, $131.0
million and $84.2 million in 1999, 1998 and 1997, respectively.
Note 11
Notes Payable
TDS has used short-term debt for acquisitions and for general corporate purposes
and to finance Aerial's construction, development and operations. Proceeds from
the sale of long-term debt and equity securities from time to time, including
the sale of debt and equity securities by subsidiaries, have been used to
31
<PAGE>
Notes to Consolidated Financial Statements
reduce such short-term debt. Proceeds from the sale of non-strategic cellular
and other investments from time to time have also been used to reduce short-term
debt.
TDS had $587 million of committed bank lines of credit for general corporate
purposes at December 31, 1999, all of which was unused. These lines of credit
consist of a $500 million TDS revolving credit facility and $87 million in
direct bank lines of credit.
TDS has a six-year $500 million revolving credit facility with a group of
banks. The terms of the credit facility provide for borrowings with interest
at the London InterBank Offered Rate ("LIBOR") plus 22.5 basis points.
Interest and principal are due the last day of the borrowing period, as
selected by the borrower, of either seven days or one, two, three or six
months. The credit facility expires in June 2002.
TDS also had $87 million in direct bank lines of credit at December 31, 1999.
The terms of the direct bank lines of credit provide for borrowings at
negotiated rates up to the prime rate.
U.S. Cellular has a seven-year $500 million revolving credit facility with
a group of banks at December 31, 1999, all of which was unused. The terms of
the credit facility provide for borrowings with interest at the LIBOR plus
26.5 basis points. Interest and principal are due the last day of the
borrowing period, as selected by the borrower, of either seven days or one,
two, three or six months. The credit facility expires in August 2004.
The carrying amount of short-term debt approximates fair value due to the
short-term nature of these instruments.
Information concerning notes payable is shown in the table below:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at end of year $ -- $170,889 $527,587
Weighted average interest
rate at end of year -- 6.0% 6.3%
Maximum amount outstanding
during the year $214,968 $572,405 $587,683
Average amount outstanding
during the year (1) $148,818 $360,375 $407,965
Weighted average interest
rate during the year (1) 5.8% 5.7% 6.1%
- --------------------------------------------------------------------------------
</TABLE>
(1)THE AVERAGE WAS COMPUTED BASED ON MONTH-END BALANCES.
Note 12
Long-term Debt
Long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Telephone and Data Systems, Inc. (Parent)
Medium-term notes, averaging 9.0%
8.0% to 9.6% due 2003-2007 $ 87,500 $ 87,500
8.0% to 10.0% due 2021-2025 151,700 151,700
----------------------------------
239,200 239,200
7.0% notes, maturing in 2006 200,000 200,000
Purchase contracts, 9.0% and 14.0%,
due through 2003 1,953 2,201
----------------------------------
Total Parent 441,153 441,401
----------------------------------
Subsidiaries
U.S. Cellular
6.0% zero coupon convertible
redeemable debentures,
maturing in 2015 739,215 744,975
Unamortized discount (442,893) (463,488)
----------------------------------
296,322 281,487
7.25% notes, maturing in 2007 250,000 250,000
TDS Telecom
RUS, RTB and FFB Mortgage
Notes, various rates averaging
5.5% in 1999 and 1998,
due through 2031 301,251 308,494
Other long-term notes, various rates
averaging 7.1% in 1999 and
7.2% in 1998, due through 2006 1,939 5,676
Other
Long-term notes, 7.3% to 8.0%,
due through 2009 4,179 3,974
----------------------------------
Total Subsidiaries 853,691 849,631
----------------------------------
Total long-term debt 1,294,844 1,291,032
Less: Current portion of long-term debt 14,967 15,946
----------------------------------
Total long-term debt,
excluding current portion $ 1,279,877 $ 1,275,086
================================================================================
</TABLE>
32
<PAGE>
Notes to Consolidated Financial Statements
The Medium-Term Notes ("MTNs") carry original maturities of 12 to 30 years,
maturing at various times from 2003 to 2025. Interest is payable semi-annually.
The MTNs may be redeemed by the Company at par value with initial redemption
dates from 1999 to 2006.
The Company sold $200 million principal amount of 7% unsecured notes in 1998
with proceeds to the Company of $198.4 million. The notes are due August 2006
and interest is payable semi-annually. The notes are redeemable at any time at
the option of the Company, at a redemption price equal to the greater of (a)
100% of the principal amount of such notes, plus accrued but unpaid interest, or
(b) the sum of the present values of the remaining scheduled payments of
principal and interest thereon discounted to the redemption date on a
semi-annual basis at the Treasury Rate plus .25%.
The 6% yield to maturity zero coupon convertible redeemable unsecured notes
are due in 2015 and there is no periodic payment of interest. Each note is
convertible at the option of the holder at any time at a conversion rate of
9.475 U.S. Cellular Common Shares per $1,000 of notes. Upon conversion, U.S.
Cellular may elect to deliver its Common Shares or cash equal to the market
value of the Common Shares. Beginning June 15, 2000, U.S. Cellular may redeem
the notes for cash at the issue price plus accrued original issue discount
through the date of redemption. Holders have the right to exercise their
conversion option prior to the redemption date. On June 15, 2000, the holders
may require U.S. Cellular to purchase the notes at the issue price plus accrued
original issue discount through that date. U.S. Cellular will have the option of
purchasing such notes with cash, U.S. Cellular Common Shares, TDS common equity
securities, or any combination thereof.
U.S. Cellular sold $250 million principal amount of 7.25% unsecured senior
notes in 1997 with proceeds of $247.0 million. The notes are due 2007 and
interest is payable semi-annually. U.S. Cellular may redeem the notes beginning
2004 at principal amount plus accrued interest.
The RUS, RTB and FFB Mortgage Notes issued under certain loan agreements with
the Rural Utilities Service ("RUS"), Rural Telephone Bank ("RTB") and Federal
Financing Bank ("FFB"), agencies of the United States of America, are to be
repaid in equal monthly or quarterly installments covering principal and
interest beginning six months to three years after dates of issue and expiring
through 2031. Substantially all telephone plant is pledged under RUS and RTB
mortgage notes and various other obligations of the telephone subsidiaries.
The annual requirements for principal payments on long-term debt are
approximately $15.0 million, $15.6 million, $16.0 million, $48.1 million and
$23.9 million for the years 2000 through 2004, respectively.
The carrying value and estimated fair value of the Company's Long-term Debt
were $1,294.8 million and $1,647.0 million at December 31, 1999 and $1,291.0
million and $1,333.0 million at December 31, 1998, respectively. The fair value
of the Company's long-term debt was estimated using market price for the 6% zero
coupon convertible debentures and discounted cash flow analysis for the
remaining debt.
Note 13
Minority Interest in Subsidiaries
The following table summarizes the minority shareholders' and partners'
interests in the equity of consolidated subsidiaries.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Cellular
Public shareholders $439,483 $362,224
Subsidiaries' partners and shareholders 40,971 43,609
-----------------------------
480,454 405,833
TDS Telecom telephone subsidiaries 28,773 24,701
Other 431 292
-----------------------------
$509,658 $430,826
================================================================================
</TABLE>
33
<PAGE>
Notes to Consolidated Financial Statements
Note 14
Company-Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely Company Subordinated
Debentures
In 1998, TDS Capital II, a subsidiary trust ("Capital II") of TDS, issued
6,000,000 of its 8.04% Company-Obligated Mandatorily Redeemable Preferred
Securities (the "1998 Preferred Securities") at $25 per Preferred Security. Net
proceeds totaled $144.9 million and were used to reduce short-term debt. The
sole asset of TDS Capital II is $154.6 million principal amount of TDS's 8.04%
Subordinated Debentures due March 31, 2038.
In 1997, TDS Capital I, a subsidiary trust ("Capital I") of TDS, issued
6,000,000 of its 8.5% Company-Obligated Mandatorily Redeemable Preferred
Securities (the "1997 Preferred Securities") at $25 per Preferred Security. Net
proceeds totaled $144.8 million and were used to reduce short-term debt. The
sole asset of TDS Capital I is $154.6 million principal amount of TDS's 8.5%
Subordinated Debentures due December 31, 2037.
Payments due on the obligations of TDS Capital I and II under 1998 Preferred
Securities and 1997 Preferred Securities (the "Preferred Securities") issued by
TDS Capital I and II are fully and unconditionally guaranteed by TDS to the
extent each trust has funds available therefor. However, TDS's obligations are
subordinate and junior in right of payment to certain other indebtedness of TDS.
TDS has the right to defer payments of interest on the Subordinated Debentures
by extending the interest payment period, at any time, for up to 20 consecutive
quarters. If interest payments on the Subordinated Debentures are so deferred,
distributions on the Preferred Securities will also be deferred. During any
deferral, distributions will continue to accrue with interest thereon. In
addition, during any such deferral, TDS may not declare or pay any dividend or
other distribution on, or redeem or purchase, any of its common stock.
The 8.04% and 8.5% Subordinated Debentures are redeemable by TDS, in whole or
in part, from time to time, on or after March 31, 2003, and November 18, 2002,
respectively, or, in whole but not in part, at any time in the event of certain
income tax circumstances. If the Subordinated Debentures are redeemed, TDS
Capital I and II must redeem Preferred Securities on a pro rata basis having an
aggregate liquidation amount equal to the aggregate principal amount of the
Subordinated Debentures so redeemed. In the event of the dissolution, winding up
or termination of TDS Capital I and II, the holders of Preferred Securities will
be entitled to receive, for each Preferred Security, a liquidation amount of $25
plus accrued and unpaid distributions thereon to the date of payment, unless, in
connection with the dissolution, winding up or termination, Subordinated
Debentures are distributed to the holders of the Preferred Securities.
The carrying value and estimated fair value of the Company's Preferred
Securities were $300.0 million and $246.8 million at December 31, 1999 and
$300.0 million and $297.8 million at December 31, 1998, respectively. The fair
value of the Company's Preferred Securities was estimated based upon the market
prices at December 31, 1999 and 1998, respectively.
34
<PAGE>
Notes to Consolidated Financial Statements
Note 15
Preferred Shares
At December 31, 1999, 90,045 Preferred Shares were authorized, issued and
outstanding. The holders of outstanding Preferred Shares are entitled to one
vote per share. The average dividend rate is $6.12 per share. At December 31,
1999, 9,218 Preferred Shares are redeemable at the option of TDS and 80,056
Preferred Shares are redeemable at the option of the holder at $100 per share,
plus accrued and unpaid dividends. At December 31, 1999, 76,060 Preferred Shares
are convertible into 277,817 TDS Common Shares.
In connection with the reincorporation of TDS into Delaware in 1998, each
issued Iowa Preferred Share, no par value, stated value of $100 per share, was
converted into a Delaware Preferred Share, $.01 par value. All Preferred Shares
have a liquidation value of $100 per share plus accrued and unpaid dividends.
Preferred Shares are stated on the balance sheet at $100 per share.
The following is a schedule of Preferred Shares activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $ 25,985 $ 32,466 $ 30,858
Add:
Acquisition -- -- 3,000
Stock Dividends -- -- --
Less:
Conversion of preferred (16,465) (6,114) (1,031)
Redemption of preferred (515) (367) (361)
--------------------------------
Balance, end of year $ 9,005 $ 25,985 $ 32,466
================================================================================
</TABLE>
The carrying value and estimated fair value of the Company's Preferred Shares
were $9.0 million and $5.3 million at December 31, 1999 and $26.0 million and
$17.8 million at December 31, 1998, respectively. The fair value of the
Company's Preferred Shares was estimated using discounted cash flow analysis.
Note 16
Common Stockholders' Equity
Common Stock
The holders of Common Shares are entitled to one vote per share. The following
table summarizes the number of Common and Series A Common Shares outstanding:
<TABLE>
<CAPTION>
Series A
Common Common Treasury
Shares Shares Shares
- --------------------------------------------------------------------------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
Balance December 31, 1996 54,237 6,917 --
Repurchase Common Shares -- -- (1,798)
Acquisitions of cellular and
telephone interests 16 -- 999
Dividend reinvestment,
incentive and
compensation plans 122 19 4
Conversion of
Preferred Shares 68 -- --
-------------------------------------
Balance December 31, 1997 54,443 6,936 (795)
Acquisitions of cellular
and telephone interests 228 -- --
Dividend reinvestment,
incentive and
compensation plans 39 14 34
Conversion of
Preferred Shares 278 -- --
-------------------------------------
Balance December 31, 1998 54,988 6,950 (761)
Repurchase Common Shares -- -- (664)
Dividend reinvestment,
incentive and
compensation plans 8 9 188
Conversion of
Preferred Shares 416 --
-------------------------------------
Balance December 31, 1999 55,412 6,959 (1,237)
================================================================================
</TABLE>
35
<PAGE>
Notes to Consolidated Financial Statements
In connection with the reincorporation of TDS into Delaware in 1998, each
issued Iowa Common and Series A Common Share, $1 par value, was converted into a
Delaware Common and Series A Common Share, $.01 par value. The December 31, 1998
amounts for Common Shares, Series A Common Shares and Capital in Excess of Par
Value have been adjusted to reflect the change in par value.
Convertible Preferred Shares
TDS issued 408,573 Common Shares in 1999, 274,634 in 1998 and 56,365 in 1997 for
TDS Preferred Shares converted. TDS also issued 6,514 Common Shares in 1999,
3,780 in 1998 and 11,345 in 1997 for subsidiary preferred stock converted.
Series A Common Shares
The holders of Series A Common Shares are entitled to ten votes per share.
Series A Common Shares are convertible, on a share-for-share basis, into Common
Shares. TDS has reserved 6,958,691 Common Shares for possible issuance upon such
conversion.
Common Share Repurchase Program
In December 1996, the Company authorized the repurchase of up to 3.0 million TDS
Common Shares over a period of three years. The Company may use repurchased
shares to fund acquisitions and for other corporate purposes.
The Company repurchased 664,410 Common Shares in 1999 for $80.5 million and
1,798,100 Common Shares in 1997 for $69.9 million. No Common Shares were
repurchased in 1998. The Company reissued 187,900 Common Shares in 1999, 33,400
in 1998 and 4,700 in 1997 for incentive and compensation plans and 998,800
Common Shares in 1997 for acquisitions.
Accumulated Other Comprehensive Income
Effective January 1, 1998, the Company implemented the provisions of SFAS No.
130, "Reporting Comprehensive Income." Under SFAS No. 130, the Company is
required to report all changes in equity during a period, except those resulting
from investments and distributions by owners, in a financial statement for the
period in which they are recognized. The Company has chosen to disclose
Comprehensive Income, which encompasses Net Income and Net Unrealized Gains on
Securities, in the Consolidated Statements of Common Stockholders' Equity. Prior
years have been restated to conform to the requirements of SFAS No. 130. The
income tax effects allocated to and the cumulative balance of unrealized gains
on securities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $75,609 $ 683 $513
------------------------------------------------------
Add:
Unrealized gains
on securities 504,055 147,620 473
Income tax effect 201,801 59,316 210
------------------------------------------------------
302,254 88,304 263
Minority share of
unrealized gains 32,179 13,198 --
------------------------------------------------------
Net unrealized gains 270,075 75,106 263
------------------------------------------------------
Deduct:
Recognized gains on sales
of securities 327,113 300 154
Income tax expense 130,845 120 61
------------------------------------------------------
196,268 180 93
Minority share of
recognized gains 29,655 -- --
------------------------------------------------------
Net recognized gains
included in Net Income 166,613 180 93
------------------------------------------------------
Net change in unrealized
gains included in
Comprehensive Income 103,462 74,926 170
------------------------------------------------------
Balance, end of year $179,071 $75,609 $683
======================================================================================
</TABLE>
Note 17
Dividend Reinvestment,
Incentive and Compensation Plans
The following table summarizes Common and Series A Common Shares issued,
including reissued Treasury Shares, for the employee stock ownership plans and
dividend reinvestment plans described below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Shares
Tax-deferred savings plan 25,287 13,270 32,354
Dividend reinvestment plan 8,161 14,883 25,273
Stock-based
compensation plans 162,651 44,662 69,109
-------------------------------------------
196,099 72,815 126,736
================================================================================
Series A Common Shares
Dividend reinvestment plan 8,787 13,627 19,731
================================================================================
</TABLE>
36
<PAGE>
Notes to Consolidated Financial Statements
Tax-Deferred Savings Plan
TDS had reserved 133,408 Common Shares for issuance under the TDS Tax-Deferred
Savings Plan, a qualified profit-sharing plan pursuant to Sections 401(a) and
401(k) of the Internal Revenue Code. Participating employees have the option of
investing their contributions in TDS Common Shares, U.S. Cellular Common Shares
or five nonaffiliated funds.
Dividend Reinvestment Plans
TDS had reserved 437,698 Common Shares for issuance under the Automatic Dividend
Reinvestment and Stock Purchase Plan and 150,109 Series A Common Shares for
issuance under the Series A Common Share Automatic Dividend Reinvestment Plan.
These plans enable holders of TDS's Common Shares and Preferred Shares to
reinvest cash dividends in Common Shares and holders of Series A Common Shares
to reinvest cash dividends in Series A Common Shares. The purchase price of the
shares is 95% of the market value, based on the average of the daily high and
low sales prices for TDS's Common Shares on the American Stock Exchange for the
ten trading days preceding the date on which the purchase is made.
Stock-based Compensation Plans
TDS had reserved 2,852,716 Common Shares for options granted and to be granted
to key employees. TDS has established certain plans that provide for the grant
of stock options to officers and employees. The options are exercisable over a
specified period not in excess of ten years. The options expire from 2000 to
2009 or 30 days after the date of the employee's termination of employment, if
earlier.
TDS accounts for stock options, stock appreciation rights ("SARs") and
employee stock purchase plans under Accounting Principles Board ("APB") Opinion
No. 25. No compensation costs have been recognized for the stock option and
employee stock purchase plans. Compensation expense for SARs, measured on the
difference between the year-end market price of the Common Shares and SAR
prices, was $91,000 in 1997. Had compensation cost for all plans been determined
consistent with SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share from continuing operations would
have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Income from Continuing
Operations
As Reported $ 314,151 $ 201,399 $ 99,745
Pro Forma 311,062 197,226 97,791
Basic Earnings per Share
from Continuing Operations
As Reported 5.09 3.28 1.63
Pro Forma 5.04 3.21 1.59
Diluted Earnings per Share
from Continuing Operations
As Reported 5.02 3.22 1.59
Pro Forma $ 4.97 $ 3.15 $ 1.56
- --------------------------------------------------------------------------------
</TABLE>
A summary of the status of TDS stock option plans at December 31, 1999, 1998
and 1997 and changes during the years then ended is presented in the table and
narrative below:
<TABLE>
<CAPTION>
Weighted Weighted
Number Average Average
of Shares Option Prices Fair Values
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Stock Options:
Outstanding December 31, 1996
(405,996 exercisable) 591,438 $34.08
Granted 68,137 $43.90 $10.61
Exercised (43,824) $19.51
Canceled (41,243) $40.78
--------
Outstanding December 31, 1997
(492,917 exercisable) 574,508 $35.87
Granted 463,433 $42.09 $11.73
Exercised (21,227) $30.36
Canceled (14,089) $47.45
--------
Outstanding December 31, 1998
(776,653 exercisable) 1,002,625 $38.70
Granted 124,470 $63.82 $25.51
Exercised (199,278) $31.32
Canceled (9,700) $43.75
--------
Outstanding December 31, 1999
(812,748 exercisable) 918,117 $43.66
================================================================================
</TABLE>
37
<PAGE>
Notes to Consolidated Financial Statements
Of the options outstanding at December 31, 1999, 812,748 options are
exercisable, have exercise prices between $4.15 and $108.34 with a weighted
average exercise price of $43.66, and a weighted average remaining contractual
life of 6.8 years. The remaining 105,369 options are not exercisable, have
exercise prices between $50.44 and $108.34 with a weighted average exercise
price of $63.82, and a weighted average remaining contractual life of 9.5 years.
STOCK OPTIONS. The fair value of each option grant was estimated on the date
of the grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1999, 1998 and 1997,
respectively: risk-free interest rates of 5.2%, 5.2% and 6.1%; expected dividend
yields of 0.6%, 1.0% and 1.0%; expected lives of 7.5 years, 7.0 years and 5.0
years and expected volatility of 27.3%, 20.4% and 19.2%.
STOCK APPRECIATION RIGHTS allow the grantee to receive an amount in cash or
Common Shares, or a combination thereof, equivalent to the difference between
the exercise price and the fair market value of Common Shares on the exercise
date. At the beginning of 1997, 10,070 rights were outstanding. During 1997, an
additional 630 rights were granted and 10,700 rights were exercised. All rights
expired March 1997. The fair value of each stock appreciation right grant was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants in 1997: risk-free
interest rate of 4.9%; expected dividend yield of 1.0%; expected life of 0.1
year; and expected volatility of 20.5%.
EMPLOYEE STOCK PURCHASE PLAN. TDS had reserved 204,808 Common Shares for sale
to the employees of TDS and its subsidiaries.
Note 18
Employee Benefit Plans
Pension Plan
The Company sponsors two qualified noncontributory defined
contribution pension plans. One plan (the "TDS Plan")provides benefits for
the employees of TDS, TDS Telecom and substantially all of the telephone
company subsidiaries. (Employees of certain telephone subsidiaries are
covered under other pension plans or receive direct pension payments.) The
other plan provides pension benefits for U.S. Cellular employees. Under these
plans, pension costs are calculated separately for each participant and are
funded currently. TDS also sponsors an unfunded non-qualified deferred
compensation plan to supplement the benefits under these plans to offset the
reduction of benefits caused by the limitation on annual employee
compensation under the tax laws.
Total pension costs were $8.4 million, $7.3 million and $5.0 million in 1999,
1998 and 1997, respectively.
Other Postretirement Benefits
The Company sponsors two defined benefit postretirement plans that cover most of
the employees of TDS, TDS Telecom and its telephone subsidiaries. One plan
provides medical benefits and the other plan provides life insurance benefits.
Both plans are contributory, with retiree contributions adjusted annually. The
medical plan anticipates future cost sharing changes that are consistent with
the Company's intent to increase retiree contributions by the health care cost
trend rate. An amount not to exceed 25% of the total contribution to the TDS
Plan will be contributed to fund the cost of the medical benefits annually. An
additional contribution equal to a reasonable amortization of the past service
cost may be made without regard to the 25% limitation described above.
38
<PAGE>
Notes to Consolidated Financial Statements
The following table reconciles the beginning and ending balances of the
benefit obligation and the fair value of plan assets for the other
postretirement benefit plans:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $ 21,336 $ 21,339
Service cost 1,019 933
Interest cost 1,475 1,486
Amendments 258 198
Actuarial gain (2,309) (1,968)
Benefits paid (680) (652)
----------------------------------------
Benefit obligation at end of year 21,099 21,336
----------------------------------------
Change in Plan Assets
Fair value of plan assets at
beginning of year 18,976 14,604
Actual return on plan assets 3,263 723
Employer contribution 2,626 2,171
Acquisition -- 2,130
Benefits paid (680) (652)
----------------------------------------
Fair value of plan assets at end of year 24,185 18,976
----------------------------------------
Funded Status 3,086 (2,360)
Unrecognized net actuarial gain (13,243) (8,517)
Unrecognized prior service cost 1,546 1,414
----------------------------------------
(Accrued) benefit cost $ (8,611) $ (9,463)
================================================================================
</TABLE>
The following table sets forth the weighted average assumptions used in
accounting for the plans:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 7.5% 7.0%
Expected return on plan assets 8.0% 8.0%
- --------------------------------------------------------------------------------
</TABLE>
For measurement purposes, an 8.6% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999; the rate was assumed
to decrease over six years to 6.1% and to remain at 6.1% thereafter.
Net periodic benefit cost for the years ended December 31, 1999, 1998 and
1997 include the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost $ 1,019 $ 933 $ 875
Interest cost on
accumulated postretirement
benefit obligation 1,475 1,486 1,346
Expected return on plan assets (1,498) (1,271) (632)
Net amortization and deferral (228) (160) (344)
----------------------------------------
Net postretirement cost $ 768 $ 988 $1,245
================================================================================
</TABLE>
The health care cost trend rate assumption has a significant effect on the
amounts reported. A one-percentage-point increase or decrease in assumed health
care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1 Percentage Point
Increase Decrease
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Effect on total of service and
interest cost components $686 $390
Effect on postretirement
benefit obligation $3,713 $2,919
- --------------------------------------------------------------------------------
</TABLE>
Note 19
Commitments and Contingencies
Construction and Expansion
The primary purpose of TDS's construction and expansion strategy is to provide
for normal growth, to upgrade communications service, to expand into new
communication areas, and to take advantage of service-enhancing and
cost-reducing technological developments. The U.S. Cellular capital additions
budget totals approximately $330 million for 2000, primarily to add additional
cell sites to expand and enhance coverage, including adding digital service
capabilities to its systems. The TDS Telecom capital additions budget totals
approximately $125 million for 2000, including approximately $95 million for the
local telephone markets to provide for normal growth, and to upgrade plant and
equipment to provide enhanced services and $30 million for the competitive local
exchange business to build switching and other network facilities to expand
current markets and enter new markets.
39
<PAGE>
Notes to Consolidated Financial Statements
Lease Commitments
TDS and its subsidiaries have leases for certain cellular plant facilities,
office space and data processing equipment, most of which are classified as
operating leases. For the years 1999, 1998 and 1997, rent expense for
noncancelable, long-term leases was $31.2 million, $30.5 million and $25.7
million, respectively, and rent expense under cancelable, short-term leases was
$14.6 million, $8.8 million and $6.3 million, respectively. At December 31,
1999, the aggregate minimum rental commitments under noncancelable, long-term
operating leases were as follows:
<TABLE>
<CAPTION>
Minimum Future
Rental Payments
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
2000 $32,956
2001 31,091
2002 26,524
2003 20,520
2004 16,659
Thereafter 76,475
- --------------------------------------------------------------------------------
</TABLE>
Advance to Aerial
TDS has agreed to advance approximately $280 million to Aerial under the
revolving credit agreement between TDS and a subsidiary of Aerial. At December
31, 1999, TDS had loaned a total of $37.8 million to Aerial. At the time of the
merger, under certain circumstances, TDS is required to advance funds to a
subsidiary of Aerial to bring the amount outstanding under the revolving credit
agreement to $315 million. The $315 million outstanding will be repaid by
VoiceStream one year from the date of the merger, or earlier at VoiceStream's
option.
Contingencies
The Company is involved in legal proceedings before the Federal Communications
Commission and various state and federal courts from time to time. Management
does not believe that any of such proceedings should have a material adverse
impact on the financial position, results of operations or cash flows of the
Company
Note 20
Business Segment Information
TDS has two reportable segments - cellular telephone operations and local
telephone operations. The Company conducts substantially all of its cellular
operations through its 80.7%-owned subsidiary United States Cellular
Corporation ("U.S. Cellular"). At December 31, 1999, U.S. Cellular provided
cellular telephone service to 2,602,000 customers through 139 majority-owned
and managed cellular systems in 25 states. The Company conducts its telephone
operations through its wholly-owned subsidiary TDS Telecommunications
Corporation ("TDS Telecom"). At December 31, 1999, TDS Telecom operated 104
telephone companies serving 571,700 access lines and two competitive local
exchange carriers serving 74,100 access lines in 28 states.
In September 1999, TDS approved a plan of merger between Aerial and
VoiceStream. The results of operations and net assets of Aerial are reflected as
discontinued operations in the consolidated financial statements. See Note
1--Discontinued Operations.
Effective March 31, 1998, TDS contributed substantially all of the assets and
certain, limited liabilities of American Paging, Inc. to a previously unrelated
limited liability corporation for a 30% interest in that corporation. American
Paging's revenues are netted against its expenses in the Consolidated Statements
of Operations 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 month period ended March 31, 1998,
and revenues totaled $94.4 million and operating expenses totaled $129.7 million
for the year ended December 31, 1997. Beginning April 1, 1998, TDS followed the
equity method of accounting for this investment.
U.S. Cellular and TDS Telecom are billed for all services they receive from
TDS, consisting primarily of information processing and general management
services. Such billings are based on expenses specifically identified to U.S.
Cellular and TDS Telecom and on allocations of common expenses. Management
believes the method used to allocate common expenses is reasonable and that all
expenses and costs applicable to U.S. Cellular and TDS Telecom are reflected in
the accompanying business segment information on a basis which is representative
of what they would have been if U.S. Cellular and TDS Telecom operated on a
stand-alone basis.
40
<PAGE>
Notes to Consolidated Financial Statements
Financial data for the Company's business segments for each of the years ended
December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
DISCONTINUED
YEAR ENDED OR AT DECEMBER 31, 1999 U.S. CELLULAR TDS TELECOM ALL OTHER(1) OPERATIONS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 1,417,181 $ 545,917 $ -- $ -- $ 1,963,098
Operating cash flow 485,814 237,901 -- -- 723,715
Depreciation and amortization expense 229,972 123,350 -- -- 353,322
Operating income 255,842 114,551 -- -- 370,393
Significant noncash items:
Deferred taxes(2) 134,130 26,652 (8,560) -- 152,222
Investment income 30,374 1,369 (419) -- 31,324
Minority share of (income) loss (64,559) (568) 10 -- (65,117)
Gain on sale of cellular and other investments 266,744 79,071 123 -- 345,938
Noncash interest expense 18,297 -- -- -- 18,297
Total Assets 3,331,590 1,472,556 334,537 237,145 5,375,828
Investment in equity method investees 122,522 26,271 113,566 -- 262,359
Capital expenditures $ 277,450 $ 122,181 $ -- $ -- $ 399,631
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DISCONTINUED
YEAR ENDED OR AT DECEMBER 31, 1998 U.S. CELLULAR TDS TELECOM ALL OTHER(1) OPERATIONS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 1,162,467 $ 488,104 $ -- $ -- $ 1,650,571
Operating cash flow 382,854 205,814 (3,510) -- 585,158
Depreciation and amortization expense 206,779 111,402 7,896 -- 326,077
Operating income (loss) 176,075 94,412 (11,406) -- 259,081
Significant noncash items:
Deferred taxes, net(2) 107,201 17,471 (48,744) -- 75,928
Investment income 42,451 1,121 (2,798) -- 40,774
Minority share of income (47,122) (339) -- -- (47,461)
Gain on sale of cellular and other investments 215,154 38,803 8,741 -- 262,698
Noncash interest expense 20,189 -- -- -- 20,189
Total Assets 3,011,237 1,352,554 180,008 498,805 5,042,604
Investment in equity method investees 132,133 28,987 125,024 -- 286,144
Capital expenditures $ 320,417 $ 143,126 $ -- $ -- $ 463,543
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DISCONTINUED
YEAR ENDED OR AT DECEMBER 31, 1997 U.S. CELLULAR TDS TELECOM ALL OTHER(1) OPERATIONS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 876,965 $ 437,624 $ -- $ -- $ 1,314,589
Operating cash flow 261,922 198,164 (3,267) -- 456,819
Depreciation and amortization expense 132,379 98,021 32,040 -- 262,440
Operating income (loss) 129,543 100,143 (35,307) -- 194,379
Significant noncash items:
Deferred taxes, net(2) 24,077 2,691 (24,796) -- 1,972
Investment income 77,121 3,285 3,262 -- 83,668
Minority share of income (33,562) (1,155) (5) -- (34,722)
Gain on sale of cellular and other investments 30,318 722 10,398 -- 41,438
Noncash interest expense 15,948 -- -- -- 15,948
Total Assets 2,508,916 1,244,174 235,010 573,857 4,561,957
Investment in equity method investees 197,786 42,167 25,501 -- 265,454
Capital expenditures $ 318,748 $ 151,460 $ 18,625 $ -- $ 488,833
====================================================================================================================================
</TABLE>
(1) CONSISTS OF THE TDS CORPORATE OPERATIONS, AMERICAN PAGING OPERATIONS AND ALL
OTHER BUSINESSES NOT INCLUDED IN THE U.S. CELLULAR OR TDS TELECOM SEGMENTS.
(2) TAX BENEFITS ASSOCIATED WITH NET OPERATING LOSS CARRYFORWARDS REMAIN AT THE
TDS CORPORATE LEVEL.
41
<PAGE>
Report of Independent Public Accountants
To the Stockholders and Board of Directors
of Telephone and Data Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Telephone and
Data Systems, Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations, common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Telephone and Data Systems,
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen
- -------------------
Arthur Andersen LLP
Chicago, Illinois
January 26, 2000
42
<PAGE>
Consolidated Quarterly Income Information (Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- -----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1999
Operating Revenues $ 454,950 $ 497,259 $ 510,639 $ 500,250
Operating Income from Ongoing Operations 79,068 103,668 124,997 62,660
Gain on Sale of Cellular and Other Investments 11,551 328,341 6,046 --
Net Income Available to Common
from Continuing Operations 32,684 216,368 52,620 11,331
From Operations 25,663 33,819 50,701 11,331
From Gains 7,021 182,549 1,919 --
Net Income Available to Common $ 10,050 $ 182,206 $ 25,227 $ 11,331
Weighted Average Shares Outstanding (000s) 61,279 61,399 61,451 61,614
Basic Earnings per Share
from Continuing Operations $ .53 $ 3.52 $ .86 $ .18
Diluted Earnings per Share
from Continuing Operations .52 3.47 .84 .18
From Operations .41 .54 .81 .18
From Gains .11 2.93 .03 --
Basic Earning per Share .16 2.97 .41 .18
Diluted Earnings per Share $ .16 $ 2.92 $ .40 $ .18
1998
Operating Revenues $ 359,323 $ 410,263 $ 435,370 $ 445,615
Operating Income from Ongoing Operations 55,187 72,955 85,690 56,655
Gain on Sale of Cellular and Other Investments 221,442 10,516 3,399 27,341
Net Income Available to Common
from Continuing Operations 128,725 21,891 25,864 23,268
From Operations 16,241 16,768 23,963 8,214
From Gains 112,484 5,123 1,901 15,054
Net Income Available to Common $ 73,730 $ (14,095) $ 5,910 $ (2,788)
Weighted Average Shares Outstanding (000s) 60,750 60,984 61,036 61,157
Basic Earnings per Share
from Continuing Operations $ 2.12 $ .36 $ .42 $ .38
Diluted Earnings per Share
from Continuing Operations 2.08 .35 .41 .37
From Operations .26 .27 .38 .13
From Gains 1.82 .08 .03 .24
Basic Earnings per Share 1.21 (.23) .10 (.05)
Diluted Earnings per Share $ 1.19 $ (.23) $ .09 $ (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NET INCOME AVAILABLE TO COMMON FROM CONTINUING OPERATIONS FOR 1999 AND 1998
INCLUDED SIGNIFICANT GAINS FROM THE SALES OF CELLULAR AND OTHER INVESTMENTS. THE
TABLE ABOVE SUMMARIZES THE EFFECT OF THE GAINS ON NET INCOME AVAILABLE TO COMMON
FROM CONTINUING OPERATIONS AND DILUTED EARNINGS PER SHARE FROM CONTINUING
OPERATIONS.
MANAGEMENT BELIEVES U.S. CELLULAR'S OPERATING RESULTS REFLECT SEASONALITY IN
BOTH SERVICE REVENUES, WHICH TEND TO INCREASE MORE SLOWLY IN THE FIRST AND
FOURTH QUARTERS, AND OPERATING EXPENSES, WHICH TEND TO BE HIGHER IN THE FOURTH
QUARTER DUE TO INCREASED MARKETING ACTIVITIES AND CUSTOMER GROWTH. THIS
SEASONALITY MAY CAUSE OPERATING INCOME TO VARY FROM QUARTER TO QUARTER.
INFORMATION PRESENTED FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998, JUNE 30,
1999 AND 1998, AND DECEMBER 31, 1998 VARY FROM AMOUNTS PREVIOUSLY REPORTED ON
FORM 10-Q OR FORM 10-K AS THESE PERIODS HAVE BEEN RESTATED TO REFLECT THE
RESULTS OF OPERATIONS OF AERIAL AS DISCONTINUED OPERATIONS.
43
<PAGE>
Shareowners' Information
TDS Stock and Dividend Information
TDS's Common Shares are listed on the American Stock Exchange ("AMEX") under the
symbol "TDS" and in the newspapers as "TeleData." As of February 29, 2000, TDS
Common Shares were held by 2,742 record owners and the Series A Common Shares
were held by 56 record owners. TDS has paid cash dividends on Common Shares
since 1974, and paid dividends of $.46 and $.44 per Common and Series A Common
Share during 1999 and 1998, respectively.
The Common Shares of United States Cellular Corporation, an 80.7%-owned
subsidiary of TDS, are listed on the AMEX under the symbol "USM" and in the
newspapers as "US Cellu." The Common Shares of Aerial Communications, Inc., an
82.1%-owned subsidiary of TDS are listed on the NASDAQ National Market under the
symbol "AERL" and in the newspapers as "AerialComm."
Market Price Per Common Share by Quarter
TDS's Series A Common Shares and Preferred Shares are not actively traded and
therefore, quotations are not reported for such securities. Dividends on TDS's
Preferred Shares have been paid quarterly since the dates of issue. The high and
low sales prices of the Common Shares on the AMEX as reported by the Dow Jones
News Service are as follows:
<TABLE>
<CAPTION>
1999 1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High $58.00 73.50 89.25 136.87
Low $44.13 55.44 65.81 87.25
Dividends Paid $ .115 .115 .115 .115
- --------------------------------------------------------------------------------
1998 1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
High $50.13 49.75 44.25 47.88
Low $43.19 38.25 30.94 30.63
Dividends Paid $ .11 .11 .11 .11
- --------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
Exhibit 21
TELEPHONE AND DATA SYSTEMS, INC.
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
INCORPORATION
-------------
<S> <C>
U.S. CELLULAR
U.S. CELLULAR CORPORATION DELAWARE
APPLETON CELLULAR TELEPHONE COMPANY Partnership
BANGOR CELLULAR TELEPHONE CO., L.P. Partnership
CALIFORNIA RURAL SERVICE AREA #1, INC. CALIFORNIA
CAROLINA CELLULAR, INC. NORTH CAROLINA
CEDAR RAPIDS CELLULAR TELEPHONE, L.P. Partnership
CELLULAR AMERICA, INC. PENNSYLVANIA
CELLVEST, INC. DELAWARE
CENTRAL FLORIDA CELLULAR TELEPHONE COMPANY, INC. FLORIDA
CHARLOTTESVILLE MSA CELLULAR PARTNERSHIP Partnership
COMMUNITY CELLULAR TELEPHONE COMPANY TEXAS
CROOK COUNTY RSA LIMITED PARTNERSHIP Partnership
DAVENPORT CELLULAR TELEPHONE COMPANY Partnership
DAVENPORT CELLULAR TELEPHONE COMPANY, INC. DELAWARE
DUBUQUE CELLULAR TELEPHONE, L.P. Partnership
EASTERN NORTH CAROLINA CELLULAR JOINT VENTURE (GP) Partnership
EAU CLAIRE MSA, INC. WISCONSIN
FLORIDA RSA # 8, INC. DELAWARE
GEORGIA RSA # 11, INC. GEORGIA
GRAY BUTTE JOINT VENTURE Partnership
GREEN BAY CELLTELCO PARTNERSHIP Partnership
HARDY CELLULAR TELEPHONE COMPANY DELAWARE
HBM, INC. DELAWARE
HUMPHREY COUNTY CELLULAR, INC. DELAWARE
ILLINOIS RSA # 3, INC. ILLINOIS
INDIANA 8 SERVICE COMPANY DELAWARE
INDIANA RSA # 4, INC. DELAWARE
INDIANA RSA # 5, INC. INDIANA
INDIANA RSA NO. 4 L.P. Partnership
INDIANA RSA NO. 5 L.P. Partnership
IOWA # 13, INC. DELAWARE
IOWA RSA # 3, INC. DELAWARE
IOWA RSA # 9, INC. DELAWARE
IOWA RSA # 12, INC. DELAWARE
JACKSONVILLE CELLULAR PARTNERSHIP Partnership
JACKSONVILLE CELLULAR TELEPHONE CO. DELAWARE
JANESVILLE CELLULAR TELEPHONE COMPANY, INC. DELAWARE
JOPLIN CELLULAR TELEPHONE COMPANY, INC. DELAWARE
JOPLIN CELLULAR TELEPHONE COMPANY, L.P. Partnership
KANSAS # 15 LP Partnership
KANSAS RSA # 15, INC. OHIO
KENOSHA CELLULAR TELEPHONE, L.P. Partnership
LACROSSE CELLULAR TELEPHONE COMPANY, INC. DELAWARE
LEWISTON CELLTELLCO PARTNERSHIP Partnership
MADISON CELLULAR TELEPHONE COMPANY Partnership
MAINE RSA # 1, INC. MAINE
MAINE RSA # 4, INC. MAINE
MAINE RSA NO. 4 LIMITED PARTNERSHIP Partnership
MANCHESTER-NASHUA CELLULAR TELEPHONE, L.P. Partnership
MCDANIEL CELLULAR TELEPHONE COMPANY DELAWARE
MEDFORD PAGING, INC. OREGON
MINNESOTA INVCO OF RSA # 5, INC. DELAWARE
MINNESOTA INVCO OF RSA # 7, INC. DELAWARE
MINNESOTA INVCO OF RSA # 8, INC. DELAWARE
MINNESOTA INVCO OF RSA # 9, INC. DELAWARE
</TABLE>
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
INCORPORATION
-------------
<S> <C>
MINNESOTA INVCO OF RSA # 10, INC. DELAWARE
MINNESOTA INVCO OF RSA # 11, INC. DELAWARE
MISSOURI # 15 RURAL CELLULAR, INC. MISSOURI
MISSOURI RSA 11, INC. DELAWARE
N.H. #1 RURAL CELLULAR, INC. NEW HAMPSHIRE
NELSON-BALL GROUND CELLULAR TELEPHONE & SERVICES, INC. GEORGIA
NORTH CAROLINA RSA # 4, INC. DELAWARE
NORTH CAROLINA RSA # 6, INC. CALIFORNIA
NORTH CAROLINA RSA # 9, INC. NORTH CAROLINA
NORTH CAROLINA RSA 1 PARTNERSHIP Partnership
OHIO STATE CELLULAR PHONE COMPANY, INC. FLORIDA
OREGON RSA # 2, INC. OREGON
OREGON RSA # 3, INC. OREGON
OREGON RSA # 6, INC. OREGON
OREGON RSA NO. 2 LIMITED PARTNERSHIP Partnership
OREGON RSA NO. 3 LIMITED PARTNERSHIP Partnership
PEACE VALLEY CELLULAR TELEPHONE COMPANY DELAWARE
RACINE CELLULAR TELEPHONE COMPANY Partnership
SHEBOYGAN CELLULAR TELEPHONE COMPANY, INC. DELAWARE
SOUTH CANAAN CELLULAR TELEPHONE COMPANY PENNSYLVANIA
ST. LAWRENCE SEAWAY RSA CELLULAR, LP Partnership
TENNESSEE RSA # 3, INC. DELAWARE
TENNESSEE RSA # 4 SUB 2, INC. TENNESSEE
TEXAHOMA CELLULAR TELEPHONE COMPANY TEXAS
TEXAHOMA CELLULAR, L.P. Partnership
TEXAS # 20 RURAL CELLULAR, INC. TEXAS
TEXAS INVCO OF RSA # 6, INC. DELAWARE
TOWNSHIP CELLULAR TELEPHONE CO. DELAWARE
TRI-CITIES PAGING, INC. WASHINGTON
TRI-STATES CELLULAR COMMUNICATIONS, INC. MISSOURI
TULSA GENERAL PARTNER, INC. DELAWARE
UNITED STATES CELLULAR INVESTMENT COMPANY, INC. DELAWARE
UNITED STATES CELLULAR INVESTMENT CO. OF ALLENTOWN PENNSYLVANIA
UNITED STATES CELLULAR INVESTMENT COMPANY OF EAU CLAIRE WISCONSIN
UNITED STATES CELLULAR INVESTMENT COMPANY OF FRESNO, INC. CALIFORNIA
UNITED STATES CELLULAR INVESTMENT COMPANY OF GREEN BAY, INC. WISCONSIN
UNITED STATES CELLULAR INVESTMENT COMPANY OF OKLAHOMA CITY OKLAHOMA
UNITED STATES CELLULAR INVESTMENT COMPANY OF PORTSMOUTH, INC. NEW HAMPSHIRE
UNITED STATES CELLULAR INVESTMENT COMPANY OF ROCKFORD DELAWARE
UNITED STATES CELLULAR INVESTMENT COMPANY OF SANTA CRUZ, INC. CALIFORNIA
UNITED STATES CELLULAR INVESTMENT COMPANY OF ST. CLOUD MINNESOTA
UNITED STATES CELLULAR INVESTMENT CORPORATION OF LOS ANGELES INDIANA
UNITED STATES CELLULAR OPERATING COMPANY, INC. DELAWARE
UNITED STATES CELLULAR OPERATING COMPANY OF APPLETON, INC. INDIANA
UNITED STATES CELLULAR OPERATING COMPANY OF BANGOR MAINE
UNITED STATES CELLULAR OPERATING COMPANY OF BILOXI MISSISSIPPI
UNITED STATES CELLULAR OPERATING COMPANY OF CEDAR RAPIDS DELAWARE
UNITED STATES CELLULAR OPERATING COMPANY OF COLUMBIA MISSOURI
UNITED STATES CELLULAR OPERATING COMPANY -- DES MOINES IOWA
UNITED STATES CELLULAR OPERATING COMPANY OF DUBUQUE IOWA
UNITED STATES CELLULAR OPERATING COMPANY OF FT. PIERCE FLORIDA
UNITED STATES CELLULAR OPERATING COMPANY OF JOPLIN MISSOURI
UNITED STATES CELLULAR OPERATING COMPANY OF KENOSHA DELAWARE
UNITED STATES CELLULAR OPERATING COMPANY OF KNOXVILLE TENNESSEE
UNITED STATES CELLULAR OPERATING COMPANY OF LACROSSE, INC. WISCONSIN
UNITED STATES CELLULAR OPERATING COMPANY OF LEWISTON-AUBURN MAINE
UNITED STATES CELLULAR OPERATING COMPANY OF MANCHESTER-NASHUA, INC. NEW HAMPSHIRE
</TABLE>
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
INCORPORATION
-------------
<S> <C>
UNITED STATES CELLULAR OPERATING COMPANY OF MEDFORD OREGON
UNITED STATES CELLULAR OPERATING COMPANY OF RICHLAND WASHINGTON
UNITED STATES CELLULAR OPERATING COMPANY OF TULSA, INC. OKLAHOMA
UNITED STATES CELLULAR OPERATING COMPANY OF WATERLOO IOWA
UNITED STATES CELLULAR OPERATING COMPANY OF WAUSAU, INC. WISCONSIN
UNITED STATES CELLULAR OPERATING COMPANY OF YAKIMA WASHINGTON
UNITED STATES CELLULAR TELEPHONE COMPANY (GREATER KNOXVILLE), L.P. Partnership
UNITED STATES CELLULAR TELEPHONE COMPANY OF GREATER TULSA, L.L.C. OKLAHOMA
UNIVERSAL CELLULAR FOR EAU CLAIRE MSA, INC. WISCONSIN
USCC PAYROLL CORPORATION DELAWARE
USCC REAL ESTATE CORPORATION DELAWARE
USCIC OF AMARILLO, INC. DELAWARE
USCIC OF BROWNSVILLE, INC. DELAWARE
USCIC OF JACKSON, INC. DELAWARE
USCIC OF MCALLEN, INC. DELAWARE
USCIC OF NORTH CAROLINA RSA # 1, INC. DELAWARE
USCIC OF OHIO RSA #9, INC. (f.k.a. Carry Phone, Inc.) DELAWARE
USCOC OF CHARLOTTESVILLE, INC. VIRGINIA
USCOC OF CORPUS CHRISTI, INC. TEXAS
USCOC OF CUMBERLAND, INC. MARYLAND
USCOC OF GREATER IOWA, INC PENNSYLVANIA
USCOC OF HAWAII 3, INC. DELAWARE
USCOC OF IDAHO RSA # 5, INC DELAWARE
USCOC OF ILLINOIS RSA # 1, INC. VIRGINIA
USCOC OF ILLINOIS RSA # 4, INC. ILLINOIS
USCOC OF IOWA RSA # 1, INC. IOWA
USCOC OF IOWA RSA # 16, INC. DELAWARE
USCOC OF JACKSONVILLE, INC. NORTH CAROLINA
USCOC OF JACK-WIL, INC. DELAWARE
USCOC OF MISSOURI RSA # 13, INC. DELAWARE
USCOC OF MISSOURI RSA # 5, INC. ILLINOIS
USCOC OF NEW HAMPSHIRE RSA # 2, INC. DELAWARE
USCOC OF NORTH CAROLINA RSA # 7, INC. NORTH CAROLINA
USCOC OF OHIO RSA #7, INC. COLORADO
USCOC OF OKLAHOMA RSA # 10, INC. OKLAHOMA
USCOC OF OREGON RSA # 5, INC. DELAWARE
USCOC OF PENNSYLVANIA RSA #10-B2, INC. DELAWARE
USCOC OF PORTLAND, INC. MAINE
USCOC OF ROCKFORD, INC. ILLINOIS
USCOC OF SOUTH CAROLINA RSA # 4, INC. SOUTH CAROLINA
USCOC OF TALLAHASSEE FLORIDA
USCOC OF TEXAHOMA TEXAS
USCOC OF VICTORIA, INC. TEXAS
USCOC OF VIRGINIA RSA # 2, INC. VIRGINIA
USCOC OF VIRGINIA RSA # 3, INC. VIRGINIA
USCOC OF WASHINGTON 4, INC. DELAWARE
USCOC OF WILMINGTON, INC. NORTH CAROLINA
USCOC OF WISCONSIN RSA #7, INC. DELAWARE
VERMONT RSA NO. 2-B2, INC. DELAWARE
VICTORIA CELLULAR CORPORATION TEXAS
VICTORIA CELLULAR PARTNERSHIP Partnership
VIRGINIA RSA # 4, INC. VIRGINIA
VIRGINIA RSA # 7, INC. VIRGINIA
WARD BUTTE JOINT VENTURE Partnership
WASHINGTON RSA # 5, INC. WASHINGTON
WATERLOO / CEDAR FALLS CELLTELCO PARTNERSHIP Partnership
WESTERN SUB-RSA LIMITED PARTNERSHIP Partnership
WILMINGTON CELLULAR PARTNERSHIP Partnership
WILMINGTON CELLULAR TELEPHONE CO. NORTH CAROLINA
</TABLE>
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
INCORPORATION
-------------
<S> <C>
YAKIMA MSA LIMITED PARTNERSHIP Partnership
YAKIMA VALLEY PAGING LIMITED PARTNERSHIP Partnership
TDS TELECOMMUNICATIONS
TDS TELECOMMUNICATIONS CORPORATION DELAWARE
INCUMBENT LOCAL EXCHANGE COMPANIES
AMELIA TELEPHONE CORPORATION VIRGINIA
ARCADIA TELEPHONE COMPANY OHIO
ARIZONA TELEPHONE COMPANY ARIZONA
ARVIG TELECOM, INC. MINNESOTA
ARVIG TELEPHONE COMPANY MINNESOTA
ASOTIN TELEPHONE COMPANY WASHINGTON
BADGER TELECOM, INC. WISCONSIN
BARNARDSVILLE TELEPHONE COMPANY NORTH CAROLINA
BLACK EARTH TELEPHONE COMPANY, INC. WISCONSIN
BLUE RIDGE TELEPHONE COMPANY GEORGIA
BONDUEL TELEPHONE COMPANY WISCONSIN
BRIDGEWATER TELEPHONE COMPANY MINNESOTA
BURLINGTON, BRIGHTON & WHEATLAND TELEPHONE COMPANY WISCONSIN
BUTLER TELEPHONE COMPANY, INC. ALABAMA
CALHOUN CITY TELEPHONE COMPANY, INC. MISSISSIPPI
CAMDEN TELEPHONE COMPANY INDIANA
CAMDEN TELEPHONE AND TELEGRAPH COMPANY, INC. GEORGIA
CENTRAL STATE TELEPHONE COMPANY WISCONSIN
CHATHAM TELEPHONE COMPANY MICHIGAN
CLEVELAND COUNTY TELEPHONE COMPANY, INC. ARKANSAS
COMMUNICATIONS CORPORATION OF INDIANA INDIANA
COMMUNICATIONS CORPORATION OF MICHIGAN MICHIGAN
COMMUNICATIONS CORPORATION OF SOUTHERN INDIANA INDIANA
CONCORD TELEPHONE EXCHANGE, INC. TENNESSEE
CONTINENTAL TELEPHONE COMPANY OHIO
DANUBE COMMUNICATIONS, INC. MINNESOTA
DECATUR TELEPHONE COMPANY ARKANSAS
DELTA COUNTY TELE-COMM, INC. COLORADO
DEPOSIT TELEPHONE COMPANY NEW YORK
EASTCOAST TELECOM, INC. WISCONSIN
EDWARDS TELEPHONE COMPANY, INC. NEW YORK
GRANTLAND TELECOM, INC. WISCONSIN
HAMPDEN TELEPHONE COMPANY MAINE
HAPPY VALLEY TELEPHONE COMPANY CALIFORNIA
HARTLAND & ST. ALBANS TELEPHONE COMPANY MAINE
HOME TELEPHONE COMPANY, INC. INDIANA
HOME TELEPHONE COMPANY OREGON
HOME TELEPHONE COMPANY OF PITTSBORO, INC. INDIANA
HORNITOS TELEPHONE COMPANY CALIFORNIA
HUMPHREYS COUNTY TELEPHONE COMPANY TENNESSEE
ISLAND TELEPHONE COMPANY MICHIGAN
KEARSARGE TELEPHONE COMPANY NEW HAMPSHIRE
LESLIE COUNTY TELEPHONE COMPANY KENTUCKY
LEWIS RIVER TELEPHONE COMPANY WASHINGTON
LEWISPORT TELEPHONE COMPANY, INC. KENTUCKY
LITTLE MIAMI COMMUNICATIONS CORPORATION OHIO
LUDLOW TELEPHONE COMPANY VERMONT
MAHANOY & MAHANTANGO TELEPHONE COMPANY PENNSYLVANIA
MCCLELLANVILLE TELEPHONE COMPANY, INC. SOUTH CAROLINA
</TABLE>
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
INCORPORATION
-------------
<S> <C>
MCDANIEL TELEPHONE COMPANY DELAWARE
MID-AMERICA TELEPHONE, INC. OKLAHOMA
MID-STATE TELEPHONE COMPANY MINNESOTA
MIDWAY TELEPHONE COMPANY WISCONSIN
MOUNT VERNON TELEPHONE COMPANY WISCONSIN
MYRTLE TELEPHONE COMPANY MISSISSIPPI
NELSON BALLGROUND TELEPHONE COMPANY GEORGIA
NEW CASTLE TELEPHONE COMPANY VIRGINIA
NEW LONDON TELEPHONE COMPANY MISSOURI
NORTHFIELD TELEPHONE COMPANY VERMONT
NORWAY TELEPHONE COMPANY, INC. SOUTH CAROLINA
OAKMAN TELEPHONE COMPANY, INC. ALABAMA
OAKWOOD TELEPHONE COMPANY OHIO
OKLAHOMA COMMUNICATION SYSTEMS, INC. OKLAHOMA
ORCHARD FARM TELEPHONE COMPANY MISSOURI
ORISKANY FALLS TELEPHONE CORPORATION NEW YORK
PEOPLES TELEPHONE COMPANY ALABAMA
PERKINSVILLE TELEPHONE COMPANY, INC. VERMONT
PORT BYRON TELEPHONE COMPANY NEW YORK
POTLATCH TELEPHONE COMPANY IDAHO
QUINCY TELEPHONE COMPANY FLORIDA
RIVERSIDE TELECOM, INC. WISCONSIN
S & W TELEPHONE COMPANY, INC. INDIANA
SALEM TELEPHONE COMPANY, INC. KENTUCKY
SALUDA MOUNTAIN TELEPHONE COMPANY DELAWARE
SCANDINAVIA TELEPHONE COMPANY WISCONSIN
SERVICE TELEPHONE COMPANY, INC. NORTH CAROLINA
SHIAWASSEE TELEPHONE COMPANY MICHIGAN
SOMERSET TELEPHONE COMPANY MAINE
SOUTHEAST MISSISSIPPI TELEPHONE COMPANY MISSISSIPPI
SOUTHWESTERN TELEPHONE COMPANY ARIZONA
ST STEPHEN TELEPHONE COMPANY SOUTH CAROLINA
STOCKBRIDGE & SHERWOOD TELEPHONE COMPANY, INC. WISCONSIN
STOUTLAND TELEPHONE COMPANY MISSOURI
STRASBURG TELEPHONE COMPANY COLORADO
SUGAR VALLEY TELEPHONE COMPANY PENNSYLVANIA
TELLICO TELEPHONE COMPANY, INC. TENNESSEE
TENNESSEE TELEPHONE COMPANY TENNESSEE
TENNEY TELEPHONE COMPANY WISCONSIN
THE ISLAND TELEPHONE COMPANY MAINE
THE MERCHANTS & FARMERS TELEPHONE COMPANY INDIANA
TIPTON TELEPHONE COMPANY, INC. INDIANA
TOWNSHIP TELEPHONE COMPANY DELAWARE
TRI-COUNTY TELEPHONE COMPANY, INC. INDIANA
TROY TELEPHONE COMPANY, INC. IDAHO
UTELCO, INC. WISCONSIN
VANLUE TELEPHONE COMPANY OHIO
VERNON TELEPHONE COMPANY NEW YORK
VIRGINIA TELEPHONE COMPANY VIRGINIA
WARREN TELEPHONE COMPANY MAINE
WAUNAKEE TELEPHONE COMPANY, INC. WISCONSIN
WEST PENOBSCOT TELEPHONE & TELEGRAPH COMPANY MAINE
WILLISTON TELEPHONE COMPANY SOUTH CAROLINA
WINSTED TELEPHONE COMPANY MINNESOTA
WINTERHAVEN TELEPHONE COMPANY CALIFORNIA
WOLVERINE TELEPHONE COMPANY MICHIGAN
WYANDOTTE TELEPHONE CO. OKLAHOMA
</TABLE>
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
INCORPORATION
-------------
<S> <C>
OTHER COMPANIES
ARVIG CELLULAR, INC. MINNESOTA
CAMDEN CELLULAR, INC. DELAWARE
DELTA COUNTY CATV, INC. COLORADO
GEORGIA RSA # 12 PARTNERSHIP GEORGIA
GLENNA-MARIE CORPORATION INDIANA
METROPLEX COMMUNICATIONS CORPORATION WASHINGTON
METROPLEX CABLE INC. WASHINGTON
PEQUOT LAKES CABLE COMPANY MINNESOTA
TDS DATACOM, INC. DELAWARE
TDS METROCOM, INC. DELAWARE
TDS TELECOM SERVICE CORPORATION IOWA
TRI-COUNTY COMMUNICATIONS CORPORATION INDIANA
TRI-COUNTY LONG DISTANCE INDIANA
U.S. LINK, INC. MINNESOTA
AERIAL COMMUNICATIONS
AERIAL COMMUNICATIONS, INC. DELAWARE
AERIAL OPERATING COMPANY, INC. DELAWARE
APT COLUMBUS, INC. DELAWARE
APT HOUSTON, INC. DELAWARE
APT KANSAS CITY, INC. DELAWARE
APT MINNEAPOLIS, INC. DELAWARE
APT TAMPA / ORLANDO, INC. DELAWARE
APT PITTSBURGH GENERAL PARTNER, INC. PENNSYLVANIA
APT PITTSBURGH LIMITED PARTNERSHIP Partnership
TDS GROUP
AFFILIATE FUND DELAWARE
COMMVEST, INC. DELAWARE
NATIONAL TELEPHONE & TELEGRAPH COMPANY CALIFORNIA
RUDEVCO, INC. CALIFORNIA
SUTTLE PRESS INC. WISCONSIN
TDS CABLE COMMUNICATIONS CORP. IOWA
TDS CAPITAL TRUST I DELAWARE
TDS CAPITAL TRUST III DELAWARE
TDS CAPITAL TRUST III DELAWARE
TDS REAL ESTATE INVESTMENT CORPORATION WISCONSIN
TELECOM TECHNOLOGIES FUND LLC (TTF)
VOLUTEER TV CABLE CO. TENNESSEE
PAGING
API MERGER CORP. DELAWARE
AMERICAN PAGING, INC. (OF CALIFORNIA) CALIFORNIA
PAGING HOLDING CO. DELAWARE
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of Telephone and Data Systems, Inc. of our report
dated January 26, 2000 on the consolidated financial statements of Telephone
and Data Systems, Inc. and Subsidiaries, (the "Company") included in the
Company's 1999 Annual Report to Shareholders, to the inclusion in this Form
10-K of our report dated January 26, 2000 on the financial statement
schedules of the Company and to the incorporation by reference of such
reports into the Company's previously filed S-8 Registration Statements, File
No. 33-1192, File No. 33-35172, File No. 33-57257, File No. 33-64035, File
No. 333-01041, File No. 333-23947, File No. 333-58121, File No. 333-58127,
File No. 333-76453 and File No. 333-58121, and into the Company's previously
filed S-3 Registration Statements, File No. 33-8564, File No. 33-8857, File
No. 33-68456, File No. 33-59435 and File No. 333-38355, and into the
Company's previously filed S-4 Registration Statements, File No. 33-45570 and
File No. 33-64293.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF TELEPHONE AND DATA SYSTEMS, INC. AS OF
DECEMBER 31, 1999, AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 111,010
<SECURITIES> 843,280
<RECEIVABLES> 327,550
<ALLOWANCES> 10,525
<INVENTORY> 39,880
<CURRENT-ASSETS> 508,008
<PP&E> 3,373,209
<DEPRECIATION> 1,227,320
<TOTAL-ASSETS> 5,375,828
<CURRENT-LIABILITIES> 369,672
<BONDS> 1,279,877
0
9,005
<COMMON> 624
<OTHER-SE> 2,482,477
<TOTAL-LIABILITY-AND-EQUITY> 5,375,828
<SALES> 0
<TOTAL-REVENUES> 1,963,098
<CGS> 0
<TOTAL-COSTS> 1,592,705
<OTHER-EXPENSES> (296,728)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124,794
<INCOME-PRETAX> 542,327
<INCOME-TAX> 228,176
<INCOME-CONTINUING> 314,151
<DISCONTINUED> (84,190)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 229,961
<EPS-BASIC> 3.72
<EPS-DILUTED> 3.67
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF TELEPHONE AND DATA SYSTEMS INC. AS OF
MARCH 31, 1999 AND JUNE 30, 1999, AND FOR THE PERIODS THEN ENDED RESTATED TO
REFLECT AERIAL COMMUNICATIONS, INC. AS DISCONTINUED OPERATION, AND IS
QUALFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JAN-01-1999
<PERIOD-END> MAR-31-1999 JUN-30-1999
<CASH> 48,606 79,359
<SECURITIES> 509,912 524,584
<RECEIVABLES> 250,739 331,145
<ALLOWANCES> 7,221 7,962
<INVENTORY> 21,778 33,032
<CURRENT-ASSETS> 344,703 464,842
<PP&E> 3,163,142 3,231,846
<DEPRECIATION> 1,115,220 1,164,665
<TOTAL-ASSETS> 5,141,688 5,307,223
<CURRENT-LIABILITIES> 547,080 555,457
<BONDS> 1,277,222 1,277,838
0 0
24,029 23,025
<COMMON> 619 621
<OTHER-SE> 2,311,788 2,353,280
<TOTAL-LIABILITY-AND-EQUITY> 5,141,688 5,307,223
<SALES> 0 0
<TOTAL-REVENUES> 454,950 952,209
<CGS> 0 0
<TOTAL-COSTS> 375,882 769,473
<OTHER-EXPENSES> (10,546) (300,234)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 31,766 63,645
<INCOME-PRETAX> 57,848 419,325
<INCOME-TAX> 24,814 169,586
<INCOME-CONTINUING> 33,034 249,739
<DISCONTINUED> (22,634)<F1> (56,796)<F1>
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,400 192,943
<EPS-BASIC> 0.16 3.13
<EPS-DILUTED> 0.16 3.08
<FN>
<F1>THE AMOUNTS ABOVE HAVE BEEN RESTATED TO REFLECT AERIAL COMMUNICATIONS,
INC. AS A DISCONTINUED OPEARTION.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF TELEPHONE AND DATA SYSTEMS, INC. AS OF
MARCH 31, 1998, JUNE 30, 1998, SEPTEMBER 30, 1999 AND DECEMBER 31, 1998, AND FOR
THE PERIODS THEN ENDED RESTATED TO REFLECT AERIAL COMMUNICATIONS, INC. AS A
DISCONTINUED OPERATION, AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998 JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998 DEC-31-1998
<CASH> 65,670 90,009 77,078 45,139
<SECURITIES> 248,482 308,395 299,161 382,706
<RECEIVABLES> 218,351 242,058 259,779 263,565
<ALLOWANCES> 7,419 5,195 6,060 6,732
<INVENTORY> 20,949 20,419 22,840 25,243
<CURRENT-ASSETS> 339,312 385,092 387,706 356,743
<PP&E> 2,828,659 2,859,877 2,959,605 3,078,053
<DEPRECIATION> 942,991 977,550 1,032,312 1,057,961
<TOTAL-ASSETS> 4,770,458 4,892,097 4,942,234 5,042,604
<CURRENT-LIABILITIES> 697,875 801,222 496,969 548,922
<BONDS> 1,072,479 1,072,449 1,273,942 1,275,086
0 0 0 0
29,116 27,437 27,016 25,985
<COMMON> 61,673 618 618 619
<OTHER-SE> 1,996,491 2,070,679 2,212,284 2,237,289
<TOTAL-LIABILITY-AND-EQUITY> 4,770,458 4,892,097 4,942,234 5,042,604
<SALES> 0 0 0 0
<TOTAL-REVENUES> 359,323 769,586 1,204,956 1,650,571
<CGS> 0 0 0 0
<TOTAL-COSTS> 304,136 641,444 991,124 1,380,084
<OTHER-EXPENSES> (192,624) (193,706) (191,105) (207,845)
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 32,440 65,664 99,578 131,875
<INCOME-PRETAX> 215,371 256,184 305,359 346,457
<INCOME-TAX> 86,206 104,710 127,603 145,058
<INCOME-CONTINUING> 129,165 151,474 177,756 201,399
<DISCONTINUED> (54,995)<F1> (90,981)<F1> (110,935)<F1> (136,991)<F1>
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 74,170 60,493 66,821 64,408
<EPS-BASIC> 1.21 0.98 1.08 1.03
<EPS-DILUTED> 1.19 0.96 1.05 1.01
<FN>
<F1>THE AMOUNTS ABOVE HAVE BEEN RESTATED TO REFLECT AERIAL
COMMUNICATIONS, INC. AS A DISCONTINUED OPERATIONS.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF TELEPHONE AND DATA SYSTEMS, INC. AS OF
DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED RESTATED TO REFLECT AERIAL
COMMUNICATIONS, INC. AS A DISCONTINUED OPERATION, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 45,996
<SECURITIES> 1,621
<RECEIVABLES> 230,933
<ALLOWANCES> 7,850
<INVENTORY> 29,178
<CURRENT-ASSETS> 350,297
<PP&E> 2,848,163
<DEPRECIATION> 955,607
<TOTAL-ASSETS> 4,561,957
<CURRENT-LIABILITIES> 799,255
<BONDS> 1,067,778
0
32,467
<COMMON> 61,379
<OTHER-SE> 1,906,740
<TOTAL-LIABILITY-AND-EQUITY> 4,561,957
<SALES> 0
<TOTAL-REVENUES> 1,314,589
<CGS> 0
<TOTAL-COSTS> 1,084,903
<OTHER-EXPENSES> (50,997)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93,533
<INCOME-PRETAX> 187,150
<INCOME-TAX> 87,405
<INCOME-CONTINUING> 99,745
<DISCONTINUED> (109,294)<F1>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,549)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.21)
<FN>
<F1>THE AMOUNTS ABOVE HAVE BEEN RESTATED TO REFLECT AERIAL
COMMUNICATIONS, INC. AS A DISCONTINUED OPERATIONS.
</FN>
</TABLE>
