<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1998
REGISTRATION NO. 333-48453
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TELEPHONE AND DATA SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 36-2669023
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
30 NORTH LASALLE STREET
CHICAGO, ILLINOIS 60602
(312) 630-1900
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
LEROY T. CARLSON, CHAIRMAN
TELEPHONE AND DATA SYSTEMS, INC.
30 NORTH LASALLE STREET
CHICAGO, ILLINOIS 60602
(312) 630-1900
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
--------------------------
Copies to:
<TABLE>
<S> <C>
WILBUR C. DELP, JR., ESQ. THOMAS H. KENNEDY, ESQ.
SIDLEY & AUSTIN SKADDEN, ARPS, SLATE, MEAGHER & FLOM
ONE FIRST NATIONAL PLAZA LLP
CHICAGO, ILLINOIS 60603 919 THIRD AVENUE
(312) 853-7000 NEW YORK, NEW YORK 10022
(212) 735-3000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS REASONABLY PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES
EFFECTIVE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 15, 1998
U.S. PROSPECTUS
13,500,000 SHARES
[LOGO]
TDS TELECOMMUNICATIONS GROUP COMMON SHARES
OF
TELEPHONE AND DATA SYSTEMS, INC.
Of the 13,500,000 TDS Telecommunications Group Common Shares ("Telecom Group
Shares") being offered hereby by Telephone and Data Systems, Inc. ("TDS" or the
"Company"), Telecom Group Shares are being offered in the United
States and Canada and Telecom Group Shares are being offered in a
concurrent international offering outside the United States and Canada. Such
offerings are collectively referred to herein as the "Offerings." The net
proceeds of the Offerings will be allocated to the Telecom Group (as defined
herein). Prior to the Offerings, there has been no public market for the Telecom
Group Shares. It is currently estimated that the initial public offering price
will be between $12.50 and $14.50 per share. The initial public offering price
and the aggregate underwriting discount per share are identical for both
Offerings. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price.
The Telecom Group Shares are a class of common stock of the Company and are
intended to reflect the separate performance of the Telecom Group, including the
Company's interest in TDS Telecommunications Corporation, a Delaware corporation
and a wholly-owned subsidiary of the Company ("TDS Telecom"), which concurrently
owns and operates landline telephone companies. The Telecom Group Shares are one
of five classes of common stock of the Company expected to be outstanding
following the Offerings and certain related transactions described herein.
Holders of Telecom Group Shares and the other classes of common stock of the
Company are holders of common stock of the Company and continue to be subject to
all the risks of an investment in the Company and all of its businesses, assets
and liabilities.
The other classes of common stock of the Company are the Common Shares, the
Series A Common Shares, the United States Cellular Group Common Shares
("Cellular Group Shares") and the Aerial Communications Group Common Shares
("Aerial Group Shares"). The Telecom Group Shares offered hereby, the Cellular
Group Shares and the Aerial Group Shares are collectively referred to herein as
the "Tracking Stocks." See "Description of Capital Stock" for a description of
the rights and privileges of shares of each class of TDS common stock.
The holders of Telecom Group Shares vote as a group together with the
holders of certain shares of preferred stock of the Company, the Common Shares,
the Cellular Group Shares and the Aerial Group Shares in the election of 25% of
the directors plus one additional director. Initially, holders of Telecom Group
Shares will have one vote per share. Thereafter, the number of votes which such
shares will have in such vote will vary based upon the average Market
Capitalization (as defined herein) of such class compared to the average Market
Capitalization of all shares held by the Public Holders (as defined herein). The
Telecom Group Shares are not entitled to vote on any other matters except as
required by law.
Subject to the dividend preference of shares of TDS preferred stock,
dividends on issued Telecom Group Shares will be paid at the discretion of the
Board of Directors of the Company and will be payable only out of the lesser of
(i) the assets of the Company legally available for the payment of dividends and
(ii) the Telecom Group's Available Dividend Amount (as defined herein), an
amount approximately equal to the product of the Outstanding Interest Fraction
(as defined herein) and the amount of assets that would be available for the
payment of dividends under Delaware law if the Telecom Group were a separate
subsidiary.
TDS has made an application for listing of the Telecom Group Shares on the
American Stock Exchange ("AMEX") under the symbol "TLG."
--------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS COMPANY (1)
<S> <C> <C> <C>
Per Share $ $ $
Total (2) $ $ $
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $675,000.
(2) The Company has granted to the U.S. Underwriters and the International
Managers a 30-day option to purchase up to an additional 2,025,000 Telecom
Group Shares solely to cover over-allotments, if any. If the option is
exercised in full, the total Price to Public, the Underwriting Discounts and
Commissions, and the Proceeds to Company will total $ , $ ,
and $ , respectively. See "Underwriting."
The Telecom Group Shares offered by this Prospectus are offered by the
several U.S. Underwriters named herein, subject to prior sale, when, as and if
delivered to and accepted by the U.S. Underwriters and subject to such U.S.
Underwriters' right to reject any order in whole or in part and to withdraw,
cancel or modify the offer without notice. It is expected that the Telecom Group
Shares will be available for delivery on or about , 1998 against
payment in immediately available funds.
JOINT GLOBAL COORDINATORS AND BOOK RUNNERS
(IN ALPHABETICAL ORDER)
CREDIT SUISSE FIRST BOSTON SALOMON SMITH BARNEY
-----------
DONALDSON, LUFKIN & JENRETTE GOLDMAN, SACHS & CO.
SECURITIES CORPORATION
, 1998
<PAGE>
[LOGO]
TDS TELECOM'S OPERATIONS
[MAP DEPICTING TDS TELECOM'S CORPORATE OPERATIONS]
"TDS Telecom" is a trademark of the Company.
- ------------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE TELECOM
GROUP SHARES OFFERED HEREBY INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMEX OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE "UNDERWRITING".
2
<PAGE>
AVAILABLE INFORMATION
The Company files reports, proxy statements and other information with the
Securities and Exchange Commission ("SEC"). You may inspect and copy such
reports, proxy statements and other information at the public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the following Regional Offices of
the SEC: Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies
may be obtained by mail at prescribed rates from the Public Reference Section of
the SEC at its principal office at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information. Such
materials also may be accessed electronically by means of the SEC's web site at
http://www.sec.gov. Copies of such materials may also be inspected at the
offices of the American Stock Exchange, 86 Trinity Place, New York, New York
10006.
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") with the SEC pursuant to the Securities Act of 1933,
as amended (the "Securities Act") with respect to the Telecom Group Shares being
offered hereby. This Prospectus is a part of that Registration Statement. As
allowed by SEC rules, this Prospectus does not contain all of the information
which you can find in the Registration Statement. You are referred to the
Registration Statement and the Exhibits thereto for further information. This
document is qualified in its entirety by such other information.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows the Company to "incorporate by reference" information into
this Prospectus, which means that we can disclose important information to you
by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be a part of this Prospectus,
except for any information superseded by information in this Prospectus. This
Prospectus incorporates by reference the documents set forth below that have
been previously filed with the SEC. These documents contain important
information about the Company's businesses and finances.
1. TDS's Annual Report on Form 10-K for the year ended December 31, 1997;
2. TDS's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998;
3. TDS's Current Reports on Form 8-K reporting events on January 28,
February 10, March 24, April 17, April 21, and April 27, 1998; and
4. TDS's Proxy Statement for the Special Meeting of Shareholders held April
27, 1998 included as a part of TDS's Registration Statement on Form S-4
(Registration No. 333-42535), as amended.
This Prospectus also incorporates by reference additional documents that may
be filed by the Company with the SEC following the date of this Prospectus. All
reports and other documents filed by TDS pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
subsequent to the date of this Prospectus and prior to the termination of the
Offerings shall be deemed to be incorporated by reference and to be part of this
Prospectus from the dates of filing of such reports and documents (such
documents, and the documents enumerated above, being hereinafter referred to as
"Incorporated Documents").
You may obtain copies of the documents which are incorporated by reference
in this Prospectus (other than exhibits to such documents which are not
specifically incorporated by reference in this Prospectus), without charge, upon
written or oral request to Investor Relations, Telephone and Data Systems, Inc.,
30 North LaSalle Street, Chicago, IL 60603, (312) 630-1900.
You should rely only on the information contained or incorporated by
reference in this Prospectus. We have not authorized anyone to provide you with
information that is different from what is contained in this Prospectus. You
should not assume that the information contained in this Prospectus is accurate
as of any date other than the date of this Prospectus, and neither the delivery
of this Prospectus nor the distribution of any securities hereunder shall create
any implication to the contrary.
3
<PAGE>
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This Prospectus (including "Telecom Group Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Telephone and
Data Systems, Inc. Management's Discussion and Analysis of Financial Condition
and Results of Operations"), contains "forward-looking" statements, as defined
in the Private Securities Litigation Reform Act of 1995, that are based on
current expectations, estimates and projections. Statements that are not
historical facts, including statements about TDS's and/ or TDS Telecom's beliefs
and expectations are forward-looking statements. These statements contain
potential risks and uncertainties and therefore, actual results may differ
materially. TDS undertakes no obligation to update publicly any forward-looking
statements whether as a result of new information, future events or otherwise.
Important factors that may affect these projections or expectations include,
but are not limited to: changes in the overall economy; changes in competition
in markets in which TDS and/or TDS Telecom operate; advances in
telecommunications technology; changes in the telecommunications regulatory
environment; pending and future litigation; availability of future financing;
start-up of personal communications services operations; unanticipated changes
in growth in cellular customers, penetration rates, churn rates and the mix of
products and services offered in TDS's and/or TDS Telecom's markets. Readers
should evaluate any statements in light of these important factors.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
CONTAINED ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. SEE
"AVAILABLE INFORMATION." UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED
IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT
OPTION. FOR DEFINITIONS OF CERTAIN TERMS USED IN THIS SUMMARY, SEE "CERTAIN
DEFINITIONS."
TDS TELECOM
TDS Telecom provides modern, high-quality telecommunications services to
rural and suburban communities. Through its incumbent local exchange carriers
("ILECs"), TDS Telecom served approximately 528,900 access lines as of March 31,
1998 and on this basis is the ninth largest non-Bell local exchange telephone
company in the United States. TDS Telecom's ILEC markets are located in 28
states throughout the United States. At March 31, 1998, approximately 56% of the
Telecom Group's access lines were in Alabama, Georgia, Indiana, Minnesota,
Tennessee, and Wisconsin. Internal access line growth was 5.4% during the twelve
month period ended March 31, 1998.
TDS Telecom recently began providing telecommunications services as a
facilities-based competitive local exchange carrier ("CLEC") in Madison,
Wisconsin and is developing CLEC operations in selected additional markets in
Wisconsin and Minnesota. TDS Telecom is also pursuing emerging
telecommunications businesses such as Internet and other data services.
TDS Telecom's revenues for the fiscal year ended December 31, 1997 were
$444.2 million, representing an increase of 12.3% over 1996. During 1997, TDS
Telecom's access lines increased by 6.4%.
BUSINESS STRATEGY
TDS Telecom has historically produced revenue growth in its ILEC markets by
providing its customers with state-of-the-art telecommunications solutions,
maintaining a high quality of on-going service and selectively acquiring
landline telephone companies. TDS Telecom expects to benefit from the following
operational and market-related advantages: (i) a modern network substantially
upgraded to provide a variety of advanced calling services, such as call
waiting, call forwarding, three-way calling, speed dialing and Caller ID
("Advanced Calling Services"), (ii) a strong local presence and established
brand name, (iii) economies of scale not available to smaller independent
operators, (iv) attractive and growing markets, (v) a favorable regulatory
environment and (vi) markets which are likely to be less competitive than urban
markets.
TDS Telecom intends to: (i) grow and protect TDS Telecom's core ILEC
business, and pursue acquisitions of operating telephone companies, (ii) provide
service to targeted CLEC markets by leveraging its technical and managerial
expertise and telecommunications infrastructure from its existing ILEC
operations, (iii) pursue emerging telecommunications businesses, such as
Internet and other data services, to become a leading provider of communications
products and services in all of its markets, and (iv) enhance profitability
through improved operating efficiencies.
GROW CORE ILEC BUSINESS
TDS Telecom believes that the key to growing and protecting its existing
ILEC markets is to continue to build customer loyalty by providing superior
customer service, offering a full range of standardized products and services
not typically available in rural markets and rapidly developing new data
products and services. TDS Telecom maintains a local presence in each of its
ILEC markets in order to provide superior customer service. Management intends
to increase revenue in its ILEC business by meeting increased demand for
telecommunications services in TDS Telecom's existing geographical markets,
including providing service to new customers, upgrading existing customers to
higher grades of service and providing
5
<PAGE>
Advanced Calling Services and other newly introduced services. TDS Telecom
increasingly markets itself to consumers as a single telecommunications provider
offering bundled packages of advanced telecommunications services including
local, long-distance, Internet and other data services. These service packages
will further build brand equity in the TDS Telecom name. In addition, TDS
Telecom believes it can achieve cost economies through selective acquisitions
designed to increase the geographic clustering of its ILEC markets. TDS Telecom
continually reviews attractive opportunities to acquire operating telephone
companies. Since January 1, 1993, TDS Telecom has acquired 18 telephone
companies serving a total of 95,600 access lines for an aggregate consideration
totaling $197 million.
LEVERAGE ILEC STRENGTHS INTO CLEC MARKETS
TDS Telecom is providing CLEC services in certain targeted third-tier cities
which are geographically proximate to existing TDS Telecom facilities and
service areas. TDS Telecom believes that service levels have deteriorated in
certain markets, thereby creating an opportunity for TDS Telecom to compete
effectively in those markets. In addition, TDS Telecom believes that the smaller
size of these markets may discourage competition from additional
facilities-based CLECs. Through March 31, 1998, TDS Telecom had invested $15
million to install a digital switch and to construct 54 miles of fiber optic
cable in and around Madison, Wisconsin. TDS Telecom initiated service in Madison
as a CLEC in January 1998 and is providing service to approximately 4,000
business access lines. In addition, TDS Telecom commenced operations as a CLEC
in secondary markets in Minnesota in January 1998, initially as a reseller,
through its regional long-distance company, USLink, and is providing service to
approximately 5,000 business access lines. TDS Telecom intends to initiate
service as a facilities-based CLEC in Appleton and Green Bay, Wisconsin, in
mid-1998.
TDS Telecom's CLEC strategy is designed to leverage its existing
infrastructure to facilitate early entry into new CLEC markets and to complement
its ILEC clustering strategy by focusing on markets that are geographically
proximate to existing operations. TDS Telecom believes that significant
synergies exist between its ILEC and CLEC businesses. TDS Telecom is able to
utilize existing resources and business processes that currently serve ILEC
markets in developing and expanding its CLEC operations, including
administrative and financial support, marketing and new product development
support, information technology and systems, and shared network systems support.
These synergies reduce the overall time to market and cost required for TDS
Telecom to expand into its new CLEC markets.
PURSUE EMERGING DATA MARKETS
Data communications is one of the fastest growing segments of the
telecommunications services industry. According to the Yankee Group, data usage
generated $10.9 billion in revenues in 1995 and is projected to grow at a
compound annual growth rate of 23.6% to $31.4 billion in revenues in 2000. In
light of the growth of the use of the Internet and rapid introduction of new
telecommunications technology, TDS Telecom intends to offer a full range of data
products to its customers, including Internet access and, potentially, ATM,
Frame Relay, high speed Digital Subscriber Loop ("xDSL") and other products, if
appropriate, in all of its markets, thereby positioning itself as a full-service
data communications service provider. Most of TDS Telecom's data products are in
the early stages of development. TDS Telecom currently provides Internet access
service to approximately 40,000 customers and has developed a Local Area Network
("LAN") wiring business as part of its strategy to enter the data market.
ENHANCE PROFITABILITY THROUGH IMPROVED OPERATING EFFICIENCIES
TDS Telecom will continue to standardize operations, improve cost controls
and selectively invest in network facilities in order to realize increased cost
efficiencies across its businesses. For example, TDS Telecom's Network
Management Center enables TDS Telecom to more cost effectively monitor and
control its network than could be done regionally. At the end of 1997, TDS
Telecom's Network Management Center monitored 64% of its network. By the end of
1998, coverage is expected to increase to 100%.
6
<PAGE>
In addition, TDS Telecom is developing a Virtual Business Office ("VBO") to
provide high quality service to its customers on a cost-effective basis. The VBO
builds on TDS Telecom's current community-oriented customer service by linking
business offices through technology and standardized processes. When entering
new lines of business, TDS Telecom will in most cases use existing
infrastructure and resources to maximize cost efficiencies.
TELEPHONE AND DATA SYSTEMS, INC.
TDS is a diversified telecommunications service company with established
landline telephone, cellular telephone, and radio paging operations and
developing personal communications services ("PCS") operations. At March 31,
1998, the Company, through its subsidiaries, served approximately 2.5 million
customer units in 37 states, including 528,900 telephone access lines, 1,817,000
cellular telephones, and 165,000 PCS telephones. For the year ended December 31,
1997, telephone operations provided 30% of the Company's consolidated revenues;
cellular telephone operations provided 60%; PCS operations provided 4%; and
paging operations provided 6% of such revenues. The Company's long-term business
development strategy is to expand its existing operations through internal
growth and acquisitions and to explore and develop other telecommunications
businesses that management believes will utilize the Company's expertise in
customer-based telecommunications services. The Company conducts its landline
telephone operations through TDS Telecom.
The Company conducts substantially all of its cellular telephone operations
through its 81%-owned subsidiary United States Cellular Corporation ("U.S.
Cellular"). U.S. Cellular and its subsidiaries own, operate and invest in
cellular telephone systems throughout the United States. At December 31, 1997,
U.S. Cellular was the eighth largest cellular telephone company in the United
States, based on the aggregate number of population equivalents ("POPs") it
owns. Since beginning operations in 1985, U.S. Cellular has expanded its
cellular networks and customer service operations to include 134 majority-owned
and managed markets ("Consolidated Markets") serving 1,710,000 customers at
December 31, 1997. U.S. Cellular's 143 managed markets, which include the 134
Consolidated Markets, are operated as eight market clusters. Each of these
clusters has a total population of more than one million, and four of the
clusters each have a population of more than two million.
The Company conducts substantially all of its PCS business through its
majority-owned subsidiary Aerial Communications, Inc. ("Aerial"). 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 auctions conducted by the Federal Communications Commission
("FCC") and are the newest entrants in the wireless telecommunications market.
Aerial, together with its subsidiaries, is a provider of PCS in the United
States, with licenses to provide service in the Minneapolis, Tampa-St.
Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus Major Trading
Areas ("MTAs") (collectively, the "PCS Markets"). The PCS Markets include
approximately 27.6 million POPs. The Company has constructed networks for its
PCS Markets using Global System for Mobile Communication technology and the
Company has commenced service in each of its PCS Markets. During the second
quarter of 1997, the Company completed the Phase I portion of its buildout of
its PCS Markets covering 60% of its MTA population. At December 31, 1997, the
Company had expanded its system coverage to approximately 80% of its MTA
population.
The Company previously conducted substantially all of its radio paging
operations through its subsidiary, American Paging, Inc. ("American Paging"). On
April 7, 1998, TDS announced that it had completed a transaction in which it
contributed substantially all of the assets and certain liabilities of American
Paging, and TSR Paging Inc. ("TSR") contributed all of its assets and
liabilities, to a limited liability company, TSR Wireless Holdings, LLC ("TSR
Holdings"), pursuant to a previously announced asset contribution agreement. TDS
has a 30% interest and TSR has a 70% interest in TSR Holdings. TSR Holdings
offers radio paging and related services through its subsidiaries.
7
<PAGE>
THE RECAPITALIZATION
On April 27, 1998, the shareholders of TDS approved a corporate
restructuring plan providing for, among other things, the creation of three new
classes of TDS common stock (the "Tracking Stocks") which are intended to
separately reflect the performance of TDS's landline telephone, cellular
telephone and PCS businesses, respectively (each, a "Tracking Group"). The
creation of the Tracking Stocks was intended by the Board of Directors of TDS
(the "Board") to result in:
GREATER MARKET RECOGNITION. The Tracking Stocks are intended to establish
greater market recognition of the value (individually and collectively) of TDS
and TDS's three principal business groups, thereby enhancing shareholder value
over the long term. Additionally, a public market for each of TDS's three
principal business groups should make it easier for the capital markets to
understand and value TDS's businesses and assets.
INCREASED LIQUIDITY. The Tracking Stocks are expected to create increased
liquidity in the equity interests related to TDS's subsidiaries.
FINANCING FLEXIBILITY. The Tracking Stocks should provide TDS with greater
flexibility in raising capital and making acquisitions, with equity securities
specifically related to the Tracking Groups. The Tracking Stocks may also be
used, rather than Common Shares, for TDS's employee stock purchase plans, stock
option plans and other employee benefit plans.
SHAREHOLDER FLEXIBILITY. The issuance and sale of the Tracking Stocks would
also provide shareholders with the opportunity to continue to invest in all of
the TDS businesses through the TDS Group or any one or more of the Tracking
Groups individually, depending upon their investment objectives.
CONSOLIDATED ENTERPRISE. The Tracking Stocks will retain for TDS the
advantages of doing business as a single company, including synergies that may
result from the eventual convergence of the telecommunications and wireless
industries and strategic, financial, operational benefits, economies of scale
and debt capacity that would not be available if the Tracking Groups were
separate legal entities. The Tracking Stocks would also permit TDS to retain the
advantages of tax consolidation.
FUTURE ALTERNATIVES. The Tracking Stocks will not preclude other
alternatives to increase shareholder value.
EMPLOYEE COMPENSATION. The ability to issue shares of one or more of the
Tracking Stocks would increase TDS's flexibility to tailor stock incentives to
employees by creating stocks that are tied directly to the stock price
performance of the Group in which they are employed.
ACCEPTANCE OF TRACKING STOCK CAPITAL STRUCTURES. The use of tracking stocks
by other companies, including several large, well known companies, has increased
in the last several years and tracking stocks are now generally well followed by
financial analysts and accepted by investors.
After the completion of the Offerings, the Board intends to authorize the
Distribution of Telecom Group Shares in the form of a stock dividend to holders
of Common Shares and the Series A Common Shares. It is currently expected that
the Distribution would take place in August 1998 or later. After giving effect
to the Offerings and the Distribution, the Telecom Group Shares that would be
held by the public would represent in the aggregate an approximately 80%
interest in the Telecom Group and the TDS Group would have a Retained Interest
of approximately 20% in the Telecom Group.
8
<PAGE>
The table below sets forth the number of Telecom Group Shares that would be
outstanding or retained by TDS after the Offerings and the Distribution based on
shares outstanding at April 30, 1998.
<TABLE>
<CAPTION>
NUMBER OF
SHARES %
------------ ---------
<S> <C> <C>
Telecom Group Shares:
Issued through the Offerings (1)................................... 13,500,000 20.0%
Issued through the Distribution.................................... 40,650,331 60.0%
Retained Interest held by TDS...................................... 13,550,110 20.0%
------------ ---------
Total.......................................................... 67,700,441 100.0%
------------ ---------
------------ ---------
</TABLE>
- ------------------------
(1) Assumes that the Underwriters do not exercise their over-allotment options.
9
<PAGE>
THE OFFERINGS
<TABLE>
<CAPTION>
Telecom Group Shares offered by
the Company:
<S> <C>
U.S. Offering............... shares
International Offering...... shares
Total..................... 13,500,000 shares
Telecom Group Shares outstanding
after the Distribution (based
on shares outstanding April
30, 1998)..................... 54,150,331 shares
Voting Rights................... The Telecom Group Shares have voting power
only in the election of certain directors
described below under "Rights and Terms of
Telecom Group Shares" and as required by law.
Use of Proceeds................. The net proceeds to the Company from the
offering are estimated to be approximately
$169.7 million ($195.3 million if the
over-allotment option is exercised in full),
at an assumed initial public offering price of
$13.50 per share after deducting the
underwriting discount and estimated offering
expenses payable by the Company. All of the
net proceeds will be allocated to the Telecom
Group and used to repay a portion of the
outstanding intercompany debt of TDS Telecom
to the Company. The Company intends to use the
net proceeds received from TDS Telecom to
repay certain short-term indebtedness.
Proposed AMEX symbol............ TLG
</TABLE>
RIGHTS AND TERMS OF TELECOM GROUP SHARES
The Telecom Group Shares are intended to reflect the separate performance of
the Telecom Group. Following completion of the Recapitalization, the Telecom
Group Shares will be one of three outstanding classes of Tracking Stock of the
Company and one of five outstanding classes of common stock of the Company. The
following summarizes the rights and terms of the Telecom Group Shares. For a
more detailed description, see "Description of Capital Stock--Description of
Telecom Group Shares and Other Tracking Stocks."
<TABLE>
<S> <C>
Voting for Directors............ The holders of Telecom Group Shares vote as a
group together with the holders of shares of
the other Tracking Stocks, any issued Special
Common Shares, Preferred Shares issued before
October 31, 1981 and Common Shares (together,
the "Public Holders") in the election of 25%
of the directors plus one additional director
(I.E., four directors based on a Board of
twelve directors). In such vote, holders of
Telecom Group Shares initially have one vote
per share. Thereafter, the number of votes
which such shares will have in such vote will
vary based on the average Market
Capitalization of the Telecom Group Shares
compared to the average Market Capitalization
of all shares held by the Public Holders,
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
calculated over the twenty-Trading Day period
ending ten Trading Days prior to the record
date for each annual meeting of shareholders.
It is anticipated that the Telecom Group
Shares will have approximately one vote per
share based on anticipated market values,
although this may change over time.
Dividends....................... Subject to the dividend preference of the
Preferred Shares, dividends on issued Telecom
Group Shares are payable only out of the
lesser of (i) the assets of the Company
legally available for the payment of dividends
and (ii) the Telecom Group's Available
Dividend Amount. The Available Dividend Amount
is intended to be similar to an amount equal
to the product of the Outstanding Interest
Fraction and the amount of assets that would
be available for the payment of dividends
under Delaware law if such Tracking Group were
a separate subsidiary. The Board initially
intends to establish a policy of declaring an
annual dividend of $0.50 per Telecom Group
Share. Dividends are expected to be paid
quarterly and will be paid on Telecom Group
Shares issued in the Offerings if outstanding
prior to the Distribution.
With respect to stock dividends that may be
issued from time to time by the Board, holders
of Telecom Group Shares may receive additional
Telecom Group Shares, as well as shares of any
other Tracking Stock up to the amount of the
Telecom Group's Inter-Group Interest in such
other Tracking Stock. Holders of Telecom Group
Shares may not receive any TDS Group Shares
since a Tracking Group may not have an Inter-
Group Interest in the TDS Group. In addition,
shares of a new class or series of capital
stock which represents a subdivision or new
business of the Telecom Group, or any assets
attributed by the Board to the Telecom Group,
could be distributed to the holders of Telecom
Group Shares on an equal per share basis.
Distribution of a TDS Group
Subsidiary.................... Holders of Telecom Group Shares are not
entitled to participate in the distribution of
a subsidiary which is included in the TDS
Group.
Distribution of a Subsidiary of
the Telecom Group............. With respect to the distribution of a
subsidiary that is attributed to the Telecom
Group, other than a Qualifying Subsidiary that
holds all of the assets and liabilities of the
Telecom Group, to the extent practicable, the
holders of Telecom Group Shares will generally
receive subsidiary shares corresponding to
Special Common Shares. Holders of shares of
Tracking Stock of any other Group may, at the
sole discretion of the Board, receive
subsidiary shares corresponding to Special
Common Shares, up to the amount of any
Inter-Group Interest of such Group in the
Telecom Group.
Liquidation of the Company...... In the event of a liquidation of the Company,
the issued shares of each class of Tracking
Stock would share any assets remaining for
distribution to holders of common stock based
upon Liquidation Units, with each Series A
Common Share, Common
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Share and Special Common Share having 1.0
Liquidation Unit, each Telecom Group Share
having 0.9 Liquidation Units, each Cellular
Group Share having 2.5 Liquidation Units and
each Aerial Group Share having 1.1 Liquidation
Units.
Disposition of Substantially All
Assets of the Telecom Group... In the event of a disposition by the Company
of substantially all of the properties and
assets attributed to the Telecom Group, except
under certain circumstances, the Company must
either: (i) distribute to the holders of the
Telecom Group Shares by special dividend or by
redemption of outstanding Telecom Group Shares
an amount in cash, securities or other
property or any combination thereof equal to
the proportionate interest of the outstanding
Telecom Group Shares in the Fair Value of the
Net Proceeds of the Disposition; or (ii)
convert each outstanding Telecom Group Share
into a number (or fraction) of Special Common
Shares or shares of any other Tracking Stock
(or any combination thereof on a pro rata
basis) equal to 110% of the average daily
ratio (calculated to the nearest five decimal
places) of the Market Value of (A) one Telecom
Group Share to (B) the Market Value of one
Special Common Share or such other share of
Tracking Stock (or any combination thereof on
a pro rata basis) during a forty-Trading Day
period beginning on the eleventh Trading Day
after consummation of the transaction.
The Company may, at any time prior to the
first anniversary of a dividend on, or partial
redemption of, Telecom Group Shares following
a Disposition of all or substantially all of
the properties and assets attributed to the
Telecom Group, convert each outstanding
Telecom Group Share into a number (or
fraction) of Special Common Shares or shares
of another class or classes of Tracking Stock,
equal to the product of the Disposition
Conversion Percentage and the average daily
ratio of the Market Value of one Telecom Group
Share to the Market Value of one Special
Common Share or one share of such other
Tracking Stock (or a combination thereof on a
pro rata basis), calculated over the
twenty-Trading Day period ending five Trading
Days prior to the date of notice of such
conversion. If there is no public market for
the Special Common Shares at the time of such
conversion, the Market Value per share will be
deemed to be the same as the Common Shares.
Redemption at the Option of the
Company....................... The Company may redeem the Telecom Group
Shares for a number of shares of one or more
Qualifying Subsidiaries (that hold all of the
assets and liabilities attributed to the
Telecom Group) equal to the product of the
Adjusted Outstanding Interest Fraction of the
Telecom Group and the total number of shares
of each of such Qualifying Subsidiaries held
by the Company.
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
In addition to the redemption provisions
described above, the Restated Certificate
permits the redemption of Telecom Group Shares
by the Company, generally at fair market
value, to the extent necessary to prevent the
loss or secure the reinstatement of, or
prevent the denial of applications for the
renewal of, any license or franchise from any
governmental agency.
Conversion at the Option of the
Company....................... The Company may, at any time, convert each
Telecom Group Share into a number of Special
Common Shares or shares of another class or
classes of Tracking Stock or any combination
thereof, equal to the Optional Conversion
Percentage of the average daily ratio of the
Market Value of one Telecom Group Share to be
converted to the Market Value of one Special
Common Share or share of such other class of
Tracking Stock (or a combination thereof on a
pro rata basis), calculated over the
twenty-Trading Day period ending five Trading
Days prior to the date of notice of such
conversion. The initial Optional Conversion
Percentage will be 115% and will remain fixed
for a period ending on the fifth anniversary
of the initial issuance date, and then will
decline annually at a rate of 1% per year
until the Optional Conversion Percentage is
110% for the period commencing on the ninth
anniversary of the initial issuance date of
the Telecom Group Shares. If there is no
public market for the Special Common Shares,
the Market Value per share will be deemed to
be the same as the Common Shares.
</TABLE>
See "Risk Factors" beginning on page 18 for a discussion of certain factors
relating to the Company, its business and an investment in the Telecom Group
Shares.
13
<PAGE>
TELECOM GROUP
SUMMARY FINANCIAL DATA
The following summary historical financial data reflects the historical
results of operations and financial condition of the Telecom Group and has been
derived from the audited financial statements of the Telecom Group as of and for
the fiscal years ended December 31, 1993 through December 31, 1997 and as of and
for the three month periods ended March 31, 1997 and 1998. The information is
only a summary and should be read in conjunction with the financial statements
(and related notes) contained in this Prospectus. Information for the three
month periods ended March 31, 1997 and 1998 has been derived from the unaudited
financial statements of the Telecom Group that have been prepared on the same
basis as the audited financial statements of the Telecom Group, and, in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such period. Operating results for the three month period ended
March 31, 1998 are not necessarily indicative of the results of operations that
may be expected for the year ending December 31, 1998.
<TABLE>
<CAPTION>
(UNAUDITED)
AS OF OR FOR THE
THREE MONTHS ENDED
AS OF OR FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating Revenues
Telephone Revenue....................... $ 268,122 $ 296,722 $ 332,287 $ 371,913 $ 412,380 $ 98,632 $ 107,294
Other Service Revenue................... -- 10,499 23,764 24,747 33,516 7,171 9,400
Intercompany Revenues................... -- (880) (1,210) (1,058) (1,693) (232) (479)
--------- --------- --------- --------- --------- --------- ---------
Total Operating Revenues.......... 268,122 306,341 354,841 395,602 444,203 105,571 116,215
--------- --------- --------- --------- --------- --------- ---------
Operating Expenses
Telephone
Network Operations.................... 42,524 45,412 54,964 67,521 80,487 18,030 20,678
Depreciation and Amortization......... 60,087 67,956 74,758 85,575 95,278 23,293 26,007
Customer Operations................... 39,416 42,617 46,818 53,764 65,167 14,897 17,509
Corporate Operations.................. 47,510 49,705 58,998 62,276 68,454 15,456 18,948
Other Service
Operating Expenses.................... -- 9,003 19,676 21,932 35,109 6,655 12,428
Depreciation and Amortization......... -- 923 2,597 2,884 2,788 565 809
Intercompany Expenses................... -- (880) (1,210) (1,058) (1,693) (232) (479)
--------- --------- --------- --------- --------- --------- ---------
Total Operating Expenses.......... 189,537 214,736 256,601 292,894 345,590 78,664 95,900
--------- --------- --------- --------- --------- --------- ---------
Operating Income.......................... 78,585 91,605 98,240 102,708 98,613 26,907 20,315
--------- --------- --------- --------- --------- --------- ---------
Other Income.............................. 10,223 15,254 20,794 20,243 17,529 4,451 41,416
Interest Expense.......................... (47,016) (50,676) (60,648) (61,572) (63,151) (15,803) (14,780)
Income Tax Expense........................ (16,658) (22,806) (24,231) (25,685) (22,603) (6,634) (18,332)
Cumulative Effect of Accounting Change.... -- (723) -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net Income(1)............................. $ 25,134 $ 32,654 $ 34,155 $ 35,694 $ 30,388 $ 8,921 $ 28,619
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PRO FORMA(2):
Net Income Attributable to TDS Group
through Retained Interest............... $ 6,284 $ 8,164 $ 8,539 $ 8,924 $ 7,597 $ 2,230 $ 7,155
Net Income Attributable to TDS
Telecommunications Group Common Shares.. $ 18,850 $ 24,490 $ 25,616 $ 26,770 $ 22,791 $ 6,691 $ 21,464
Weighted Average TDS Telecommunications
Group Shares Outstanding................ 31,330 35,497 38,304 40,309 40,141 40,789 40,500
Earnings per TDS Telecommunications Group
Share................................... $ 0.60 $ 0.69 $ 0.67 $ 0.66 $ 0.57 $ 0.16 $ 0.53
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
AS OF OR FOR THE
THREE MONTHS ENDED
AS OF OR FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(3)................................. $ 138,672 $ 160,484 $ 175,595 $ 191,167 $ 196,679 $ 50,765 $ 47,131
Construction Expenditures................. $ 80,818 $ 115,483 $ 104,372 $ 144,440 $ 151,460 $ 23,599 $ 30,739
Access Lines.............................. 356,200 392,500 425,900 484,500 515,500 493,000 528,900
BALANCE SHEET DATA:
Cash and Cash Equivalents and Temporary
Investments............................. $ 159,699 $ 163,267 $ 215,979 $ 222,918 $ 206,239 $ 205,720 $ 230,807
Property, Plant and Equipment, Net........ 524,322 611,450 659,339 769,361 830,767 768,625 840,979
Total Assets.............................. 959,582 1,138,242 1,228,232 1,352,929 1,406,048 1,334,944 1,486,953
Notes Payable............................. 12,080 15,059 15,784 25,039 28,181 25,980 28,861
Long-term Debt--Including Current
Portion................................. 698,797 717,688 769,555 800,382 818,676 800,626 835,639
Telecom Group Equity...................... $ 107,298 $ 228,800 $ 265,387 $ 343,816 $ 383,759 $ 343,926 $ 426,532
</TABLE>
- ------------------------------
(1) Net income for the three months ended March 31, 1998 includes net income
from operations of $5.2 million and net income from gains from the sale of
cellular interests of $23.4 million.
(2) Pro forma net income attributable to the Telecom Group and to the TDS Group
through the Retained Interest assumes that the Offerings have not taken
place and therefore 75% of Net Income is attributable to the Telecom Group
Shares and 25% of Net Income is attributable to the Retained Interest for
the TDS Group. Pro forma earnings per share was computed based on the
weighted average TDS Telecommunications Group Shares outstanding during the
periods, adjusted to give retroactive effect to the Distribution of TDS
Telecommunications Group Shares in conjunction with Telephone and Data
Systems, Inc. proposed restructuring, as if the restructuring had occurred
at January 1, 1993.
(3) EBITDA represents Operating Income plus depreciation and amortization.
EBITDA is a measure commonly used by the financial community but is not
prepared in accordance with United States generally accepted accounting
principles and should not be considered as a measurement of net cash flows
from operations.
15
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
SUMMARY FINANCIAL DATA
The following summary consolidated historical financial data of TDS has been
derived from audited financial statements as of and for the fiscal years ended
December 31, 1993 through December 31, 1997 and as of and for the three month
periods ended March 31, 1997 and 1998. The information is only a summary and
should be read in conjunction with the financial statements (and related notes)
contained in this Prospectus. See also "Available Information" for information
about other financial information incorporated by reference herein. Information
for the three month periods ended March 31, 1997 and 1998 has been derived from
the unaudited financial statements of TDS that have been prepared on the same
basis as the audited financial statements of TDS, and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
such period. Operating results for the three month period ended March 31, 1998
are not necessarily indicative of the results of operations that may be expected
for the year ending December 31, 1998.
<TABLE>
<CAPTION>
(UNAUDITED)
AS OF OR FOR THE
THREE MONTHS ENDED
AS OF OR FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating Revenues(1)(2)............. $ 553,829 $ 726,036 $ 942,307 $1,179,857 $1,471,533 $ 290,155 $ 392,118
Operating Income (Loss).............. 69,733 108,822 131,998 153,448 (3,702) 41,941 (27,249)
Other Income......................... 28,126 33,686 103,857 141,190 113,979 (4,672) 223,882
Interest Expense..................... 37,466 41,251 50,848 42,853 89,744 13,814 31,613
Income Taxes......................... 26,497 40,713 81,029 123,646 28,559 13,838 85,954
Net Income (Loss) Before Cumulative
Effect of Accounting Change........ 33,896 60,544 103,978 128,139 (9,549) 9,617 74,170
Cumulative Effect of Accounting
Change(3).......................... -- (723) -- -- -- -- --
Net Income (Loss).................... 33,896 59,821 103,978 128,139 (9,549) 9,617 74,170
Net Income Available to Common....... $ 31,510 $ 57,362 $ 101,469 $ 126,182 $ (11,441) $ 9,136 $ 73,730
Weighted Average Common Shares
(000s)............................. 46,995 53,295 57,456 60,464 60,211 61,184 60,750
Earnings Per Common Share--Basic:
Before Cumulative Effect of
Accounting Change................ $ 0.67 $ 1.09 $ 1.77 $ 2.09 $ (0.19) $ 0.15 $ 1.21
Net Income (Loss).................. 0.67 1.08 1.77 2.09 (0.19) 0.15 1.21
Earnings per Common Share--Diluted:
Before Cumulative Effect of
Accounting Change................ 0.67 1.08 1.74 2.07 (0.19) 0.15 1.20
Net Income (Loss).................. 0.67 1.06 1.74 2.07 (0.19) 0.15 1.20
Dividends Per Common and Series A
Common Share....................... $ 0.34 $ 0.36 $ 0.38 $ 0.40 $ 0.42 $ 0.105 $ 0.11
OTHER DATA:
EBITDA(4)............................ $ 187,714 $ 260,333 $ 323,503 $ 384,523 $ 297,854 $ 103,664 $ 72,424
Capital Expenditures................. $ 200,984 $ 319,701 $ 359,996 $ 550,204 $ 786,317 $ 169,024 $ 125,314
BALANCE SHEET DATA:
Cash and Cash Equivalents and
Temporary Investments.............. $ 73,385 $ 44,566 $ 80,851 $ 119,297 $ 75,567 $ 85,840 $ 84,230
Property, Plant and Equipment
(Net).............................. 846,089 1,063,656 1,293,410 1,828,889 2,465,653 1,945,145 2,451,246
Total Assets......................... 2,259,182 2,790,127 3,469,082 4,200,969 4,971,601 4,315,866 5,201,108
Notes Payable........................ 6,309 98,608 184,320 160,537 527,587 299,468 450,615
Long-term Debt (including current
portion)........................... 537,566 562,165 894,584 1,018,851 1,279,034 1,021,001 1,307,385
Redeemable Preferred Shares
(including current portion)........ 27,367 25,001 15,093 1,858 1,479 1,578 1,192
Common Stockholders' Equity.......... $1,224,285 $1,473,038 $1,684,365 $2,032,941 $1,968,119 $2,003,629 $2,058,164
</TABLE>
- ------------------------------
(1) Effective January 1, 1997, U.S. Cellular changed its financial reporting
presentation for certain credits given to cellular customers on their
monthly bills. Amounts for the years 1993-1996 have been reclassified to
conform to the 1997 presentation.
16
<PAGE>
(2) Operating revenues for the three-months ended March 31, 1997 and 1998 do not
include American Paging revenues. On April 7, 1998, TDS announced that it
had transferred substantially all of the assets and certain, limited
liabilities of American Paging to TSR Wireless Holdings, LLC pursuant to an
asset contribution agreement.
(3) Effective January 1, 1994, TDS adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Post Employment Benefits." The
cumulative effect of the change on years prior to 1994 has been reflected in
1994 Net Income. Prior years' financial information has not been restated.
(4) EBITDA represents Operating Income plus depreciation and amortization.
EBITDA is a measure commonly used by the financial community but is not
prepared in accordance with United States generally accepted accounting
principles and should not be considered as a measurement of net cash flows
from operating activities.
17
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE TELECOM GROUP SHARES OFFERED HEREBY INVOLVES CERTAIN
RISKS. ACCORDINGLY, YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS,
TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE
PURCHASING THE TELECOM GROUP SHARES OFFERED HEREBY. THIS PROSPECTUS CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND UNCERTAINTY. ACTUAL
RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS SET
FORTH BELOW AND OTHER FACTORS DISCUSSED ELSEWHERE IN THIS PROSPECTUS. SEE
"PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT." FOR DEFINITIONS OF CERTAIN TERMS USED IN THIS SECTION, SEE "CERTAIN
DEFINITIONS."
RISK OF ADVERSE DEVELOPMENTS IN THE BUSINESS OF TDS TELECOM
GOVERNMENT REGULATION
TDS Telecom is subject to extensive federal and state regulation, much of
which is governed by the Telecommunications Act of 1996 (the "1996 Act"). TDS
Telecom cannot predict the manner in which all aspects of the 1996 Act will be
implemented by the FCC and by state regulators or the impact that such
implementation and regulation will have on its business.
The majority of TDS Telecom's subsidiaries continue to operate under
regulations limiting their rates of return on interstate and intrastate
services. For their interstate services, the FCC periodically reviews the
reasonableness of the allowed rate-of-return for such ILECs and may reduce such
allowed rate-of-return. Similarly, state commissions from time to time review,
and may require reductions in, the allowed rates of return for such ILECs from
intrastate services. The FCC also plans to reform the rules that govern how
ILECs, on their own or through the National Exchange Carrier Association, charge
interstate companies for local distribution of their long distance calls. Some
of the reforms already adopted for price cap regulated ILECs, if expanded to
cover TDS Telecom's ILECs, could reduce the interstate costs recovered from
interstate access charges. Many state commissions are also reforming access
charges for intrastate services, which could reduce the costs recovered by TDS
Telecom's ILECs from intrastate toll services.
The extent to which TDS Telecom will be eligible to receive payments from
the universal service fund remain uncertain. The 1996 Act established a
federal-state joint board to make recommendations to the FCC regarding
implementation of the universal service provisions of the 1996 Act. On May 8,
1997, the FCC released an Order on universal service, adopting many of the joint
board's recommendations. The FCC adopted the use of forward-looking proxy cost
models to determine costs rather than relying on actual costs. However, rural
ILECs will continue to receive support based on their actual costs through
December 31, 2000. After December 31, 2000, rural ILECs will transition to the
use of proxy cost models over an additional three-year period. To date, the FCC
has not adopted any proxy cost model for rural ILECs. The FCC's rules would
reduce the federal support for rural ILECs, and require states to determine
whether to increase the support they provide through state universal service
mechanisms. The availability and extent of federal and state universal service
support mechanisms are uncertain in light of pending petitions to review FCC
decisions, court appeals, and federal and state proceedings.
Many other aspects of TDS Telecom's services and operations are subject to
federal and state regulation, including the introduction and pricing of existing
services, interconnections with other carriers, and uses of radio frequencies.
Federal and state regulations affecting TDS Telecom change from time to time,
and any such change may adversely affect TDS Telecom. See "Business--ILEC
Telephone Markets-- Federal Support Revenues."
COMPETITION
The 1996 Act was intended to promote competition in the telecommunications
industry as a national policy and continue the process of deregulation. The 1996
Act requires ILECs to provide reasonable and
18
<PAGE>
non-discriminatory interconnection services and access to unbundled network
elements to any CLEC that seeks to enter the markets in which the ILEC already
offers services. The 1996 Act also allows CLECs to co-locate network equipment
on the ILEC's premises and prevents ILECs and CLECs from unduly restricting each
other from use of facilities or information that would allow other organizations
to effectively compete with them. Although all 106 TDS Telecom companies are
exempt from many of the interconnection provisions of the 1996 Act until they
receive a bonafide request for interconnection and the relevant state commission
lifts the exemption, some TDS Telecom ILECs have already had requests filed by
potential competitors seeking to terminate their exemptions. TDS Telecom
believes there will eventually be open entry into nearly every aspect of the
telephone industry, including local service, interstate and intrastate toll,
switched and special access services and customer premises equipment, although
the high cost of serving some rural areas may limit competition.
In Madison and each city where 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 and may face
competition from other CLECs and other potential competitors. TDS Telecom will
compete with the ILECs and competing CLECs on the basis of price, reliability,
state-of-the-art technology, product offerings, route diversity, ease of
ordering and customer service. However, the ILECs have long-standing
relationships with their customers, have the potential to subsidize competitive
services from monopoly service revenues, and benefit from favorable state and
federal regulations.
TDS Telecom expects competition in the telephone business in both its ILEC
and CLEC markets to increase substantially as a result of the entrance of new
competitors and the development of new technologies, products and services.
Increased competition is expected from competitive access providers,
interexchange carriers ("IXCs"), out-of-territory Regional Bell Operating
Companies ("RBOCs") and independent telephone companies, niche entrepreneurs,
cable and utility companies, and wireless and satellite providers. Many of TDS
Telecom's existing and potential competitors have financial, personnel and other
resources significantly greater than those of TDS Telecom. See
"Business--Competition."
LIMITED HISTORY OF CLEC OPERATIONS; NEGATIVE CASH FLOW AND OPERATING LOSSES
The development of TDS Telecom's CLEC business and the acquisition,
installation and expansion of its networks in new CLEC markets require
significant expenditures, a substantial portion of which must be made before any
revenues will be realized. Such capital expenditures are expected to increase as
TDS Telecom decides to pursue opportunities created by the accelerated pace of
regulatory changes designed to open local exchange markets to CLEC competition.
See "Telecom Group Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Business--CLEC
Telephone Markets." These expenditures, together with the associated high
initial service costs of providing service in new markets, will result in
negative cash flow and operating losses from CLEC operations until an adequate
revenue base is established. There can be no assurance that an adequate revenue
base will be established in each CLEC market or in the CLEC markets as a group.
Growth and profitability in the CLEC operations may also require interconnection
and resale terms and pricing which depend on federal and state regulatory
decisions and court interpretations of legislation; there is substantial
uncertainty about such decisions and interpretations, and developments may be
adverse to the CLEC operations.
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry has experienced and is expected to continue
to experience rapid and significant changes in technology. While TDS Telecom
believes that, for the foreseeable future, these changes will neither materially
affect the continued use of fiber optic cable or digital switches and
transmission equipment nor materially hinder TDS Telecom's ability to acquire
necessary technologies, the effect of technological changes on TDS Telecom's
business and operations cannot be predicted. Also, alternative technologies may
develop for the provision of services to customers, such as the possible
19
<PAGE>
increased use of wireless technologies to provide basic telephone service to
residences or businesses. TDS Telecom may be required to select one technology
over another; however TDS Telecom cannot predict with any certainty, at the time
TDS Telecom is required to make its investment, which technology will prove to
be the most profitable in the long run. Thus, there can be no assurance that
technological developments will not have a material adverse effect on TDS
Telecom.
RISKS OF EXPANSION AND ENTRY INTO NEW BUSINESSES
Currently, TDS Telecom's services are predominantly local and are almost
exclusively as an ILEC. However, TDS Telecom is expanding into other related
telecommunications businesses, such as providing data and Internet services and
entering into new markets as a CLEC. As TDS Telecom expands into new
telecommunications businesses, it will incur certain additional risks in
connection with such expansion, including increased legal and regulatory risks,
and possible adverse reaction by some of its current customers. Such
telecommunications businesses and markets are highly competitive and, as a new
entrant, TDS Telecom may be disadvantaged. The success of TDS Telecom's entry
into new telecommunications businesses will be dependent upon, among other
things, TDS Telecom's ability to select new equipment and software and to
integrate the new equipment and software into its networks, to hire and train
qualified personnel and to enhance its billing, back-office and information
systems to accommodate new services. No assurance can be given that TDS Telecom
will be successful with respect to these telecommunications businesses. If TDS
Telecom is not successful with respect to these matters, there may be a material
adverse effect on TDS Telecom's business. In addition, demand and market
acceptance for these new products and services are subject to a high level of
uncertainty.
Entry by TDS Telecom into new telecommunications businesses involves risks
associated with such ventures. The data services business is extremely
competitive and prices for data services have declined substantially in recent
years and are expected to continue to decline. The success of TDS Telecom's
entry into the data services business will be dependent upon, among other
things, TDS Telecom's ability to select and integrate new equipment and software
into its networks, and its ability to enhance its existing billing and
information systems to accommodate data services. The success of the data
services businesses will ultimately be dependent upon customer acceptance of TDS
Telecom's data service offerings. The success of TDS Telecom's Internet products
and services is substantially dependent upon its customers' understanding and
adopting the Internet as a new way of conducting business and exchanging
information. If the market develops more slowly than expected, or remains highly
competitive, the development of TDS Telecom's Internet products may be
materially adversely affected. The LAN wiring business involves the sale of a
service which is substantially dissimilar to TDS Telecom's core business of
providing telecommunications services to a recurring base of customers. TDS
Telecom's CLEC expansion will depend on, among other things, TDS Telecom's
ability to assess markets, design fiber network backbone routes, install
facilities, acquire rights-of-way and building access, obtain any required
governmental authorizations and permits and implement interconnection with
ILECs, all in a timely manner, at reasonable costs and on terms and conditions
acceptable to TDS Telecom.
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
TDS Telecom expects that a portion of its future growth may come from
acquisitions. The acquisition of additional systems will depend on TDS Telecom's
ability to identify suitable acquisition candidates, to negotiate acceptable
terms for their acquisition and to finance any such acquisitions. TDS Telecom
will also be subject to competition for suitable acquisition candidates. Any
acquisitions, if made, could divert the resources and management time of TDS
Telecom and would require integration with TDS Telecom's existing networks and
services. As a result, there can be no assurance that any such acquisitions will
occur or that any such acquisitions, if made, would be made in a timely manner
or on terms favorable to TDS Telecom or would be successfully integrated into
TDS Telecom's operations.
20
<PAGE>
DEPENDENCE ON BUSINESS FROM IXCS
For the year ended December 31, 1997, approximately 53% of TDS Telecom's
revenues were attributable to access services provided to IXCs, including AT&T,
MCI and Sprint. Approximately 46% of such access revenues were attributable to
services provided to AT&T and its affiliates. The loss of access revenues from
IXCs in general or the loss of AT&T as a customer could have a material adverse
effect on TDS Telecom's financial condition and results of operations. See
"Business--Sales and Marketing."
DEPENDENCE ON KEY PERSONNEL
TDS Telecom's businesses are managed by a relatively small number of senior
management and operating personnel, the loss of certain of whom could have a
material adverse effect on TDS Telecom. TDS Telecom believes that its ability to
manage its planned growth successfully will depend in large part on its
continued ability to attract and retain highly skilled and qualified personnel.
See "Management of TDS Telecom" for detailed information on TDS Telecom's
management.
YEAR 2000 RISK
TDS Telecom has implemented a Year 2000 program to ensure that its computer
systems and applications will function properly beyond 1999. TDS Telecom
believes that it has allocated adequate resources for this purpose and expects
its Year 2000 date conversion program to be successfully completed on a timely
basis. There can, however, be no assurance that this will be the case. TDS
Telecom does not expect to incur significant expenditures to address this issue.
The ability of third parties with whom TDS Telecom transacts business to
adequately address their Year 2000 issues is outside of TDS Telecom's control.
There can be no assurance that the failure of TDS Telecom or such third parties
adequately to address their respective Year 2000 issues will not have a material
adverse effect on TDS Telecom's business, financial condition, cash flows and
results of operations.
RISKS RELATED TO CAPITAL STRUCTURE AND THE TELECOM GROUP SHARES
SHAREHOLDERS OF ONE COMPANY; FINANCIAL EFFECTS OF OTHER GROUPS COULD
ADVERSELY AFFECT THE TELECOM GROUP
Notwithstanding the attribution of assets and liabilities (including
contingent liabilities) and shareholders' equity among the Groups for the
purpose of preparing their respective financial statements, such attribution and
the change in the capital structure of the Company will not affect legal title
to such assets or responsibility for such liabilities of the Company or any of
its subsidiaries. Financial impacts arising from the TDS Group, the Cellular
Group or the Aerial Group that affect the consolidated results of operations or
financial position of the Company could affect the results of operations or
financial position of the Telecom Group. Moreover, any net losses of the TDS
Group, the Cellular Group or the Aerial Group, and any distributions on, or
repurchases of, any shares of capital stock will reduce the funds of the Company
legally available for the payment of dividends on the Telecom Group Shares.
Accordingly, the Telecom Group financial information should be read in
conjunction with the Company's consolidated financial information.
Although U.S. Cellular and TDS Telecom are currently profitable and have
positive cash flow, on a consolidated basis TDS has recently experienced
operating losses and net losses due primarily to large start-up losses at
Aerial. Aerial launched commercial services in early 1997 and has incurred
significant operating and net losses to date. The Company expects Aerial to
continue to incur significant operating losses and net losses and to generate
negative cash flow from operating activities during the next several years while
Aerial continues to develop and construct its PCS networks and build a PCS
customer base. There can be no assurance that Aerial will achieve or sustain
profitability or positive cash flow from operating activities in the future.
21
<PAGE>
Important factors that may have a material adverse effect on the Cellular
Group and/or Aerial Group include, but are not limited to: changes in the
overall economy; changes in competition in markets in which the Cellular Group
and/or the Aerial Group operate; advances in telecommunications technology;
changes in the telecommunications regulatory environment; pending and future
litigation; availability of future financing; and unanticipated negative changes
in growth in customers, penetration rates, churn rates or the mix of products
and services offered in their respective markets.
LIMITED SEPARATE SHAREHOLDER RIGHTS
Holders of Telecom Group Shares do not have any legal rights specifically
related to the assets attributed to the Telecom Group except as described
herein. Holders of Telecom Group Shares will be common shareholders of the
Company, and will continue to be subject to all the risks associated with an
investment in the Company and all of its businesses and liabilities. The Company
and its subsidiaries will continue to be responsible for each of their
respective liabilities.
LIMITED VOTING RIGHTS; VARIABLE VOTING RIGHTS
Holders of Telecom Group Shares do not have any right to vote on matters
other than the election of certain directors, except as otherwise required by
law. Accordingly, actions submitted to a vote of shareholders other than the
election of directors will generally be voted on only by holders of Common
Shares, Series A Common Shares and any series of Preferred Shares which has
voting rights. Under the Restated Certificate, only the affirmative vote of the
holders of a majority of the outstanding voting power of the Common Shares,
Series A Common Shares and such voting Preferred Shares, voting as a group, will
be required to amend the Restated Certificate, approve any merger or
consolidation of TDS with or into any other corporation, approve the dissolution
of TDS or approve any other matter required to be voted on by shareholders,
except as required under the Delaware General Corporation Law ("DGCL"). Under
the DGCL, the holders of the outstanding shares of a class are entitled to vote
as a class upon a proposed amendment, whether or not entitled to vote thereon by
the Restated Certificate, if the amendment would increase or decrease the par
value of the shares of such class or alter or change the powers, preferences or
special rights of the shares of such class so as to affect them adversely. As
permitted by the DGCL, the Restated Certificate will permit the number of
authorized shares of any class of capital stock to be increased or decreased
(but not below the number of shares then outstanding in such class,
respectively) by the affirmative vote of a majority of the voting power of the
shares of capital stock entitled to vote with respect to such matter, voting
together as one group.
When a vote is taken on any matter as to which all stock is voting together
as one group, any one or more classes entitled to more than the number of votes
required to approve such matter will be in a position to control the outcome of
the vote on such matter. Certain matters on which holders of common stock would
vote together as a single class could involve a divergence or the appearance of
a divergence of the interests between the holders of classes of common stock.
The Restated Certificate does not require that a merger or consolidation of
the Company requiring the approval of the Company's shareholders be approved by
a separate class vote of holders of any class of capital stock. As a result, the
TDS Voting Trust (as defined herein), as the holder of Series A Common Shares
representing a majority of the voting power of the Company, could approve a
merger of the Company without a class vote by any class of capital stock,
including the Telecom Group Shares.
The relative voting power of the Telecom Group Shares in the election of
directors elected by the Public Holders will fluctuate from time to time, with
each Telecom Group Share having a variable number of votes, based upon the
ratio, over a specified period, of the average Market Capitalization of the
Telecom Group Shares to the average Market Capitalization of all classes of
stock voting in the election of directors elected by the Public Holders.
22
<PAGE>
POTENTIAL DIVERGENCE OF INTERESTS; NO SPECIFIC PROCEDURES FOR RESOLUTION
Occasions may arise when the interests of the holders of the Telecom Group
Shares and the holders of the other Tracking Stocks or Common Shares and Series
A Common Shares, or some combination thereof, may diverge or appear to diverge.
Examples include, among others, determinations by the Board to (i) redeem the
shares of a class of Tracking Stock, (ii) approve the disposition of all or
substantially all of the properties and assets of one of the Tracking Groups,
(iii) allocate consideration to be received by holders of common stock in
connection with a merger or consolidation involving the Company among holders of
different classes of common stock, (iv) allocate resources and financial support
to or pursue business opportunities or operational strategies through one Group
instead of one or more of the other Groups, (v) if and to the extent there is
either a Retained Interest or an Inter-Group Interest, allocate the proceeds of
future issuances of the Tracking Stock as a reduction (a) in a Retained Interest
or Inter-Group Interest (as the case may be) in the issuing Tracking Group or
(b) to the equity of the issuing Tracking Group, (vi) pay or omit dividends on
any class of common stock or (vii) approve transactions involving the transfer
of funds or assets from one Group to one or more of the other Groups or make
other operational or financial decisions with respect to one Group that could be
considered to be detrimental to one or more of the other Groups.
The Company has adopted procedures for consideration of matters involving a
divergence of interests among the holders of the Company's different classes of
common stock; however, these policies could be modified or rescinded by the
Board, in its sole discretion, without the approval of shareholders, although
there is no present intention to do so. The Board intends to exercise its
judgment from time to time, depending on the circumstances, as to how best to
obtain information regarding the divergence (or potential divergence) of
interests, under what circumstances to seek the assistance of outside advisors,
whether a committee of the Board should be appointed to address the matter and
how to assess which available alternative is in the best interests of the
Company and all of its shareholders. The Company and the Board believe the
advantages of retaining flexibility in determining how best to fulfill its
responsibilities in such circumstances as they may arise outweigh any perceived
advantages from attempting to adopt specific procedures in advance to cover all
conceivable circumstances.
Disproportionate ownership interests of members of the Board in one or more
classes of common stock of the Company or disparate values of the classes of
common stock of the Company held by directors could create or appear to create
potential conflicts of interest when directors are faced with decisions that
could have different implications for different classes. Nevertheless, the
Company believes that a director would be able to discharge his or her fiduciary
duties even if his or her interests in shares of the classes of common stock
were disproportionate and/or had disparate values.
The Company's counsel has advised the Company that there is no definitive
precedent directly concerning the manner in which Delaware law would be applied
to a board of directors' duties in the context of a capital structure which
includes tracking stocks with divergent interests. The Company has been advised
by counsel that, in general, under existing Delaware case law, disinterested
directors would be deemed to have satisfied their duty of care to the Company
and its shareholders if they act in good faith with the care an ordinarily
prudent person in a like position would exercise under similar circumstances,
and in a manner such directors reasonably believe to be in the best interests of
the Company. Based on the advice of counsel, the Company believes that, under
Delaware law, a good faith determination by a disinterested and adequately
informed Board, or a committee thereof, which discharges such duty, and which
the directors honestly believe is in the best interests of the Company and its
shareholders, would be a defense to any challenge by or on behalf of the holders
of any class of common stock to any determination by the Board that could have a
disparate effect on any class of common stock.
23
<PAGE>
NO ASSURANCE OF PAYMENT OF DIVIDENDS
Dividends on Telecom Group Shares are payable out of the lesser of assets of
the Company legally available therefor and the Available Dividend Amount for the
Telecom Group. Subject to the foregoing provisions, and notwithstanding the
Available Dividend Amount for the Telecom Group, the respective amounts of prior
dividends paid on, or liquidation rights of, any shares of common stock, or any
other factor, dividends may be declared and paid on the Common Shares, the
Series A Common Shares, any Special Common Shares that may be issued in the
future, the Telecom Group Shares, the Cellular Group Shares and/or the Aerial
Group Shares in equal or unequal amounts (with the exception that dividends paid
on Common Shares and any Special Common Shares that may be issued in the future
must always be the same per share and equal to or greater than the per share
dividend on the Series A Common Shares). Any decision to pay dividends on the
Telecom Group Shares will depend on the financial condition, results of
operations and business requirements of TDS Telecom and the Company as a whole.
In making a determination as to the allocation of any dividends among the
classes or series of common stock, the Board expects to follow a policy under
which it will consider, among other factors, the relative financial condition,
results of operations and business requirements of each of the respective
Groups. See "Dividend Policy."
If any of the Groups incurs a net loss, the assets legally available for
payment of dividends on all classes of common stock would be reduced. In
addition, payment of dividends or distributions on any class of common stock
will decrease the amount of funds available under the limitations described
above for the payment of dividends on all classes of common stock.
ALLOCATION OF PROCEEDS OF MERGERS OR CONSOLIDATIONS
The Restated Certificate does not contain any provisions governing how
consideration to be received by the Company's shareholders in connection with a
merger or consolidation involving the Company (in which the common stock is to
be converted into other securities, cash or other property) is to be allocated
among holders of the various classes or series of common stock, except that, in
general, holders of Common Shares and Special Common Shares are entitled to
receive the same consideration per share in any merger or consolidation of the
Company. In any such merger or consolidation, the allocation of consideration to
the Telecom Group Shares would be determined by the Board and would be subject
to approval by a majority of the voting power of all shares of capital stock of
the Company, voting together as one group. At the present time, the TDS Voting
Trust controls a majority of the voting power of all shares of capital stock.
See "Control by Voting Trust."
OPTIONAL CONVERSION OF TRACKING STOCK
The Company could, at any time, in the sole discretion of the Board,
determine to convert each outstanding Telecom Group Share into shares of another
class or classes of Tracking Stock or Special Common Shares, or combination
thereof, at a predetermined premium. The determination by the Board to convert
Telecom Group Shares into shares of another class or classes of Tracking Stock
or Special Common Shares or a combination thereof could be made at a time when
any class of the Company's stock may be considered to be overvalued or
undervalued, or at a time when there is no public market for any class of stock.
In addition, any such conversion would preclude holders of the converted Telecom
Group Shares from retaining their investment in a security that is intended to
reflect separately the performance of the Telecom Group. See "Description of
Capital Stock--Description of Terms of Telecom Group Shares and the other
Tracking Stocks--Conversion at Option of Company."
DISPOSITION OF TELECOM GROUP ASSETS
As long as the assets of the Telecom Group continue to represent less than
substantially all of the properties and assets of the Company, the Board may
approve sales and other dispositions of any amount of the properties and assets
of the Telecom Group without shareholder approval, because under the
24
<PAGE>
DGCL and the Restated Certificate shareholder approval is required only for a
sale or other disposition of all or substantially all of the properties and
assets of the Company as a whole. In the event of a Disposition of substantially
all of the properties or assets attributed to the Telecom Group, except under
certain circumstances, the Company must distribute the Fair Value of the Net
Proceeds (as defined below) from the Disposition or exchange each Telecom Group
Share for shares of another class or classes of Tracking Stock or Special Common
Shares or a combination thereof at a predetermined premium, at the option of the
Board.
The determination by the Board to so exchange the Telecom Group Shares for
shares of another class or classes of Tracking Stock and/or Special Common
Shares could be made at a time when any class of the Company's stock may be
considered to be overvalued or undervalued, or at a time when there is no public
market for any class of stock. Any consideration which holders of the Telecom
Group Shares may receive in connection with the Disposition of all or
substantially all of the properties or assets attributed to the Telecom Group
may not correspond to what such holders would receive if they held equity
interests directly in the Telecom Group. In addition, any such exchange would
preclude holders of the Telecom Group Shares from retaining their investment in
a security that is intended to reflect separately the performance of the Telecom
Group.
The term "Fair Value of the Net Proceeds" means the fair value of the gross
proceeds of a Disposition after payment of or provision for certain specified
costs, including taxes related to the Disposition or such dividend or
redemption, transaction costs and liabilities and other obligations (contingent
or otherwise), including obligations in respect of Preferred Shares and
Convertible Securities (without duplication) attributed to the Telecom Group
Shares. If the Telecom Group were a separate independent company and its shares
were acquired by another person, certain of those costs, including corporate and
shareholder level taxes, might not be payable in connection with such an
acquisition. As a result, the consideration that would be received by
shareholders of such a separate independent company in connection with such a
stock acquisition might be greater than the Fair Value of the Net Proceeds that
would be received by holders of Telecom Group Shares if all or substantially all
of the properties and assets of the Telecom Group were sold. In addition, no
assurance can be given that the Fair Value of the Net Proceeds per share of
Telecom Group Shares to be received in connection with a Disposition of all or
substantially all of the properties and assets of the Telecom Group will be
equal to or more than the Market Value per share of such Telecom Group Shares
prior to or after announcement of such Disposition. See "Description of Capital
Stock--Description of Terms of Telecom Group Shares and other Tracking
Stock--Disposition of Assets of a Tracking Group."
ALLOCATION OF PROCEEDS UPON SUBSEQUENT ISSUANCES OF TELECOM GROUP SHARES
If and to the extent that, at the time of any subsequent issuance of Telecom
Group Shares, (i) the TDS Group has a Retained Interest in the Telecom Group or
(ii) another Tracking Group has an Inter-Group Interest in the Telecom Group,
the Board would determine the allocation of the net proceeds of such issuance
among the TDS Group, the other Tracking Group which holds the Inter-Group
Interest and the shareholders' equity of the Telecom Group. Any such allocation
of net proceeds to the TDS Group would reduce the Retained Interest in the
Telecom Group and any allocation to a Tracking Group holding an Inter-Group
Interest in the Telecom Group would reduce such Inter-Group Interest. See
"Description of Capital Stock--Description of Terms of Telecom Group Shares and
other Tracking Stocks."
PUBLIC POLICY DETERMINATIONS
Because of the nature of the Company's businesses, the Groups may have
diverging interests with respect to various regulatory issues. For example, FCC
regulations which may advance the interests of the Telecom Group may not advance
the interests of the Cellular Group or the Aerial Group. In addition, increasing
overlap between the businesses of the Groups resulting from regulatory changes
and technological advancements may increase such conflicts. The Board will cause
policies and procedures to be
25
<PAGE>
implemented to resolve any such conflicts. In the event any such conflict cannot
be resolved or otherwise requires resolution by the Board, the Board would
resolve such conflict in accordance with its good faith business judgment of the
best interests of the Company and all of its shareholders.
MANAGEMENT AND ALLOCATION POLICIES
The expansion of the business of TDS Telecom beyond the ownership and
operation of its ILECs and its existing CLEC and data and Internet services will
require the consent of the Company's Board. The Board intends to authorize any
proposed expansion on a case-by-case basis. The Board has adopted certain
management and allocation policies described herein with respect to cash
management, corporate expenses and inter-Group transactions, any and all of
which could be modified or rescinded by the Board, in its sole discretion,
without the approval of shareholders, although there is no present intention to
do so. The Board could also decide to modify or rescind such policies, or to
adopt additional policies, and any such decision could have disparate effects
upon holders of shares of any class or series of common stock. The Board could
also allocate resources and financial support to or pursue business
opportunities or operational strategies through one Group instead of the other
Groups. The decision to allocate resources and financial support to one Group
may adversely affect the ability of the other Groups to obtain funds sufficient
to implement their business strategies. In making any such determination, the
Board may also consider regulatory requirements, including those imposed by the
public utility commissions of various states and the FCC. See "Management and
Allocation Policies."
TRANSFER OF FUNDS AMONG GROUPS; EQUITY CONTRIBUTIONS
All debt incurred or preferred stock issued by the Company and its
subsidiaries following the issuance by the Company of the Tracking Stock will be
(unless the Board otherwise provides) specifically attributed to and reflected
in the combined financial statements of the Tracking Group that includes the
entity which incurred the debt or issued the preferred stock or, in case of debt
or preferred stock that is not specifically attributed to one of the Tracking
Groups, the TDS Group. The Board could, however, determine from time to time
that debt incurred or preferred stock issued by entities included in a Group
should be specifically attributed to and reflected in the combined financial
statements of one of the other Groups to the extent that the debt is incurred or
the preferred stock is issued for the benefit of such other Group.
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such other Group. The Company has
provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the Groups are
remitted to the TDS Group and certain cash disbursements of the other Groups
will be funded by the TDS Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board, in the case of a transfer from the TDS Group or one of the other Groups,
as the case may be, to the Telecom Group, reflected as the creation of a
Retained Interest or Inter-Group Interest, as the case may be, in the Telecom
Group, or as an increase or decrease in any such existing interest.
There are no specific criteria for determining when a transfer will be
reflected as a borrowing or as the creation of, or an increase or reduction in,
a Retained Interest or an Inter-Group Interest. The Board expects to make such
determinations, either in specific instances or by setting generally applicable
policies from time to time, after consideration of such factors as it deems
relevant, including, without limitation, the needs of the Company, the financing
needs and objectives of the Groups, the investment objectives of the Groups, the
availability, cost and time associated with alternative financing sources,
prevailing interest rates and general economic conditions.
Generally, it is expected that TDS Telecom and the entities included in each
of the other Groups will each seek their own long-term debt financing. However,
the Board may permit a Group with excess funds to lend such funds to another
Group which requires funds. Loans from one Group to another Group
26
<PAGE>
would bear interest at such rates and have such repayment schedules and other
terms as are established from time to time by, or pursuant to procedures
established by, the Board. The Board expects to make such determinations, either
in specific instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant, including,
without limitation, the needs of the Company, the use of proceeds by and
creditworthiness of the recipient Group, the capital expenditure plans and
investment opportunities available to each Group and the availability, cost and
time associated with alternative financing sources.
Although the creation of or any increase in a Retained Interest or an
Inter-Group Interest resulting from an equity contribution by the TDS Group or
another Group to the Telecom Group (or any decrease in such Retained Interest or
Inter-Group Interest) would be determined by reference to the Market Value of
the Telecom Group Shares as of the date of such event, an increase (or decrease)
could occur at a time when the Telecom Group Shares could be considered
undervalued or overvalued.
ABSENCE OF APPROVAL RIGHTS WITH RESPECT TO FUTURE ISSUANCES OF AUTHORIZED
SHARES
The authorized but unissued Telecom Group Shares will be available for
issuance from time to time at the sole discretion of the Board for any proper
corporate purpose. In addition, the Board will be able to designate and issue
series of common or preferred stock from the authorized but unissued
Undesignated Shares. The approval of the shareholders of the Company will not be
sought by the Company for the issuance of authorized but unissued shares of any
class of capital stock (or the reissuance of previously issued shares that have
been reacquired by the Company) or securities of the Company that are
convertible into or exercisable or exchangeable for such shares, unless deemed
advisable by the Board or required by applicable law, regulation or AMEX
requirements. The Company has no current plans to issue any Telecom Group Shares
or any other shares of Tracking Stock except in connection with the
Recapitalization and as otherwise described herein. The Company has no current
plans to issue any Special Common Shares or to designate any series of
Undesignated Shares.
In addition, as permitted by Delaware law, the Restated Certificate will
permit the number of authorized Telecom Group Shares to be increased or
decreased (but not below the number of shares then outstanding) by the
affirmative vote of the holders of a majority of the voting power of the shares
of capital stock of the Company entitled to vote with respect to such matter.
The TDS Voting Trust presently holds a majority of the voting power of the
Company. This provision could allow the Company to authorize and issue shares of
capital stock under circumstances which could preserve the ability of the TDS
Voting Trust to continue to exercise control over a majority of the voting power
of the Company and, therefore, could deprive shareholders of the Company of an
opportunity to sell their shares at a premium over market prices or make it more
difficult to replace the current Board and management of the Company. The
Company has no current intention to take any action to authorize any additional
shares of capital stock, other than as described herein.
CONTROL BY VOTING TRUST
A substantial majority of the outstanding Series A Common Shares are held in
a voting trust which expires on June 30, 2009 (herein referred to as the "TDS
Voting Trust"). The TDS Voting Trust was created to facilitate the long-standing
relationships among the trustees' certificate holders. By virtue of the number
of shares held by them, the voting trustees have the power to elect
approximately 75% (less one) of the directors, or eight directors based on the
current size of the Board, and control a majority of the voting power of the
Company with respect to matters other than the election of directors.
As of April 30, 1998, the TDS Voting Trust had voting or dispositive power
over an aggregate of 6,340,132 Series A Common Shares, representing
approximately 51.3% of the voting power of the Company with respect to matters
other than the election of directors. Based on such shares, the TDS Voting Trust
would receive an aggregate of 4,226,754 Telecom Group Shares, 6,340,132 Cellular
Group
27
<PAGE>
Shares, and 4,226,754 Aerial Group Shares in connection with the Distribution.
Under the current terms of the TDS Voting Trust, such shares of Tracking Stock
will be distributed by the trustees to the beneficiaries. Following the
Distribution, and after the distribution of all of the Telecom Group Shares,
Cellular Group Shares and Aerial Group Shares received by the TDS Voting Trust
to the beneficiaries thereof, the TDS Voting Trust would continue to have at
least 51.3% of the aggregate voting power of the Company with respect to all
matters other than the election of directors and will be able to elect eight of
the twelve directors, assuming no other changes.
ANTI-TAKEOVER CONSIDERATIONS
The existence of the TDS Voting Trust is likely to deter any potential
unsolicited or hostile takeover attempts or other efforts to obtain control of
the Company and may make it more difficult for shareholders to sell shares of
the Company at higher than market prices. The trustees of the TDS Voting Trust
have advised the Company that they intend to maintain the ability to keep or
dispose of voting control of TDS.
The Restated Certificate and the Company's Bylaws also contain provisions
which may serve to discourage or make more difficult a change in control of the
Company without the support of the Board or without meeting various other
conditions. In particular, the Restated Certificate includes a provision which
authorizes the Board to consider various factors, including effects on
customers, taxes, and the long-term and short-term interests of the Company, in
the context of a proposal or offer to acquire or merge the corporation, or to
sell its assets, and to reject such offer if the Board determines that the
proposal is not in the best interests of the corporation based on such factors.
In addition, the existence of the Tracking Stocks could present complexities and
could in certain circumstances pose obstacles, financial and otherwise, to an
acquiring person. The provisions of the Restated Certificate and the Bylaws of
the Company and the existence of the Tracking Stocks could, under certain
circumstances, prevent shareholders from profiting from an increase in the
market value of their shares as a result of a change in control of the Company
by delaying or preventing such change in control.
The Restated Certificate also authorizes the Board to designate and issue
Undesignated Shares in one or more classes or series of preferred or common
stock from time to time. Generally, no further action or authorization by the
shareholders is necessary prior to the designation or issuance of the additional
Undesignated Shares authorized pursuant to the Restated Certificate unless
applicable laws or regulations would require such approval in a given instance.
Such Undesignated Shares could be issued in circumstances that would serve to
preserve control of TDS's then existing management. See "Description of Capital
Stock--General."
The Restated Certificate divides the Board into three classes, with
staggered terms of office. Each year, one class is elected for a three-year
term. The classification of directors may have the effect of limiting or
deterring a proxy contest for the removal of incumbent directors.
The Company is not aware of any current intention of the TDS Voting Trust to
dispose of any significant amount of Series A Common Shares of the Company or of
any existing or planned effort on the part of any party to accumulate material
amounts of Common Shares or Series A Common Shares, or to acquire control of TDS
by means of a merger, tender offer, solicitation in opposition to management or
otherwise, or to change TDS's management.
LIMITATIONS ON POTENTIAL UNSOLICITED ACQUISITIONS OF THE TELECOM GROUP
If the Telecom Group were a stand-alone corporation, any person interested
in acquiring such corporation without negotiation with management could seek
control of the Telecom Group by means of a tender offer or proxy contest for the
outstanding Telecom Group Shares. Although the Telecom Group Shares are intended
to reflect the performance of the Telecom Group, a person interested in
acquiring only the Telecom Group without negotiation with TDS's management will
still be required to seek control
28
<PAGE>
of the voting power represented by all of the outstanding capital stock of TDS
entitled to vote on such acquisition in order to consummate any such
transaction.
ABSENCE OF PRIOR MARKET FOR TELECOM GROUP SHARES; NO ASSURANCES AS TO MARKET
PRICE
Because there has been no prior market for the Telecom Group Shares, there
can be no assurance as to the market price of such shares following the
Offering. Until an orderly market develops for the Telecom Group Shares, their
trading price may fluctuate significantly. If an active trading market does
develop, there can be no assurance that it will be maintained. The prices at
which the Telecom Group Shares will trade will be determined in the trading
markets and may be influenced by many factors, including the consolidated
results of the Company, as well as the performance of the Telecom Group,
investors' expectations for the Company and the Telecom Group, trading volume
and general economic and market conditions. There is no assurance that investors
will assign value to the Telecom Group Shares based on the reported financial
results and fundamental operating prospects of the Telecom Group. Financial
results of the Groups that affect the Company's consolidated results of
operations or financial condition could affect the market prices of the Telecom
Group Shares. In addition, the Company cannot predict the impact on the market
values of the Telecom Group Shares of certain terms of the securities, such as
(i) the ability of the Company to convert or redeem the Telecom Group Shares,
(ii) the discretion of the Board to make various determinations relating to the
separate classes of capital stock or (iii) the limited voting power of the
Telecom Group Shares.
As a result of all of these factors, as well as other factors common to
initial public offerings, the market price of the Telecom Group Shares could
fluctuate substantially from the offering price.
NO ASSURANCE OF COMPLETION OF RECAPITALIZATION
This Prospectus describes the Recapitalization as currently contemplated by
the Board. The Recapitalization is subject to various conditions and
uncertainties and there can be no assurance that the Recapitalization will be
completed or, if it is completed, that it will be completed on the terms
described in this Prospectus.
29
<PAGE>
USE OF PROCEEDS
The net proceeds to TDS from the sale of the Telecom Group Shares in the
Offerings are estimated to be $169.7 million ($195.3 million if the
over-allotment option is exercised in full) at an assumed public offering price
of $13.50 per share after deducting the underwriting discounts and commissions
and estimated offering expenses payable by TDS.
All of the net proceeds will be allocated by TDS to the Telecom Group and
used to repay a portion of the outstanding intercompany debt of TDS Telecom and
its subsidiaries to TDS classified as Long-Term Debt--Affiliated. At March 31,
1998, such amounts totaled approximately $271.2 million and bore interest at a
rate that reflects TDS's cost of funds under its bank lines of credit which
provide for borrowings at negotiated rates up to the prime rate. TDS intends to
use the net proceeds received from TDS Telecom to repay certain short-term
indebtedness.
DIVIDEND POLICY
Following the Distribution, subject to the restrictions on the payment of
dividends described under "Description of Capital Stock--Description of Terms of
Telecom Group Shares and Other Tracking Stocks--Dividends," the Board currently
intends to establish an annual dividend on the Telecom Group Shares in an amount
equal to $0.50 per share. Dividends are expected to be paid quarterly and will
be paid on Telecom Group Shares issued in the Offerings if outstanding prior to
the Distribution.
TDS is a legal entity separate and distinct from its various subsidiaries.
As a company with no significant operations of its own, the principal sources of
its funds are dividends or other distributions from its operating subsidiaries,
borrowings and sales of equity. The ability of TDS Telecom, U.S. Cellular,
Aerial and other subsidiaries of the Company to pay dividends or make
distributions to the Company and, accordingly, the ability of the Company to pay
dividends on the Telecom Group Shares, will depend on the respective earnings,
financial requirements and contractual restrictions of such subsidiaries. In
addition, the Board may elect to reduce or discontinue the payment of dividends
in light of the financial condition, results of operations and business
requirements of the Telecom Group, other Tracking Groups and/or the Company as a
whole.
30
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1998 (i) the capitalization
of the Telecom Group, and (ii) the capitalization of the Telecom Group as
adjusted to give effect to the Offerings and the application of the net proceeds
therefrom to the repayment of certain indebtedness of TDS Telecom.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
TELECOM GROUP
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
Cash and Cash Equivalents and Temporary Investments...................................... $ 230,807 $ 230,807
--------- -----------
--------- -----------
Short-term Debt (includes notes payable and current portion of long-term debt)........... $ 43,935 $ 43,935
Long-term Debt (excluding current maturities):
Affiliated............................................................................. 271,164 101,435
Other.................................................................................. 549,401 549,401
Minority Interest in Subsidiaries........................................................ 23,153 23,153
Telecom Group Equity..................................................................... 426,532 596,261
--------- -----------
Total Capitalization..................................................................... $1,314,185 $1,314,185
--------- -----------
--------- -----------
</TABLE>
The following table sets forth as of March 31, 1998, (i) the consolidated
capitalization of the Company, and (ii) the consolidated capitalization of the
Company as adjusted to give effect to the Reincorporation (as defined herein)
and the Offerings but excluding the effect of the Cellular Merger (as defined
herein), the Aerial Merger (as defined herein) and the Distribution (as defined
herein).
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------
TELEPHONE AND DATA SYSTEMS,
INC.
------------------------------
ACTUAL AS ADJUSTED
----------------- -----------
<S> <C> <C>
Cash and Cash Equivalents and Temporary Investments............................... $ 84,230 $ 84,230
----------------- -----------
----------------- -----------
Short-term Debt (includes notes payable and current portion of long-term debt and
preferred shares)............................................................... $ 466,706 $ 296,977
Long-term Debt (excluding current maturities)..................................... 1,292,311 1,292,311
Minority Interest in Subsidiaries................................................. 419,564 419,564
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust
Holding Solely Company Subordinated Debentures.................................. 300,000 300,000
Preferred Shares (excluding current maturities)................................... 28,099 28,099
Stockholders' Equity:
Common Shares, par value $1 per share (par value $.01 per share after the
Reincorporation); authorized 100,000,000 shares; issued and outstanding
54,736,841...................................................................... 54,737 547
Series A Common Shares; par value $1 per share (par value $.01 per share after the
Reincorporation); authorized 25,000,000 shares; issued and outstanding
6,936,277....................................................................... 6,936 69
Common Shares Issuable, 12,584 shares............................................. 549 549
Telecom Group Shares, par value $.01 per share; authorized 90,000,000 shares;
issued and outstanding 13,500,000 shares as adjusted............................ -- 135
Capital in Excess of Par Value.................................................... 1,686,179 1,916,830
Treasury Shares, at cost, 770,132 shares.......................................... (29,768) (29,768)
Retained Earnings................................................................. 339,531 339,531
----------------- -----------
Total Stockholders' Equity...................................................... 2,058,164 2,227,893
----------------- -----------
Total Capitalization.............................................................. $ 4,564,844 $4,564,844
----------------- -----------
----------------- -----------
</TABLE>
31
<PAGE>
SELECTED FINANCIAL INFORMATION OF THE TELECOM GROUP
The following table sets forth selected financial information for the
Telecom Group for each of the fiscal years in the five year period ended
December 31, 1997 and for the three month periods ended March 31, 1997 and 1998.
The information for each of the five years ended December 31, 1997 has been
derived from, and should be read in conjunction with, the audited financial
statements of TDS as of and for the fiscal years ended December 31, 1993 through
December 31, 1997 and the notes thereto and other financial information
contained elsewhere in this Prospectus. Information for the three month periods
ended March 31, 1997 and 1998 has been derived from the unaudited financial
statements of the Telecom Group that have been prepared on the same basis as the
audited financial statements of the Telecom Group, and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
such period. Operating results for the three month period ended March 31, 1998
are not necessarily indicative of the results of operations that may be expected
for the year ending December 31, 1998.
<TABLE>
<CAPTION>
(UNAUDITED)
AS OF OR FOR THE
THREE MONTHS ENDED
AS OF OR FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating Revenues
Telephone Revenue........... $ 268,122 $ 296,722 $ 332,287 $ 371,913 $ 412,380 $ 98,632 $ 107,294
Other Service Revenue....... -- 10,499 23,764 24,747 33,516 7,171 9,400
Intercompany Revenues....... -- (880) (1,210) (1,058) (1,693) (232) (479)
--------- --------- --------- --------- --------- --------- ---------
Total Operating
Revenues............ 268,122 306,341 354,841 395,602 444,203 105,571 116,215
--------- --------- --------- --------- --------- --------- ---------
Operating Expenses
Telephone
Network Operations........ 42,524 45,412 54,964 67,521 80,487 18,030 20,678
Depreciation and
Amortization............ 60,087 67,956 74,758 85,575 95,278 23,293 26,007
Customer Operations....... 39,416 42,617 46,818 53,764 65,167 14,897 17,509
Corporate Operations...... 47,510 49,705 58,998 62,276 68,454 15,456 18,948
Other Service
Operating Expenses........ -- 9,003 19,676 21,932 35,109 6,655 12,428
Depreciation and
Amortization............ -- 923 2,597 2,884 2,788 565 809
Intercompany Expenses....... -- (880) (1,210) (1,058) (1,693) (232) (479)
--------- --------- --------- --------- --------- --------- ---------
Total Operating
Expenses............ 189,537 214,736 256,601 292,894 345,590 78,664 95,900
--------- --------- --------- --------- --------- --------- ---------
Operating Income.............. 78,585 91,605 98,240 102,708 98,613 26,907 20,315
--------- --------- --------- --------- --------- --------- ---------
Other Income.................. 10,223 15,254 20,794 20,243 17,529 4,451 41,416
Interest Expense.............. (47,016) (50,676) (60,648) (61,572) (63,151) (15,803) (14,780)
Income Tax Expense............ (16,658) (22,806) (24,231) (25,685) (22,603) (6,634) (18,332)
Cumulative Effect of
Accounting Change........... -- (723) -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net Income(1)................. $ 25,134 $ 32,654 $ 34,155 $ 35,694 $ 30,388 $ 8,921 $ 28,619
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PRO FORMA(2):
Net Income Attributable to TDS
Group through Retained
Interest.................... $ 6,284 $ 8,164 $ 8,539 $ 8,924 $ 7,597 $ 2,230 $ 7,155
Net Income Attributable to TDS
Telecommunications Group
Common Shares............... $ 18,850 $ 24,490 $ 25,616 $ 26,770 $ 22,791 $ 6,691 $ 21,464
Weighted Average TDS
Telecommunications Group
Shares Outstanding.......... 31,330 35,497 38,304 40,309 40,141 40,789 40,500
Earnings per TDS
Telecommunications Group
Share....................... $ 0.60 $ 0.69 $ 0.67 $ 0.66 $ 0.57 $ 0.16 $ 0.53
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
AS OF OR FOR THE
THREE MONTHS ENDED
AS OF OR FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(3)..................... $ 138,672 $ 160,484 $ 175,595 $ 191,167 $ 196,679 $ 50,765 $ 47,131
Construction Expenditures..... $ 80,818 $ 115,483 $ 104,372 $ 144,440 $ 151,460 $ 23,599 $ 30,739
Access Lines.................. 356,200 392,500 425,900 484,500 515,500 493,000 528,900
BALANCE SHEET DATA:
Cash and Cash Equivalents and
Temporary Investments....... $ 159,699 $ 163,267 $ 215,979 $ 222,918 $ 206,239 $ 205,720 $ 230,807
Property, Plant and Equipment,
Net......................... 524,322 611,450 659,339 769,361 830,767 768,625 840,979
Total Assets.................. 959,582 1,138,242 1,228,232 1,352,929 1,406,048 1,334,944 1,486,953
Notes Payable................. 12,080 15,059 15,784 25,039 28,181 25,980 28,861
Long-term Debt--Including
Current Portion............. 698,797 717,688 769,555 800,382 818,676 800,626 835,639
Telecom Group Equity.......... $ 107,298 $ 228,800 $ 265,387 $ 343,816 $ 383,759 $ 343,926 $ 426,532
</TABLE>
- ------------------------------
(1) Net income for the three months ended March 31, 1998 includes net income
from operations of $5.2 million and net income from gains from the sale of
cellular interests of $23.4 million.
(2) Pro forma net income attributable to the Telecom Group and to the TDS Group
through the Retained Interest assumes that the Offerings have not taken
place and therefore 75% of Net Income is attributable to the Telecom Group
Shares and 25% of Net Income is attributable to the Retained Interest for
the TDS Group. Pro forma earnings per share was computed based on the
weighted average TDS Telecommunications Group Shares outstanding during the
periods, adjusted to give retroactive effect to the Distribution of TDS
Telecommunications Group Shares in conjunction with Telephone and Data
Systems, Inc. proposed restructuring, as if the restructuring had occurred
at January 1, 1993.
(3) EBITDA represents Operating Income plus depreciation and amortization.
EBITDA is a measure commonly used by the financial community but is not
prepared in accordance with United States generally accepted accounting
principles and should not be considered as a measurement of net cash flows
from operations.
33
<PAGE>
TELECOM GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Telecom Group consists of TDS Telecom and its subsidiaries which operate
primarily landline telephone companies. The Telecom Group may in the future also
include such other assets and liabilities of TDS as the Board may determine to
attribute to the Telecom Group and such other businesses, assets and liabilities
as TDS or any of its subsidiaries may in the future acquire for the Telecom
Group, as determined by the Board.
OVERVIEW
The Telecom Group is a full-service local exchange carrier providing modern,
high-quality telecommunication services, including local and long-distance
telephone service and Internet access, to rural and suburban communities through
TDS Telecom's 106 telephone company subsidiaries. Each of these telephone
companies, ranging in size from less than 500 to more than 50,000 access lines,
is an ILEC. The Telecom Group operated 105 telephone companies serving 493,000
access lines at the end of the first quarter of 1997 and 106 telephone companies
serving 528,900 access lines in 28 states at the end of the first quarter of
1998. At March 31, 1998, approximately 56% of the Telecom Group's access lines
were in Alabama, Georgia, Indiana, Minnesota, Tennessee, and Wisconsin. Internal
access line growth during 1995, 1996 and 1997 was 5.1%, 6.0% and 5.7%,
respectively. Internal access line growth was 5.4% during the twelve month
period ended March 31, 1998.
<TABLE>
<CAPTION>
AS OF AND FOR THE
AS OF AND FOR THE THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Number of Companies.................................. 100 105 106 105 106
Access Lines......................................... 425,900 484,500 515,500 493,000 528,900
% Residential...................................... 80.6% 79.9% 78.3% 78.9% 78.4%
% Business......................................... 19.4% 20.1% 21.7% 21.1% 21.6%
Total Revenues (in thousands)........................ $ 354,841 $ 395,602 $ 444,203 $ 105,571 $ 116,215
% Local Service.................................... 26.8% 27.9% 27.7% 28.3% 28.0%
% Network Access and Long-Distance................. 55.1% 53.9% 53.1% 53.6% 52.4%
% Miscellaneous and Other Services................. 18.1% 18.2% 19.2% 18.1% 19.6%
Average Monthly Revenue per Access Line.............. $ 66.82 $ 67.10 $ 68.78 $ 67.24 $ 68.48
</TABLE>
The Telecom Group provides consumers and businesses with landline local
telephone service through its switching and intra-city network. Long-distance or
toll service is provided through connections with long-distance carriers,
primarily AT&T and the RBOCs, which purchase network access from the Telecom
Group. Both the fees charged to the Telecom Group's customers for its services
and the access charges to interexchange carriers are based upon rates
established by the various state regulatory agencies for intrastate services and
the FCC for interstate services. Generally, these fees are a function of a
prescribed return on the telephone subsidiaries' investment in plant and
equipment, and the cost of services provided to their subscribers.
The Telecom Group also operates USLink, a small long-distance and local
service provider; TDSNET, an Internet access provider; TDS DATACOM, a LAN wiring
business; and TDS METROCOM, a CLEC. The revenues and expenses of these
businesses are included in Other Services.
34
<PAGE>
THREE MONTHS ENDED MARCH 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
RESULTS OF OPERATIONS
OPERATING REVENUE increased 10% ($10.6 million) from $105.6 million in the
first quarter of 1997 to $116.2 million in the first quarter of 1998. The
increase was due to growth in telephone revenues ($8.7 million) and other
services ($2.2 million).
TELEPHONE REVENUES
Telephone revenues increased 9% ($8.7 million) in the first quarter of 1998
to $107.3 million. The net effect of acquisitions increased telephone revenues
2% ($1.6 million). The average telephone revenue per access line increased 2%
from $67.24 in the first quarter of 1997 to $68.48 in the first quarter of 1998.
LOCAL SERVICE REVENUES are derived from providing local telephone exchange
service within the franchise service area of the Telecom Group's telephone
subsidiaries. Local service revenues increased 9% ($2.7 million) in the first
quarter of 1998. Internal access line growth of 5.4% increased local service
revenues $1.5 million, while custom calling and advanced feature sales and other
miscellaneous revenues increased revenues by $0.9 million. The effects of
acquisitions increased local service revenues $0.4 million.
NETWORK ACCESS REVENUES are compensation for providing access to
interexchange carriers for both interstate and intrastate long-distance traffic.
Network access revenues increased 8% ($4.3 million) in the first quarter of
1998. Increased expense and investment levels for providing access service
increased revenues $2.1 million through recovery of the costs from state and
national revenue pools. Increased usage of the network generated $1.3 million of
additional intrastate revenues. The effects of acquisitions increased network
access revenues $0.8 million.
MISCELLANEOUS REVENUES include revenues related to (i) leasing, selling,
installing, maintaining and repairing customer premise equipment, such as
telephone answering equipment or business systems and associated peripheral
equipment, and wiring ("CPE services"), (ii) providing billing and collection
services for interexchange carriers, (iii) leasing network facilities and (iv)
sale of satellite dishes (Digital Broadcast Satellite or "DBS"). Miscellaneous
revenues increased 14% ($1.7 million) in the first quarter of 1998. Higher sales
and leases of customer premise equipment and higher DBS sales increased revenues
$1.7 million. The effects of acquisitions increased miscellaneous revenues $0.4
million.
OTHER SERVICES REVENUES
Other services revenues increased 31% ($2.2 million) in the first quarter of
1998. Revenues from LAN wiring increased $1.4 million and revenues from Internet
services increased $0.9 million. TDS DATACOM (LAN wiring) began operations in
late 1996.
OPERATING EXPENSES increased 22% ($17.2 million) from $78.7 million in the
first quarter of 1997 to $95.9 million in the first quarter of 1998. The
increase was due to the growth in telephone operations ($11.5 million) and other
services ($6.0 million).
TELEPHONE EXPENSES
Operating expenses from local telephone operations increased 16% ($11.5
million) in the first quarter of 1998 to $83.1 million. The net effect of
acquisitions increased telephone expenses 2% ($1.5 million).
NETWORK OPERATIONS EXPENSE consists of costs to maintain the high-quality
telecommunications networks to provide advanced telecommunications services and
the cost of CPE services, including DBS, sold to customers. Network operations
expense increased 15% ($2.6 million) in the first quarter of 1998. The increased
sales activity from DBS, a new product offering in 1997, and increased sales
activity of CPE services, resulted in increased cost of goods sold, increasing
network operations expense $1.3 million. In
35
<PAGE>
1997, the Telecom Group implemented the next phase of its program to upgrade,
standardize and expand its network. This program will monitor the network 24
hours-a-day, and proactively identify and correct network faults to minimize
interruption or degradation of service to the customer. The increased quality of
the network will provide long-term benefits in terms of future cost avoidance,
the ability to offer advanced technological services to the customer, and to
increase customer loyalty and satisfaction. The resources necessary to support
this network increased network operations expense by $1.0 million. Acquisitions
increased expenses $0.6 million. The remaining increase is due to general wage
increases and inflation.
CUSTOMER OPERATIONS EXPENSE includes costs for marketing, sales, and product
management, as well as expenses for establishing and servicing customer
accounts. Customer operations expense increased 18% ($2.6 million) in the first
quarter of 1998. Increased customer billing costs due to customer growth, costs
incurred to explore new business opportunities, general wage increases and
inflation are the major reasons for the increase. Incentives paid to employees
for significantly improving customer satisfaction increased expenses by $0.5
million. In late 1997, a new centralized payment process was implemented,
allowing local forces to focus on customer sales and service, which increased
expenses $0.3 million. Increased product advertising in conjunction with
aggressive sales and marketing campaigns for DBS and advanced calling features
increased expenses by $0.3 million. Acquisitions increased customer operations
expense by $0.1 million.
CORPORATE AND OTHER EXPENSES consist of costs incurred for executive
administration and management, accounting, human resource management,
information management, legal services, and property and other non-income taxes.
Corporate and other expenses increased 23% ($3.5 million) in the first quarter
of 1998. The increase can be primarily attributed to factors such as general
wage increases, incentive plan costs and inflation. Costs incurred to support
and maintain computer applications and local and wide area networks increased by
$1.2 million. Acquisitions increased expenses by $0.3 million.
DEPRECIATION AND AMORTIZATION EXPENSE increased 12% ($2.7 million) in the
first quarter of 1998. Increased investment in plant and equipment was the
primary driver of the increase in depreciation expense. Acquisitions increased
depreciation and amortization by $0.4 million.
OTHER SERVICES EXPENSES
Other services expenses increased 83% ($6.0 million) in the first quarter of
1998. The increase in other services expenses primarily related to the growth at
TDS DATACOM ($2.9 million) and at TDSNET ($0.9 million), and to start-up
activities at TDS METROCOM ($2.1 million). TDS METROCOM (CLEC) began operations
in early 1998.
OPERATING INCOME decreased 25% ($6.6 million) in the first quarter of 1998
and the operating margin declined from 25.5% in the first quarter of 1997 to
17.5% in the first quarter of 1998. The decrease in operating income is
primarily due to start-up costs of new business ventures, which lowered
operating income $3.8 million. Expansion into lower margin products, increased
costs associated with the support of the data network, as well as earnings
pressures from regulatory agencies and long-distance providers lowered operating
income $2.8 million. The operating margin for the new services is considerably
lower than that of the typical telephone company, resulting in a reduction in
overall margins. The telephone operating margin was 27.3% in the first quarter
of 1997 and 22.5% in the first quarter of 1998.
OTHER INCOME, NET increased $37.0 million from $4.5 million in the first
quarter of 1997 to $41.4 million in the first quarter of 1998 due to the $37.1
million gain from the sale of certain minority cellular interests in 1998. These
interests were sold as a part of a larger transaction which included interests
sold by U.S. Cellular. The Telecom Group received 1.1 million AirTouch
Communications, Inc. common shares for its two minority cellular interests.
36
<PAGE>
INTEREST EXPENSE decreased $1.0 million from $15.8 million in the first
quarter of 1997 to $14.8 million in the first quarter of 1998 due to lower
interest rates.
INCOME TAX EXPENSE increased $11.7 million from $6.6 million in the first
quarter of 1997 to $18.3 million in the first quarter of 1998 primarily due to
the taxes related to the gains on the sale of cellular interests.
NET INCOME increased from $8.9 million in the first quarter of 1997 to $19.7
million in the first quarter of 1998. The increase in net income relates
primarily to the gain on sale of cellular interests in 1998. Excluding gains,
net income totaled $8.9 million in the first quarter of 1997 compared to $5.2
million in the first quarter of 1998.
FINANCIAL RESOURCES
The Telecom Group operates a capital-intensive business. The Telecom Group
has financed and plans to continue to finance its construction program primarily
using internally generated cash, supplemented by long-term financing from
federal government programs and financing from TDS, as needed.
CASH FLOWS FROM OPERATING ACTIVITIES provided $18.4 million in the first
quarter of 1997 and $32.4 million in the first quarter of 1998. Operating cash
flow (operating income plus depreciation and amortization) totaled $50.8 million
in the first quarter of 1997 and $47.1 million in the first quarter of 1998.
Cash flows from other operating activities (investment and other income,
interest and income tax expense, and changes in working capital and other assets
and liabilities) required $32.3 million in the first quarter of 1997 and $14.7
million in the first quarter of 1998.
CASH FLOWS FROM FINANCING ACTIVITIES provided $1.2 million in the first
quarter of 1997 and $13.3 million in the first quarter of 1998, reflecting
borrowings and repayments of short-term and long-term debt. During the first
quarter of 1998, the Telecom Group borrowed $16.9 million from TDS to finance
the operations and capital expenditures of TDS METROCOM, TDS DATACOM and TDSNET
($12.3 million), and for general corporate purposes ($4.6 million).
CASH FLOWS FROM INVESTING ACTIVITIES required $24.3 million in the first
quarter of 1997 and $15.4 million in the first quarter of 1998. The Telecom
Group makes substantial investments each year to construct, operate and maintain
modern high-quality telecommunications networks and facilities. In recent years,
rapid changes in technology and new opportunities have required substantial
investments in revenue-enhancing and cost-reducing upgrades of the Telecom
Group's networks. Cash expenditures for telecommunications property and plant
additions totaled $23.6 million in the first quarter of 1997 and $30.7 million
in the first quarter of 1998. These expenditures were primarily for the purpose
of installing new switching systems and completing construction projects from
the previous year. Cash expenditures for property and plant totaled $5.7 million
in the first quarter of 1998 for TDS DATACOM, TDS METROCOM and TDSNET and
totaled $0.3 million for TDS DATACOM and TDSNET in the first quarter of 1997
(TDS METROCOM had not begun its expenditures during the first quarter of 1997).
Maturing temporary and longer-term cash investments required cash of $1.1
million in the first quarter of 1997 and provided $12.2 million in the first
quarter of 1998.
Capital expenditures during 1998 are expected to total approximately $140
million, including about $34 million for new digital switches and other
switching facilities, $45 million for improvements to outside plant facilities,
$25 million for systems development and $36 million for other services,
primarily CLEC expenditures.
ACQUISITIONS. The Telecom Group seeks to acquire telephone companies which
add value to the Telecom Group. The Telecom Group acquired one telephone company
in the first quarter of 1998 for aggregate consideration of $8.7 million,
consisting of approximately 200,000 TDS Common Shares.
37
<PAGE>
LIQUIDITY
The Telecom Group had cash and cash equivalents, temporary cash investments
and construction funds totaling $231.5 million at March 31, 1998. These
investments are primarily the result of internally generated cash from telephone
operations. While certain debt agreements of the Telecom Group's telephone
subsidiaries place limits on the transfer of funds to TDS, these restrictions
are not expected to affect the Telecom Group's ability to meet its cash
obligations.
The Telecom Group plans to finance its construction program using primarily
internally generated cash supplemented by long-term financing from federal
government programs and short-term financing. Operating cash flow totaled $193.0
million for the twelve months ended March 31, 1998. At March 31, 1998, the
Telecom Group's telephone subsidiaries had $114.7 million in unadvanced loan
funds from federal government programs to finance the telephone construction
program. These loan commitments have a weighted average annual interest rate of
5.67%.
In accordance with the Tracking Stock Proposal, the Board of Directors
intends to establish an annual dividend on the Telecom Group Shares in an amount
of $.50 per share. Based upon the distribution of two-thirds of a Telecom Group
Share for each outstanding Series A Common Share and Common Share of TDS, the
Telecom Group would be required to pay approximately $20.4 million, excluding
any amounts for Telecom Group Shares to be issued in the public offering and
excluding the amount of dividend which would be deemed to be paid with respect
to the Retained Interest. The Telecom Group plans to finance the dividend
requirements through internally generated cash flow.
Management believes the Telecom Group has sufficient internal and external
resources to finance the anticipated requirements of its business development
and construction programs.
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
RESULTS OF OPERATIONS
OPERATING REVENUES increased 11% ($40.8 million) from $354.8 million in 1995
to $395.6 million in 1996, and increased 12% ($48.6 million) to $444.2 million
in 1997. The increases were due to growth in telephone revenues ($39.6 million
in 1996 and $40.5 million in 1997) and other services ($1.0 million in 1996 and
$8.8 million in 1997).
TELEPHONE REVENUES
Telephone revenues increased 12% ($39.6 million) in 1996 to $371.9 million
from $332.3 million in 1995 and 11% ($40.5 million) in 1997 to $412.4 million.
The net effect of acquisitions increased telephone revenues 6% ($18.8 million)
in 1996 and 2% ($8.1 million) in 1997. The average monthly revenue per access
line was $66.82 in 1995, $67.10 in 1996 and $68.78 in 1997.
LOCAL SERVICE REVENUES are derived from providing local telephone exchange
service within the franchise serving area of the Telecom Group's telephone
subsidiaries. Local service revenues increased 16% ($15.3 million) in 1996.
Acquisitions increased local service revenues by $6.0 million, while internal
access line growth of 6.0% resulted in an increase of $5.2 million. The sales of
custom calling and advanced features and other miscellaneous revenues increased
local service revenues by $2.9 million in 1996.
Local service revenues increased 11% ($12.3 million) in 1997. The effects of
acquisitions increased local service revenues $2.7 million in 1997. Internal
access line growth of 5.7% increased local service revenues $5.7 million in
1997, while custom calling and advanced feature sales and other miscellaneous
revenues increased revenues by $3.1 million.
38
<PAGE>
NETWORK ACCESS AND LONG DISTANCE REVENUES are compensation for carrying
interstate and intrastate long-distance traffic on the Telecom Group's operating
telephone subsidiaries' networks. The interstate and intrastate access rates
charged include the cost of providing service plus a fair rate of return under
cost separation procedures established by the FCC. The Telecom Group
participates in the National Exchange Carrier Association ("NECA") interstate
common line and traffic sensitive tariffs for all but one portion of one ILEC's
interstate access. These operating companies participate in the access revenue
pools administered by NECA, which collect and distribute revenue from interstate
access services. The FCC created NECA and it operates subject to FCC rules and
oversight. Where applicable and subject to state regulatory approval, the
Telecom Group's ILEC subsidiaries utilize intrastate access tariffs and
participate in intrastate revenue pools. However, many intrastate toll revenue
pooling arrangements, a source of substantial revenues to TDS Telecom's ILECs,
have been replaced with access-charge-based arrangements. In these cases, access
charges are typically set to generate revenue flows similar to those realized in
the pooling process. The impact of the 1996 Act has accelerated the pace of
regulatory re-evaluation at both the state and federal level. To the extent that
state-ordered access charge revisions reduce revenues, the Telecom Group may
seek adjustments in other rates. Some states are utilizing a state high cost
fund to offset access charge reductions. The interstate portion of these
revenues is initially received based on estimates of expenses, plant investment
and rates of return for the settlement period (usually a calendar year). When
the separations studies are approved and finalized, the estimates are adjusted
to actual. The intrastate portion of these revenues, based on approved tariffs,
is influenced by changes in traffic levels as measured by minutes of use.
Network access and long distance revenues increased 9.0% ($17.5 million) in
1996. The effects of acquisitions increased network access revenues $9.9
million. Increased expense and investment levels for providing access service
increased revenues $8.1 million in 1996 through state and national revenue
pools, and increased usage of the network generated $4.5 million of additional
revenues. Revenue adjustments due to updated cost separation and pool rate of
return information were $3.0 million less in 1996 than in 1995. The impact of
extended area service plans implemented in Vermont and Ohio reduced access
revenue $1.0 million in 1996.
Network access and long distance revenues increased 11% ($22.6 million) in
1997. The effects of acquisitions increased network access revenues $4.5 million
in 1997. Recovery of increased expense and investment levels for providing
access service, as explained above, increased revenues $12.1 million in 1997
through state and national revenue pools. Increased usage of the network
generated $5.7 million of additional intrastate revenues. Revenue adjustments
due to updated cost separation and pool rate of return information increased
network access revenues by $0.5 million in 1997.
MISCELLANEOUS REVENUES include revenues related to (i) leasing, selling,
installing, maintaining and repairing customer premise telecommunications
equipment, such as telephone answering equipment or business systems and
associated peripheral equipment, and wiring ("CPE services"), (ii) providing
billing and collection services for IXCs, (iii) leasing network facilities and
(iv) sale of satellite dishes (Digital Broadcast Satellite or "DBS").
Miscellaneous revenues increased 16% ($6.8 million) in 1996. The effects of
acquisitions increased miscellaneous revenues $2.9 million. Higher sales and
leases of customer premise equipment, including satellite sales, increased
miscellaneous revenues $2.2 million in 1996.
Miscellaneous revenues increased 11% ($5.5 million) in 1997. The effects of
acquisitions increased miscellaneous revenues $1.0 million. Higher sales and
leases of customer premise equipment, including satellite sales, increased
revenues $6.1 million in 1997. Billing and collection revenues decreased $1.9
million compared to 1996, primarily due to reduced prices for billing and
collection services and less services performed.
39
<PAGE>
OTHER SERVICES REVENUES
Other services revenues increased 4% ($1.0 million) in 1996 and 35% ($8.8
million) in 1997. Revenues from LAN wiring increased $6.0 million in 1997, while
revenues from Internet services increased $2.8 million in 1997. TDSNET (Internet
service) began operations in early 1996 while TDS DATACOM (LAN wiring) began
operations in late 1996. TDS METROCOM (CLEC) began operations in early 1998.
OPERATING EXPENSES increased 14% ($36.3 million) from $256.6 million in 1995
to $292.9 million in 1996, and increased 18% ($52.7 million) to $345.6 million
in 1997. The increases were due to the growth in telephone expenses ($33.6
million in 1996 and $40.3 million in 1997) and other services ($2.5 million in
1996 and $13.1 million in 1997).
TELEPHONE EXPENSES
Operating expenses from local telephone operations increased 14% ($33.6
million) in 1996 to $269.1 million from $235.5 million in 1995 and 15% ($40.3
million) in 1997 to $309.4 million. The net effect of acquisitions increased
telephone expenses 6% ($14.6 million) in 1996 and 2% ($6.2 million) in 1997.
NETWORK OPERATIONS EXPENSE consists of costs to maintain high-quality
telecommunications networks to provide advanced telecommunications services and
the cost of CPE services, including DBS, sold to customers. Network operations
expense increased 23% ($12.6 million) in 1996, with acquisitions increasing
expenses $4.1 million. The development of a centralized Network Management
Center to provide more effective network monitoring and maintenance caused an
increase in operating expenses of $3.4 million in 1996. Other increases in
operating expenses can be attributed to factors such as general wage increases
and inflation.
Network operations expense increased 19% ($13.0 million) in 1997, with
acquisitions increasing expenses $1.5 million. The increased sales activity from
DBS, a new product offering in 1997, and increased sales and lease activity of
CPE services, resulted in network operations expense increases of $5.2 million.
General wage increases and inflation in 1997 increased network operations
expenses by an additional $3.3 million. In 1997, the Telecom Group implemented
the next phase of its program to upgrade, standardize and expand its network.
This program is expected to monitor the network 24 hours-a-day, and to
proactively identify and correct network faults to minimize interruption or
degradation of service to the customer. The increased quality of the network is
expected to provide long-term benefits in terms of future cost avoidance and the
ability to offer advanced technological services to the customer, and to
increase customer loyalty and satisfaction. The increase in staff to support
this network increased network operations expense by $1.8 million.
CUSTOMER OPERATIONS EXPENSE includes costs for marketing, sales, and product
management, as well as expenses for establishing and servicing customer
accounts. Customer operations expense increased 15% ($6.9 million) in 1996 and
21% ($11.4 million) in 1997. Acquisitions increased customer operations expense
by $2.7 million in 1996 and $1.4 million in 1997. The cost to explore new
business opportunities caused customer operations expenses to increase by $3.2
million in 1996. Increased product advertising in conjunction with aggressive
sales and marketing campaigns for DBS and advanced calling features increased
expenses by $4.7 million in 1997. Also in 1997, costs incurred to update
customer billing systems and infrastructure support costs for customer service
representatives increased expenses by $4.6 million.
CORPORATE AND OTHER EXPENSES consist of costs incurred for executive
administration and management, accounting, human resource management,
information management, legal services, and property and other non-income taxes.
Corporate and other expenses increased 6% ($3.3 million) in 1996 and 10% ($6.2
million) in 1997. Acquisitions increased expenses by $3.8 million in 1996 and
$1.3 million in 1997. Costs incurred to support and maintain general computer
applications and local and wide area networks increased by $3.8 million in 1997.
40
<PAGE>
DEPRECIATION AND AMORTIZATION EXPENSE increased 14% ($10.8 million) in 1996
and 11% ($9.7 million) in 1997. Acquisitions increased depreciation and
amortization by $4.0 million in 1996 and $2.0 million in 1997. Increased
investment in plant and equipment was the primary driver of the increase in
depreciation expense in 1996 and 1997. The composite depreciation rate was 7.1%
in 1995, 7.2% in 1996 and 7.4% in 1997.
OTHER SERVICES EXPENSES
OTHER SERVICES EXPENSES increased 11% ($2.5 million) in 1996 and 53% ($13.1
million) in 1997. The increase in other services expenses in 1997 primarily
related to the growth at TDS DATACOM of $7.6 million and at TDSNET of $3.2
million. The remaining increase was primarily due to start-up activities at TDS
METROCOM.
OPERATING INCOME increased 5% ($4.5 million) in 1996 and decreased 4% ($4.1
million) in 1997. The operating margin declined from 27.7% in 1995 to 26.0% in
1996 and 22.2% in 1997 primarily due to increased costs associated with the
development of the centralized Network Management Center and new business
opportunities, as well as earnings pressures from regulatory agencies and
long-distance providers. The operating margin for the other services group is
considerably lower than that of the typical telephone company, resulting in a
reduction in overall margins.
OTHER INCOME, NET decreased 3% ($0.6 million) in 1996 and 13% ($2.7 million)
in 1997. CELLULAR EQUITY INCOME increased $3.5 million in 1996 reflecting
increased earnings from minority interests in cellular partnerships and
decreased $2.0 million in 1997 due to the transfer of the majority of the
cellular interests to TDS during 1996. The cellular interests held by the
Telecom Group were owned by telephone subsidiaries prior to being acquired by
TDS. GAIN ON SALES OF INVESTMENTS decreased $4.1 million in 1996 as the Telecom
Group sold a cellular interest, a telephone company and various marketable
securities in 1995.
INTEREST EXPENSE increased 2% ($0.9 million) in 1996 and 3% ($1.6 million)
in 1997, primarily due to the added interest expense from acquisitions.
INCOME TAX EXPENSE increased 6% ($1.5 million) in 1996 and decreased 12%
($3.1 million) in 1997. The effective income tax rate was 41.5% in 1995 compared
to 41.8% in 1996 and 42.7% in 1997.
NET INCOME increased 5% ($1.5 million) in 1996 and decreased 15% ($5.3
million) in 1997. The decrease in net income in 1997 relates primarily to the
reduction in operating income as well as the reduction in other income.
OTHER MATTERS
The Telecom Group is subject to the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain
Types of Regulation." Criteria that would give rise to the discontinuance of
SFAS No. 71 include: (i) increasing competition that would restrict the Telecom
Group's ability to establish prices to recover specific costs, and (ii) a
significant change in the manner in which rates are set by regulators from
cost-based regulation to another form of regulation. The Telecom Group
periodically reviews the criteria for applying these provisions to determine
whether continuing application of SFAS No. 71 is appropriate. The Telecom Group
believes that such criteria are still being met and therefore has no current
plans to change its method of accounting.
In analyzing the effects of discontinuing the application of SFAS No. 71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles. Therefore any adjustments to telecommunications
plant would be immaterial, as would be the write-off of regulatory assets and
liabilities.
41
<PAGE>
INFLATION
Management believes that inflation affects the Telecom Group's business to
no greater extent than the general economy.
FINANCIAL RESOURCES
The Telecom Group operates a capital-intensive business. The Telecom Group
has financed and plans to continue to finance its construction program primarily
using internally generated cash supplemented by long-term financing from federal
government programs and short-term financing from the TDS Group, as needed.
Internally generated cash financed 88%, 92% and 90% of telecommunications plant
and equipment additions in 1995, 1996 and 1997, respectively. Financing from
federal government programs provided 12%, 8% and 10% of telecommunications plant
and equipment additions in 1995, 1996 and 1997, respectively.
CASH FLOWS FROM OPERATING ACTIVITIES increased 13% ($15.9 million) to $138.7
million in 1996 and decreased 3% ($3.7 million) to $134.9 million in 1997.
Operating cash flow (operating income plus depreciation and amortization)
totaled $175.6 million in 1995, $191.2 million in 1996 and $196.7 million in
1997. Cash flows from other operating activities (investment and other income,
interest and income tax expense, and changes in working capital and other assets
and liabilities) required $52.8 million in 1995, $52.5 million in 1996 and $61.8
million in 1997.
CASH FLOWS FROM FINANCING ACTIVITIES required $14.2 million in 1995, $5.5
million in 1996 and $0.5 million in 1997, reflecting the payment of cash
dividends to TDS, and borrowing and repayment of short-and long-term debt.
CASH FLOWS FROM INVESTING ACTIVITIES required $60.8 million in 1995, $142.8
million in 1996 and $133.3 million in 1997. The maturing of temporary and
longer-term cash investments provided cash of $29.1 million in 1995 and $11.2
million in 1997. In 1996, the investment in temporary and longer-term cash
investments reduced cash by $2.9 million. Proceeds from the sales of certain
investments and marketable securities provided $10.1 million in 1995, $5.9
million in 1996 and $2.1 million in 1997.
The Telecom Group makes substantial investments each year to construct,
operate and maintain modern high-quality telecommunications networks and
facilities. In recent years, rapid changes in technology and new opportunities
have required substantial investments in revenue-enhancing and cost-reducing
upgrades of the Telecom Group's networks. Cash expenditures for
telecommunications property and plant additions totaled $104.4 million in 1995,
$144.4 million in 1996 and $151.5 million in 1997. The following table
summarizes the Telecom Group's investments in telecommunications plant during
the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Central Office Equipment................................. $ 38,697 $ 47,208 $ 52,479
Outside Plant............................................ 55,569 53,130 60,974
Systems Development...................................... 7,137 20,497 9,127
Other.................................................... 2,969 23,605 28,880
---------- ---------- ----------
$ 104,372 $ 144,440 $ 151,460
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Telecom Group's capital additions include expenditures for outside plant
facilities and upgrades of recently acquired companies for new customer growth
and switch modernization. The Telecom Group installed 39 digital switches in
1995, 35 in 1996, and 32 in 1997 and made substantial improvements in outside
plant facilities during each year.
42
<PAGE>
Capital expenditures during 1998 are expected to total approximately $140
million, including about $34 million for new digital switches and other
switching facilities, $45 million for improvements to outside plant facilities,
$25 million for systems development and $36 million for other services,
primarily CLEC expenditures. It is expected that internally generated funds will
be primarily used to finance these improvements, supplemented by long-term
financing from federal government programs.
ACQUISITIONS. The Telecom Group seeks to acquire telephone companies which
add value to the Telecom Group. The Telecom Group acquired five telephone
companies in 1995, five in 1996, and one in 1997. A majority-owned telephone
subsidiary also purchased an additional interest in a cellular entity in 1996.
The 1995 consideration of $46.1 million consisted of approximately 1.0 million
TDS Common Shares and $250,000 in cash. The 1996 consideration of $88.1 million
consisted of approximately 1.5 million TDS Common Shares and $17.4 million in
cash. Consideration of $13.4 million was paid for the acquisition in 1997,
consisting of approximately 240,000 TDS Common Shares, 30,000 TDS Preferred
Shares and $200,000 in cash.
LIQUIDITY
The Telecom Group is generating substantial internal funds to finance its
construction program. Operating cash flow (operating income plus depreciation
and amortization) increased 9% to $191.2 million in 1996 from $175.6 million in
1995, and 3% in 1997 to $196.7 million. Operating cash flows were 168% of
capital additions in 1995, 132% in 1996 and 130% in 1997.
The Telecom Group had cash and cash equivalents, temporary cash investments,
construction funds and marketable securities totaling $230.7 million at December
31, 1997. These investments are primarily the result of internally generated
cash from telephone operations. While certain debt agreements of the Telecom
Group's telephone subsidiaries place limits on the transfer of funds to TDS
Telecom, these restrictions are not expected to affect the parent's ability to
meet its cash obligations.
From time to time, the Telecom Group has borrowed funds from TDS to
temporarily finance its construction program and acquisitions and for general
corporate purposes. At December 31, 1997 the amount of such borrowings
aggregated $28.2 million for such debt classified as current and $255.3 million
classified as long-term debt.
The Telecom Group is one of four Groups of TDS. To the extent cash needs of
one Group exceed cash provided by such Group, one of the other Groups may
transfer funds to such Group. TDS has provided and will continue to provide
centralized cash management functions under which cash receipts of certain
entities attributed to the other Groups will be remitted to the TDS Group and
certain cash disbursements of the other Groups will be funded by the TDS Group
on a daily basis. See "Risk Factors--Risks Related to Capital Structure and the
Telecom Group Shares--Management and Allocation Policies" and "Management and
Allocation Policies--Cash Transfers."
In addition, a substantial number of the Telecom Group's telephone companies
operate in a rate-of-return regulatory environment. The telephone companies'
rates and earnings are dependent in part on the level of equity in the
subsidiaries. Accordingly, the Telecom Group must manage its dividend policy to
maintain appropriate equity levels in the telephone companies.
The Telecom Group plans to continue financing the telephone construction
program primarily using internally generated cash supplemented by long-term
financing from federal government programs and short-term financing from TDS.
The Telecom Group's telephone subsidiaries had $112.0 million in unadvanced loan
funds from federal government programs at December 31, 1997 to finance the
telephone construction program. These loan commitments have a weighted average
annual interest rate of 5.71%.
Cash dividends paid by the Telecom Group totaled $17.1 million in 1995,
$15.6 million in 1996 and $18.1 million in 1997. Subject to the approval of the
Tracking Stock Proposal, the Board intends to establish an annual dividend on
the Telecom Group Shares in an amount of $0.50 per share. Based upon
43
<PAGE>
the distribution of two-thirds of a Telecom Group Share for each outstanding
Series A Common Share and Common Share of TDS, the Telecom Group would be
required to pay approximately $20.4 million annually, excluding any amounts for
Telecom Group Shares issued in the Offerings and excluding the amount of
dividend which would be deemed paid with respect to the Retained Interest. The
Telecom Group plans to finance the dividend requirements through internally
generated cash flow.
Management believes the Telecom Group has sufficient internal and external
resources to finance the anticipated requirements of its business development
and construction programs.
The Telecom Group has assessed, and continues to assess, the impact of the
Year 2000 Issue on its reporting systems and operations. The Telecom Group
believes that modifying its reporting systems and operations is not a material
event and is taking steps to make its systems Year 2000 compliant. The Year 2000
Issue exists because many computer systems and applications abbreviate dates by
eliminating the first two digits of the year, assuming that these two digits
would always be "19". Unless corrected, this shortcut is expected to cause
problems when the century date occurs. On that date, some computer programs may
recognize the date as January 1, 1900 instead of January 1, 2000. This may cause
systems to incorrectly process critical financial and operational information,
or stop processing altogether. The cost of addressing the Year 2000 Issue to
date has not been material to the Telecom Group's results of operations or
financial condition, and management believes that the costs to be incurred in
1998 and 1999 will not be material to future operating results or financial
condition. If management's steps are not successful in making the systems Year
2000 compliant, it could have a material adverse effect on results of
operations.
44
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
OF TELEPHONE AND DATA SYSTEMS, INC.
The following table sets forth selected consolidated financial information
for TDS for each of the fiscal years in the five year period ended December 31,
1997 and for the three month periods ended March 31, 1997 and 1998. The
information for each of the five years ended December 31, 1997 has been derived
from the audited Consolidated Financial Statements as of and for the fiscal
years ended December 31, 1993 through December 31, 1997, and the notes thereto,
and other financial information contained in TDS's Annual Reports on Form 10-K
for each of such years. See "Available Information." Information for the three
month periods ended March 31, 1997 and 1998 has been derived from the unaudited
financial statements of TDS that have been prepared on the same basis as the
audited financial statements of TDS, and, in the opinion of management, contain
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the results of operations for such period. Operating
results for the three month period ended March 31, 1998 are not necessarily
indicative of the results of operations that may be expected for the year ending
December 31, 1998
<TABLE>
<CAPTION>
(UNAUDITED)
AS OF OR FOR THE
THREE MONTHS ENDED
AS OF OR FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating Revenues(1)(2)...... $ 553,829 $ 726,036 $ 942,307 $1,179,857 $1,471,533 $ 290,155 $ 392,118
Operating Income (Loss)....... 69,733 108,822 131,998 153,448 (3,702) 41,941 (27,249)
Other Income.................. 28,126 33,686 103,857 141,190 113,979 (4,672) 223,882
Interest Expense.............. 37,466 41,251 50,848 42,853 89,744 13,814 31,613
Income Taxes.................. 26,497 40,713 81,029 123,646 28,559 13,838 85,954
Net Income (Loss) Before
Cumulative Effect of
Accounting Change........... 33,896 60,544 103,978 128,139 (9,549) 9,617 74,170
Cumulative Effect of
Accounting Change(3)........ -- (723) -- -- -- -- --
Net Income (Loss)........... 33,896 59,821 103,978 128,139 (9,549) 9,617 74,170
Net Income Available to
Common...................... $ 31,510 $ 57,362 $ 101,469 $ 126,182 $ (11,441) $ 9,136 $ 73,730
Weighted Average Common Shares
(000s)...................... 46,995 53,295 57,456 60,464 60,211 61,184 60,750
Earnings Per Common Share--
Basic:
Before Cumulative Effect of
Accounting
Change...................... $ 0.67 $ 1.09 $ 1.77 $ 2.09 $ (0.19) $ 0.15 $ 1.21
Net Income (Loss)........... 0.67 1.08 1.77 2.09 (0.19) 0.15 1.21
Earnings per Common Share--
Diluted:
Before Cumulative Effect of
Accounting Change......... 0.67 1.08 1.74 2.07 (0.19) 0.15 1.20
Net Income (Loss)........... 0.67 1.06 1.74 2.07 (0.19) 0.15 1.20
Dividends Per Common and
Series A Common Share....... $ 0.34 $ 0.36 $ 0.38 $ 0.40 $ 0.42 $ 0.105 $ 0.11
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
AS OF OR FOR THE
THREE MONTHS ENDED
AS OF OR FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(4)..................... $ 187,714 $ 260,333 $ 323,503 $ 384,523 $ 297,854 $ 103,664 $ 72,424
Capital Expenditures.......... $ 200,984 $ 319,701 $ 359,996 $ 550,204 $ 786,317 $ 169,024 $ 125,314
BALANCE SHEET DATA:
Cash and Cash Equivalents and
Temporary Investments....... $ 73,385 $ 44,566 $ 80,851 $ 119,297 $ 75,567 $ 85,840 $ 84,230
Property, Plant and Equipment
(Net)....................... 846,089 1,063,656 1,293,410 1,828,889 2,465,653 1,945,145 2,451,246
Total Assets.................. 2,259,182 2,790,127 3,469,082 4,200,969 4,971,601 4,315,866 5,201,108
Notes Payable................. 6,309 98,608 184,320 160,537 527,587 299,468 450,615
Long-term Debt (including
current portion)............ 537,566 562,165 894,584 1,018,851 1,279,034 1,021,001 1,307,385
Redeemable Preferred Shares
(including current
portion).................... 27,367 25,001 15,093 1,858 1,479 1,578 1,192
Common Stockholders' Equity... $1,224,285 $1,473,038 $1,684,365 $2,032,941 $1,968,119 $2,003,629 $2,058,164
</TABLE>
- ------------------------------
(1) Effective January 1, 1997, U.S. Cellular changed its financial reporting
presentation for certain credits given to cellular customers on their
monthly bills. Amounts for the years 1993-1996 have been reclassified to
conform to the 1997 presentation.
(2) Operating revenues for the three months ended March 31, 1997 and 1998 do not
include American Paging revenues. On April 7, 1998, TDS announced that it
had transfered substantially all of the assets and certain, limited
liabilities of American Paging to TSR Wireless Holdings, LLC pursuant to an
asset contribution agreement.
(3) Effective January 1, 1994, TDS adopted SFAS No. 112, "Employers' Accounting
for Post Employment Benefits." The cumulative effect of the change on years
prior to 1994 has been reflected in 1994 Net Income. Prior years' financial
information has not been restated.
(4) EBITDA represents Operating Income plus depreciation and amortization.
EBITDA is a measure commonly used by the financial community but is not
prepared in accordance with United States generally accepted accounting
principles and should not be considered as a measurement of net cash flows
from operating activities.
46
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Telephone and Data Systems, Inc. ("TDS" or the "Company") is a diversified
telecommunications company which provides high-quality telecommunications
services to over 2.5 million cellular telephone, local telephone and personal
communications service ("PCS") customer units. TDS's long-term business
development strategy is to expand its operations through internal growth and
acquisitions, and to explore and develop telecommunications businesses that
management believes utilize TDS's expertise in customer-based
telecommunications.
THREE MONTHS ENDED MARCH 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
TDS reported a 35% increase in revenues for the first quarter of 1998 on a
52% growth in customers since March 31, 1997. United States Cellular Corporation
("U.S. Cellular") revenues increased 33% primarily due to a 56% increase in
customer units. TDS Telecommunications Corporation ("TDS Telecom") reported a
10% increase in revenues on a 7% increase in access lines and increased activity
in its new business ventures. Aerial Communications, Inc. ("Aerial") reported
revenues of $30.7 million in the first quarter of 1998 and 165,000 customer
units at March 31, 1998. Aerial launched service at the end of the first quarter
1997. Expenses incurred by Aerial prior to the launch of operations were
reported as PCS Development Costs included in Investment and Other Income
(Expense).
Consolidated cash flow and operating income were down due to Aerial's
rapidly increasing operating costs as it continues the challenge of attracting
new customers. U.S. Cellular's cash flow and operating income increased 46% and
41%, respectively, reflecting the increase in customers and the effects of
acquisitions. TDS Telecom's cash flow and operating income declined by 7% and
25%, respectively, reflecting increased operating expenses in the telephone
operations and start-up costs in the new business ventures.
Investment and other income totaled $223.9 million, consisting primarily of
$221.4 million of gains from the sale of cellular interests and other
investments recorded in the first quarter of 1998. Interest expense increased
129% as a result of the increase in short- and long-term debt balances. Net
income available to common increased seven fold over the first quarter of 1997
due mainly to significant gains recorded on the sale of cellular interests and
other investments.
TDS completed the transfer of substantially all of the assets and certain,
limited liabilities of American Paging, Inc. to TSR Wireless Holdings, LLC,
effective March 31, 1998, pursuant to a previously announced asset contribution
agreement.
RESULTS OF OPERATIONS
Telephone and Data Systems, Inc. reported net income available to common of
$9.1 million, or $0.15 per share--diluted, in the first quarter of 1997,
compared to $73.7 million, or $1.20 per share--diluted, in the first quarter of
1998. Net income for the first quarter of 1998 included significant gains from
the sale of cellular interests and other investments totaling $112.5 million, or
$1.84 per share. Net income from U.S. Cellular increased from $14.9 million, or
$0.24 per share, in the first quarter of 1997 to $15.9 million, or $0.26 per
share, in the first quarter of 1998. Net income from TDS Telecom decreased from
$8.9 million, or $0.15 per share, in the first quarter of 1997 to $5.2 million,
or $0.09 per share, in the first quarter of 1998, primarily due to the $6.6
million decrease in operating income. Net income from Corporate, American Paging
and Other increased from $3.8 million, or $0.06 per share, in the first quarter
of 1997 to $11.9 million, or $0.19 per share, in the first quarter of 1998 due
primarily to increase in the tax benefit associated with Aerial's losses. The
business units compute their federal income taxes as if they filed a separate
return. Any income tax benefits used on a consolidated basis, not used by the
business units, are recorded by TDS, the parent company. TDS and the business
units have tax allocation agreements and
47
<PAGE>
policies under which the business units are able to carry forward any losses and
credits and use them to offset any future income tax liability to TDS. Aerial's
activities reduced net income by $18.5 million, or $0.30 per share in the first
quarter of 1997 compared to $71.7 million, or $1.18 per share, in the first
quarter of 1998.
The table below summarizes the effects of the business units and gains
(along with the related impact on income taxes and minority interest) on net
income available to common and earnings per share-- diluted.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Net Income Available to Common
U.S. Cellular........................................................................... $ 14,947 $ 15,855
TDS Telecom............................................................................. 8,921 5,203
Aerial.................................................................................. (18,490) (71,680)
Corporate, American Paging and Other.................................................... 3,758 11,868
Gains................................................................................... -- 112,484
---------- ----------
$ 9,136 $ 73,730
---------- ----------
---------- ----------
Diluted Earnings Per Share
U.S. Cellular........................................................................... $ 0.24 $ 0.26
TDS Telecom............................................................................. 0.15 0.09
Aerial.................................................................................. (0.30) (1.18)
Corporate, American Paging and Other.................................................... 0.06 0.19
Gains................................................................................... -- 1.84
---------- ----------
$ 0.15 $ 1.20
---------- ----------
---------- ----------
</TABLE>
U.S. Cellular's operating results were impacted by the effects of
acquisitions, sales and exchanges, primarily those related to the exchange of
markets with BellSouth Corporation ("BellSouth"). The markets acquired in that
transaction, net of the markets divested, generated increases in overall
revenues, operating expenses, operating cash flow and operating income. These
increases were primarily due to the increase in the U.S. Cellular's customer
base as a result of the exchange.
However, the result of certain of U.S. Cellular's existing markets which are
adjacent to the markets acquired were negatively impacted by the effects of the
exchange. Specifically, inbound roaming revenue and, to a lesser extent,
operating cash flow suffered the most negative impact in these markets. This
impact was primarily due to the change in the nature and pricing of transactions
in which customers from the acquired markets use their wireless phones when
roaming in U.S. Cellular's existing markets. Prior to the exchange, U.S.
Cellular's existing markets recorded inbound roaming revenue at premium rates;
after the exchange, those markets recorded an intercompany transfer amount which
is eliminated in U.S. Cellular's consolidated financial statements.
Overall, U.S. Cellular's revenues, operating cash flow and operating income
were positively impacted by the effects of the BellSouth exchange.
OPERATING REVENUES increased 35% ($102.0 million) during the first quarter
of 1998 primarily as a result of a 52% increase in customer units served. U.S.
Cellular represented 59% ($60.6 million) of the total increase in revenues as
customer units increased by 653,000 units, or 56%, for the twelve months ended
March 31, 1998, to 1,817,000 units. Aerial represented 30% ($30.7 million) of
the increase as it added over 165,000 units in its first twelve months of
operations. TDS Telecom represented 11% ($10.6 million) of the
48
<PAGE>
total increase in revenues. Access lines increased 7% for the twelve month
period ended March 31, 1998 to 528,900 access lines.
U.S. Cellular revenues increased 33% ($60.6 million) in 1998 reflecting a
56% increase in customer units. LOCAL RETAIL REVENUE increased 41% ($49.1
million) in the first quarter of 1998 due primarily to the 56% customer growth.
Average local minutes of use per retail customer decreased by 5% from 100 in the
first quarter of 1997 to 95 in the first quarter of 1998, while average local
retail revenue per minute totaled $0.36 in the first quarter of 1997 compared to
$0.34 in the first quarter of 1998. U.S. Cellular's use of incentive programs in
1997 and 1998 that encourage lower-priced weekend and off-peak usage, in order
to stimulate overall usage, resulted in a lower average revenue per minute of
use. Average revenue per minute also declined due to increased amounts of bill
credits given to new and current customers as incentives to become or remain
customers. INBOUND ROAMING REVENUE (charges to customers of other systems who
use U.S. Cellular's cellular systems when roaming) increased 2% ($900,000) in
the first quarter of 1998. Roaming transactions between U.S. Cellular's existing
markets and the acquired markets, and vice versa, are considered intracompany
transactions in 1998, the revenue from those roaming transactions is recorded as
an offset to customer usage expense in the current year. Roaming traffic
involving the same markets would have been recorded as inbound roaming revenue
and customer usage expense in 1997. The 32% increase in roaming minutes used was
offset by negotiated reductions in roaming rates. Average inbound roaming
revenue per minute declined by 22% from $0.88 in the first quarter of 1997 to
$0.69 in the first quarter of 1998. The addition of the acquired markets also
caused the elimination of certain inbound roaming revenues between U.S.
Cellular's existing markets and the acquired markets.
Total average monthly service revenue per customer decreased 17% ($8.84)
from $53.50 in the first quarter of 1997 to $44.66 in the first quarter of 1998.
Average monthly local retail revenue per customer declined 11% ($3.91) from
$36.05 in the first quarter of 1997 to $32.14 in the first quarter of 1998 due
primarily to competitive pressures, incentive programs being offered to new and
current customers to become or remain customers, consumer market penetration and
the effects of acquisitions. The recently acquired markets produced a lower
amount of revenue per customer (approximately 20%), thereby reducing the average
retail revenue per customer. Average monthly inbound roaming revenue per
customer declined 35% ($4.78) from $13.51 in the first quarter of 1997 compared
to $8.73 in the first quarter of 1998. This decrease is related to the decrease
in roaming revenue per minute, the faster growth of U.S. Cellular's customer
base as compared to the growth of inbound roaming revenues and the elimination
of certain inbound roaming revenues between U.S. Cellular's existing markets and
the acquired markets.
TDS Telecom revenues increased 10% ($10.6 million) in the first quarter of
1998 due to growth in telephone operations ($8.7 million) and growth in other
services ($2.2 million). Telephone operations revenues increased primarily as a
result of the recovery of increased costs of providing long-distance services
($2.1 million), increased sale of customer premise equipment ($1.7 million),
effects of acquisitions ($1.6 million), internal access line growth of 5% since
March 31, 1997 ($1.5 million), and increased network usage ($1.3 million). The
number of telephone access lines increased by 7% (5% from internal growth and 2%
from acquisitions) from 493,000 at March 31, 1997 to 528,900 at March 31, 1998.
Average monthly revenue per access line increased by 2% from $67.24 in the first
quarter of 1997 to $68.48 in the first quarter of 1998. The other services
increase was primarily driven by increases in revenues in the LAN wiring
business of $1.4 million and from the Internet access provider of $900,000.
Aerial revenues totaled $30.7 million in the first quarter of 1998,
consisting of service revenue of $24.1 million and equipment sales revenues of
$6.6 million. Average revenue per customer declined to approximately $57 in the
first quarter of 1998 as compared to over $70 in the third and fourth quarter of
1997. During the first quarter, a number of subscribers were deactivated for
non-payment. Despite churn, including Aerial-initiated deactivations, Aerial
added over 40,000 customer units in the first quarter of
49
<PAGE>
1998 and had over 165,000 customers in service at March 31, 1998. Aerial did not
have any revenues in the first quarter of 1997.
OPERATING EXPENSES rose 70% ($168.2 million) in the first quarter of 1998
due primarily to added expenses at Aerial for the development of its markets and
added expenses to serve the growing customer base. Aerial represented 60%
($100.1 million) of the total increase in operating expenses, while cellular
represented 30% ($50.9 million) and telephone represented 10% ($17.2 million) of
the total increase.
U.S. Cellular expenses increased 32% ($50.9 million) during the first
quarter of 1998. SYSTEM OPERATIONS expenses increased 18% ($5.7 million) in the
first quarter of 1998 as a result of increases in customer usage expenses and
costs associated with the growing number of cell sites within U.S. Cellular's
systems. Customer usage expenses grew 19% ($3.7 million) primarily due to the
increase in net outbound roaming expense and the effects of acquisitions. Net
outbound roaming usage expense is the result of U.S. Cellular providing a larger
service footprint to its customers while charging them local rates, which are
lower than roaming rates it is charged by other carriers, as an incentive to
become or remain customers. Maintenance, utility and cell site expenses
increased 17% ($2.1 million) reflecting primarily the increase in the number of
cell sites from 1,377 in the first quarter of 1997 to 1,786 in the first quarter
of 1998.
MARKETING AND SELLING EXPENSES increased 27% ($15.0 million), including a
$2.8 million increase in cost of equipment sold reflecting costs incurred to add
new customers, increased advertising to promote the United States Cellular brand
and cellular wireless communications and the effects of acquisitions. Cost per
gross customer addition declined from $324 in the first quarter of 1997, to $313
in the first quarter of 1998 while gross customer activations increased from
157,000 in the first quarter of 1997 to 198,000 in the first quarter of 1998.
GENERAL AND ADMINISTRATIVE EXPENSES increased 34% ($15.1 million) due to the
growing customer base in existing markets and an expansion of local office and
corporate staff necessitated by U.S. Cellular's growth and the effects of
acquisitions. DEPRECIATION AND AMORTIZATION increased 50% ($15.1 million)
primarily due to the increase in average fixed assets since March 31, 1997 as
well as a reduction in useful lives of certain assets beginning in 1998 which
increased depreciation expense by $3.5 million.
TDS Telecom expenses increased 22% ($17.2 million) during the first quarter
of 1998 due to growth in telephone operations ($11.5 million) and to growth in
other services ($6.0 million). Telephone operations increased primarily due to
increased depreciation and amortization ($2.3 million), the effects of
acquisitions ($1.5 million), increased sales of customer premise equipment ($1.3
million), increased costs to support and maintain information systems ($1.2
million) and increased costs of maintaining the centralized network management
center ($1.0 million). The remaining increase is due to growth in internal
operations, including wage and salary increases, staffing and inflation. Other
services increased primarily due to the growth in the LAN wiring business of
$2.9 million, development activities at a start-up competitive local exchange
carrier of $2.1 million and growth at the Internet access provider of $900,000.
Aerial's expenses totaled $100.1 million in the first quarter of 1998.
Expenses incurred in the first quarter of 1997 prior to the launch of service
totaled $21.6 million and were reported as PCS Development Costs as part of
Investment and Other Income (Expense). SYSTEM OPERATIONS EXPENSES totaled $15.0
million reflecting the costs of operating Aerial's network, primarily cell site
expenses, landline interconnection charges and wages. MARKETING AND SELLING
EXPENSES incurred to add new customers totaled $17.4 million while COST OF
EQUIPMENT SOLD totaled $22.8 million. GENERAL AND ADMINISTRATIVE EXPENSES
totaled $14.2 million reflecting the expenses associated with the management and
operating teams as well as overhead expenses. CUSTOMER SERVICE EXPENSES totaled
$10.9 million primarily for the staffing to support the PCS markets.
DEPRECIATION AND AMORTIZATION totaled $19.7 million.
OPERATING INCOME totaled $41.9 million income in the first quarter of 1997
compared to $(27.2) million loss in the first quarter of 1998 reflecting the
increased expenses of Aerial's development activities. Aerial incurred an
operating loss of $69.3 million in the first quarter of 1998 which offset the
U.S. Cellular and TDS Telecom operating income. U.S. Cellular's operating income
increased 41% to $33.2 million in the
50
<PAGE>
first quarter of 1998 and its operating income margin increased from 12.7% in
the first quarter of 1997 to 13.5% in the first quarter of 1998. TDS Telecom's
operating income declined $6.6 million to $20.3 million reflecting $3.8 million
of additional operating losses from other services, primarily the CLEC business
and the LAN wiring business, and a $2.8 million decrease in telephone operating
income. TDS Telecom's operating margin decreased from 25.5% in the first quarter
of 1997 to 17.5% in the first quarter of 1998 due to the impact of new business
ventures and higher operating costs.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1997 1998 CHANGE
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Income (Loss) from Ongoing Operations
U.S. Cellular............................................................... $ 23,445 $ 33,155 $ 9,710
TDS Telecom................................................................. 26,907 20,315 (6,592)
Aerial...................................................................... -- (69,313) (69,313)
---------- ---------- ----------
50,352 (15,843) (66,195)
American Paging Operating (Loss).............................................. (8,411) (11,406) (2,995)
---------- ---------- ----------
Operating Income (Loss)....................................................... $ 41,941 $ (27,249) $ (69,190)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
TDS completed the transfer of substantially all of the assets and certain,
limited liabilities of American Paging, Inc. to TSR Wireless Holdings, LLC
pursuant to a previously announced asset contribution agreement. American
Paging's revenues are netted against its expenses with the resulting operating
loss reported as American Paging Operating (Loss). American Paging's revenues
totaled $24.6 million and $17.8 million for the three months ended March 31,
1997 and 1998, respectively, and expenses totaled $33.0 million and $29.2
million, respectively. Effective in the second quarter of 1998, TDS will follow
the equity method of accounting for its interest in TSR Wireless Holdings, LLC
and will report these results as a component of Investment and Other Income
(Expense).
INVESTMENT AND OTHER INCOME (EXPENSE) totaled $(4.7) million in the first
quarter of 1997 and $223.9 million in the first quarter of 1998.
GAIN ON SALE OF CELLULAR INTERESTS AND OTHER INVESTMENTS totaled $221.4
million in the first quarter of 1998 as the Company has sold or traded certain
non-strategic minority cellular interests. There were no asset sales in the
first quarter of 1997.
PCS DEVELOPMENT COSTS totaled $21.6 million in the first quarter of 1997
reflecting the costs prior to the launch of PCS service in Aerial markets.
CELLULAR INVESTMENT INCOME, the Company's share of income of cellular
markets in which the Company has a minority interest and follows the equity
method of accounting, decreased 24% ($4.3 million) in the first quarter of 1998
primarily due to the transfer of minority interests to BellSouth in the fourth
quarter of 1997. Cellular investment income is net of amortization of license
costs relating to these minority interests.
MINORITY SHARE OF INCOME includes the minority shareholders' share of U.S.
Cellular's and Aerial's net income or loss, the minority partners' share of U.S.
Cellular's operating markets and other minority shareholders' and partners'
share of subsidiaries' net income or loss. The increase in minority share of
income in the first quarter is primarily due to the gains from the sale of
cellular interests at U.S. Cellular,
51
<PAGE>
which accounted for $(20.9) million of the $(24.5) million of U.S. Cellular's
minority shareholders' share of income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1997 1998 CHANGE
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Minority Share of (Income) Loss
United States Cellular
Minority Shareholders' Share.............................................. $ (3,521) $ (24,535) $ (21,014)
Minority Partners' Share.................................................. (2,865) (1,182) 1,683
---------- ---------- ----------
(6,386) (25,717) (19,331)
Aerial Communications....................................................... 3,849 15,241 11,392
Telephone Subsidiaries and Other............................................ (222) (1,077) (855)
---------- ---------- ----------
$ (2,759) $ (11,553) $ (8,794)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
INTEREST EXPENSE increased $17.8 million to $31.6 million in the first
quarter of 1998 primarily due to a reduced amount of capitalized interest ($6.9
million), the increase in short-term debt ($4.2 million), the increase in U.S.
Cellular's long-term debt ($4.5 million) and the increase in Aerial's long-term
debt ($2.2 million). The Company capitalized $132,000 of interest in the first
quarter of 1998 and $7.1 million in the first quarter of 1997 related to
qualifying license and construction costs.
MINORITY INTEREST IN INCOME OF SUBSIDIARY TRUST totaled $4.9 million in the
first quarter of 1998. This preferred dividend requirement is the result of the
issuance of Company-Obligated Mandatorily Redeemable Preferred Securities
("Preferred Securities") in November 1997 and February 1998. In February 1998,
TDS Capital II, a subsidiary trust of TDS, issued 6,000,000 of its 8.04%
Preferred Securities at $25 per Preferred Security. The sole asset of TDS
Capital II is $154.6 million principal amount of TDS's 8.04% Subordinated
Debentures due March 31, 2038.
INCOME TAX EXPENSE increased $72.1 million in the first quarter of 1998 to
$86.0 million primarily due to the significant gains on the sale of cellular
interests and other investments.
NET INCOME AVAILABLE TO COMMON increased $64.6 million from $9.1 million in
the first quarter of 1997 to $73.7 million in the first quarter of 1998. The
gains from the sale of cellular interests and other investments totaled $112.5
million in the first quarter of 1998. EARNINGS PER COMMON SHARE--DILUTED was
$0.15 in the first quarter of 1997 and $1.20 in the first quarter of 1998. Gains
from the sale of cellular interests and other investments contributed $1.84 per
share.
Management believes operating expenses tend to be higher in the fourth
quarter, particularly at U.S. Cellular, due to increased marketing activities
and customer growth. This seasonality may cause operating income to be lower in
the fourth quarter. PCS competitors have initiated service in certain of U.S.
Cellular's markets over the past two years. U.S. Cellular expects PCS
competitors to complete initial deployment of PCS in portions of all of its
market clusters by the end of 1998. U.S. Cellular has increased its advertising
to promote the United States Cellular brand and to distinguish its service from
other wireless communications providers. U.S. Cellular's management continues to
monitor other wireless communications providers' strategies to determine what
effects additional competition will have on U.S. Cellular's future strategies
and results. TDS anticipates that Aerial will continue to incur operating losses
and generate negative cash flow as it continues to build its customer base
reducing TDS's cash flow, operating and net income during 1998.
52
<PAGE>
FINANCIAL RESOURCES AND LIQUIDITY
TDS and its subsidiaries operate relatively capital-intensive businesses.
Rapid growth has caused expenditures for construction, expansion and acquisition
programs to exceed internally generated cash flow. Accordingly, TDS has obtained
substantial funds from external sources to finance the build-out of PCS markets,
to fund acquisitions and for general corporate purposes. Although increasing
internal cash flow from U.S. Cellular and steady internal cash flow from TDS
Telecom have reduced the need for external financing, Aerial's development and
construction activities will require substantial additional funds from external
sources.
CASH FLOWS FROM OPERATING ACTIVITIES. TDS is generating substantial
internal funds from U.S. Cellular and TDS Telecom. Cash flows from operating
activities totaled $54.7 million in the first quarter of 1997 compared to $28.1
million in the first quarter of 1998. The launch of Aerial's operations required
substantial funds reducing cash flows from operating activities in the first
quarter of 1998. U.S. Cellular's operating cash flow (operating income plus
depreciation and amortization) totaled $78.4 million in the first quarter of
1998 (up 46%) while TDS Telecom's operating cash flow totaled $47.1 million
(down 7%). Aerial's start-up activities resulted in an operating cash outflow of
$49.6 million for the first quarter of 1998. Cash flows for other operating
activities (investment and other income, interest and income tax expense, and
changes in working capital and other assets and liabilities) required $48.9
million in the first quarter of 1997 and $44.3 million in the first quarter of
1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1997 1998 CHANGE
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating cash flow
U.S. Cellular............................................................... $ 53,606 $ 78,422 $ 24,816
TDS Telecom................................................................. 50,765 47,130 (3,635)
Aerial...................................................................... -- (49,617) (49,617)
American Paging............................................................. (707) (3,511) (2,804)
---------- ---------- ----------
103,664 72,424 (31,240)
Other operating activities.................................................... (48,936) (44,311) 4,625
---------- ---------- ----------
$ 54,728 $ 28,113 $ (26,615)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
CASH FLOWS FROM FINANCING ACTIVITIES. TDS has used short-term debt to
finance its PCS operations, for acquisitions and for general corporate purposes.
TDS has taken advantage of attractive opportunities from time-to-time to reduce
short-term debt with proceeds from long-term debt and equity sales, and sales of
non-strategic assets.
Cash flows from financing activities totaled $90.9 million in the first
quarter of 1997 compared to $54.2 million in the first quarter of 1998.
Increases in short-term debt provided most of the Company's external financing
requirements during the first quarter of 1997. The 1997 borrowings were used
primarily to fund expenditures for PCS construction and development activities
and for stock repurchases. In 1998, TDS received $145.1 million on the sale of
8.04% Preferred Securities. The proceeds from the issuance of the Preferred
Securities provided most of the Company's external financing during the first
quarter of 1998 and were used to reduce notes payable balances.
In the first quarter of 1997, TDS purchased, on the open market, 728,100 TDS
Common Shares for $28.9 million and 350,000 U.S. Cellular Common Shares for $9.8
million. In the first quarter of 1998, TDS expended $5.7 million for the
purchase of American Paging common shares pursuant to a tender offer.
CASH FLOWS FROM INVESTING ACTIVITIES. TDS makes substantial investments
each year to acquire, construct, operate and maintain modern high-quality
communications networks and facilities as a basis for
53
<PAGE>
creating long-term value for shareowners. Cash flows from investing activities
required $147.4 million in the first quarter of 1997 compared to $66.5 million
in the first quarter of 1998. Capital expenditures required $169.0 million in
the first quarter of 1997 and $125.3 million in the first quarter of 1998.
Aerial's capital expenditures have decreased in 1998 because it has completed
its initial build out program. Acquisitions, net of cash acquired, required
$52.3 million in the first quarter of 1998. The sales of non-strategic cellular
interests and other investments provided $96.4 million in the first quarter of
1998 reducing total cash flows required for investing activities in 1998.
The primary purpose of TDS's construction and expansion program is to
provide for significant customer growth, to upgrade service, to expand into new
communication areas, and to take advantage of service-enhancing and
cost-reducing technological developments. Capital expenditures totaled $169.0
million in the first quarter of 1997 consisting primarily of $53.1 million for
cellular plant and equipment, $23.9 million for telephone plant and equipment
and $84.6 million for PCS property and equipment. Capital expenditures totaled
$125.3 million in the first quarter of 1998 consisting primarily of $69.1
million for cellular plant and equipment, $30.7 million for telephone plant and
equipment and $29.7 million for PCS property and equipment.
LIQUIDITY
TDS anticipates that the aggregate resources required for 1998 will include
approximately $545 million for capital spending, consisting of $330 million for
cellular capital additions, $140 million for telephone capital additions and $75
million for PCS capital additions. In addition, Aerial's working capital and
operating expenses will require an estimated $185 million. The Company
anticipates financing these expenditures with internally generated funds and
short-term financing.
U.S. Cellular plans to finance its cellular construction program using
primarily internally generated cash supplemented by short-term financing. U.S.
Cellular's operating cash flow totaled $286.7 million for the twelve months
ended March 31, 1998, up 35% ($73.9 million) from 1997. U.S. Cellular had $500
million of bank lines of credit for general corporate purposes at March 31,
1998, all of which was unused. These line of credit agreements provide for
borrowings at the London InterBank Offered Rate ("LIBOR") plus 26.5 basis
points.
TDS Telecom plans to finance its construction program using primarily
internally generated cash supplemented by long-term financing from federal
government programs and short-term financing. Operating cash flow totaled $193.0
million for the twelve months ended March 31, 1998, down 2% ($4.9 million) from
1997. At March 31, 1998, TDS Telecom telephone subsidiaries had $114.7 million
in unadvanced loan funds from federal government programs to finance the
telephone construction program.
Aerial plans to finance its construction expenditures and working capital
requirements with short-term financing. Aerial is currently negotiating for
additional financing, although there can be no assurance that these negotiations
will be completed on terms or prices acceptable to it. Aerial issued 10-year
8.05% zero coupon notes for $100 million in February 1998 in satisfaction of all
outstanding obligations (aggregating approximately $84 million) and certain
future obligations (aggregating approximately $16 million) of Aerial under the
Nokia Credit Agreement.
TDS and its subsidiaries had cash and temporary investments totaling $84.2
million and longer-term cash investments totaling $19.7 million at March 31,
1998. These investments are primarily the result of telephone operations'
internally generated cash. While certain regulated telephone subsidiaries' debt
agreements place limits on intercompany dividend payments, these restrictions
are not expected to affect the Company's ability to meet its cash obligations.
TDS and its subsidiaries also have access to a variety of external capital
sources. TDS had $650 million of bank lines of credit for general corporate
purposes at March 31, 1998. Unused amounts of such lines totaled $200 million.
These line of credit agreements provide for borrowings at negotiated rates up to
the prime rate.
54
<PAGE>
Management believes that TDS's internal cash flows and funds available from
cash and cash equivalents, lines of credit, and longer-term financing
commitments provide sufficient financial flexibility. However, the timing and
amounts of capital expenditures and acquisitions as well as working capital
requirements and amounts needed for general corporate purposes may vary
throughout the year. There can be no assurance that sufficient funds will be
available to the Company on terms or at prices acceptable to the Company. If
sufficient funding is not made available to the Company on terms and prices
acceptable to the Company, the Company would have to reduce its construction,
development and acquisition programs. TDS and its subsidiaries anticipate
accessing public and private capital markets to issue debt and equity securities
only when capital requirements, financial market conditions and other factors
warrant.
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
OVERVIEW
TDS reported net income available to common and earnings per share--diluted
of $101.5 million, or $1.74 per share, in 1995 compared to $126.2 million, or
$2.07 per share, in 1996 and a net loss available to common and loss per
share--diluted of $11.4 million, or $0.19 per share, in 1997. Net income
available to common from U.S. Cellular and TDS Telecom increased 23% in 1996 and
45% in 1997. The growth at U.S. Cellular and at TDS Telecom in 1997 was
overshadowed by large start-up losses at Aerial due to the costs associated with
the launch of service in all six PCS Markets. Net income included significant
gains on the sale of cellular interests and other investments in 1995 and 1996.
The table below summarizes the effects of the business units and gains
(along with the related impact of income taxes and minority interest) on net
income (loss) available to common and earnings per share-- diluted.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
NET INCOME (LOSS) AVAILABLE TO COMMON
U.S. Cellular and TDS Telecom................................. $ 75.7 $ 93.4 $ 135.1
Aerial........................................................ (6.7) (15.3) (129.4)
American Paging............................................... (8.1) (16.4) (33.0)
Gains......................................................... 40.6 64.5 15.9
--------- --------- ---------
$ 101.5 $ 126.2 $ (11.4)
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE--DILUTED
U.S. Cellular and TDS Telecom................................. $ 1.30 $ 1.54 $ 2.25
Aerial........................................................ (0.11) (0.25) (2.15)
American Paging............................................... (0.14) (0.27) (0.55)
Gains......................................................... 0.69 1.05 0.26
--------- --------- ---------
$ 1.74 $ 2.07 $ (0.19)
--------- --------- ---------
--------- --------- ---------
</TABLE>
U.S. Cellular continued its outstanding growth during 1997. Customer units
increased by 637,000 units, or 59% (442,000 units, or 41%, excluding customers
added through acquisitions), to 1.7 million customer units, following a 363,000
unit, or 51%, increase in 1996. The increase in customer units drove a 29%
increase in revenues, a 33% increase in cash flow and a 48% increase in
operating income. Capital expenditures to add cell sites, expand coverage and
add capacity totaled $318.7 million and expenditures for acquisitions totaled
$128.8 million.
TDS Telecom continued to provide steady growth in revenues and cash flow.
Telephone access lines increased 6% resulting in a 12% increase in operating
revenues and a 3% increase in cash flow. Operating
55
<PAGE>
income decreased 4% as TDS Telecom incurred additional expenses related to the
development and marketing of its new business ventures, an Internet access
provider, a LAN wiring business and a CLEC. TDS Telecom's investment in outside
plant facilities and new digital switches to maintain and enhance the quality of
service and offer new revenue opportunities totaled $151.5 million.
Aerial launched service in all of its markets prior to the end of the second
quarter. A total of 125,000 net customers were added by the end of 1997. Service
was launched across its markets with approximately 600 cell sites in place,
which provided wide-area metropolitan coverage in its MTAs. By the end of 1997,
it had 1,044 cell sites in service and had extended coverage to approximately
80% of the population in its MTAs.
Aerial's operating results reflect the high cost of launching service.
Revenues totaled $56.0 million, operating cash flow, a negative $157.5 million
and operating loss totaled $196.6 million. Aerial's investment in property and
equipment, including network design and equipment, site acquisition and
information systems totaled $274.7 million in 1997.
RESULTS OF OPERATIONS
OPERATING REVENUES increased 25% ($237.5 million) during 1996 and 25%
($291.7 million) during 1997 primarily as a result of growth at U.S. Cellular
and TDS Telecom in 1996 and 1997 as well as the start-up of PCS operations at
Aerial in 1997.
U.S. Cellular revenues increased $199.8 million in 1996 and $196.9 million
in 1997 on 51% and 59% increases in customer units and 31% and 13% increases in
inbound roaming revenues, respectively. TDS Telecom revenues increased $40.8
million in 1996 and $48.6 million in 1997 as a result of recovery of increased
costs of providing long-distance services, internal access line growth,
acquisitions and increased network usage. Aerial revenues totaled $56.0 million
since start-up of operations in mid-1997. American Paging revenues decreased
$3.0 million in 1996 and $9.8 million in 1997 reflecting competitive pricing
declines.
U.S. Cellular contributed 51% of consolidated revenue in 1995, compared to
60% in 1997 reflecting revenue growth rates substantially higher than the other
business units. TDS Telecom and American Paging contributed 38% and 11% of
consolidated revenue in 1995 and 30% and 6% in 1997, respectively. Aerial
contributed 4% of consolidated revenue in 1997.
OPERATING EXPENSES rose 27% ($216.1 million) in 1996 and 44% ($448.8
million) in 1997. The increase in expenses includes added expenses from the
growth in operations at U.S. Cellular and TDS Telecom in 1996 and 1997 as well
as Aerial's expenses subsequent to the launch of service in 1997.
PCS operating expenses totaled $252.5 million in 1997 reflecting the costs
of operating Aerial's network, marketing, selling and advertising and promotion
expenses, cost of equipment sold, customer service expenses as well as general
and administrative expenses. U.S. Cellular operating expenses increased $155.1
million during 1996 and $154.7 million during 1997 due to the effects of
additional marketing and selling expenses to add new customers as well as the
costs of providing services to the larger customer base. TDS Telecom operating
expenses increased $36.3 million during 1996 and $52.7 million during 1997 due
to growth in internal operations, the development and start-up of new business
ventures and the effects of acquisitions. American Paging operating expenses
increased $24.7 million in 1996 and decreased $11.1 million in 1997.
OPERATING INCOME increased to $153.4 million in 1996 from $132.0 million in
1995 reflecting growth in operations at U.S. Cellular, offset somewhat by
increased losses at American Paging. Operating income declined to a negative
$3.7 million in 1997 from $153.4 million in 1996 reflecting strong growth at
U.S. Cellular offset by Aerial's costs of launching service. U.S. Cellular's
operating income increased 104% ($44.6 million) in 1996 and 48% ($42.2 million)
in 1997 reflecting the increase in customers and revenues. U.S. Cellular's
operating margin has increased steadily from 8.9% in 1995 to 12.8% in 1996 and
14.8% in
56
<PAGE>
1997. TDS Telecom's operating income increased $4.5 million in 1996 and
decreased $4.1 million in 1997. The decrease in TDS Telecom's operating income
was primarily due to operating losses from new business ventures. TDS Telecom's
operating margin continued its decline from 27.7% in 1995 to 26.0% in 1996 and
22.2% in 1997 due primarily to the development of new business ventures which
have lower margins than traditional telephone operations as well as earnings
pressures on telephone operations from regulatory agencies and long-distance
providers. Aerial's operating loss totaled $196.6 million in 1997, reflecting
the costs associated with launching service in all six markets. American
Paging's operating loss increased $27.6 million in 1996 and decreased $1.3
million in 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Income (Loss)
U.S. Cellular......................................... $ 42,755 $ 87,366 $ 129,543
TDS Telecom........................................... 98,240 102,708 98,613
Aerial................................................ -- -- (196,551)
American Paging....................................... (8,997) (36,626) (35,307)
----------- ---------- ----------
$ 131,998 $ 153,448 $ (3,702)
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
Management expects Aerial to generate significant losses in 1998 as it
continues to build its customer base. Upon completion of a December 1997
agreement between TDS and TSR Paging, Inc. to combine their respective paging
businesses, TDS will follow the equity method of accounting for its 30% interest
in the new combined company and will report these results as a component of
Investment and Other Income. This combination is expected to be completed in the
first half of 1998. See "Combination of American Paging and TSR Paging."
INVESTMENT AND OTHER INCOME (EXPENSE) totaled $103.9 million in 1995, $141.2
million in 1996 and $114.0 million in 1997. Investment and other income
(expense) includes interest and dividend income, cellular investment income,
gain on sale of cellular interests and other investments, PCS development costs
and minority share of income.
CELLULAR INVESTMENT INCOME, the Company's share of income of cellular
markets in which the Company has a minority interest and follows the equity
method of accounting, increased 35% ($14.1 million) in 1996 and 42% ($22.8
million) in 1997. Cellular investment income is net of amortization of license
costs relating to these minority interests. Cellular investment income is
expected to decrease in 1998 as a result of the transfer of certain minority
interests to BellSouth Corporation ("BellSouth") in the fourth quarter of 1997
and the pending transfer of certain other minority interests to AirTouch
Communications, Inc. in 1998. See "Financial Resources--Acquisitions, Trades and
Sales."
GAIN ON SALE OF CELLULAR INTERESTS AND OTHER INVESTMENTS totaled $86.6
million in 1995, $138.7 million in 1996 and $41.4 million in 1997. TDS and U.S.
Cellular continue to assess the makeup of cellular holdings in order to maximize
the benefits derived from clustering markets. Certain markets, identified as
non-strategic, were sold or traded in the past few years resulting in the
recognition of gains.
PCS DEVELOPMENT COSTS totaled $7.8 million in 1995, $43.9 million in 1996
and $21.6 million in 1997. Expenses incurred by Aerial prior to the launch of
operations in March 1997 to recruit an experienced management team, develop and
execute a business plan, raise capital and design and construct its PCS networks
were recorded in Other Income (Expense). Revenues and expenses incurred
subsequent to the launch of service have been included as a component of
operating income.
MINORITY SHARE OF (INCOME) LOSS includes the minority shareholders' share of
U.S. Cellular's, Aerial's and American Paging's net income or loss, the minority
partners' share of U.S. Cellular's operating markets net income or loss and
other minority shareholders' and partners' share of subsidiaries' net
57
<PAGE>
income or loss. The change in 1997 is primarily related to the increased losses
of Aerial allocated to its minority shareholders. Minority shareholders of
American Paging are not allocated losses in 1997 as American Paging's
shareholders' equity is negative.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Minority Share of (Income) Loss
U.S. Cellular
Minority Shareholders' Share.......................... $ (19,046) $ (25,179) $ (21,264)
Minority Partners' Share.............................. (7,902) (13,743) (12,298)
---------- ---------- ----------
(26,948) (38,922) (33,562)
Aerial................................................ -- 4,944 43,038
American Paging....................................... 2,781 6,368 --
Telephone Subsidiaries and Other...................... (1,691) 920 (2,663)
---------- ---------- ----------
$ (25,858) $ (26,690) $ 6,813
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
INTEREST EXPENSE decreased 16% ($8.0 million) in 1996 and increased 113%
($48.4 million) in 1997. Interest expense decreased in 1996 because of increased
capitalized interest ($14.4 million) which offset additional interest from U.S.
Cellular's sale of convertible debt in 1995 ($6.0 million). Interest expense
increased in 1997 due to increased interest expense from larger short-term debt
balances ($19.6 million), a smaller amount of capitalized interest ($16.6
million), additional interest expense from U.S. Cellular's sale of debt in 1997
and Aerial's zero coupon notes issued in late 1996 ($11.7 million).
TDS and Aerial capitalized interest totaling $13.2 million in 1995, $27.6
million in 1996 and $11.0 million in 1997 on expenditures for PCS licenses and
construction costs. The Company stops capitalizing interest on qualifying assets
when those assets are placed in service.
MINORITY INTEREST IN INCOME OF SUBSIDIARY TRUST totaled $1.5 million in
1997. In November 1997, TDS Capital I, a subsidiary trust of TDS, issued
6,000,000 of its 8.5% Company-Obligated Mandatorily Redeemable Preferred
Securities (the "Trust Preferred Securities") at $25 per Trust Preferred
Security. The sole asset of TDS Capital I is $154.6 million principal amount of
TDS's 8.5% Subordinated Debentures due December 31, 2037.
INCOME TAX EXPENSE increased $42.6 million to $123.6 million in 1996, and
decreased $95.1 million in 1997 to $28.6 million reflecting primarily the
changes in pretax income.
NET INCOME (LOSS) AVAILABLE TO COMMON was $101.5 million in 1995, $126.2
million in 1996 and ($11.4 million) in 1997. EARNINGS PER COMMON SHARE--DILUTED
was $1.74 in 1995, $2.07 in 1996 and ($0.19) in 1997.
CELLULAR TELEPHONE, TELEPHONE, BROADBAND PERSONAL COMMUNICATIONS SERVICES AND
RADIO PAGING OPERATIONS
Reference is made to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, as amended, for Management's Discussion and Analysis of
Results of Operations and Financial Condition for the Company's cellular
telephone, landline telephone, personal communications services and radio paging
operations.
FINANCIAL RESOURCES
TDS and its subsidiaries operate relatively capital-intensive businesses.
Rapid growth has caused expenditures for construction, expansion and acquisition
programs to exceed internally generated cash
58
<PAGE>
flow. Accordingly, in recent years, TDS and its principal subsidiaries have
obtained substantial funds from external sources to acquire PCS licenses, to
finance PCS construction, start-up and development costs and to fund
acquisitions. Although the increasing internal cash flow from U.S. Cellular and
the steady internal cash flow from TDS Telecom have reduced the need for
external financing, Aerial's development and construction activities have
required substantial additional funds from external sources.
CASH FLOWS FROM OPERATING ACTIVITIES. TDS is generating substantial internal
funds from the rapid growth in customer units and revenues at U.S. Cellular and
steady growth at TDS Telecom. The launch of PCS operations, however, required
substantial funds, thereby reducing cash flows from operating activities in
1997. Cash flows from operating activities totaled $210.9 million in 1995,
$295.0 million in 1996 and $206.5 million in 1997.
Aerial's market launch activities also substantially reduced operating cash
flow in 1997. Operating cash flow (operating income plus depreciation and
amortization) was $323.5 million in 1995, $384.5 million in 1996 and $297.9
million in 1997. Aerial's operations reduced operating cash flow by $157.5
million in 1997. U.S. Cellular's operating cash flow increased 48% ($64.0
million) to $196.2 million in 1996, and 33% ($65.7 million) to $261.9 million in
1997 while TDS Telecom's operating cash flow increased 9% ($15.6 million) to
$191.2 million in 1996 and 3% ($5.5 million) to $196.7 million in 1997. Cash
flows from other operating activities (investment and other income, interest and
income tax expense and changes in working capital and other assets and
liabilities) required $112.6 million in 1995, $89.5 million in 1996, and $91.3
million in 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Cash Flow:
U.S. Cellular........................................ $ 132,213 $ 196,205 $ 261,922
TDS Telecom.......................................... 175,595 191,167 196,679
Aerial............................................... -- -- (157,480)
American Paging...................................... 15,695 (2,849) (3,267)
----------- ---------- -----------
323,503 384,523 297,854
Other operating activities........................... (112,627) (89,529) (91,347)
----------- ---------- -----------
$ 210,876 $ 294,994 $ 206,507
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
CASH FLOWS FROM FINANCING ACTIVITIES. TDS's long-term strategy is to
maintain a strong yet flexible financial foundation. Consolidated equity capital
(common equity, preferred stock, Trust Preferred Securities and minority
interest) was 66% of total capitalization at December 31, 1995, compared to 68%
and 59% at December 31, 1996 and 1997, respectively. The reduced equity capital
percentage to total capitalization in 1997 is primarily a result of increases in
long-term debt at U.S. Cellular and Aerial and the increase in TDS's short-term
debt. TDS targets a ratio of equity to total capital in the range of 55% to 65%.
Cash flows from financing activities totaled $369.5 million in 1995, $124.9
million in 1996 and $547.6 million in 1997. TDS has required significant funds
from external sources to finance the purchase of the PCS licenses in 1995 and
PCS construction, start-up and development activities in 1996 and 1997. TDS has
used short-term debt to finance these PCS expenditures, as well as to finance
its radio paging operations, for acquisitions and for general corporate
purposes.
TDS takes advantage of attractive opportunities to retire short-term debt
with proceeds from long-term debt and equity financing, including sales of debt
and equity securities by subsidiaries. Proceeds from the issuance of long-term
debt and equity securities totaled $260.7 million, $195.3 million and $392.0
million in 1995, 1996 and 1997, respectively. Proceeds from the sales of
non-strategic cellular and other
59
<PAGE>
investments from time to time in 1995, 1996 and 1997 have also been used to
retire short-term debt. TDS has cash management arrangements with its
subsidiaries under which the subsidiaries may from time to time deposit excess
cash with TDS for investment under TDS's cash management program. Deposits made
under the arrangements are available to the subsidiaries on demand and bear
interest each month at the 30-day Commercial Paper Rate as reported in The Wall
Street Journal, plus 1/4%, or such higher rate as TDS may at its discretion
offer on such deposits.
In 1995, U.S. Cellular received $221.5 million from the sale of 20-year 6%
zero coupon convertible debt and TDS sold $39.2 million of Medium-Term Notes. In
1996, Aerial received $195.3 million in an initial public offering of Common
Shares. In 1997, TDS received net proceeds of $144.8 million on the sale of 8.5%
Trust Preferred Securities. U.S. Cellular received $247.0 million on the sale of
10-year 7.25% notes and used the proceeds to repay existing balances on vendor
financing arrangements, to finance the cash requirements for the BellSouth
exchange and for general corporate purposes.
Aerial, TDS Telecom and U.S. Cellular have also used long-term debt to
finance their construction and development activities. U.S. Cellular financed
cellular system equipment and construction costs totaling $59.5 million in 1995
under vendor financing arrangements. In 1996, Aerial issued 10-year 8.34% zero
coupon notes for $100 million of digital radio channel and switching equipment.
The $100 million proceeds of the sale of the notes were paid to Nokia
Telecommunications, Inc. ("Nokia") in satisfaction of all outstanding
obligations and future obligations up to $100 million under a $200 million
Credit Agreement between Aerial and Nokia ("Nokia Credit Agreement"). TDS
Telecom telephone subsidiaries borrowed $12.0 million in 1995, $12.2 million in
1996 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.
In December 1996, TDS authorized the repurchase of up to 3.0 million TDS
Common Shares over a period of three years. In 1997, TDS purchased 1.8 million
TDS Common Shares for $69.9 million. A total of 1.0 million shares were
subsequently reissued, primarily for acquisitions. TDS has paid dividends of
$0.38, $0.40 and $0.42 per Common and Series A Common Share in 1995, 1996 and
1997, respectively. Aggregate dividends paid on Common and Preferred Shares,
excluding dividends reinvested, totaled $24.0 million in 1995, $26.2 million in
1996 and $27.2 million in 1997.
CASH FLOWS FROM INVESTING ACTIVITIES. TDS makes substantial investments each
year to acquire, construct, operate and maintain modern, high-quality
communications networks and facilities as a basis for creating long-term value
for shareholders. In recent years, rapid changes in technology and new
opportunities have required substantial investments in revenue enhancing and
cost reducing upgrades of the Company's networks. In addition, the Company has
made substantial investments to enter the PCS business.
Cash flows from investing activities totaled $550.0 million in 1995, $417.4
million in 1996 and $760.7 million in 1997 primarily for capital expenditures,
the purchase of PCS licenses and acquisitions. Cash expenditures for capital
additions totaled $360.0 million in 1995, $550.2 million in 1996 and $786.3
million in 1997. The acquisition of broadband and narrowband PCS licenses
required $326.0 million in 1995. Cash used for acquisitions, excluding cash
acquired, totaled $53.8 million in 1995, $31.0 million in 1996 and $129.0
million in 1997. The sale of non-strategic cellular assets and other investments
provided net proceeds of $197.6 million in 1995, $221.5 million in 1996 and
$84.2 million in 1997. Distributions from partnerships totaled $9.1 million in
1995, $25.5 million in 1996 and $56.4 million in 1997.
CAPITAL EXPENDITURES
The primary purpose of TDS's construction and expansion program is to
provide for significant customer growth, to upgrade service, to expand into new
communications areas, and to take advantage of
60
<PAGE>
service-enhancing and cost-reducing technological developments. The following
table summarizes the Company's investments in its communications networks and
related facilities during the past three years.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
------------------------------------
1995 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Cellular
Cell sites and equipment............................. $ 150,340 $ 133,832 $ 238,797
Switching equipment.................................. 13,002 5,713 5,457
Systems development.................................. 10,148 28,753 40,949
Other................................................ 37,388 79,825 33,545
------------ ---------- ----------
210,878 248,123 318,748
------------ ---------- ----------
TDS Telecom
Central office....................................... 38,697 47,208 52,479
Outside plant........................................ 55,569 53,130 60,974
Systems development.................................. 7,137 20,497 9,127
Other................................................ 2,969 23,605 28,880
------------ ---------- ----------
104,372 144,440 151,460
------------ ---------- ----------
Aerial
Cell sites and equipment............................. -- 150,386 291,922
Switching equipment.................................. -- 53,170 38,428
Systems development.................................. -- 26,277 55,553
Other................................................ 8,521 12,436 1,815
Prepaid network infrastructure....................... -- 70,300 (70,300)
------------ ---------- ----------
8,521 312,569 317,418
Less noncash items................................... -- (199,630) (42,709)
------------ ---------- ----------
8,521 112,939 274,709
------------ ---------- ----------
American Paging...................................... 26,527 32,517 18,624
------------ ---------- ----------
Other................................................ 9,698 12,185 22,776
------------ ---------- ----------
$ 359,996 $ 550,204 $ 786,317
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
U.S. Cellular's capital additions include expenditures to add additional
cell sites and radio channels to expand coverage and add capacity. U.S. Cellular
constructed 292 cell sites in 1995, 242 in 1996 and 331 in 1997. TDS Telecom's
capital additions include expenditures for switch modernization and outside
plant facilities to maintain and enhance the quality of service and provide new
revenue opportunities. TDS Telecom installed 39 digital switches in 1995, 35 in
1996 and 32 in 1997. Aerial has completed the construction of the five planned
switching centers, the central Network Operations Center and has over 1,000 cell
sites in service.
The Company's expected 1998 property, plant and equipment additions reflect
the Company's construction and expansion programs and are anticipated to
aggregate approximately $545 million. In addition, Aerial's working capital and
operating expenses will require an estimated $175 million.
- The cellular capital additions budget totals approximately $330 million,
including about $240 million for new cell sites and about $90 million for
various information systems initiatives.
- The telephone capital additions budget totals approximately $140 million,
including about $50 million for new digital switches and other switching
facilities and $35 million for improvements to outside plant facilities.
61
<PAGE>
- The PCS capital additions budget totals approximately $75 million,
including $20 million for cell sites, $25 million for switching equipment
and $15 million for systems development. Aerial's working capital and
operating expenses will require an estimated $175 million.
ACQUISITIONS, TRADES AND SALES
TDS continually reviews attractive opportunities for the acquisition of
additional telecommunications companies which add value to the organization. TDS
and U.S. Cellular continue to assess the makeup of cellular holdings in order to
maximize the benefits derived from clustering U.S. Cellular's markets. As the
number of opportunities for outright acquisitions of cellular interests has
decreased and as U.S. Cellular's clusters have grown to realize greater
economies of scale, U.S. Cellular's focus has shifted toward exchanges and sales
of non-strategic interests.
Cash expenditures (excluding cash acquired) for acquisitions totaled $53.8
million in 1995, $31.0 million in 1996 and $129.0 million in 1997. TDS completed
the acquisition of controlling interests in eleven cellular markets and five
telephone companies in 1995, two cellular markets and five telephone companies
in 1996 and two cellular markets and one telephone company in 1997. TDS also
completed an exchange with BellSouth in 1997 and increased its ownership of
certain cellular interests during the last three years for an aggregate
consideration (consisting of cash, TDS Common Shares, TDS Preferred Shares, and
U.S. Cellular Common Shares) totaling $194.4 million, $144.1 million and $174.7
million, respectively.
In October 1997, U.S. Cellular completed an exchange with BellSouth.
Pursuant to the exchange, U.S. Cellular received majority interests representing
approximately 4.0 million pops in exchange for majority interests representing
2.0 million pops, minority interests representing 1.2 million pops and a net
amount of $86.7 million in cash. The majority interests U.S. Cellular received
are in 12 markets adjacent to its Iowa/Missouri and Wisconsin/Illinois/Indiana
clusters.
In December 1997, U.S. Cellular announced that AirTouch will acquire
noncontrolling interests in eleven markets owned by U.S. Cellular and TDS.
AirTouch will issue approximately 5,000,000 shares of its common stock and pay
approximately $54.2 million in cash to U.S. Cellular and TDS in exchange for
these interests. Management expects that it will record a significant pretax
gain upon the completion of the sales transactions. The sales are expected to be
completed in the first half of 1998.
LIQUIDITY
The Company anticipates that the aggregate resources required for 1998 will
include approximately $545 million for capital spending, consisting of $330
million for cellular capital additions, $140 million for telephone capital
additions and $75 million for PCS capital additions. In addition, Aerial's
working capital and operating expenses will require an estimated $175 million.
U.S. Cellular plans to finance its construction program primarily with
internally generated cash supplemented by short-term financing. U.S. Cellular's
operating cash flow totaled $261.9 million in 1997 (approximately 82% of 1997
capital expenditures) up 33% ($65.7 million) from 1996. U.S. Cellular also
received $52.4 million in distributions from minority partnership interests and
$61.1 million from the proceeds of investment sales to supplement operating cash
flow. At December 31, 1997, U.S. Cellular had $500 million of bank lines of
credit for general corporate purposes, all of which was available.
TDS Telecom plans to finance its construction program using internally
generated cash supplemented by long-term financing from federal government
programs. Operating cash flow totaled $196.7 million in 1997 (approximately 130%
of 1997 capital expenditures) up 3% ($5.5 million) from 1996. At December 31,
1997, TDS Telecom telephone subsidiaries had $112.0 million in unadvanced loan
funds from federal government programs to finance the telephone construction
program. These loan commitments have a weighted average annual interest rate of
5.71%.
62
<PAGE>
Aerial plans to finance its construction expenditures and working capital
requirements with borrowings under the TDS lines of credit and vendor financing.
Aerial issued 10-year 8.05% zero coupon notes for $100 million in February 1998
to finance digital radio channel and switching infrastructure equipment. The
$100 million proceeds from the sale were paid to Nokia in satisfaction of all
outstanding obligations and certain future obligations of Aerial under the Nokia
Credit Agreement.
TDS and its subsidiaries had cash and temporary investments totaling $75.6
million and longer-term investments totaling $32.6 million at December 31, 1997.
These investments are primarily the result of telephone operations' internally
generated cash. While certain regulated telephone subsidiaries' debt agreements
place limits on intercompany dividend payments, these restrictions are not
expected to affect the Company's ability to meet its cash obligations.
TDS had $644 million of bank lines of credit for general corporate purposes
at December 31, 1997 of which $118 million was unused. These line of credit
agreements provide for borrowings at negotiated rates up to the prime rate.
In February 1998, TDS received net proceeds of $145 million on the sale of
6.0 million 8.04% Trust Preferred Securities at $25 per Trust Preferred
Security. The net proceeds were used to repay certain short-term indebtedness.
The net proceeds of the Offerings will be used to repay obligations of TDS
Telecom to TDS, and TDS will use such proceeds to repay certain short-term
indebtedness.
Management believes that TDS's internal cash flows and funds available from
cash and cash equivalents, lines of credit, and longer-term financing
commitments provide sufficient financial flexibility. However, the timing and
amounts of capital expenditures and acquisitions as well as working capital
requirements and amounts needed for general corporate purposes may vary
throughout the year. There can be no assurance that sufficient funds will be
available to the Company on terms or at prices acceptable to the Company. If
sufficient funding is not made available to the Company on terms and prices
acceptable to the Company, the Company would have to reduce its construction,
development and acquisition programs. TDS and its subsidiaries anticipate
accessing public and private capital markets to issue debt and equity securities
only when capital requirements, financial market conditions and other factors
warrant.
TDS has assessed, and continues to assess, the impact of the Year 2000 Issue
on its reporting systems and operations. The Company believes that modifying its
reporting systems and operations is not a material event and is taking steps to
make its systems Year 2000 compliant. The Year 2000 Issue exists because many
computer systems and applications abbreviate dates by eliminating the first two
digits of the year, assuming that these two digits would always be "19". Unless
corrected, this shortcut is expected to cause problems when the century date
occurs. On that date, some computer programs may recognize the date as January
1, 1900 instead of January 1, 2000. This may cause systems to incorrectly
process critical financial and operational information, or stop processing
altogether. The cost of addressing the Year 2000 Issue to date was not material
to the Company's results of operations or financial condition, and management
believes that the costs to be incurred in 1998 and 1999 will not be material to
future operating results or financial condition. If management's steps are not
successful in making the systems Year 2000 compliant, it could have a material
adverse effect on results of operations.
PROPOSED CORPORATE RESTRUCTURING
The Board adopted and the shareholders approved a proposal which authorizes
the Board to issue three new classes of common stock and change the state of
incorporation of TDS from Iowa to Delaware (the "Tracking Stock Proposal"). The
Tracking Stocks are intended to separately reflect the performance of TDS's
landline telephone, cellular telephone and personal communications services
businesses.
63
<PAGE>
The Tracking Stocks are intended to result in greater market recognition of
the value (individually and collectively) of TDS and of TDS's three principal
business groups ("Tracking Groups"), thereby enhancing shareholder value over
the long term, while at the same time enabling TDS's businesses to preserve the
benefits of being part of a consolidated enterprise. The Tracking Stock Proposal
is intended to:
- provide TDS with greater flexibility in raising capital and making
acquisitions, using equity securities specifically related to the Tracking
Groups;
- enable TDS to more effectively tailor employee benefit plans to provide
incentives to employees of the Tracking Groups;
- provide shareholders with the opportunity to invest in separate securities
that specifically reflect the underlying businesses, depending upon their
investment objectives;
- permit shareholders to continue to invest in all of the TDS businesses
through the Common Shares and the Series A Common Shares.
Pursuant to the Tracking Stock Proposal each issued Preferred Share, Common
Share and Series A Common Share of TDS would be converted into a new Preferred
Share, Common Share and Series A Common Share, respectively, of the new TDS
Delaware Corporation. In addition, the Tracking Stock Proposal would authorize
three new classes of common stock, to be designated as the Telecom Group Shares,
the Cellular Group Shares and the Aerial Group Shares. The Telecom Group Shares
offered hereby are intended to reflect the separate performance of the Telecom
Group. The Cellular Group Shares, when issued, are intended to reflect the
separate performance of the United States Cellular Group (the "Cellular Group"),
which consists of TDS's interest in U. S. Cellular. The Aerial Group Shares,
when issued, are intended to reflect the separate performance of the Aerial
Group.
In connection with the Recapitalization, TDS proposes to:
- offer and sell Telecom Group Shares in the Offerings contemplated hereby
and allocate the net proceeds thereof to the Telecom Group as described
under "Use of Proceeds,"
- issue Cellular Group Shares in exchange for all of the Common Shares of U.
S. Cellular which are not owned by TDS, subject to approval by the board
of directors and the shareholders of U. S. Cellular, (the "U.S. Cellular
Merger"),
- issue Aerial Group Shares in exchange for all of the Common Shares of
Aerial which are not owned by TDS, subject to approval by the board of
directors and the shareholders of Aerial (the "Aerial Merger"), and
- distribute two-thirds of a Telecom Group Share, one Cellular Group Share
and two-thirds of an Aerial Group Share in the form of a stock dividend
with respect to each outstanding Series A Common Share and Common Share of
TDS (the "Distribution").
TDS has held several meetings and substantive negotiations with the special
committee of the board of directors of Aerial relating to the proposed Aerial
Merger. Following the most recent meeting with TDS, the special committee of the
board of directors of Aerial advised TDS that it had determined to recommend
that the board of directors of Aerial reject the offer by TDS to acquire the
publicly-held shares of Aerial which TDS does not own. The Aerial special
committee has advised TDS that it would be prepared to consider a revised
proposal which "contains increased protections designed to preserve Aerial's
inherent value for its public stockholders and also embodies an increased equity
interest in the Aerial Group tracking stock for the Aerial public stockholders."
TDS intends to make a revised proposal to the Aerial special committee and to
continue to seek an agreement to acquire the Aerial Common Shares that it does
not own on mutually acceptable terms.
With respect to the U.S. Cellular Merger, TDS has met once with, but has not
yet held substantive negotiations with, the special committee of the board of
directors of U.S. Cellular, which is continuing to
64
<PAGE>
conduct due diligence. However, the special committee of the board of directors
of U.S. Cellular has expressed significant reservations relating to the offer by
TDS to acquire the publicly-held shares of U.S. Cellular that TDS does not own.
TDS intends to continue to seek an agreement to acquire the U.S. Cellular Common
Shares that it does not own on mutually acceptable terms.
If TDS cannot reach an agreement with either the Aerial or U.S. Cellular
special committees on terms that provide mutual advantages to the Aerial and
U.S. Cellular shareholders, respectively, on the one hand, and the TDS
shareholders, on the other hand, TDS may distribute shares of tracking stock
representing approximately 75% of TDS's interest in Aerial and/or U.S. Cellular
to TDS shareholders. The special committee of the board of directors of Aerial
has expressed the view that the authorization and distribution of a second
publicly-traded security reflecting an interest in Aerial's common equity would
not be in the best interests of Aerial's public stockholders.
Although TDS believes that the acquisition of the publicly-held shares of
Aerial and U.S. Cellular would be desirable, TDS believes that the Tracking
Stock Proposal will provide substantial benefits to the TDS shareholders even if
TDS is unable to reach mutually acceptable agreements with the Aerial and/or
U.S. Cellular special committees. While TDS believes that the Aerial Merger and
the U.S. Cellular Merger would provide some advantages to TDS shareholders, TDS
does not believe that it can agree to any terms which would result in any
significant transfer of value from TDS shareholders to the public shareholders
of Aerial or U.S. Cellular. However, TDS intends to continue to try to reach an
agreement with the Aerial and U.S. Cellular special committees on terms that
would be acceptable to the public shareholders of such corporations as well as
to the TDS shareholders.
TDS desires to complete the Offerings, the U.S. Cellular Merger, the Aerial
Merger and the Distribution by mid to late 1998. However, there can be no
assurance that the U.S. Cellular Merger, the Aerial Merger or the Distribution
will be completed or, if they are completed, that they will be completed on the
terms described herein. If TDS is unable to negotiate mutually agreeable terms
with the special committees, TDS may effect all or any part of the Distribution
even if the U.S. Cellular Merger or the Aerial Merger have not taken place.
Nevertheless, TDS will proceed with any action only if the Board determines that
such action would be in the best interests of the TDS shareholders.
The shares of Tracking Stock which would be issued in the Distribution would
represent an approximately 75% interest in the common equity value of TDS in
each Tracking Group. When considering the shares of Tracking Stock which would
also be issued in the Offerings contemplated hereby, the U. S. Cellular Merger
and the Aerial Merger, as well as the Distribution, the Outstanding Interest
would initially represent in the aggregate an approximately 80% interest in each
Tracking Group. Upon completion of all of the Transactions as contemplated,
approximately 20% of the common shareholders' value of each Tracking Group would
initially be the Retained Interest in a residual group (the "TDS Group"), along
with all other interests held by TDS.
The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the Telecom Group,
the Cellular Group and the Aerial Group to the extent of the Retained Interest
in the respective groups, and to reflect the performance of the other assets and
businesses attributed to the TDS Group.
The Board currently intends to establish an annual dividend in an amount
equal to $0.50 per share, payable quarterly, on the Telecom Group Shares. The
Board also currently intends to establish an annual dividend in an amount equal
to $0.11 per share, payable quarterly, on the Common Shares and Series A Common
Shares. With regard to the Cellular Group and the Aerial Group Shares, the Board
currently intends to retain future earnings, if any, for the development of the
businesses of the Cellular Group and the Aerial Group, respectively, and does
not anticipate paying dividends on the Cellular Group or the Aerial Group Shares
in the foreseeable future. Future dividends on the shares of common stock will
be payable when, as and if declared by the Board out of the lesser of (i) all
funds of TDS legally available therefor and (ii) the Available Dividend Amount
with respect to the relevant Group.
65
<PAGE>
Funds of TDS legally available for the payment of dividends ("Surplus")
(approximately $1,966 million as of December 31, 1997, based on the financial
statements) is an amount approximately equal to the Total Common and Preferred
Equity of TDS less the par or stated value of all shares of common and preferred
stock outstanding (204,922,000 shares as of December 31, 1997 after the
Distribution). With respect to any Tracking Group, the Available Dividend Amount
(approximately $1,222 million for the Cellular Group, $287 million for the
Telecom Group and $144 million for the Aerial Group as of December 31, 1997,
based on the financial statements) is an amount approximately equal to the
Outstanding Interest Fraction of such Tracking Group (approximately 75% after
the Distribution) times the respective Tracking Group Equity less the par value
of the respective outstanding Tracking Group shares. With respect to the TDS
Group, the Available Dividend Amount (approximately $602 million as of December
31, 1997) is an amount approximately equal to the greater of (i) an amount
(approximately $313 million) which is approximately equal to the Surplus of TDS
less the sum of all Available Dividend Amounts of all Tracking Groups or (ii) an
amount (approximately $602 million) which is approximately equal to the TDS
Group Equity and Preferred Stock less the par or stated value of all Common and
Series A Common Shares and Preferred Stock outstanding.
Subject to the completion of the U.S. Cellular Merger and the Aerial Merger,
TDS intends to terminate certain intercompany agreements between TDS and U.S.
Cellular and Aerial, respectively. Thereafter, all of the relationships between
TDS and such subsidiaries would be determined solely by methods that management
of TDS believes to be reasonable. Many of such policies would continue the
arrangements which presently exist between TDS and U.S. Cellular or Aerial
pursuant to the intercompany agreements, but TDS would have no contractual
obligation to continue such policies after the intercompany agreements have been
terminated.
Following the issuance of the Tracking Stocks, TDS will prepare and file
with the SEC consolidated financial statements of TDS and financial statements
of the Telecom Group, the Cellular Group and the Aerial Group for so long as the
respective Tracking Stock is outstanding, and the TDS Group for as long as any
Tracking Stock is outstanding. Although the financial statements of the Telecom
Group, the Cellular Group, the Aerial Group, and the TDS Group will separately
report the assets, liabilities (including contingent liabilities) and
shareholders' equity of TDS attributed to the Telecom Group, the Cellular Group,
the Aerial Group, and the TDS Group, such attribution will not affect the legal
title to such assets or responsibility for such liabilities. Holders of the
Telecom Group, the Cellular Group and the Aerial Group Common Shares will be,
and holders of TDS Common Shares and Series A Common Shares will continue to be,
shareholders of TDS. TDS and its subsidiaries will each continue to be
responsible for their respective liabilities.
66
<PAGE>
BUSINESS OF THE TELECOM GROUP
OVERVIEW
TDS Telecom provides modern, high-quality telecommunications services to
rural and suburban communities. Through its ILECs, TDS Telecom served
approximately 528,900 access lines as of March 31, 1998 and on this basis is the
ninth largest non-Bell local exchange telephone company in the United States.
TDS Telecom's ILEC markets are located in 28 states throughout the United
States.
The table below sets forth, as of March 31, 1998, (i) the six largest states
of operations of TDS Telecom based on the number of access lines and (ii) the
total number of access lines operated by all of the telephone subsidiaries of
TDS Telecom.
<TABLE>
<CAPTION>
NUMBER OF ACCESS LINES
AS OF
STATE MARCH 31, 1998 % OF TOTAL
- ------------------------------------------------------------------------------ ---------------------- -----------
<S> <C> <C>
Tennessee..................................................................... 89,601 16.9%
Wisconsin..................................................................... 86,719 16.4
Georgia....................................................................... 38,502 7.3
Minnesota..................................................................... 30,410 5.8
Indiana....................................................................... 27,395 5.2
Alabama....................................................................... 26,074 4.9
Total for 6 Largest States................................................ 298,701 56.5
------- -----
Other States.................................................................. 230,199 43.5
------- -----
Total................................................................... 528,900 100.0%
------- -----
------- -----
</TABLE>
TDS Telecom recently began providing telecommunications services as a
facilities-based CLEC in Madison, Wisconsin and is developing CLEC operations in
selected additional markets in Wisconsin and Minnesota. TDS Telecom is also
pursuing emerging telecommunications businesses such as Internet and other data
services.
The Telecom Group is a business unit of TDS, founded in 1968. The Telecom
Group primarily consists of TDS Telecom, a wholly-owned subsidiary of TDS, and
may include such other businesses, assets and liabilities of the Company as the
Board may in the future determine to attribute to the Telecom Group. See
"Management and Allocation Policies" and "Risk Factors--Management and
Allocation Policies." TDS Telecom's corporate headquarters are located in
Madison, Wisconsin.
TELECOMMUNICATIONS SERVICES MARKET
The market for local telecommunications services has historically consisted
of firms offering traditional landline telephone service along with
complementary services and equipment in a highly regulated environment. TDS
Telecom's ILEC business has traditionally focused primarily on providing service
to rural and suburban areas. TDS Telecom's ILEC markets are geographically
dispersed throughout the United States with a significant concentration in the
Upper Midwest and Southeast.
The ILEC business of TDS Telecom is primarily being changed by
telecommunications reform legislation, the growth of the Internet and rapid
advances in technology. With the passage of the 1996 Act, competition in the
local telecommunications marketplace is increasing because of the removal of
certain state and local entry barriers and the introduction of ILEC facility
interconnection requirements. These changes will create challenges for TDS
Telecom in its existing ILEC business but will also create growth opportunities
for TDS Telecom in connection with its entry into CLEC markets.
67
<PAGE>
BUSINESS STRATEGY
TDS Telecom has historically produced revenue growth in its ILEC markets by
providing its customers with state-of-the-art telecommunications solutions,
maintaining a high quality of on-going service and selectively acquiring
landline telephone companies. TDS Telecom expects to benefit from the following
operational and market-related advantages: (i) a modern network substantially
upgraded to provide a variety of Advanced Calling Services, (ii) a strong local
presence and established brand name, (iii) economies of scale not available to
smaller independent operators, (iv) attractive and growing markets, (v) a
favorable regulatory environment and (vi) markets which are likely to be less
competitive than urban markets.
TDS Telecom intends to: (i) grow and protect TDS Telecom's core ILEC
business and pursue acquisitions of operating telephone companies, (ii) provide
service to targeted CLEC markets by leveraging its technical and managerial
expertise and telecommunications infrastructure from its existing ILEC
operations, (iii) pursue emerging telecommunications businesses, such as
Internet and other data services, to become a leading provider of communications
products and services in all of its markets and (iv) enhance profitability
through improved operating efficiencies.
GROW CORE ILEC BUSINESS
TDS Telecom believes that the key to growing and protecting its existing
ILEC markets is to continue to build customer loyalty by providing superior
customer service, offering a full range of standardized products and services
not typically available in rural markets and rapidly developing new data
products and services. TDS Telecom maintains a local presence in each of its
ILEC markets in order to provide superior customer service. Management intends
to increase revenue in its ILEC business by meeting increased demand for
telecommunications services in TDS Telecom's existing geographical markets,
including providing service to new customers, upgrading existing customers to
higher grades of service and providing Advanced Calling Services and other newly
introduced services. TDS Telecom increasingly markets itself to consumers as a
single telecommunications provider offering bundled packages of advanced
telecommunications services including local, long distance, Internet and other
data services. These service packages are designed to further build brand equity
in the TDS Telecom name. In addition, TDS Telecom believes it can achieve cost
economies through selective acquisitions designed to increase the geographic
clustering of its ILEC markets. TDS Telecom continually reviews attractive
opportunities to acquire operating telephone companies. Since January 1, 1993,
TDS Telecom has acquired 18 telephone companies serving a total of 95,600 access
lines for an aggregate consideration totaling $197 million. See "--ILEC
Telephone Markets."
LEVERAGE ILEC STRENGTHS INTO CLEC MARKETS
TDS Telecom is providing CLEC services in certain targeted third-tier cities
which are geographically proximate to existing TDS Telecom facilities and
service areas. TDS Telecom believes that service levels have deteriorated in
certain markets, thereby creating an opportunity for TDS Telecom to compete
effectively in those markets. In addition, TDS Telecom believes that the smaller
size of these markets may discourage competition from additional CLECs. Through
March 31, 1998, TDS Telecom had invested $15 million to install a digital switch
and to construct 54 miles of fiber optic cable in and around Madison, Wisconsin.
TDS Telecom initiated service as a CLEC in Madison in January 1998 and is
providing service to approximately 4,000 business access lines. In addition, TDS
Telecom commenced operations as a CLEC in secondary markets in Minnesota in
January 1998, initially as a reseller, through its regional long-distance
company, USLink, and is providing service to approximately 5,000 business access
lines. TDS Telecom intends to initiate service as a facilities-based CLEC in
Appleton and Green Bay, Wisconsin in mid-1998. See "--CLEC Telephone Markets".
TDS Telecom's CLEC strategy is designed to leverage its existing
infrastructure to facilitate early entry into new CLEC markets and to complement
its ILEC clustering strategy by focusing on markets that
68
<PAGE>
are geographically proximate to existing operations. TDS Telecom believes that
significant synergies exist between its ILEC and CLEC businesses. TDS Telecom is
able to utilize existing resources and business processes that currently serve
ILEC markets in developing and expanding its CLEC operations, including
administrative and financial support, marketing and new product development
support, information technology and systems, and shared network systems support.
These synergies reduce the overall time to market and cost required for TDS
Telecom to expand into its new CLEC markets.
PURSUE EMERGING DATA MARKETS
Data communications is one of the fastest growing segments of the
telecommunications services industry. According to the Yankee Group, data usage
generated $10.9 billion in revenues in 1995 and is projected to grow at a
compound annual growth rate of 23.6% to $31.4 billion in revenues in 2000. In
light of the growth of the use of the Internet and rapid introduction of new
telecommunications technology, TDS Telecom intends to offer a full range of data
products to its customers, including Internet access, and potentially, ATM,
Frame Relay, xDSL and other products, if appropriate, in all of its markets,
thereby positioning itself as a full-service data communications service
provider. Most of TDS Telecom's data products are in the early stages of
development. TDS Telecom currently provides Internet access service to
approximately 40,000 customers and has developed a LAN wiring business as part
of its strategy to enter the data market. See "--Data Initiatives."
ENHANCE PROFITABILITY THROUGH IMPROVED OPERATING EFFICIENCIES
TDS Telecom will continue to standardize operations, improve cost controls
and selectively invest in network facilities in order to realize increased cost
efficiencies across its businesses. For example, TDS Telecom's Network
Management Center enables TDS Telecom to more cost effectively monitor and
control its network than could be done regionally. At the end of 1997, TDS
Telecom's Network Management Center monitored 64% of its network. By the end of
1998, coverage is expected to increase to 100%. In addition, TDS Telecom is
developing a VBO initiative to provide high quality service to its customers on
a cost-effective basis. The VBO builds on TDS Telecom's current
community-oriented customer service by linking business offices through
technology and standardized processes. When entering new lines of business, TDS
Telecom in most cases will use existing infrastructure and resources to maximize
cost efficiencies.
NETWORK INFRASTRUCTURE
TDS Telecom provides its operating telephone companies with the most
advanced central office switching equipment that is economically feasible in
order to offer customers up-to-date services, such as advanced calling services,
high-speed data access and Internet access services. TDS Telecom plans to
provide its customers bundled service offerings and to become a single source
for their telecommunications needs as an Integrated Communications Provider
("ICP"). In furtherance of this objective, in 1997, TDS Telecom continued its
program of enhancing and expanding its service providing network. TDS Telecom
intends to meet competition by providing its customers with high-quality
telecommunications services and building its network to take full advantage of
advanced telecommunications technologies such as Signaling System 7 (which
enables Advanced Calling Services), fiber optic fed Digital Serving Areas and
Integrated Services Digital Network. The following table illustrates that TDS
Telecom is making these advanced features available to a large majority of its
customers:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------------------
% EQUIPPED LINES # EQUIPPED LINES
------------------- ----------------
<S> <C> <C>
Advanced Calling Services............................... 86% 478,690
Integrated Services Digital Network..................... 68% 378,570
</TABLE>
69
<PAGE>
As TDS Telecom upgrades and expands its network, it is also standardizing
equipment and processes to increase efficiency and has centralized the
monitoring and management of its network to reduce costs and improve service
reliability. Strategic alliances with Lucent Technologies and Siemens Telecom
Networks to modernize and standardize TDS Telecom's switching platform with the
Lucent 5ESS-2000 and Siemens EWSD switches assisted TDS Telecom in implementing
its 24 hour-a-day/7 day-per-week Network Management Center. The Network
Management Center continuously monitors the network in an effort to proactively
identify and correct network faults prior to any customer impact. By the end of
1998, the Network Management Center is expected to be proactively monitoring
100% of TDS Telecom's network, up from 64% at December 31, 1997.
TDS Telecom's total 1998 capital budget is $140 million compared to actual
capital expenditures of $151.5 million in 1997 and $144.4 million in 1996.
Financing for the 1998 capital additions will be primarily provided by
internally generated funds and supplemented by federal long-term financing.
ILEC TELEPHONE MARKETS
TDS Telecom's goal is to be a leading provider of electronically deliverable
products in its ILEC markets. According to published sources, TDS Telecom is
currently the ninth largest non-Bell local exchange telephone company in the
United States, based on the number of telephone access lines served. At March
31, 1998, the telephone subsidiaries of TDS Telecom served approximately 528,900
access lines in 28 states. TDS Telecom currently operates over 375 central
office and remote switching centers in its telephone operating areas.
Substantially all of TDS Telecom's access lines are served by digital switching
technology, which, in conjunction with other technologies, allows TDS Telecom to
offer additional premium services to its customers, including call forwarding,
conference calling, caller identification, selective call ringing and call
waiting.
As one of the major independent telephone companies in the United States,
TDS Telecom's ILECs provide both local telephone service and access to the long
distance network for customers in their respective service areas. The ILECs also
provide directory advertising through a contract with another company and
billing and collection services to IXCs. TDS Telecom provides centralized
administrative and support services to field operations from its corporate
offices in Madison, Wisconsin.
70
<PAGE>
The following table summarizes certain information regarding TDS Telecom's
telephone operations:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Telephone Operations
Access Lines................................... 356,200 392,500 425,900 484,500 515,500
% Residential................................ 82.0% 81.3% 80.6% 79.9% 78.3%
% Business (nonresidential).................. 18.0% 18.7% 19.4% 20.1% 21.7%
Total Revenues................................. $ 268,122 $ 306,341 $ 354,841 $ 402,629 $ 444,203
% Local Service.............................. 26.9% 26.8% 26.8% 27.9% 27.7%
% Network Access and Long-distance........... 59.3% 56.9% 55.1% 53.9% 53.1%
% Miscellaneous and Other.................... 13.8% 16.3% 18.1% 18.2% 19.2%
Depreciation and Amortization Expense.......... $ 59,562 $ 68,878 $ 77,354 $ 88,967 98,066
Operating Income............................... 78,585 91,606 98,240 103,358 98,613
Construction Expenditures...................... 80,818 115,483 104,372 144,440 151,460
Total Identifiable Assets...................... $ 829,489 $ 984,563 $ 1,058,241 $ 1,181,084 $ 1,221,460
% Second Lines................................. N/A N/A 4.3% 5.8% 7.8%
Penetration of Advanced Calling Services(1).... N/A 12.4% 13.6% 24.7% 30.1%
</TABLE>
- ------------------------
(1) Total number of individual Advanced Calling Services divided by total access
lines.
RETAIL MARKETS
TDS Telecom's existing ILEC business consists of two major customer focused
organizations addressing the retail and wholesale marketplace for its services.
The Retail Markets Group focuses on TDS Telecom's retail customers and is
comprised of TDS Telecom's 106 operating companies. The Retail Markets Group
serves a mix of rural and suburban customers, with a significant geographic
concentration in the Upper Midwest and Southeast. Approximately 78% of TDS
Telecom's retail customers are residential and approximately 22% are businesses,
most of which are of the small business or small office/ home office segments.
The Retail Markets Group has identified three primary goals to grow and protect
its existing ILEC business: (i) build customer loyalty, (ii) develop revenue
growth, and (iii) implement cost control. Management of TDS Telecom believes it
can achieve these goals by offering bundled services to its customers, by
building brand equity in the TDS Telecom brand name, and by providing superior
customer service to its retail customers. In addition, TDS Telecom will continue
to standardize operations, improve cost controls and selectively invest in
network facilities in order to enhance efficiency and reduce costs.
BUNDLED SERVICE OFFERINGS. Management of TDS Telecom believes that its
consumer and business customers have a strong preference to purchase all of
their telecommunications services from a single provider. TDS Telecom believes
that by offering a full complement of telecommunications services and bundling
those services in customer-friendly packages it can build customer loyalty and
reduce customer churn. Implementing a full-service strategy requires TDS Telecom
to combine the services of its network with the products and services of
carefully selected strategic partners. TDS Telecom plans to pursue such
relationships to develop the long distance, video, and wireless components of
its product mix.
STRONG BRAND EQUITY. In 1996, TDS Telecom adopted the TDS Telecom name as a
unified brand name across its ILEC markets to build its brand image. Prior to
1996, the local identity of each operating company enjoyed a higher profile than
TDS Telecom. TDS Telecom has subsequently implemented a customer awareness
campaign to build brand awareness of the TDS Telecom name. For example, all
bills now contain the TDS Telecom name and all customer checks are made payable
to TDS Telecom. The change in branding has been reinforced by a comprehensive
media campaign that includes television,
71
<PAGE>
radio, newspaper, bill inserts and direct mail advertising. Management of TDS
Telecom believes that branding will increase the loyalty of its customers and
also reduce expenses through more cost effective marketing.
SUPERIOR CUSTOMER SERVICE. TDS Telecom maintains a local business office in
each of its ILEC markets to ensure high levels of customer service. Management
believes that its community-based business offices which offer full-service,
face-to-face customer service are a fundamental competitive advantage for TDS
Telecom. To further TDS Telecom's goal of enhancing service to its customers,
TDS Telecom is implementing a VBO initiative. The VBO builds on TDS Telecom's
current community oriented customer service by linking business offices through
technology, standardizing processes, expanding hours of operations, and
providing management information on operations and service quality. VBO
technology will be deployed across TDS Telecom's business offices to enable
multiple local business offices to perform customer sales and service functions
as if they were one "virtual" office in the eyes of the customer. Unlike
traditional call centers where service representatives and technology are
centrally located, the VBO environment distributes call center technology to the
individual business offices, thereby enabling customer service representatives
to remain in their local communities.
WHOLESALE MARKETS
The Wholesale Markets Group focuses on TDS Telecom's wholesale customers and
has traditionally provided a majority of TDS Telecom's revenues. TDS Telecom
receives much of its ILEC revenue from the sale of traditional wholesale
services, such as access charges and billing and collections services. As a
result, TDS Telecom continues to provide a high level of service to traditional
wholesale customers such as AT&T, MCI, Sprint and the RBOCs.
TDS Telecom intends to grow its wholesale business by pursuing opportunities
created by the 1996 Act. TDS Telecom plans to expand into new wholesale groups
by targeting two groups of customers. First, TDS Telecom will provide new
entrants to markets, such as CLECs and PCS carriers, with access to the public
network, as well as dedicated services. Second, TDS Telecom will supply existing
businesses such as cable television providers, electric utilities and long
distance resellers with network services needed to complement their existing
assets. TDS Telecom also intends to pursue other wholesale opportunities, such
as network management and Internet access, as demand for those services
increases.
The primary source of the Company's wholesale business revenues are access
revenues. TDS Telecom's operating telephone subsidiaries receive access revenue
as compensation for carrying interstate and intrastate long-distance traffic on
its network. The interstate and intrastate access rates charged include the cost
of providing service plus a fair rate of return on the capital allocated to such
services. Access revenues account for approximately 57% of the revenue generated
by TDS Telecom's ILEC subsidiaries.
TDS Telecom's ILECs participate in the National Exchange Carrier Association
("NECA") interstate common line and traffic sensitive tariffs for all but one
portion of one ILEC's interstate access. These operating companies participate
in the access revenue pools administered by NECA, which collect and distribute
revenue from interstate access services. The FCC created NECA and it operates
subject to FCC rules and oversight.
The FCC regulates interstate access rates and other matters relating to
interstate telephone service. On May 16, 1997, the FCC released an order on
access reform. This order applies primarily to price cap local exchange carriers
("LECs"). However, non-price cap companies, such as TDS Telecom, were also
affected in certain areas by this order. The FCC is expected to release an order
on access charge reform for non-price cap companies in mid-1998. Depending on
the outcome of the order for non-price cap companies, the source and nature of
the operating companies' recovery of costs from interstate services will be
affected.
72
<PAGE>
The 1996 Act provides for reciprocal compensation for parties to any
interconnection arrangement. The FCC issued a 1996 order governing the
compensation arrangements between LECs and wireless providers. LECs must charge
wireless carriers cost-based rates and must pay access charges to wireless
carriers to terminate calls from LEC customers. Since this order raises
interconnection costs, the operating companies may adjust their charges to
recover such increased costs.
On October 7, 1997, the FCC released a Notice of Proposed Rulemaking
("NPRM") on jurisdictional separations reform. In the NPRM, the FCC reviews the
current procedures for separating LECs' service costs between the state and
federal jurisdictions. Many of the proposals in the NPRM seek to limit costs
assigned to the interstate jurisdiction and seek to assign greater costs to the
intrastate jurisdiction. To the extent that the costs are not made up in the new
federal and state universal service mechanisms, the Telecom Group may seek rate
increases in local service rates to offset any reductions in interstate
revenues.
Where applicable and subject to state regulatory approval, TDS Telecom's
ILEC subsidiaries utilize intrastate access tariffs and participate in
intrastate revenue pools. However, many intrastate toll revenue pooling
arrangements, historically a source of substantial revenues to TDS Telecom's
LECs, have been replaced with access-charge-based arrangements. In these cases,
access charges are typically set to generate revenue flows similar to those
realized in the pooling process. The impact of the 1996 Act has accelerated the
pace of regulatory re-evaluation at both the state and federal level. To the
extent that state-ordered access charge revisions reduce revenues, TDS Telecom
may seek adjustments in other rates. Some states are utilizing a state high cost
fund to offset access charge reductions. See "Risk Factors--Risk of Adverse
Developments in the Business of TDS Telecom--Government Regulation."
TELEPHONE ACQUISITIONS
TDS Telecom continually reviews attractive opportunities to acquire
operating telephone companies. Since January 1, 1993, TDS Telecom has acquired
18 telephone companies serving a total of 95,600 access lines for an aggregate
consideration totaling $197 million, all of which were attributed to TDS
Telecom. TDS Telecom acquired one telephone company in 1998 serving an aggregate
of 6,000 access lines, one telephone company in 1997 serving an aggregate of
3,200 access lines, five telephone companies in 1996 serving an aggregate of
33,100 access lines, four telephone companies in 1995 serving an aggregate of
13,500 access lines, three telephone companies in 1994 serving an aggregate of
19,700 access lines and four telephone companies in 1993 serving an aggregate of
20,100 access lines. Recently, TDS Telecom has modified its acquisition strategy
to focus on geographic clustering of telephone companies to achieve cost
economies and to complement TDS Telecom's growth strategy.
It is TDS Telecom's policy to preserve, in so far as possible, the local
management of each telephone company it acquires. TDS Telecom provides the
telephone companies with centralized purchasing and general management and other
services, at cost plus a reasonable rate of return on invested capital. These
services afford the subsidiaries expertise in finance; accounting and treasury
services; marketing; customer service; traffic; network management; engineering
and construction; customer billing; rate administration; credit and collection;
and the development of administrative and procedural practices. See "Risk
Factors-- Risk of Adverse Developments in the Business of TDS Telecom--Risks
Associated with Possible Acquisition."
FEDERAL FINANCING
TDS Telecom's primary sources of long-term financing for additions to
telephone plant and equipment have been the Rural Utilities Service ("RUS"), the
Rural Telephone Bank ("RTB") and the Federal Financing Bank ("FFB"), each of
which is an agency of the United States of America. The RUS has made primarily
35-year loans to telephone companies since 1949, at interest rates of 2% and 5%,
for the purpose of improving telephone service in rural areas. Currently, the
RUS is authorized to issue hardship loans at a
73
<PAGE>
5% interest rate and other loans at an interest rate approximating the
government's rate for instruments of comparable maturity. The RTB, established
in 1971, makes loans at interest rates based on its average cost of money (6.54%
for its fiscal year ended September 30, 1997), and in some cases makes loans
concurrently with RUS loans. In addition, the RUS guarantees loans made to
telephone companies by the FFB at the federal cost of money (6.01% for a 35-year
note at December 31, 1997).
Substantially all of TDS Telecom's telephone plant is pledged under, or is
otherwise subject to, mortgages securing obligations of the operating telephone
companies to the RUS, RTB and FFB. The amount of dividends on common stock that
may be paid by the operating telephone companies is limited by certain financial
requirements set forth in the mortgages. Effective October 6, 1997, the RUS
revised its regulations on the amount of allowable distributions a borrower can
make in any calendar year. For those companies with greater than 40% net worth
to total assets, the entire amount above 40% net worth to total assets can be
distributed. The majority of TDS Telecom's telephone subsidiaries exceed this
percentage.
At December 31, 1997, TDS Telecom's operating telephone companies had
unadvanced loan commitments under the RUS, RTB and FFB loan programs aggregating
approximately $112 million, at a weighted average annual interest rate of 5.71%,
to finance specific construction activities in 1998 and future years. These loan
commitments are generally issued for five-year periods and may be extended under
certain circumstances. TDS Telecom's operating telephone companies intend to
make further applications for additional loans from the RUS, RTB and FFB as
their needs arise. There is no assurance that these government loan programs
will continue to be available or that these applications will be accepted or
what the terms or interest rates of any future loan commitments will be.
FEDERAL AND STATE SUPPORT MECHANISMS
To promote universal service, the FCC developed a number of federal support
mechanisms to keep telephone rates affordable for both high-cost rural areas and
low-income customers. Many of TDS Telecom's ILEC subsidiaries provide telephone
service in rural areas and all of them offer service to low-income customers.
The 1996 Act codified universal service goals and support; set forth clear
principles for ensuring affordable access to modern telephone service
nationwide; established discounts for schools, libraries and rural health care
facilities; and established a federal-state joint board to make recommendations
to the FCC regarding implementation of the universal service provisions of the
1996 Act. On May 8, 1997, the FCC released an order on universal service,
adopting many of the joint board's recommendations. The FCC adopted the use of
forward-looking proxy cost models to determine costs rather than relying on
actual costs. However, rural ILECs will continue to receive support based on
their actual costs through December 31, 2000. After December 31, 2000, rural
ILECs will transition to the use of proxy cost models over an additional
three-year period. To date, management of TDS Telecom believes that no proxy
cost models have proven to provide sufficient and predictable revenue support
for the provision of universal service by rural ILECs. The FCC has not adopted
any proxy cost model for rural ILECs. Both petitions for review and judicial
appeals of portions of the FCC's universal service rules and policies remain
pending, and Congress legislated a requirement for the FCC to report on its
implementation of universal service in its appropriations legislation.
The FCC's order also mandated that all telecommunications providers
contribute to the universal service fund beginning January 1, 1998. However, the
order allows ILECs to recover these contributions through their interstate
access rates.
The final rules to implement the universal service provisions of the 1996
Act will involve development of new support mechanisms and changes in the
eligibility criteria. In addition, some of TDS Telecom's ILEC subsidiaries
operate in states where support and rate structures are either being
re-evaluated or have already been changed. Full recovery of universal service
costs in the future through interstate and
74
<PAGE>
intrastate mechanisms is uncertain. If interstate or intrastate support
decreases, TDS Telecom's ILEC subsidiaries may pursue local service rate
increases to recover the difference.
Historically, telephone company acquisition and investment decisions assumed
the ability to recover the cost and a reasonable rate of return through local
service, access and support revenues. Significant changes in the universal
service funding system could affect TDS's and TDS Telecom's acquisition and
investment strategy.
CLEC TELEPHONE MARKETS
The 1996 Act facilitates entry of TDS Telecom into new markets by requiring
non-exempted ILECs (e.g., RBOCs, GTE and other ILECs, based on state regulators'
determinations) to provide reasonable and non-discriminatory interconnection
services and access to unbundled network elements to any CLEC that seeks to
enter the markets in which the ILEC already offers services. TDS Telecom,
through TDS METROCOM, its wholly-owned subsidiary has targeted certain
third-tier cities, geographically proximate to existing TDS Telecom facilities
and service areas, for facilities-based entry as a CLEC. Management of TDS
Telecom believes that the size of the target markets will sustain one or two
facilities-based competitors in addition to the ILEC. While additional
competitors may enter such markets as resellers, TDS Telecom believes
facility-based CLECs will have a long-run cost advantage, establish a barrier to
entry and enable an alternative wholesale strategy for growth. To this end, TDS
Telecom plans to build fiber-ring, switching and other network facilities in its
targeted CLEC markets. TDS Telecom plans to follow a "clustering" approach to
building its CLECs which will allow it to seek regional long distance traffic,
share service and repair resources, and realize marketing efficiencies. As in
its ILEC markets, the Company intends to become an ICP in its CLEC markets. The
Company will provide local, long-distance, Internet access and other services
through its own facilities and via resale. The Company also intends to resell
mobile services in many markets.
TDS Telecom's first CLEC in Madison, Wisconsin became operational in January
1998. The Madison CLEC is a facilities-based, full-service alternative to
Madison's existing ILECs, Ameritech and Mid-Plains Telephone Companies,
providing both voice and data services to commercial and consumer accounts, as
well as wholesale services to IXCs and other carriers. While TDS Telecom is
beginning its CLEC venture in its Madison and Minnesota markets, it plans to
expand operations to Appleton and Green Bay, Wisconsin. As of March 31, 1998,
TDS Telecom has invested $15 million in constructing its facilities in the
Madison market and plans to invest an additional $16 million during the
remainder of 1998. TDS Telecom constructed 54 miles of fiber optic cable in and
around Madison.
The CLEC strategy will place primary emphasis on small and medium-sized
commercial and wholesale customers such as IXCs, Internet Service Providers
("ISPs") and cellular, paging and PCS companies. The Company expects to pursue
consumer markets approximately six months after the CLEC enters the commercial
market. Wholesale customers purchase transmission capacity and access services
from CLECs. These services will be available to wholesale customers shortly
after network completion. TDS Telecom believes that these customers are
generally more sophisticated and are more likely to switch providers to obtain
network reliability, redundancy and more flexible pricing. Medium-sized
commercial prospects are characterized by above-average access line-to-employee
ratios, heavier utilization of data services, and a focus on using
telecommunications for business improvement rather than by concerns for cost
reduction. These companies are generally growth-oriented and may be underserved
by the ILEC or major IXCs. TDS Telecom will pursue a personal selling approach
for its primary target markets. This approach builds on customer preference for
integrated communications services and the customer's perception that the
quality of the product is in the personalized service.
While the CLEC is positioning itself as a high-quality provider, it expects
price competition from the ILECs as they attempt to retain and regain their
customers. The CLEC will seek to maintain an efficient cost structure to ensure
it can match price-based initiatives from competitors. TDS Telecom expects to be
75
<PAGE>
more flexible in responding to customer needs than its ILEC competitors. To
effectively compete in this new environment, TDS Telecom will enhance its
efforts at product development to provide high-quality, cutting-edge services to
its customers.
DATA INITIATIVES
In 1997, TDS Telecom continued to expand its investments into data
communications in order to offer a full suite of data products in its CLEC and
many of its ILEC markets. TDS Telecom believes the targeted third-tier markets
present a significant opportunity to market data services as the major carriers
serving these locations have typically underinvested in these markets despite
the growing demand. Switched data communications represent one of the fastest
growing segments of the telecommunications services market. Computer
proliferation, connectivity via local and wide area networks, the Internet and
the emergence of multimedia applications are all driving demand. As a result,
the domestic network infrastructure is strained at both the local and national
levels. TDS Telecom's CLEC initiative will add local capacity in its selected
cities designed to capture this growth.
TDS Telecom has developed a LAN wiring business as part of its data services
business. The LAN wiring business provides in-building wiring services to its
customers. TDS Telecom assists its customers in designing and constructing
specialized wiring networks for their business needs. Customers of the LAN
wiring business include traditional in-market business customers of TDS Telecom
and also non-traditional business customers located in ILEC markets not
currently served by TDS Telecom. At December 31, 1997, TDS DATACOM, TDS
Telecom's LAN wiring entity, operated in 14 markets and generated approximately
$6.6 million in revenue for the year then ended.
In furtherance of its strategy to position itself as a full-service,
networking service provider, TDS Telecom plans to make high-speed xDSL based
services available to customers in many of its ILEC and CLEC markets. TDS
Telecom believes xDSL technology will form the foundation for new, high-speed
data services and applications and is currently conducting trials of xDSL modems
manufactured by several vendors. This technology will be employed to offer
high-speed Internet access as well as high-speed LAN connectivity. In addition,
TDS Telecom plans to develop Frame Relay and ATM services in select markets.
TDSNET, TDS Telecom's ISP, is expanding its existing business offerings to
include web hosting services and customized web content development. TDSNET
expanded its operation in 1997 by adding an additional 13 operating markets to
bring its total operating markets to 49. TDSNET served approximately 30,000
customers and generated approximately $4 million in revenue for the year then
ended.
TDS Telecom is also seeking to become a provider of enterprise network
management center ("ENMC") services to targeted markets through expanded use of
its own network management facilities. On November 17, 1997, upon completion of
a competitive bidding process, the State of Wisconsin awarded TDS Telecom the
"BadgerNet" ENMC, a multi-year contract which is expected to generate
approximately $30 million in revenues over a five-year period. The BadgerNet
ENMC will be designed to provide a focal point for the operational management of
over 72 state agency and university networks, services and equipment and is
expected to commence operations in 1998. TDS Telecom believes it has developed
substantial expertise in developing its ENMC and has the capacity through
existing facilities to provide ENMC services to additional third parties.
Although TDS Telecom currently operates these businesses, they are in an
early stage of development. There can be no assurance that TDS Telecom will
expand these businesses. See "Risk Factors--Risks of Adverse Developments in the
Business of TDS Telecom--Risks of Expansion and Entry Into New Businesses."
SALES AND MARKETING
TDS Telecom seeks to leverage its networks through sales and marketing
activities targeted at two separate customer groups: retail and wholesale.
Retail customers are composed primarily of residential
76
<PAGE>
customers, businesses, government and institutional telecommunications users.
Wholesale customers consist of IXCs and information service providers such as
commercial data processing service providers and ISPs.
RETAIL MARKETS
COMMERCIAL MARKETS. Businesses account for approximately 22% of TDS
Telecom's access lines. TDS Telecom focuses its business customer marketing on
information-intensive industries such as financial services, health services,
realty, hotels and motels, education and government. TDS Telecom uses its direct
sales force, targeted mailings, and telemarketing to sell products and services
to the commercial markets, which are segmented into tiers based on size and
strategic importance. Different sales and distribution channels are employed for
each segment. Specific account executives focus on the most profitable
commercial customers by staying in contact with them on a regular basis. In
1996, TDS Telecom adopted a more aggressive compensation plan for its account
executives targeted at revenue and customer satisfaction results.
CONSUMER MARKETS. TDS Telecom's promotional and sales strategy with respect
to its residential customers consists of two major initiatives: building brand
equity by creating awareness of the TDS Telecom brand name; and using direct
marketing to sell specific products and product groupings. Approximately 78% of
TDS Telecom's total access lines are residential. The nature of TDS Telecom's
residential markets has historically made direct marketing more effective than
mass media such as radio and television. In addressing its consumer markets, TDS
Telecom has made extensive and aggressive use of direct mail. TDS Telecom has
been more selective in the use of telemarketing as a means of generating
awareness, qualified leads, and sales. Increasingly, uniform branding has made
the use of mass media more attractive, and TDS Telecom is beginning to
increasingly incorporate these elements into its marketing program.
In nearly all of its markets, TDS Telecom offers a complete family of custom
calling services, including call waiting, call forwarding, three-way calling,
and speed dialing. In 1997, TDS Telecom sold approximately 28,000 residential
second lines, an increase of 46% over 1996. The Telecom Group recently launched
its Advanced Calling Services family, which is centered around Caller ID
service. In 1997, the Advanced Calling Services were available to 78% of the
lines in service compared to 66% in 1996. In 1997, penetration of Caller ID
increased from 13% in 1996 to 16% of lines equipped and aggregate penetration of
Advanced Calling Services increased from 25% in 1996 to 30% of lines equipped.
WHOLESALE MARKETS
Access charges, billing and collection services and other traditional
wholesale offerings generated $253 million, or approximately 61% of TDS
Telecom's ILEC revenue for the year ended December 31, 1997. TDS Telecom seeks
to establish close working relationships with the IXCs. TDS Telecom is working
to establish systems to support "electronic bonding" of its operations with
those of the IXCs. Electronic bonding provides seamless integration of TDS
Telecom's and the IXCs' networks, enabling the IXCs to access service, billing
and other data directly from TDS Telecom's network. It will also permit the IXCs
to enter access service requests electronically using the integrated network.
The initial phase of establishing these systems has taken place with the
establishment of a dedicated customer service team to provide a single point of
contact for the IXCs. During 1998 and beyond, automated systems solutions will
be implemented to fully support electronic bonding.
TDS Telecom sees significant potential in leveraging its infrastructure to
provide new wholesale offerings to non-traditional customers. TDS Telecom has
targeted high growth industry sectors such as CLECs, independent telephone
companies, cable television companies, electric utilities and other
telecommunications service providers for purchase of its wholesale offerings.
Additionally, existing cellular wireless
77
<PAGE>
carriers are expanding their services in and near TDS Telecom's territories and
new PCS wireless carriers are, or soon will be, offering service.
COMPETITION
ILEC MARKETS
The 1996 Act was intended to promote competition in the telecommunications
industry as a national policy and continue the process of deregulation. The 1996
Act requires ILECs to provide reasonable and non-discriminatory interconnection
services and access to unbundled network elements to any CLEC that seeks to
enter the markets in which the ILEC already offers services. The 1996 Act also
allows CLECs to co-locate network equipment on the ILEC's premises and prevents
ILECs and CLECs from unduly restricting each other from use of facilities or
information that would allow other organizations to effectively compete with
them.
All 106 telephone company subsidiaries of TDS Telecom are currently exempt
from many of the interconnection provisions of the 1996 Act. According to the
1996 Act, a rural telephone company (which currently includes all 106 of TDS
Telecom's ILECs) is exempt from the ILEC interconnection requirements until (i)
such company has received a bona fide request for interconnection, resale of
services, or network elements, and (ii) the state commission determines that
such request is not unduly economically burdensome, is technically feasible, and
is consistent with the universal service provisions of the 1996 Act. The party
making a bona fide request must submit a notice of its request to the
appropriate state commission which must then conduct an inquiry to determine
whether to terminate the exemption. Within 120 days after a state commission
receives notice of the request, it must determine if it will terminate the
exemption. Upon termination of the exemption, the state commission must
establish an implementation schedule for compliance with the request.
Accordingly, the length of TDS Telecom's rural exemptions will vary based on the
decisions of the various state commissions. Some TDS Telecom ILECs have already
had requests filed by potential competitors seeking to terminate their
exemptions and TDS Telecom believes there will eventually be open entry into
nearly every aspect of the telephone industry, including local service, and,
switched and special access services.
TDS Telecom expects competition in the local telephone and access services
businesses to be increased substantially as a result of the entrance of new
competitors and the development of new technologies, products and services.
Increased competition is expected from competitive access providers, IXCs,
out-of-territory RBOCs and independent telephone companies, niche entrepreneurs,
cable and utility companies, and wireless and satellite providers. To meet this
increasing competition, TDS Telecom's strategy is to build customer loyalty by
providing superior customer service, offering a full range of standardized
products and services bundled in response to customer preferences and to rapidly
develop new data products and services.
TDS Telecom believes that the wireless companies pose the most significant
threat in the long run to the local exchange industry. Although traditional
analog cellular radio service cannot match the features or the clarity of
communications provided via wireline networks, and as a result of high error
rates and speed limitations is not currently suitable for data transmission,
advances in digital PCS technology may permit wireless companies to eventually
match the functionality and clarity of wireline communication and still allow
customers the mobility of traditional wireless service. As the emerging PCS
companies compete directly with established cellular radio companies, flat rate
pricing alternatives may drive wireless rates towards or below wireline rates.
In order to minimize the impact of wireless competition, TDS Telecom is pursuing
wholesale service agreements with wireless companies to provide services to them
and expects to provide wireless services through resale in many of its markets.
78
<PAGE>
CLEC MARKETS
In Madison and each city where 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, have the potential to subsidize competitive services from monopoly
service revenues, and benefit from favorable state and federal regulations. TDS
Telecom expects its CLECs to provide a full range of local telecommunications
services in order to compete effectively with the ILECs.
Although the ILECs generally are subject to greater pricing and regulatory
constraints than CLECs, ILECs are achieving increased pricing flexibility for
their services as a result of, among other things, the 1996 Act. Existing
competition for private line, special access and local exchange services is
based primarily on quality, capacity and reliability of network facilities,
customer service, response to customer needs, service features and price, and is
not based on any proprietary technology. As a result of the technology used in
its networks, TDS Telecom may have cost and service quality advantages over some
currently available ILEC networks. In addition, TDS Telecom believes that, in
general, it will provide more attention and responsiveness to its customers than
its ILEC competitors.
TDS Telecom may face competition from other CLECs and other potential
competitors in certain of the cities in which TDS Telecom plans to offers its
services. Many of TDS Telecom's existing and potential competitors have
financial, personnel and other resources significantly greater than those of TDS
Telecom. However, TDS Telecom believes that its strategy of targeting third-tier
cities, its capital, technical and management resources and its orientation
toward IXCs and other commercial telecommunications users will enable it to
achieve its strategic objectives. CLECs' ability to compete depends in part on
federal and state rules covering pricing and terms for ILECs' services provided
by unbundled network elements and resale, as well as ILECs' operation support
systems.
In addition to the ILECs and other CLECs, potential competitors capable of
offering private line, special access and local exchange services include long
distance carriers, cable television companies, electric utilities, microwave
carriers, wireless telephone system operators, and private networks built by
large end users. Previous impediments to certain utility companies entering
telecommunications markets under the Public Utility Holding Company Act of 1935
were removed by the 1996 Act.
REGULATION
The intrastate, local and access services of TDS Telecom's ILEC subsidiaries
are regulated by state regulatory agencies, and TDS Telecom seeks to maintain
positive relationships with these regulators. Rate setting, including local
rates, intrastate toll rates and intrastate access charges, are subject to state
commission approval. TDS Telecom will continue to pursue necessary changes in
rate structures to ensure affordable rates and reasonable earnings.
State regulators can approve service areas, service standards, accounting
and related matters. In some states, construction plans, borrowing, depreciation
rates, affiliated charge transactions and certain other financial transactions
are also subject to regulatory approval. States have traditionally regulated
entry into local markets by designating a single carrier to be the universal
service provider. However, the 1996 Act has almost completely pre-empted state
authority over market entry. Each state retains the power to impose
competitively neutral requirements that are consistent with the 1996 Act's
universal service provision and necessary for universal services, public safety
and welfare, continued service quality and consumer rights. While a state may
not impose requirements that effectively function as barriers to entry, and the
FCC must pre-empt challenged state requirements if they impose such barriers to
entry, a state retains limited authority to regulate certain competitive
practices in rural telephone company service areas.
79
<PAGE>
The 1996 Act establishes a general duty for all telecommunications carriers,
including wireless providers, to interconnect with other carriers. Congress
prescribed a more specific list of interconnection requirements for all LECs
including resale, number portability, dialing parity, access to rights-of-way
and reciprocal compensation. The FCC has adopted or is considering rules and
policies implementing the provisions of the 1996 Act.
Unless exempted, or granted suspension or modification, ILECs have
additional obligations: (a) to negotiate in good faith terms of interconnection;
(b) to comply with more detailed interconnection terms, including
non-discrimination and unbundling their network and service components so
competitors may use only those elements they choose for providing their
services; (c) to offer their retail services at wholesale rates to facilitate
resale by their competitors; and (d) to allow other carriers to place equipment
necessary for interconnection or access on their premises. Rural telephone
companies are exempted from these obligations until they receive a bona fide
request for interconnection, resale of services or network elements and the
applicable state commission determines that termination of the exemption is not
unduly economically burdensome, is technically feasible and is consistent with
universal service.
Many of the FCC determinations made to implement the 1996 law and to
facilitate competition in local service and other telephone services involve
investment and upgrades to TDS Telecom's networks. These investments and
upgrades include requirements to implement local number portability so
subscribers may change to competitors' services without changing their telephone
numbers, network signaling information that must be provided to certain other
carriers and pay phone providers, and other changes that require additional
investments and expenses. TDS Telecom is seeking to comply with these
requirements, and is pursuing policies that provide a fair opportunity to
recover its costs, but in some cases is asking for waivers or delayed
implementation deadlines. A new law also requires LECs to provide certain
communications for law enforcement purposes. The full cost and the adequacy of
the government compensation are not yet known, but the LEC industry is pursuing
regulatory policies that cover any shortfall in available government
compensation.
As defined in the 1996 Act, all of TDS Telecom's ILEC subsidiaries qualify
as rural telephone companies. Therefore, they enjoy an exemption from the ILEC
interconnection requirements until they receive a bona fide request for
interconnection and the state commission lifts the exemption. TDS Telecom has
received two requests for interconnection, one of which has been withdrawn, and
the other of which is currently pending. The FCC has also adopted extensive
rules for state commissions to follow in mediating and arbitrating
interconnection negotiations between incumbent LECs and carriers requesting
interconnection, resale of services or network elements. The 1996 Act
establishes deadlines, standards for state commission approval of
interconnection agreements and recourse to the FCC if a state commission fails
to act. A federal appellate decision striking down FCC pricing regulations for
interconnection and several rules that limited the Telecom Group telephone
companies' ability to obtain regulatory relief from stricter interconnection
requirements for incumbent telephone companies has been accepted for review by
the U.S. Supreme Court. TDS cannot predict the outcome of this or the numerous
other court and FCC proceedings stemming from the 1996 Act.
TDS Telecom seeks to maintain and enhance existing revenue streams despite
heightened earnings review activity by state regulators and the advent of local
exchange competition resulting from the 1996 Act. TDS Telecom is preparing for
competition even though such changes will often require changes in state
regulation or state regulatory approvals. For example, TDS Telecom is seeking
the necessary pricing flexibility to adjust its rate structures to a more
competitive model. TDS Telecom is also participating in state regulatory and
legislative processes to urge that any telecommunications reform measures treat
rural areas fairly and continue to provide sufficient contributions to high cost
rural service areas to keep the rates of TDS Telecom's ILECs affordable. The
ongoing changes in public policy and introduction of competition may negatively
affect the earnings of the operating subsidiaries, and TDS Telecom is not able
to predict the extent of any such negative impact.
While the majority of TDS Telecom's ILEC subsidiaries continue to operate in
a rate-of-return environment, a number of state commissions are negotiating, or
have agreed to alternative regulation
80
<PAGE>
plans, with ILECs. Price regulation, the most common form of alternative
regulations, focuses on the price of telecommunications services rather than
rules based on authorized costs and rates of return. TDS Telecom's ILEC
subsidiaries in Alabama, Arkansas, Michigan and Pennsylvania are currently
operating in a price-regulated environment, whereby the commissions in those
states are no longer reviewing earnings annually. For several years, the RBOCs
and some of the nation's larger ILECs have operated under an FCC "price cap"
plan, modified in 1997, where earnings can be increased through productivity
improvements.
For 1998, TDS Telecom's telephone subsidiaries neither elected federal price
caps nor an alternative FCC plan, which was designed for smaller LECs. Instead,
the operating subsidiaries plan to continue to abide by traditional
rate-of-return regulation for interstate purposes, unless those regulatory terms
are changed. Since approximately one-third of TDS Telecom's telephone
subsidiaries serve high-cost areas, important averaging mechanisms associated
with the NECA pooling process would be lost if TDS Telecom elected either of the
alternatives to traditional rate-of-return regulation. However, the FCC
periodically considers whether to initiate a proceeding to lower the allowed
rate-of-return for rate-of-return LECs. The FCC also plans to reform the rules
that govern how rate-of-return regulated LECs, on their own or through NECA,
charge IXCs for local distribution of their interstate calls. Some of the
reforms already adopted for price cap regulated LECs, if expanded to cover the
TDS Telecom LECs, could reduce interstate cost recovery, and could prompt the
LECs to seek state commission approval of increased local rates.
NECA is requesting access charge changes from the FCC which would use a
"banded" rate structure to help pool members with lower costs charge more
competitive rates. NECA's most recent access charges were approved effective
January 1, 1998.
Access to affordable long-distance service in rural areas was achieved
because the FCC ordered AT&T to provide nationwide average rates. As a result of
increasing competition, the FCC lifted all regulations relating to AT&T's
interstate services in 1996. However, the 1996 Act preserves interstate toll
rate averaging and endorses a nationwide policy that interstate and intrastate
long-distance rates of all long-distance carriers should not be higher in rural
areas than in urban areas they serve. The statute is intended to ensure
affordable long-distance services even in TDS Telecom's most remote exchanges.
OTHER INVESTMENTS
At December 31, 1997, certain subsidiaries of TDS Telecom owned cellular
interests representing approximately 388,000 POPs. On February 27, 1998, a
portion of the cellular interests were exchanged for approximately 1.1 million
shares of AirTouch Communications common stock. Cellular interests representing
approximately 262,000 POPs were retained.
EMPLOYEES
As of December 31, 1997, TDS Telecom had a total of 2,297 employees. There
are 131 employees at TDS Telecom who are represented by labor unions. TDS
Telecom considers its relations with its employees to be favorable.
81
<PAGE>
MANAGEMENT OF TDS TELECOM
Set forth below is certain information regarding the senior management of
TDS Telecom:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
LeRoy T. Carlson, Jr................... 51 Chairman
James Barr III......................... 58 President and Chief Executive Officer
Jerry W. Masters....................... 55 President--Retail Markets Group and President-- Wholesale
Markets Group
Charles W. Ricker...................... 51 President--Product and Business Development Group
David A. Darwin........................ 53 Senior Vice President--Government and Regulatory Affairs
William G. Grabel...................... 55 Senior Vice President--Human Resources and Administration
David A. Wittwer....................... 37 Chief Financial Officer and Vice President--Finance
G. Ronnie Barnes....................... 51 Vice President--Southern Region, Retail Markets Group
James A. Bubar......................... 48 Vice President--Information Systems and Chief Information
Officer
James W. Butman........................ 40 President and General Manager--TDS METROCOM
Michael F. Edl......................... 45 Vice President--Network Services
Kevin G. Hess.......................... 44 Vice President--Federal Affairs
Michael A. LeaVesseur.................. 42 Vice President--Wholesale Markets Group
Michael A. Pandow...................... 43 Vice President--Eastern Region, Retail Markets Group
Louis D. Reilly........................ 55 Vice President--Western Region, Retail Markets Group
Michael B. Roddy....................... 36 President--USLink
Collette A. Sorgel..................... 41 Vice President--Marketing, Retail Markets Group
</TABLE>
LEROY T. CARLSON, JR., CHAIRMAN. Mr. Carlson has been Chairman of TDS
Telecom and President, Chief Executive Officer and a director of TDS for more
than five years. Mr. Carlson is also Chairman and a director of U.S. Cellular
and Aerial and serves on the Board of Directors of the National Rural Telecom
Association. Prior to joining TDS, Mr. Carlson was associated with Arthur
Andersen & Co., and the Singer Corporation in various financial positions. He
holds a Master of Business Administration degree from Harvard University as well
as an undergraduate degree in economics from the same University.
JAMES BARR III, PRESIDENT AND CEO. Prior to becoming President and CEO of
TDS Telecom in 1990, Mr. Barr was Vice President of Sales for AT&T, where he was
responsible for all major accounts in New York and New England. Mr. Barr spent
27 years with the Bell System and AT&T. In addition to working in several
departments at AT&T, including AT&T's Business Markets Group and its Business
Sales Division, Mr. Barr has also worked for Bell Canada and Telecom Canada. Mr.
Barr is a member of the Board of Directors of TDS and Aerial, and of the
National Rural Telecom Association. Mr. Barr holds a B.S. in mechanical
engineering from Iowa State University and an MBA from the University of
Chicago.
JERRY W. MASTERS, PRESIDENT--RETAIL MARKETS GROUP AND PRESIDENT--WHOLESALE
MARKETS GROUP. Mr. Masters has served as President--Wholesale Markets Group
since January 1998 and as President-- Retail Markets Group since 1995. Before
joining the Company in 1991 as Vice President--Marketing,
82
<PAGE>
Mr. Masters worked for AT&T as Service Vice President for Federal Government
Services, a position in which he led an organization that provided operations
support for all network services provided to the federal government. He holds a
B.A. in business from Drury College and an M.S.B.M. from Pace University.
CHARLES W. RICKER, PRESIDENT--PRODUCT AND BUSINESS DEVELOPMENT GROUP. Prior
to being appointed President of Product and Business Development in January
1997, Mr. Ricker was President of TDS Telecom's Planning and Network Group. Mr.
Ricker served as Senior Vice President for the Central Region, where he was
responsible for the general operations of 50 independent telephone companies
serving 140,000 customers located in 15 midwestern and western states. Mr.
Ricker holds a B.A. in Accounting from Bentley College.
DAVID A. DARWIN, SENIOR VICE PRESIDENT--GOVERNMENT AND REGULATORY
AFFAIRS. Mr. Darwin became Senior Vice President--Government and Regulatory
Affairs in 1997 after serving as TDS Telecom's Senior Vice President of State
Regulatory Affairs and as Director of Revenue Requirements. Mr. Darwin holds a
B.A. in Accounting from the University of Wisconsin--Madison.
WILLIAM G. GRABEL, SENIOR VICE PRESIDENT--HUMAN RESOURCES AND
ADMINISTRATION. Prior to being appointed Senior Vice President--Human Resources
and Administration in 1997, Mr. Grabel served as CFO of TDS Telecom from 1990
until 1997. Mr. Grabel has also served as TDS Telecom's Controller and Director
of Internal Audit. Mr. Grabel holds a B.A. in Accounting and Business
Administration from Lakeland College. He is also a Certified Public Accountant.
DAVID A. WITTWER, CHIEF FINANCIAL OFFICER AND VICE
PRESIDENT--FINANCE. Prior to being appointed CFO in 1997, Mr. Wittwer served as
Vice President of Finance from 1995 to 1997. Mr. Wittwer has also served as TDS
Telecom's Controller. Mr. Wittwer holds a B.A. in Accounting from the University
of Wisconsin-- Whitewater and an M.S. from the University of Wisconsin--Madison.
He is also a Certified Public Accountant.
G. RONNIE BARNES, VICE PRESIDENT--SOUTHERN REGION; RETAIL MARKETS
GROUP. Prior to being appointed to his present position in 1996, Mr. Barnes
served as Vice President--Operations (1993-1996) and Director--Operations of the
TDS Telecom Southeast Region.
JAMES A. BUBAR, VICE PRESIDENT--INFORMATION SYSTEMS AND CHIEF INFORMATION
OFFICER. Prior to being named Vice President for Information Systems and Chief
Information Officer in 1994, Mr. Bubar served as Vice President and Mid-Central
Division Manager for TDS Telecom between 1990 and 1994. Mr. Bubar holds a B.A.
in Administrative Sciences from Colby College, an M.B.A. from Thomas College and
is a Certified Management Accountant.
JAMES W. BUTMAN, PRESIDENT AND GENERAL MANAGER, TDS METROCOM. Prior to his
assignment as President and General Manager of TDS METROCOM in 1997, Mr. Butman
served as President of USLink, TDS Telecom's long distance subsidiary since
1994, and has held positions in State Regulatory Affairs, Government &
Regulatory Affairs, and Marketing. Mr. Butman holds a B.A. from the University
of Wisconsin--Eau Claire and an MBA from the University of Wisconsin--Madison
and he is a Certified Management Accountant.
MICHAEL F. EDL, VICE PRESIDENT--NETWORK SERVICES. Mr. Edl joined the
Company in 1996 after spending 16 years at MCI. At MCI, Mr. Edl was Director of
Operations for the Midwest region maintaining the long distance network in
Michigan, Ohio and Indiana, including MCI's CLEC, MCImetro. Mr. Edl holds a B.A.
from the University of Phoenix and an M.B.A. from Case Western Reserve
University.
KEVIN G. HESS, VICE PRESIDENT--FEDERAL AFFAIRS. Prior to being appointed to
his present position in 1997, Mr. Hess held various positions in Government &
Regulatory Affairs and State Regulatory Affairs
83
<PAGE>
since joining TDS Telecom. He is a Certified Public Accountant, a graduate of
the University of Wisconsin--Madison, and has an MBA from the University of
Tennessee.
LOUIS D. REILLY, VICE PRESIDENT--WESTERN REGION; RETAIL MARKETS
GROUP. Prior to being appointed to his present position, Mr. Reilly was Vice
President of Customer Service of TDS Telecom. He holds a B.A. in Business from
Pennsylvania State University.
MICHAEL A. LEAVESSEUR, VICE PRESIDENT--WHOLESALE MARKETS GROUP. Prior to
being appointed Vice President--Wholesale Markets Group in 1998, Mr. LeaVesseur
served as Retail Markets Group Vice-President of the Western Region and as
District Manager for TDS Telecom's East Tennessee and Georgia companies. He
holds a B.A. from the University of Wisconsin and is a Certified Public
Accountant.
MICHAEL A. PANDOW, VICE PRESIDENT--EASTERN REGION; RETAIL MARKETS
GROUP. Prior to being appointed Vice-President--Eastern Region; Retail Markets
Group in 1995, Mr. Pandow held various high level staff positions in regulatory
affairs and marketing areas of TDS Telecom and has also served as a District
Manager in the operations area. He holds an undergraduate degree in Business Law
and an MBA in Finance from the University of Wisconsin-Whitewater.
MICHAEL B. RODDY, PRESIDENT--USLINK. Prior to being appointed
President--USLink in 1997, Mr. Roddy's assignments with TDS Telecom included
rates and tariff development, policy development and advocacy, rate case
filings, and industry/intercompany settlements. Mr. Roddy holds a B.S. degree in
Accounting from Villanova University and an MBA from the University of
Wisconsin.
COLLETTE SORGEL, VICE PRESIDENT--MARKETING; RETAIL MARKETS GROUP. Ms.
Sorgel joined TDS Telecom in 1996 in her present position. Prior to that, Ms.
Sorgel was Marketing Services Director for DCI Marketing. Ms. Sorgel holds a
B.S. degree from the University of Wisconsin--Whitewater. She is also a
Certified Marketing Executive through Sales and Marketing Executives
International.
DIRECTORS
Although TDS Telecom is and will continue to be wholly-owned by TDS and
controlled by the TDS Board of Directors, TDS Telecom will continue to be a
separate subsidiary and will continue to have a separate board of directors (the
"TDS Telecom Board"). The TDS Telecom Board currently is and will continue to be
responsible for the business affairs and operations of TDS Telecom. Although not
required to do so, TDS intends to appoint two independent directors to the TDS
Telecom Board. TDS believes that the presence of qualified independent directors
on the TDS Telecom Board will serve to enhance the quality of TDS Telecom's
business affairs and operations by providing independent oversight and judgment.
In addition to such two independent directors of TDS Telecom, who have not yet
been identified, the following persons are expected to serve as members of the
initial TDS Telecom Board following the completion of the offerings:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH TDS AND TDS TELECOM / PRINCIPAL OCCUPATION
- --------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
LeRoy T. Carlson....................... 81 Director and Chairman of TDS
LeRoy T. Carlson, Jr................... 51 Director and President of TDS, and Director and Chairman of
TDS Telecom
James Barr III......................... 58 Director of TDS, and President and Chief Executive Officer
of TDS Telecom
Walter C. D. Carlson................... 44 Director of TDS and Partner of Sidley & Austin
Gregory J. Wilkinson................... 47 Vice President and Controller of TDS
</TABLE>
84
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following is a description of the capital stock of the Company,
reflecting the filing of the Restated Certificate authorizing the Telecom Group
Shares and the other Tracking Stocks with the Delaware Secretary of State. This
description does not purport to be complete and is qualified in its entirety by
reference to the Restated Certificate, which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. For the definitions
of certain capitalized terms used in this section which have not been previously
defined, see "Certain Definitions."
GENERAL
AUTHORIZED SHARES. The Restated Certificate authorizes the issuance of an
aggregate of 475,000,000 shares of capital stock of the Company, consisting of
up to 279,401 Preferred Shares, 4,720,599 Undesignated Shares, 25,000,000 Series
A Common Shares, 100,000,000 Common Shares, 20,000,000 Special Common Shares, in
each case with a par value of $0.01 per share, 90,000,000 Telecom Group Shares,
140,000,000 Cellular Group Shares and 95,000,000 Aerial Group Shares.
In addition to the shares of each of the Tracking Stocks to be issued in the
Recapitalization, shares of each of the Tracking Stocks are being reserved for
issuance upon conversion, exercise or exchange subsequent to the Distribution of
certain outstanding convertible securities issued by the Company, and certain
options to purchase Common Shares that are outstanding under the Company's
existing stock incentive plans. All such convertible securities and options will
be adjusted upon the Distribution so that the security or option is convertible,
or exercisable, as the case may be, into Common Shares and shares of each of the
Telecom Group, Cellular Group and Aerial Group as if such convertible security
or option was converted or exercised, as the case may be, immediately prior to
the Distribution.
The following table shows the number of shares of capital stock of TDS
outstanding after the Merger, the number of shares of TDS capital stock which
would be issued and outstanding if the Recapitalization is completed as
contemplated, the number of shares which are expected to be reserved for
issuance for certain purposes and the number of authorized shares which would be
available for other purposes based on shares outstanding at April 30, 1998.
<TABLE>
<CAPTION>
SHARES
ISSUED IN ISSUABLE TO AVAILABLE
ISSUED IN ISSUED IN THE THE THIRD RESERVED FOR FOR RETAINED
MERGER RECAPITALIZATION(1) DISTRIBUTION PARTIES(2) ISSUANCE(3) ISSUANCE INTEREST(4)
----------- ------------------- ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
TDS Group:
Common Shares.......... 54,036,216(5) -- -- 1,483,357 5,020,755 39,459,672 --
Series A Common
Shares............... 6,939,280 -- -- -- 169,520 17,891,200 --
Special Common
Shares............... -- -- -- -- -- 20,000,000 --
Total TDS Group
Common Shares...... 60,975,496 -- -- 1,483,357 5,190,275 77,350,872 --
Preferred Shares....... 279,401 -- -- -- -- -- --
Undesignated Shares...... -- -- -- -- -- 4,720,599 --
Telecom Group Shares..... -- 13,500,000(6) 40,650,331 988,904 6,265,069 16,034,490 12,561,206
Cellular Group Shares.... -- 18,987,042(7) 60,975,496 10,284,860 7,818,715 23,092,079 18,841,808
Aerial Group Shares...... -- 11,564,752(7) 40,650,331 2,361,179 5,467,794 22,394,739 12,561,205
<CAPTION>
TOTAL
AUTHORIZED
------------
<S> <C>
TDS Group:
Common Shares.......... 100,000,000
Series A Common
Shares............... 25,000,000
Special Common
Shares............... 20,000,000
Total TDS Group
Common Shares...... 145,000,000
Preferred Shares....... 279,401
Undesignated Shares...... 4,720,599
Telecom Group Shares..... 90,000,000
Cellular Group Shares.... 140,000,000
Aerial Group Shares...... 95,000,000
</TABLE>
- ----------------------------------
(1) The Recapitalization includes the Offerings and the U.S. Cellular and Aerial
Mergers as proposed by TDS.
(2) Includes shares issuable as Committed Acquisition Shares and shares issuable
pursuant to the Pre-Distribution Convertible Securities by TDS, and shares
which would become issuable as a result of the U.S. Cellular Merger and the
Aerial Merger. See "--Certain Definitions."
(3) Shares reserved for issuance pursuant to employee benefit plans,
acquisitions and a dividend reinvestment plan.
(4) Net of shares issuable from Retained Interest.
(5) Includes 484,012 Common Shares held by a subsidiary of the Company.
(6) Assumes the Underwriters do not exercise their over-allotment option.
(7) Based on original exchange ratios offered by TDS and on shares of U.S.
Cellular and Aerial outstanding as of November 30, 1997.
85
<PAGE>
INCREASES IN AUTHORIZED SHARES. The Restated Certificate permits the number
of authorized shares of any class of capital stock to be increased or decreased
(but not below the number of shares then outstanding in such class,
respectively) by the affirmative vote of the holders of a majority of the shares
of capital stock of the Company entitled to vote with respect to matters other
than the election of directors. This provision in the Restated Certificate gives
the Company flexibility to authorize additional shares of any class of capital
stock for use for any corporate purpose, without the need to obtain the approval
of a majority of the affected class or classes, by obtaining the approval of the
holders of a majority of the voting power of the shares of capital stock of the
Company entitled to vote with respect to matters other than the election of
directors, voting as a single group. The TDS Voting Trust presently holds a
majority of the voting power of the Company.
This provision may allow TDS to authorize and issue shares of capital stock
under circumstances which could preserve the ability of the TDS Voting Trust to
continue to exercise control over a majority of the voting power of TDS and,
therefore, could deprive shareholders of TDS of an opportunity to sell their
shares at a premium over market prices or make it more difficult to replace the
current Board and management of TDS. See "Risk Factors--Risks Related to Capital
Structure and the Telecom Group Shares--Absence of Approval Rights with Respect
to Future Issuances of Authorized Shares." The TDS Voting Trust has no current
intention to take any action to authorize any additional shares of capital
stock, other than as described herein.
The Board is authorized by the Restated Certificate to designate and issue
Undesignated Shares in one or more classes or series of preferred or common
stock from time to time, and to establish as to each class or series the
designation and number of shares to be issued, the dividend rate, the redemption
price and terms, if any, the amount payable upon voluntary or involuntary
dissolution of TDS, sinking fund provisions, if any, voting rights, if any, the
terms of conversion into shares of common stock, if provided for, and such other
rights, preferences or limitations as may be provided in such designation. The
Undesignated Shares will thereafter be available for designation and issuance as
common or preferred stock from time to time for any proper corporate purpose,
including issuances for cash, acquisitions, stock splits, stock dividends, stock
option plans and funding of employee benefit plans. Generally, no further action
or authorization by the shareholders is necessary prior to the designation or
issuance of the additional Undesignated Shares authorized pursuant to the
Restated Certificate unless applicable laws or regulations would require such
approval in a given instance. Having such additional authorized shares of stock
available for designation and issuance in the future gives TDS flexibility and
may allow such shares to be issued without the expense and delay of a special
shareholders' meeting. Shares of common or preferred stock could be issued in
circumstances that would serve to preserve control of TDS's then existing
management. See "Risk Factors--Risks Related to Capital Structure and the
Telecom Group Shares--Anti-Takeover Considerations."
Undesignated Shares could be used for classes or series of preferred stock
to be designated and issued, and also permit classes or series of common stock
to be designated and issued to track new businesses or to separate existing
businesses from any of the Groups. For instance, shares of tracking stock could
be designated and issued for the benefit of the TDS Group. Such new shares of
tracking stock could be distributed to the holders of Common Shares and Series A
Common Shares upon the creation or separation of a business, sold for cash in a
public or private offering to finance a new business for the benefit of the TDS
Group or delivered in connection with the acquisition of a business by the TDS
Group. Undesignated Shares could also be designated with respect to any other
Group. The Company has no current plans to create any additional tracking stocks
or to make any material investments in any new businesses.
Any future designation and issuance of Undesignated Shares as preferred or
common stock will be attributed to one or more of the Groups as may be
determined by the Board at such time, taking into consideration the use of the
proceeds of the issuance of such shares and any other relevant factors.
86
<PAGE>
REDEMPTION TO PROTECT LICENSES. As permitted by Delaware law, the Restated
Certificate also includes a provision permitting the Company to redeem shares of
capital stock (other than Series A Common Shares) to the extent necessary to
prevent the loss or secure the reinstatement of any license or franchise from
any governmental agency.
This provision would permit the redemption of shares, if necessary, to avoid
the loss of any franchise or license under the Communications Act of 1934, as
amended (the "Communications Act") and the rules and regulations of the FCC.
Failure to comply with the requirements of the Communications Act and the FCC
may result in denial or revocation of FCC licenses.
The Restated Certificate permits TDS to redeem any shares of capital stock
(other than Series A Common Shares) from disqualified holders at their fair
market value to the extent necessary to prevent the loss of or secure the
reinstatement of, or to prevent the denial of applications for or the renewal of
any governmental license or franchise held by TDS or any of its subsidiaries, or
any person in which TDS has any direct or indirect ownership or voting interest,
if the license or franchise is conditioned upon some or all of the holders of
the corporation's stock, or persons entitled to vote such stock, possessing
prescribed qualifications or any other condition. A disqualified holder is any
holder of shares of capital stock of TDS whose holding of such shares on behalf
of such holder or on behalf of any other person, either individually or when
taken together with the holding or voting of shares of capital stock of TDS by
any other holders or persons entitled to vote such shares, may result, in the
good faith judgment of the Board, in the loss of, or the failure to secure the
reinstatement of, or the denial of applications for or the renewal of, any
license or franchise from any governmental agency held by TDS or any of its
subsidiaries, or any person in which TDS has any direct or indirect ownership or
voting interest.
The redemption price of the shares to be redeemed will be equal to the
lesser of (i) the fair market value of such shares or (ii) if such shares were
purchased by the disqualified holder within one year of the redemption date, the
disqualified holder's purchase price for such shares (the "Required Price"). The
fair market value of a share of capital stock of any class or series of TDS
means the average closing price for such a share for each of the 20 most recent
days on which shares of capital stock of such class or series have traded
preceding the day on which notice of redemption is given, except that if shares
of capital stock of such class or series are not traded on any securities
exchange or in the over-the-counter market, "fair market value" will be
determined by the Board in good faith. The redemption price of such shares may
be paid in cash, securities or any combination thereof.
TDS may redeem any shares from disqualified holders in exchange for any debt
or equity securities (other than Series A Common Shares or securities
convertible into or exchangeable for, or carrying a right to subscribe to or
acquire, Series A Common Shares) of TDS, any of its subsidiaries or any other
corporation, or any combination thereof, having such terms and conditions as may
be approved by the Board and which, together with any cash to be paid as part of
the redemption price, in the opinion of any nationally recognized investment
banking firm selected by the Board, has a value at the time of notice of
redemption at least equal to the Required Price.
If less than all the shares held by disqualified holders are to be redeemed,
the shares to be redeemed will be selected in a manner to be determined by the
Board, which may include selection first of the most recently purchased shares
thereof, selection by lot or selection in any other manner determined by the
Board.
At least 30 days' written notice of the redemption date will be given to the
record holders of the shares selected to be redeemed (unless waived in writing
by any such holder), except that the redemption date may be the date on which
written notice is given to record holders if the cash or securities necessary to
effect the redemption is deposited in trust for the benefit of such record
holders and subject to immediate withdrawal by them upon surrender of the stock
certificates for their shares to be redeemed.
87
<PAGE>
DESCRIPTION OF PREFERRED SHARES
The Restated Certificate authorizes the issuance of up to 326,664 Preferred
Shares, having substantially the same rights, limitations and privileges as the
Preferred Shares issued prior to the Merger. All obligations with respect to the
issued Preferred Shares are attributed to the TDS Group. The Preferred Shares
which are currently convertible into Common Shares will become convertible into
Telecom Group Shares, Cellular Group Shares and Aerial Group Shares, as well as
Common Shares, as a result of the Distribution. If and when such Preferred
Shares are converted, the shares to be issued upon such conversion will be
issued either from the Retained Interest, or from authorized but unissued
Telecom Group Shares, Cellular Group Shares and Aerial Group Shares, as the case
may be, provided that, if such shares are issued from authorized but unissued
shares, the TDS Group will be charged, and such other Groups will be credited,
with an amount equal to the product of the number of shares of Tracking Stock of
such Groups which are issued upon conversion and the Market Value of one share
of such Tracking Stock over the twenty-Trading Day period ending five Trading
Days prior to the issuance of such shares.
DESCRIPTION OF SERIES A COMMON SHARES, COMMON SHARES AND SPECIAL COMMON SHARES
The Series A Common Shares, Common Shares, any issued Special Common Shares
and any other shares so designated by the Board (including the issued Preferred
Shares) represent the entire equity interest in the TDS Group.
VOTING RIGHTS. In the election of directors, the holders of Preferred
Shares issued before October 31, 1981 and Common Shares vote together with the
holders of Tracking Stocks and any issued Special Common Shares, in the election
of 25% of the directors (rounded up) plus one additional director (or four
directors based on a Board of twelve directors). The Preferred Shares issued
before October 31, 1981 and Common Shares have one vote per share in the
election of such directors and all other matters (other than the election of the
directors described in the following paragraph).
The holders of Preferred Shares issued after October 31, 1981 and Series A
Common Shares vote in the election of 75% of the directors (rounded down), less
one director. Based on a Board of twelve directors, such holders would vote in
the election of eight directors. Each of the currently outstanding Preferred
Shares issued after October 31, 1981 has one vote and Series A Common Shares
have ten votes per share in the election of such directors, as well as all other
matters (other than the election of the directors elected by the voting group
described in the preceding paragraph).
If the number of Series A Common Shares issued and outstanding at any time
falls below 500,000, because of the conversion of Series A Common Shares or
otherwise, the holders of Series A Common Shares would lose the right to vote as
a separate class (with the holders of Preferred Shares issued after October 31,
1981 which have voting rights) in the election of approximately 75% of the
directors less one director, and thereafter the holders of Series A Common
Shares (with ten votes per share) would vote with the holders of all other
classes of capital stock as a single class in the election of all directors. In
such election, holders of Common Shares and any issued Special Common Shares
would have one vote per share, holders of Tracking Stock would have per share
voting rights which would float, as discussed below, and Preferred Shares would
have the voting rights specified in the Restated Certificate or designation. It
is unlikely that the number of outstanding Series A Common Shares will fall
below 500,000, because more than 6,000,000 Series A Common Shares are held in
the TDS Voting Trust, and the trustees of the TDS Voting Trust have indicated
that they have no present intention of converting Series A Common Shares into
Common Shares.
Actions submitted to a vote of shareholders other than the election of
directors will generally be voted on only by holders of Common Shares, Series A
Common Shares and series of Preferred Shares which have voting rights. Under the
Restated Certificate, except as required under the DGCL, only the affirmative
vote of the holders of a majority of the outstanding voting power of the Common
Shares, Series A Common Shares and such voting Preferred Shares, voting as a
group, is required to amend the
88
<PAGE>
Restated Certificate, approve any merger or consolidation of TDS with or into
any other corporation, approve the dissolution of TDS or approve any other
matter required to be voted on by shareholders. However, under Delaware law, the
holders of the outstanding shares of a class are entitled to vote as a class
upon a proposed amendment, whether or not entitled to vote thereon by the
certificate of incorporation, if the amendment would increase or decrease the
par value of the shares of such class or alter or change the powers, preferences
or special rights of the shares of such class so as to affect them adversely.
The Board has proposed an amendment to the Restated Certificate which would
require a class vote by a majority of the holders of the Common Shares and
Series A Common Shares, each voting separately as a class, for approval of
certain mergers or consolidations of TDS. See "--Proposed Amendments to Restated
Certificate." As discussed above, the Restated Certificate permits the number of
authorized shares of any class of capital stock to be increased or decreased
(but not below the number of shares then outstanding in such class,
respectively) by the affirmative vote of a majority of the voting power of the
shares of capital stock entitled to vote with respect to matters other than the
election of directors, without a class vote of the affected class. The Board has
also proposed an amendment to the Restated Certificate which would require a
class vote by a majority of the holders of Common Shares to increase or decrease
the authorized number of Common Shares and would require a class vote by a
majority of the holders of Series A Common Shares to increase or decrease the
authorized number of Series A Common Shares. See "--Proposed Amendments to
Restated Certificate."
DIVIDENDS. Subject to the satisfaction of all Preferred Share dividend
preference and redemption provisions, holders of common stock are entitled to
receive such dividends as may be declared from time to time by the Board.
Dividends on each of the Common Shares, the Series A Common Shares and any
issued Special Common Shares are payable out of the lesser of assets of the
Company legally available therefor and the Available Dividend Amount for the TDS
Group. See "--Certain Definitions." Subject to the foregoing provisions,
notwithstanding the Available Dividend Amount for any Group, the respective
amounts of prior dividends paid on, or liquidation rights of any shares of
common stock, or any other factor, dividends may be declared and paid with
respect to any class or series of common stock in equal or unequal amounts,
except that, except as described below, unless the same dividends, on a per
share basis, are declared and paid at the same time on any issued Special Common
Shares, no dividends may be declared or paid on the Common Shares and, unless
the same, or greater, dividends, on a per share basis, are declared and paid at
the same time on the Common Shares and any issued Special Common Shares, no
dividends may be declared or paid on the Series A Common Shares.
Any decision to pay dividends in the future will depend on the financial
condition, results of operations and business requirements of the Company as a
whole. In making a determination as to the allocation of any future dividends
among the classes or series of common stock, the Board expects to follow a
policy under which it will consider, among other factors, the relative financial
condition, results of operations and business requirements of the respective
Groups. See "Dividend Policy."
CHANGES IN CAPITAL STRUCTURE. In no event will any of the Common Shares,
Series A Common Shares, or Special Common Shares be split, subdivided or
combined unless all such classes are proportionately split, subdivided or
combined.
DESCRIPTION OF TERMS OF TELECOM GROUP SHARES AND THE OTHER TRACKING STOCKS
The following summarizes certain terms of the Telecom Group Shares. The
terms of the Cellular Group Shares and the Aerial Group Shares are substantially
similar to the terms of the Telecom Group Shares. See Annex A--Illustration of
Certain Terms, for illustrations of certain of the provisions described under
this section.
89
<PAGE>
The following table shows the Telecom Group Shares that would be issued,
issuable to third parties, authorized for various purposes and available for
issuance following the Offerings and the Distribution based on shares
outstanding at April 30, 1998.
<TABLE>
<CAPTION>
PRO FORMA TELECOM GROUP SHARES
----------------------------------------
RETAINED
OUTSTANDING INTEREST TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Telecom Group Shares issued in the Offerings............................ 13,500,000(1) -- 13,500,000
Distribution............................................................ 40,650,331 13,550,110 54,200,441
------------ ------------ ------------
Telecom Group Shares.............................................. 54,150,331 13,550,110 67,700,441
------------ ------------ ------------
SHARES ISSUABLE TO THIRD PARTIES(2):
Committed Acquisition Shares.......................................... 27,015 (27,015) --
Pre-Distribution Convertible Securities
TDS Preferred Shares................................................ 578,539 (578,539) --
Existing Plans...................................................... 383,350 (383,350) --
------------ ------------ ------------
Subtotal.......................................................... 988,904 (988,904) --
------------ ------------ ------------
SHARES RESERVED FOR ISSUANCE:
Existing Plans........................................................ 267,084 -- 267,084
1998 Long-Term Incentive Plan......................................... 2,500,000 -- 2,500,000
Tax-Deferred Savings Plan............................................. 175,000 -- 175,000
Acquisitions.......................................................... 3,172,985 -- 3,172,985
Dividend Reinvestment Plan............................................ 150,000 -- 150,000
------------ ------------ ------------
Subtotal.......................................................... 6,265,069 -- 6,265,069
------------ ------------ ------------
Pro Forma Telecom Group Shares Issued, Issuable and Reserved for
Issuance.............................................................. 61,404,304 12,561,206 73,965,510
Shares Available for Issuance........................................... 16,034,490 -- 16,034,490
------------ ------------ ------------
Total............................................................. 77,438,794 12,561,206 90,000,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- ------------------------
(1) Assumes the Underwriters do not exercise their over-allotment options.
(2) These shares would be issuable from the Retained Interest.
VOTING RIGHTS. In the election of directors, the holders of Telecom Group
Shares vote together with the holders of other Tracking Stocks, Preferred Shares
issued before October 31, 1981, Common Shares and any issued Special Common
Shares, as well as any issued Undesignated Shares which have been designated to
vote in such group (collectively, the "Public Holders"), in the election of 25%
of the directors plus one additional director (or four directors based on a
Board of twelve directors). Each of the Preferred Shares issued before October
31, 1981 and Common Shares, as well as any issued Special Common Shares (the
"One-Vote Holders"), would have one vote per share in the election of such
directors. In the election of such directors, each share of Tracking Stock would
initially have one vote per share. Thereafter, the number of votes which shares
of each class of Tracking Stock would have in the election of such directors
would be adjusted or "float" in proportion to the aggregate Market
Capitalization of such class as compared to the aggregate Market Capitalization
of the shares held by the Public Holders, and would be calculated using Market
Values over the twenty-Trading Day period ending ten Trading Days prior to the
record date for each annual meeting of shareholders.
In the election of directors elected by the Public Holders, the proportion
of the total votes of the Public Holders held by Telecom Group Shares is equal
to the percentage (the "Voting Percentage") equal to 100% multiplied by the
average daily ratio (calculated to three decimal places) of the aggregate Market
Capitalization of the Telecom Group Shares to the aggregate Market
Capitalization of the Preferred
90
<PAGE>
Shares issued before October 31, 1981, Common Shares, Telecom Group Shares,
Cellular Group Shares, Aerial Group Shares and Special Common Shares, if any are
outstanding, and any outstanding Undesignated Shares which have been designated
to vote with the Public Holders, calculated for the twenty-Trading Day period
(the "Calculation Period") ending ten Trading Days prior to the record date for
each annual meeting of shareholders (the "Adjustment Date"). In the election of
such directors, the per share voting power of each class of Tracking Stock will
be calculated on the basis that all shares of stock held by the One Vote Holders
have one vote per share for such purposes.
As an illustration, if on any Adjustment Date, the One-Vote Holders
represent 20% of the Market Capitalization of the Public Holders, the shares of
Tracking Stock in the aggregate would have 80% of the voting power of the Public
Holders in the election of directors elected by the Public Holders. If there
were 53,000,000 shares held by the One Vote Holders, each with one vote per
share, the total voting power of the Public Holders would be 265,000,000 votes,
determined by dividing 53,000,000 by 20%. The aggregate voting power of the
shares of Tracking Stock would be 212,000,000 votes, determined by subtracting
53,000,000 from 265,000,000. The proportion of votes which the Telecom Group
Shares and each other class of Tracking Stock would have in the aggregate would
be determined by multiplying 265,000,000 by the Voting Percentage of the Telecom
Group Shares and each such other class of Tracking Stock. The number of votes
per share of the Telecom Group Shares and each other class of Tracking Stock
would be determined by dividing the aggregate voting power of such class,
determined pursuant to the preceding sentence, by the average number of issued
and outstanding shares of the Telecom Group Shares and each such other class of
Tracking Stock during the Calculation Period. Any shares held in the Retained
Interest or Inter-Group Interest would not have any votes. See "Management and
Allocation Policies--The Retained Interest" and "--The Inter-Group Interest."
Accordingly, in the election of directors elected by the Public Holders,
beginning on the first Adjustment Date prior to the record date for an annual
meeting of shareholders after issuance of the Tracking Stock, each Telecom Group
Share may have more or less than one vote per share. It is expected that the
Telecom Group Shares will initially have approximately one vote per share based
on anticipated market values. The Market Capitalization of the classes of stock
could be influenced by many factors, including the results of operations of the
Company and each of the Groups, the regulatory environment, trading volume,
share issuances and repurchases and general economic and market conditions. Such
changes in the aggregate votes or relative voting power of the Telecom Group
Shares could result from the market's reaction to a decision by the Company's
management or Board that is perceived to disparately affect one class of common
stock in comparison to another. See "Risk Factors--Risks Related to Capital
Structure and the Telecom Group Shares--Management and Allocation Policies."
The periodic adjustments in the number of votes of Telecom Group Shares will
reduce the opportunity of investors in Telecom Group Shares to acquire for the
same aggregate consideration relatively greater voting power per share in the
election of directors elected by the Public Holders than investors in the other
classes. Because the adjustment of voting power will occur only annually, some
disparity in the voting power purchasable for a specified dollar amount may
exist among the Tracking Stocks from time to time.
The "Market Capitalization" of any class or series of capital stock of the
Company on any Trading Day means the product of (i) the Market Value of one
share of such class or series on such trading day and (ii) the number of shares
of such class or series outstanding on such Trading Day. The per share Market
Value of the Preferred Shares shall be the liquidation value per share. For this
purpose, if on any Adjustment Date with respect to an annual meeting, Special
Common Shares are issued and outstanding but are not listed on a stock exchange
or otherwise traded in the over-the-counter market, Special Common Shares will
be deemed to have a Market Value per share equal to the per share Market Value
of Common Shares with respect to that record date.
91
<PAGE>
The Telecom Group Shares are not entitled to any votes per share except in
the election of certain directors and to the extent that separate class or
series votes are required by the DGCL. Actions submitted to a vote of
shareholders other than the election of directors will generally be voted on
only by holders of Common Shares, Series A Common Shares and series of Preferred
Shares which have voting rights. Under the Restated Certificate, except as
required under the DGCL, only the affirmative vote of the holders of a majority
of the outstanding voting power of the Common Shares, Series A Common Shares and
such voting Preferred Shares, voting as a group, will be required to amend the
Restated Certificate, approve any merger or consolidation of TDS with or into
any other corporation, approve the dissolution of TDS or approve any other
matter required to be voted on by shareholders. However, under Delaware law, the
holders of the outstanding shares of a class are entitled to vote as a class
upon a proposed amendment, whether or not entitled to vote thereon by the
certificate of incorporation, if the amendment would increase or decrease the
par value of the shares of such class or alter or change the powers, preferences
or special rights of the shares of such class so as to affect them adversely.
DIVIDENDS. Subject to the legal restrictions on the payment of dividends
described below, the Board currently intends to establish an annual dividend on
the Telecom Group Shares in an amount equal to $0.50 per share. Following the
Distribution, the Board also currently intends to establish an annual dividend
on the Common Shares and Series A Common Shares in an amount equal to $0.11 per
share. Dividends are expected to be paid quarterly and will be paid on Telecom
Group Shares issued in the Offerings if outstanding prior to the Distribution.
Any decision to pay dividends in the future will depend on the financial
condition, results of operations and business requirements of the Company as a
whole. In making a determination as to the allocation of any future dividends
between the Cellular Group Shares, the Telecom Group Shares and the Aerial Group
Shares, as well as the Common Shares, the Series A Common Shares and any issued
Special Common Shares, the Board expects to follow a policy under which it will
consider, among other factors, the relative financial condition, results of
operations and business requirements of the respective Groups.
The Company's assets consist almost entirely of investments in its
subsidiaries. Furthermore, the initial assets of each of the Tracking Groups
consist almost entirely of the Company's investment in a subsidiary (i.e., U.S.
Cellular, TDS Telecom and Aerial). As a result, the Company's ability to pay
dividends on any class of Tracking Stock is dependent in part on the earnings
of, or other funds available to, such subsidiaries and the distribution or other
payment of such earnings or other funds from such subsidiaries to the Company in
the form of dividends, loans or other advances, payment or reimbursement of
management fees and expenses and repayment of loans and advances from the
Company. Such subsidiaries are separate and distinct legal entities and have no
obligation, contingent or otherwise, to pay the dividends on any class or series
of preferred stock of the Company or to make any funds available therefor,
whether by dividends, loans or other payments. The payment of dividends or the
making of loans and advances to the Company by such subsidiaries may be subject
to statutory or regulatory restrictions, are contingent upon the earnings of
those subsidiaries and are subject to various business considerations.
Dividends on all classes of capital stock are limited to the assets of the
Company legally available for the payment of dividends. The amount of assets of
the Company legally available for the payment of dividends will be reduced by
the amount of any net losses of the Groups and any dividends or distributions
on, or repurchases of, any class of common stock, and dividends on, or certain
repurchases of, Preferred Shares. Additionally, the assets of the Company
available for the payment of dividends may be restricted by future loan
agreements which certain subsidiaries of the Company may enter into, or become
subject to, and such loan agreements may contain provisions that restrict or
otherwise limit the amount of dividends that those companies may pay.
In addition to the limitations set forth in the foregoing paragraph,
dividends will be further limited to an amount not in excess of the applicable
Available Dividend Amount, which, in the case of the Telecom Group, is intended
to be similar to the amount that would be legally available for the payment of
dividends
92
<PAGE>
on the Telecom Group Shares under the DGCL if the Telecom Group were a separate
Delaware corporation. There can be no assurance that there will be an Available
Dividend Amount with respect to the Telecom Group.
The "Available Dividend Amount" for the Telecom Group, as of any date, means
the product of the Outstanding Interest Fraction and either (i) the excess of
(a) an amount equal to the total assets of the Telecom Group less the total
liabilities (not including preferred stock) of the Telecom Group as of such date
over (b) the aggregate par value of, or any greater amount determined to be
capital in respect of, all outstanding shares of the Telecom Group Shares and
each class or series of Preferred Shares or Undesignated Shares attributed to
the Telecom Group; or (ii) in case there is no such excess, an amount equal to
the Company Earnings (Losses) attributable to the Telecom Group (if positive)
for the fiscal year in which such date occurs and/or the preceding fiscal year.
At the time of any dividend or other distribution on the outstanding Telecom
Group Shares (including any dividend of the Fair Value of the Net Proceeds from
the Disposition of all or substantially all of the properties and assets of a
Tracking Group as described under "--Disposition of Assets of Tracking Group"),
the TDS Group (if at such time there is a Retained Interest), or another
Tracking Group (if at such time there is an Inter-Group Interest by such other
Tracking Group in the Telecom Group Shares), will be credited, and the Telecom
Group will be charged (in addition to the charge for the dividend or other
distribution paid or distributed in respect of the outstanding Telecom Group
Shares), with an amount equal to the product of (i) the aggregate amount of such
dividend or distribution paid or distributed in respect of the outstanding
Telecom Group Shares times (ii) a fraction, the numerator of which is (a) the
Retained Interest Fraction or (b) any Inter-Group Interest Fraction in the
Telecom Group, as the case may be, and the denominator of which is the
Outstanding Interest Fraction for the Telecom Group, respectively.
SHARE DISTRIBUTIONS. The right of holders of the Telecom Group Shares to
receive a distribution of shares of capital stock of the Company is limited to
the right to receive (i) a distribution of Telecom Group Shares (or Convertible
Securities convertible into or exercisable or exchangeable for Telecom Group
Shares), (ii) shares of Tracking Stock of another Tracking Group (or Convertible
Securities convertible into or exercisable or exchangeable for such Tracking
Group) up to the amount of any Inter-Group Interest in such other Tracking Group
or (iii) shares of a new class or series of capital stock which is intended to
represent a subdivision or new business of the Telecom Group or any assets
attributed by the Board to the Telecom Group. Holders of Telecom Group Shares
may not receive any TDS Group Shares as a dividend since the Telecom Group may
not have an Inter-Group interest in the TDS Group.
DISTRIBUTION OF SUBSIDIARY OF TELECOM GROUP IN DIVIDEND. The Restated
Certificate provides that if the Board intends to distribute a subsidiary
included in the Telecom Group (other than a Qualifying Subsidiary or Qualifying
Subsidiaries which hold all of the assets and liabilities of the Telecom Group)
to the holders of Telecom Group Shares in a dividend, and there is a Retained
Interest in the Telecom Group, the Board shall, to the extent practicable,
distribute subsidiary shares corresponding to Special Common Shares to the
holders of Telecom Group Shares with respect to the outstanding Telecom Group
Shares. Holders of TDS Group Shares and shares of any other Tracking Stock will
not be entitled to participate in such distribution of any shares of a
subsidiary in a dividend or otherwise which is attributable to Telecom Group
Shares, except with respect to a Retained Interest by the TDS Group or an
Inter-Group Interest by another Tracking Group. The subsidiary shares relating
to any Retained Interest or Inter-Group Interest may be retained by the Company
for the benefit of the TDS Group or any other Tracking Group, respectively, or
distributed pro rata to the holders of the TDS Group Shares or the applicable
Tracking Stock, at the sole discretion of the Board.
If the Board determines to distribute subsidiary shares with respect to such
a Retained Interest or Inter-Group Interest, it must, to the extent practicable,
distribute subsidiary shares corresponding to Special Common Shares to the
holders of Tracking Stock of such other Tracking Group with respect to any
93
<PAGE>
such Inter-Group Interest, and distribute subsidiary shares corresponding to
Series A Common Shares to the holders of Series A Common Shares, subsidiary
shares corresponding to Common Shares to the holders of Common Shares, and
subsidiary shares corresponding to Special Common Shares to the holders of
Special Common Shares with respect to any Retained Interest in the Telecom
Group, provided that the same number of shares of subsidiary common stock on a
combined basis must be distributed for each Series A Common Share, Common Share
and any issued Special Common Share.
The Restated Certificate provides that, if practicable, the Board must
recapitalize such subsidiary through an amendment to its charter or otherwise,
so that the shares of capital stock of such subsidiary and the relative rights,
limitations and preferences thereof substantially correspond to the Series A
Common Shares, Common Shares and Special Common Shares of the Company and their
relative rights, limitations and preferences, as may be determined to be
necessary or appropriate in the sole discretion of the Board, in order to permit
the distribution to be effected in the foregoing manner. The Restated
Certificate provides further that, if the subsidiary has or will have shares
corresponding to Series A Common Shares and Common Shares but does not have and
will not have shares corresponding to Special Common Shares and it is
impracticable to recapitalize the subsidiary to create Special Common Shares as
provided in the preceding sentence, the Board must distribute subsidiary shares
corresponding to Common Shares to the holders of Special Common Shares and to
holders of Tracking Stock who would otherwise be entitled to receive subsidiary
shares corresponding to Special Common Shares.
DISTRIBUTION OF SUBSIDIARY OF TDS GROUP OR ANOTHER TRACKING GROUP. Holders
of Telecom Group Shares will not be entitled to participate in a distribution of
any shares of a subsidiary in a dividend or otherwise which is attributable to
the TDS Group. Holders of Telecom Group Shares may, at the sole discretion of
the Board, participate in a distribution of a subsidiary of any other Tracking
Group, up to the amount of any Inter-Group Interest in such other Tracking
Group. If there is a Retained Interest in the Tracking Group which is
distributing subsidiary shares, all holders of Tracking Stock receiving a
distribution of subsidiary shares would normally receive subsidiary shares
corresponding to Special Common Shares.
LIQUIDATION RIGHTS. Subject to the following paragraph, in the event of a
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Company and subject to the prior payment in full of the
preferential amounts to which any class or series of Preferred Shares or
Undesignated Shares is entitled, the holders of the outstanding shares of common
stock will be entitled to receive the remaining assets of the Company,
regardless of the Group to which such assets are attributed, divided among the
holders of common stock in accordance with the per share "Liquidation Units"
attributable to each class of Common Stock. Each Series A Common Share, Common
Share and Special Common Share is attributed one Liquidation Unit, each Telecom
Group Share is attributed 0.9 of a Liquidation Unit, each Cellular Group Share
is attributed 2.5 Liquidation Units, and each Aerial Group Share is attributed
1.1 Liquidation Units. However, in the event of a liquidation, dissolution or
winding-up of the Company, the amount to be received by each holder of the
respective classes may not bear any relationship to the relative fair market
values or the relative voting rights of the classes. The Liquidation Units per
share were determined by the Board in consultation with the Company's financial
advisors, based on the anticipated initial trading ranges of the shares of
common stock and other factors. The Liquidation Unit of each class or series of
common stock will be adjusted by the Board as appropriate to reflect equitably
any subdivision (by stock split or otherwise) or combination (by reverse stock
split or otherwise) of such class of common stock or any dividend or other
distribution of shares with respect to such class of common stock. Whenever a
change in the Liquidation Units with respect to any class or series of common
stock occurs, the Company will prepare and distribute a notice of such change to
all holders of shares of stock of such class or series of common stock, together
with a notice of such stock split, reverse split, distribution or other
transaction requiring such change.
Prior to the distribution of the remaining assets of the Company as set
forth in the preceding paragraph, the Board may redeem all shares of Tracking
Stock of all Tracking Groups in exchange for
94
<PAGE>
shares of a Qualifying Subsidiary or Qualifying Subsidiaries holding all of the
assets and liabilities of the related Tracking Group, as described under
"--Redemption in Exchange for Stock of Subsidiary." In such event, all shares of
Tracking Stock would be redeemed immediately prior to the liquidation,
dissolution or winding-up and the Series A Common Shares, Common Shares and any
issued Special Common Shares would share PARI PASSU in any assets remaining for
distribution after such redemptions.
A consolidation, merger, or reorganization of the Company with any other
corporation or corporations, or a sale of all or substantially all of the assets
of the Company, will not be considered a dissolution, liquidation, or winding up
of the Company within the meaning of these provisions.
CONVERSION AT THE OPTION OF THE HOLDER. Telecom Group Shares are not
convertible into shares of any other class of common stock at the option of the
holder.
PREEMPTIVE RIGHTS. No holders of Telecom Group Shares or any other class or
series of capital stock of the Company have any preemptive right under the terms
of the Restated Certificate to acquire or subscribe for any additional shares of
capital stock or other obligations convertible into or exercisable for shares of
capital stock that may hereafter be issued by the Company.
DISPOSITION OF ASSETS OF THE TELECOM GROUP. If the Company disposes of all
or substantially all of the properties and assets of the Telecom Group (defined
as 80% or more of the then current market-value (as determined by the Board) of
the properties and assets of the Telecom Group as of such date) (a
"Disposition") in one transaction or a series of related transactions with any
one or more persons, entities or groups, other than in a transaction referred to
in the following paragraph, the Company is required to take one of the actions
listed in the fourth paragraph of this Section on or prior to the 90th Trading
Day following the consummation of a Disposition.
The requirement in the preceding paragraph does not apply to a Disposition
(i) in connection with the disposition by the Company of all of the Company's
properties and assets in one transaction or a series of related transactions or
in connection with the liquidation, dissolution or winding up of the Company,
(ii) by dividend, other distribution or redemption in accordance with any
provision described under "--Dividends," "--Share Distributions,"
"--Distribution of Tracking Group Subsidiary in Dividend," "--Redemption in
Exchange for Stock of Subsidiary" or "--Liquidation Rights," (iii) to any
person, entity or group which the Company, directly or indirectly, after giving
effect to the Disposition, controls or (iv) in connection with a Related
Business Transaction.
The Related Business Transaction exception to the requirements in the
following paragraph would enable the Company to enter into transactions in which
the properties or assets of the Telecom Group may be considered to be "disposed
of" in exchange for equity securities of an entity engaged or proposing to
engage in similar or complementary business areas to those of the Telecom Group
while maintaining the capital structure and delineation of the Tracking Stocks.
Other than as described above, the Company is required to take one of the
following actions in the event of a Disposition:
(i) subject to the limitations described above under "--Dividends,"
declare and distribute a special dividend in cash, securities or other
property or any combination thereof (other than a dividend or distribution
of common stock of the Company) to the holders of the outstanding Telecom
Group Shares, in an aggregate amount equal to the product of the applicable
Outstanding Interest Fraction as of the record date for determining the
holders entitled to receive such dividend and the Fair Value of the Net
Proceeds of such Disposition;
(ii) provided that there are assets of the Company legally available
therefor and the Available Dividend Amount for the Telecom Group Shares
would have been sufficient to pay a dividend in lieu thereof as described in
clause (i) of this paragraph, then:
(A) if such Disposition involves all (not merely substantially all) of
the properties and assets of the Telecom Group, redeem all of the
outstanding Telecom Group Shares in exchange for
95
<PAGE>
cash, securities or other property (other than common stock of the
Company) or any combination thereof in an aggregate amount equal to
the product of the Adjusted Outstanding Interest Fraction for the
Telecom Group as of the date of such complete redemption and the Fair
Value of the Net Proceeds of such Disposition; or
(B) if such Disposition involves substantially all (but not all) of the
properties and assets of the Telecom Group, apply an aggregate amount
of cash, securities or other property (other than common stock of the
Company) or any combination thereof equal to the product of the
Telecom Group's Outstanding Interest Fraction as of the date shares
are selected for redemption and the Fair Value of the Net Proceeds of
such Disposition to the redemption of outstanding Telecom Group
Shares, on a pro rata basis or by lot; or
(iii) convert each outstanding Telecom Group Share into a number (or
fraction) of fully paid and nonassessable Special Common Shares or shares of
any other class or classes of Tracking Stock (or any combination thereof on
a pro rata basis) equal to 110% (the "Disposition Conversion Percentage") of
the average daily ratio (calculated to the nearest five decimal places) of
the Market Value of (A) one Telecom Group Share to (B) the Market Value of
one Special Common Share or share of such other class or classes of Tracking
Stock (or any combination thereof on a pro rata basis) during a forty-
Trading Day period beginning on the 11th Trading Day after consummation of
the Disposition.
In the event of conversion of the Telecom Group Shares into Special
Common Shares or shares of another class of Tracking Stock, the Fair Value
of the Net Proceeds of such Disposition will be attributed to the Group
related to the shares which are issued upon such conversion (on a pro rata
basis if a combination of such shares are issued).
In the event there is no public market price for the Special Common
Shares, the Market Value per share will be deemed to be the same as the per
share Market Value of Common Shares.
The Company may elect to pay the dividend or redemption price referred to in
clause (i) or (ii) of the preceding paragraph either in the same form as the
proceeds of the Disposition were received or in any other combination of cash or
securities or property (other than common stock of the Company), on a pro rata
basis, that the Board determines will have an aggregate market value on a fully
distributed basis, of not less than the amount of the Fair Value of the Net
Proceeds of such Disposition.
If the dividend or redemption is paid in securities of an issuer other than
the Company (the "Successor"), and if there is a Retained Interest in the
Telecom Group at such time, the Board shall, to the extent practicable,
distribute Successor shares corresponding to Special Common Shares to the
holders of Telecom Group Shares. Holders of TDS Group Shares and shares of any
other Tracking Stock will not be entitled to participate in such distribution of
any shares of a Successor in a dividend or redemption which is attributable to
the Telecom Group Shares, except with respect to a Retained Interest by the TDS
Group or an Inter-Group Interest attributed to another Tracking Group. The
Successor shares relating to any Retained Interest or Inter-Group Interest may
be retained by the Company and attributed to the TDS Group or the other Tracking
Group, respectively, or distributed pro rata to the holders of the TDS Group
Shares or the applicable Tracking Stock, at the sole discretion of the Board.
If the Board determines to distribute Successor shares with respect to such
a Retained Interest or Inter-Group Interest, it must, to the extent practicable,
distribute Successor shares corresponding to Special Common Shares to the
holders of Tracking Stock of another Tracking Group with respect to any such
Inter-Group Interest, and distribute Successor shares corresponding to Series A
Common Shares to the holders of Series A Common Shares, Successor shares
corresponding to Common Shares to the holders of Common Shares, and Successor
shares corresponding to Special Common Shares to the holders of Special Common
Shares with respect to any Retained Interest in such Tracking Group, provided
that the same number of shares of Successor common stock on a combined basis
must be distributed for each Series A Common Share, Common Share and any issued
Special Common Share.
96
<PAGE>
If practicable, the Board must cause such Successor to be recapitalized
through an amendment to its charter or otherwise, so that the issued and
authorized shares of capital stock of such Successor and the relative rights,
limitations and preferences thereof substantially correspond to the Series A
Common Shares, Common Shares and Special Common Shares of the Company and their
relative rights, limitations and preferences, as may be determined to be
necessary or appropriate in the sole discretion of the Board, in order to permit
the distribution to be effected in the foregoing manner.
The option to convert the Telecom Group Shares into Special Common Shares or
shares of another class of Tracking Stock in the event of a Disposition provides
the Company with additional flexibility by allowing the Company to deliver
consideration in the form of Special Common Shares or shares of another class or
classes of Tracking Stock rather than cash or securities or other properties.
This alternative could be used, for example, in circumstances when the Company
did not have sufficient legally available assets under the DGCL to pay the full
amount of an otherwise required dividend or redemption or when the Company
desired to retain such proceeds. In addition, under current tax laws, the
conversion of Telecom Group Shares into Special Common Shares or shares of
another class of Tracking Stock should not be taxable to shareholders, whereas a
dividend or redemption would be taxable to shareholders. See "Certain Federal
Income Tax Consequences."
The "Fair Value of the Net Proceeds" means the fair value of the gross
proceeds of such Disposition after payment of or provision for certain specified
costs, including taxes related to the Disposition or a dividend or redemption in
connection therewith, transaction costs and liabilities and other obligations
(contingent or otherwise), including obligations in respect of committed
acquisitions, Preferred Shares or Convertible Securities attributed to the
Telecom Group (without duplication). See "Certain Definitions."
The Board has complete discretion as to which of the above-referenced
options to select. However, once the disposition option selected by the Board is
publicly announced, the selection becomes irrevocable. The Board is not required
to select the disposition option which would result in the distribution with the
highest value to the holders of the shares of the Telecom Group Shares or with
the smallest effect on the remaining classes and series of the Company's common
stock. In the event of a Disposition, the Company is not required to make any
payment or other distributions to the holders of Common Shares, Series A Common
Shares, Special Common Shares or shares of any class of Tracking Stock other
than the Telecom Group Shares. However, the Company may, at the option of the
Board, make a distribution to such other shareholders in respect of any Retained
Interest or any Inter-Group Interest in the Telecom Group existing at the time
of a Disposition.
The Company may, at any time prior to the first anniversary of a dividend
on, or partial redemption of, Telecom Group Shares following a Disposition,
convert each remaining outstanding share of Telecom Group Shares into a number
(or fraction) of Special Common Shares or shares of any other class or classes
of Tracking Stock equal to the product of the Disposition Conversion Percentage
and the average daily ratio (calculated to the nearest five decimal places) of
the Market Value of one Special Common Share or share of such other class or
classes of Tracking Stock during a twenty-Trading Day period ending on the fifth
Trading Day prior to the date of notice of such conversion.
The effect of using the Adjusted Outstanding Interest Fraction, instead of
the Outstanding Interest Fraction, in the determination of amounts to be paid in
redemption of Telecom Group Shares following a Disposition of all of the
properties and assets of the Telecom Group is to allocate to the TDS Group a
portion of the Fair Value of the Net Proceeds of the Disposition, in addition to
the amount so allocated in respect of the Retained Interest, sufficient to
provide for the delivery of the portion of the consideration deliverable by the
Company with respect to Shares Issuable to Third Parties. To the extent such
Shares Issuable to Third Parties are included in the determination of the
Adjusted Outstanding Interest Fraction, the Company's obligations in respect of
such securities would not be a reduction in the calculation of the Fair Value of
the Net Proceeds.
97
<PAGE>
In the event any redemption of Telecom Group Shares is made in circumstances
in which cash, securities or property are allocated to the TDS Group in respect
of Shares Issuable to Third Parties (such cash, securities or other property,
the "Reserved Property"), the Company will be permitted to segregate and hold
such property separate (in the case of any Reserved Property other than Special
Common Shares or shares of another class of Tracking Stock). In the event the
Reserved Property is, for any reason, not delivered with respect to the
obligations under the Shares Issuable to Third Parties, then the former holders
of Telecom Group Shares shall have no interest in such Reserved Property, and
such Reserved Property shall revert to the TDS Group, subject to escheat laws.
In the event of any conversion of Telecom Group Shares into Special Common
Shares or shares of any other Tracking Stock, the Company will reserve Special
Common Shares or shares of such other class of Tracking Stock issuable with
respect to Shares Issuable to Third Parties.
If less than substantially all of the properties and assets of the Telecom
Group are disposed of by the Company in one transaction, the Company would not
be required to pay a dividend on, redeem or convert the outstanding Telecom
Group Shares even if an additional transaction were consummated at a later time
in which additional properties and assets of the Telecom Group were disposed of
by the Company, which, together with the properties and assets disposed of in
the first transaction, would have constituted substantially all of the
properties and assets of the Telecom Group at the time of the first transaction,
unless such transactions constituted a series of related transactions. The
second transaction, however, could trigger such a requirement if, at the time of
the second transaction, the properties and assets disposed of in such
transaction constituted at least substantially all of the properties and assets
of the Telecom Group at such time. If less than substantially all of the
properties and assets of the Telecom Group were disposed of by the Company, the
proceeds would be allocated to the Telecom Group, but the holders of Telecom
Group Shares would not be entitled to receive any dividend or have their shares
redeemed or converted for Special Common Shares or shares of any other Tracking
Stock, although the Board could determine, in its sole discretion, to pay a
dividend to the holders of Telecom Group Shares in an amount related to the
proceeds of such a Disposition.
At the time of any dividend made as a result of a Disposition referred to
above, the TDS Group will be credited, and the Telecom Group will be charged (in
addition to the charge for the dividend paid in respect of the outstanding
Telecom Group Shares), with an amount equal to the product of (i) the aggregate
amount paid in respect of such dividend times (ii) a fraction the numerator of
which is the Retained Interest Fraction and the denominator of which is the
Outstanding Interest Fraction of such Group.
If any Inter-Group Interests in the Telecom Group exist at the time of any
dividend made as a result of a Disposition referred to above, the Tracking Group
holding such an Inter-Group Interest will be credited, and the Telecom Group
will be charged (in addition to the charge for the dividend paid in respect of
outstanding Telecom Group Shares) with an amount equal to the product of (i) the
aggregate amount paid in respect of such dividend times (ii) a fraction the
numerator of which is the Inter-Group Interest Fraction and the denominator of
which is the Outstanding Interest Fraction of the Telecom Group.
PROCEDURES RELATING TO DISPOSITION RIGHTS. Not later than the fifth Trading
Day following the consummation of a Disposition referred to above, the Company
will announce publicly by press release (i) the Fair Value of the Net Proceeds
of such Disposition, (ii) the number of outstanding Telecom Group Shares, (iii)
information describing and indicating the Number of Shares Issuable to Third
Parties of the Telecom Group Shares, including the number of such shares which
are issuable as Committed Acquisition Shares and the number of such shares into
or for which Convertible Securities are then convertible, exercisable or
exchangeable, and the conversion, exercise or exchange prices thereof (and
stating which, if any, of such Convertible Securities are Pre-Distribution
Convertible Securities), (iv) the Disposition Conversion Percentage, (v) the
Outstanding Interest Fraction for the Telecom Group Shares as of a recent date
preceding the date of such notice and (vi) the Adjusted Outstanding Interest
Fraction for the Telecom Group Shares as of a recent date preceding the date of
such notice. Not earlier than the 51st Trading Day and not later
98
<PAGE>
than the 55th Trading Day following the consummation of such Disposition, the
Company will announce publicly by press release which of the redemption options
or combinations thereof described under "--Disposition of Assets of the Telecom
Group" it has irrevocably determined to take. As noted under "--Disposition of
Assets of the Telecom Group," the Board has complete discretion to select which
disposition option or combination thereof to employ in the event of a
Disposition.
NOTICE OF DIVIDEND FOLLOWING DISPOSITION. If the Company determines to pay
a dividend of cash, securities or other property or any combination thereof
following a Disposition, as described in clause (i) of the fourth paragraph
under "--Disposition of Assets of the Telecom Group," the Company will, not
earlier than the 51st Trading Day and not later than the 55th Trading Day
following the consummation of such Disposition, cause to be sent to each holder
of outstanding Telecom Group Shares a notice setting forth (i) the record date
for determining holders entitled to receive such dividend, which will be not
earlier than the 61st Trading Day and not later than the 65th Trading Day
following the consummation of such Disposition, (ii) the anticipated payment
date of such dividend (which will not be more than 90 Trading Days following the
consummation of such Disposition), (iii) the kind and amount of cash, securities
or property or combination thereof to be distributed in respect of each Telecom
Group Share, (iv) the amount of the Fair Value of the Net Proceeds of such
Disposition, (v) the Outstanding Interest Fraction as of a recent date preceding
the date of such notice, and (vi) the number of outstanding Telecom Group Shares
subject to the Disposition and the Number of Shares Issuable to Third Parties of
the Telecom Group Shares, including the number of such shares which are issuable
as Committed Acquisition Shares and the number of Telecom Group Shares into or
for which outstanding Convertible Securities are then convertible, exercisable
or exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, are Pre-Distribution Convertible Securities).
NOTICE OF REDEMPTION OF ENTIRE CLASS FOLLOWING DISPOSITION. If the Company
determines to undertake a redemption of the Telecom Group Shares following a
Disposition of all (not merely substantially all) of the properties and assets
of the Telecom Group with respect to the Fair Value of the Net Proceeds, as
described in clause (ii)(A) of the fourth paragraph under "--Disposition of
Assets of the Telecom Group," the Company will cause to be given to each holder
of outstanding Telecom Group Shares a notice setting forth (i) a statement that
all of the Telecom Group Shares outstanding on the redemption date will be
redeemed, (ii) the anticipated redemption date (which will not be more than 90
Trading Days following the consummation of such Disposition), (iii) the kind and
amount of cash, securities or property or combination thereof to be paid as a
redemption price in respect of Telecom Group Shares outstanding on the
redemption date, (iv) the amount of the Fair Value of the Net Proceeds of such
Disposition, (v) the Adjusted Outstanding Interest Fraction as of a recent date
preceding the date of such notice, (vi) the place or places where certificates
for Telecom Group Shares, properly endorsed or assigned for transfer (unless the
Company waives such requirement), are to be surrendered for cash, securities or
property or combination thereof, and (vii) the number of outstanding Telecom
Group Shares and the Number of Shares Issuable to Third Parties of the Telecom
Group Shares, including the number of such shares which are issuable as
Committed Acquisition Shares and the number of shares of the Telecom Group
Shares into or for which outstanding Convertible Securities are then
convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof (and stating which, if any, of such Convertible
Securities are Pre-Distribution Convertible Securities). Such notice will be
sent not less than 51 Trading Days nor more than 55 Trading Days following the
consummation of the Disposition and not less than 25 Trading Days prior to the
redemption date.
NOTICE OF PARTIAL REDEMPTION FOLLOWING DISPOSITION. If the Company
determines to undertake a partial redemption of Telecom Group Shares following a
Disposition of substantially all (but not all) of the properties and assets of
the Telecom Group, as described in clause (ii)(B) of the fourth paragraph under
"--Disposition of Assets of the Telecom Group," such partial redemption will be
done on a pro rata basis or by lot. The Company will, not earlier than the 51st
Trading Day and not later than the 55th Trading Day
99
<PAGE>
following the consummation of such a Disposition, cause to be given to each
holder of record of outstanding Telecom Group Shares a notice setting forth (i)
a statement that a portion of the Telecom Group Shares outstanding on the
redemption date will be redeemed, specifying the number of such shares or how
such number will be determined, (ii) a date not earlier than the 61st Trading
Day and not later than the 65th Trading Day following the consummation of such
Disposition which will be the date on which Telecom Group Shares then
outstanding will be selected for redemption, (iii) the anticipated redemption
date (which will not be more than 90 Trading Days following the consummation of
such Disposition), (iv) the kind and amount of cash, securities or property or
combination thereof to be paid as a redemption price in respect of the Telecom
Group Shares, (v) the amount of the Fair Value of the Net Proceeds of such
Disposition, (vi) the Outstanding Interest Fraction as of a recent date
preceding the date of such notice, (vii) the Number of Shares Issuable to Third
Parties of the Telecom Group Shares, including the number of such shares which
are issuable as Committed Acquisition Shares and the number of Telecom Group
Shares into or for which outstanding Convertible Securities are then
convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof (and stating which, if any, of such Convertible
Securities are Pre-Distribution Convertible Securities), and (viii) a statement
that the Company will not be required to register a transfer of any Telecom
Group Shares for a period of up to 15 Trading Days next preceding the date
referred to in clause (ii) of this sentence. Promptly following the date
referred to in clause (ii) of the preceding sentence, but not earlier than the
61st Trading Day and not later than the 65th Trading Day following the
consummation of such Disposition, the Company will cause to be given to each
holder of Telecom Group Shares, a notice setting forth (i) the number of Telecom
Group Shares held by such holder to be redeemed, (ii) a statement that such
Telecom Group Shares will be redeemed, (iii) the redemption date (which will not
be more than 90 Trading Days following the consummation of such Disposition),
(iv) the kind and per share amount of cash, securities or property or
combination thereof to be received by such holder with respect to each Telecom
Group Share to be redeemed, including details as to the calculation thereof, and
(v) the place or places where certificates for such Telecom Group Shares,
properly endorsed or assigned for transfer (unless the Company waives such
requirement), are to be surrendered for delivery of cash, securities or property
or combination thereof.
NOTICE OF CONVERSION FOLLOWING DISPOSITION. In the event of any conversion
following a Disposition, as described above in clause (iii) of the fourth
paragraph under "--Disposition of Assets of the Telecom Group," the Company will
cause to be given to each holder of outstanding Telecom Group Shares a notice
setting forth (i) a statement that some or all of the outstanding Telecom Group
Shares will be converted, specifying the number of such shares or how such
number shall be determined, (ii) the anticipated conversion date (which will not
be more than 90 Trading Days following the consummation of such Disposition),
(iii) the per share number (or fraction) of Special Common Shares or shares of
another class or classes of Tracking Stock, as applicable, to be received with
respect to each Telecom Group Share, specifying the shares or the combination of
such shares to be delivered, the Disposition Conversion Percentage and other
details as to the calculation thereof, (iv) the place or places where
certificates for the Telecom Group Shares, properly endorsed or assigned for
transfer (unless the Company waives such requirement), are to be surrendered,
and (v) the number of outstanding Telecom Group Shares and the Number of Shares
Issuable to Third Parties of the Telecom Group Shares, including the number of
such shares which are issuable as Committed Acquisition Shares and the number of
Telecom Group Shares into or for which outstanding Convertible Securities are
then convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof (and stating which, if any, are Pre-Distribution
Convertible Securities). Such notice will be sent not less than 51 Trading Days
nor more than 55 Trading Days following the consummation of the Disposition and
not less than 25 Trading Days prior to the conversion date.
Upon the Company's decision to convert all of the remaining outstanding
Telecom Group Shares at any time prior to the first anniversary of a dividend
on, or partial redemption of, Telecom Group Shares following a Disposition, as
described above under "--Disposition of Assets of the Telecom Group," the
Company will announce publicly by press release (i) the number of outstanding
Telecom Group Shares to be converted, (ii) the Number of Shares Issuable to
Third Parties of such Telecom Group Shares, including
100
<PAGE>
the number of such shares which are issuable as Committed Acquisition Shares and
into or for which Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, of such Convertible Securities are Pre-Distribution
Convertible Securities), (iii) the Disposition Conversion Percentage and (iv)
the Outstanding Interest Fraction for such Telecom Group Shares as of a recent
date preceding the date of such notice. The Company will subsequently announce
publicly by press release whether the Telecom Group Shares are being converted
in exchange for Special Common Shares, shares of another Tracking Stock or a
combination thereof on a pro rata basis.
In the event of any conversion at any time prior to the first anniversary of
a dividend on, or partial redemption of, Telecom Group Shares following a
Disposition, as described in the preceding paragraph, the Company will cause to
be given to each holder of outstanding Telecom Group Shares a notice setting
forth (i) a statement that all of the outstanding Telecom Group Shares will be
converted into a number or fraction of Special Common Shares or shares of any
other class of Tracking Stock or combination thereof on a pro rata basis, (ii)
the anticipated conversion date (which will not be more than 90 Trading Days
following the press release that publicly announces such conversion), (iii) the
per share number (or fraction) of Special Common Shares or shares of another
class of Tracking Stock or combination thereof, as applicable, to be received
with respect to each Telecom Group Share, specifying such number or fraction of
shares or combination thereof, the Disposition Conversion Percentage and other
details as to the calculation thereof, (iv) the place or places where
certificates for Telecom Group Shares, properly endorsed or assigned for
transfer (unless the Company waives such requirement), are to be surrendered,
and (v) the number of outstanding Telecom Group Shares and the Number of Shares
Issuable to Third Parties of the Telecom Group Shares, including the number of
such shares which are issuable as Committed Acquisition Shares and the number of
Telecom Group Shares into or for which outstanding Convertible Securities are
then convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof (and stating which, if any, are Pre-Distribution
Convertible Securities). Such notice will be sent not less than 25 Trading Days
nor more than 35 Trading Days prior to the conversion date.
CONVERSION AT OPTION OF THE COMPANY. The Company may, at the sole discretion
of the Board, at any time convert each outstanding Telecom Group Share into a
number of fully paid and nonassessable Special Common Shares or shares of
another class of Tracking Stock or any combination thereof, equal to the
applicable percentage set forth below (the "Optional Conversion Percentage") on
the conversion date, of the average daily ratio (calculated to the nearest five
decimal places) of the Market Value of one Telecom Group Share to the Market
Value of one Special Common Share or share of such other class or classes of
Tracking Stock (or any combination thereof on a pro rata basis), during a
twenty-Trading Day period ending on the fifth Trading Day prior to the date of
notice of such conversion:
<TABLE>
<CAPTION>
12-MONTH PERIOD PRIOR TO OPTIONAL CONVERSION
ANNIVERSARY OF INITIAL ISSUANCE DATE PERCENTAGE
- ------------------------------------------------------------------------- ---------------------
<S> <C>
First through Fifth...................................................... 115%
Sixth.................................................................... 114%
Seventh.................................................................. 113%
Eighth................................................................... 112%
Ninth.................................................................... 111%
Thereafter............................................................... 110%
</TABLE>
In the event of the conversion of the Telecom Group Shares into Special
Common Shares or shares of another class or classes of Tracking Stock, the
assets and liabilities of the Telecom Group will be attributed to the Group
related to the shares which are issued upon such conversion (on a pro rata basis
if a combination of such shares are issued).
101
<PAGE>
In the event there is no public market for the Special Common Shares, the
Market Value per share will be deemed to be the same as the per share Market
Value of the Common Shares.
The foregoing provisions would provide the Company the flexibility to
recapitalize the capital structure of the Company in several ways. For instance,
one Tracking Group could be combined with another Tracking Group. As an example,
the Telecom Group Shares could be converted into Cellular Group Shares, in which
case the resulting Cellular Group Shares would thereafter represent an equity
interest in the business of the Cellular Group and the Telecom Group. In
addition, the Company could convert any or all classes of Tracking Stock into
Special Common Shares. For example, if the Telecom Group Shares were converted
into Special Common Shares, the TDS Group would thereafter include the business
of the Telecom Group. If all shares of Tracking Stock were converted into
Special Common Shares, the Special Common Shares, together with Common Shares
and Series A Common Shares, would thereafter represent a common equity interest
in all of the Company's businesses and all Tracking Groups would cease to exist.
The optional conversion could be exercised at any time in the future if the
Board determines that, under the circumstances, a combination of some or all of
the businesses of the Company would be in the best interests of the Company and
its shareholders. However, such conversion may be exercised by the Company at a
time that is disadvantageous to holders of one or more of the shares of capital
stock of the Company. See "Risk Factors." The Company has no current intentions
or plans to convert any of the shares of Tracking Stock into Special Common
Shares or shares of any other Tracking Stock or to combine any of the Groups.
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY. The Company, in the sole
discretion of the Board, may at any time, redeem (at no premium) all of the
outstanding Telecom Group Shares, for a number of outstanding shares of common
stock of a Qualifying Subsidiary or Qualifying Subsidiaries that hold all of the
assets and liabilities attributed to the Telecom Group equal to the product of
the Adjusted Outstanding Interest Fraction multiplied by the number of all of
the outstanding shares of the Qualifying Subsidiaries owned directly or
indirectly by the Company, on a pro rata basis, provided that there are funds of
the Company legally available therefor. The Company may retain the balance of
the outstanding shares of the common stock of the Qualifying Subsidiaries in
respect of the Retained Interest and any Inter-Group Interest in the Telecom
Group Shares, or distribute such shares in respect thereof as discussed below.
In the event that the Board, in its sole discretion, decides to redeem all
of the outstanding Telecom Group Shares in exchange for a proportionate interest
in the outstanding shares of any one or more Qualifying Subsidiaries that hold
all of the assets and liabilities attributed to the Telecom Group, the
percentage of the stock of the Qualifying Subsidiary or Qualifying Subsidiaries
owned by the Company that is distributable in the redemption would be based on
the Adjusted Outstanding Interest Fraction for the Telecom Group Shares. The
effect of using the Adjusted Outstanding Interest Fraction, instead of the
Outstanding Interest Fraction, for the Telecom Group Shares to be redeemed, in
the determination of shares of the Qualifying Subsidiaries deliverable in such a
redemption, is to allocate to the TDS Group a portion of the shares of the
Qualifying Subsidiaries, in addition to the number of such shares so allocated
in respect of the Retained Interest, sufficient to provide for the delivery of
the consideration deliverable by the Company with respect to Shares Issuable to
Third Parties of the Telecom Group Shares.
In the event the Board determines to redeem the Telecom Group Shares for
shares of a Qualifying Subsidiary, and if there is a Retained Interest in such
Tracking Group, the Board must, to the extent practicable, distribute Qualifying
Subsidiary shares corresponding to Special Common Shares to the holders of
Telecom Group Shares with respect to the Adjusted Outstanding Interest Fraction
in the Telecom Group. In such event, if the Board determines to distribute
shares of such Qualifying Subsidiary to other shareholders with respect to any
Retained Interest or Inter-Group Interest, the Company must, to the extent
practicable, distribute Qualifying Subsidiary shares corresponding to Special
Common Shares to the holders of any other Tracking Stock with respect to any
such Inter-Group Interest in the Telecom Group, and distribute Qualifying
Subsidiary shares corresponding to Series A Common Shares to the holders of
Series A Common Shares, Qualifying Subsidiary shares corresponding to Common
Shares to
102
<PAGE>
the holders of Common Shares, and Qualifying Subsidiary shares corresponding to
Special Common Shares to the holders of Special Common Shares with respect to
any Retained Interest in the Telecom Group, provided that the same number of
shares of Qualifying Subsidiary common stock on a combined basis must be
distributed for each Series A Common Share, Common Share and any issued Special
Common Share.
If practicable, the Board must recapitalize such Qualifying Subsidiary or
Qualifying Subsidiaries through an amendment to its charter or otherwise, so
that the shares of capital stock of such subsidiary and the relative rights,
limitations and preferences thereof substantially correspond to the Series A
Common Shares, Common Shares and Special Common Shares of the Company and their
relative rights, limitations and preferences, as may be determined to be
necessary or appropriate in the sole discretion of the Board, in order to permit
the distribution to be effected in the foregoing manner. However, if the
Qualifying Subsidiary has or will have shares corresponding to Series A Common
Shares and Common Shares but does not have and will not have shares
corresponding to Special Common Shares and it is impracticable to recapitalize
the subsidiary as provided in the preceding sentence to create Special Common
Shares, the Board must distribute Qualifying Subsidiary shares corresponding to
Common Shares to the holders of Tracking Stock which would otherwise be entitled
to receive Qualifying Subsidiary shares corresponding to Special Common Shares,
and to the holders of Special Common Shares in respect of any Retained Interest.
A Qualifying Subsidiary for this purpose may include an existing subsidiary
of the Company that may in the future hold all of the assets and liabilities
attributed to the Telecom Group or any future subsidiary of the Company that
meets the definition of Qualifying Subsidiary and holds such assets and
liabilities, whether or not created exclusively for such purpose. To the extent
that any Qualifying Subsidiary did not hold all assets and liabilities
attributable to the Telecom Group, it is expected that such assets and/or
liabilities would be transferred to such Qualifying Subsidiary prior to the
redemption. To the extent that any such Qualifying Subsidiary held assets and/or
liabilities in addition to those attributed to the Telecom Group, it is expected
that in connection with any such redemption such additional assets or
liabilities would either be attributed to the Telecom Group or transferred by
such Qualifying Subsidiary to the TDS Group or to a different Tracking Group.
Alternatively, in any such case, any then existing Retained Interest or
Inter-Group Interest could be appropriately adjusted or other consideration that
the Board may determine in its discretion to be appropriate could be paid by one
Tracking Group to the TDS Group or such other Tracking Group. See "Management
and Allocation Policies."
The ability of the Company to exercise its right to redeem the outstanding
shares of Tracking Stock in exchange for a proportionate interest in shares of
one or more Qualifying Subsidiaries may be limited by the tax consequences to
the Company.
PROCEDURES RELATING TO CONVERSION OR REDEMPTION OF TELECOM GROUP SHARES.
Upon the Company's decision to convert or redeem all of the outstanding Telecom
Group Shares as described under "--Conversion at Option of the Company" or
"--Redemption in Exchange for Stock of Subsidiary," the Company will announce
publicly by press release (i) the number of outstanding Telecom Group Shares
which will be converted or redeemed, (ii) the Number of Shares Issuable to Third
Parties of Telecom Group Shares, including the number of such shares which are
issuable as Committed Acquisition Shares and into or for which Convertible
Securities are then convertible, exercisable or exchangeable and the conversion,
exercise or exchange prices thereof (and stating which, if any, of such
Convertible Securities are Pre-Distribution Convertible Securities), (iii) the
Optional Conversion Percentage and details as to the calculation thereof and
(iv) the Outstanding Interest Fraction and the Adjusted Outstanding Interest
Fraction for Telecom Group Shares as of a recent date preceding the date of such
notice. The Company will subsequently announce publicly by press release whether
the Telecom Group Shares are being converted in exchange for Special Common
Shares, shares of another class or classes of Tracking Stock or a combination
thereof, or are being redeemed for shares of a Qualifying Subsidiary.
103
<PAGE>
Unlike the conversion feature described under "--Disposition of Assets of
the Telecom Group," the Company's decision to convert or redeem all of the
outstanding Telecom Group Shares as described under "--Conversion at Option of
the Company" or "--Redemption in Exchange for Stock of Subsidiary," is not an
irrevocable decision, nor is its decision as to which securities the Company
will use to redeem the Telecom Group Shares irrevocable. The conversion or
redemption of all of the Telecom Group Shares as described under "--Conversion
at Option of the Company" or "--Redemption in Exchange for Stock of Subsidiary"
may be abandoned or modified by the Company at any time prior to the Company's
delivery of the replacement securities in exchange for the converted or redeemed
Telecom Group Shares.
NOTICE UPON OPTIONAL CONVERSION. If the Company determines to convert the
Telecom Group Shares into Special Common Shares or shares of any other class or
classes of Tracking Stock or any combination thereof, as described above under
"--Conversion at the Option of the Company," the Company will promptly cause to
be given to each holder of Telecom Group Shares to be converted a notice setting
forth (i) a statement that all outstanding Telecom Group Shares will be
converted in exchange for Special Common Shares or shares of any other class or
classes of Tracking Stock or any combination thereof, (ii) the anticipated
conversion date (which will not be more than 90 Trading Days following the press
release that publicly announces such conversion), (iii) the per share number (or
fraction) of Special Common Shares, shares of another class or classes of
Tracking Stock or combination thereof, as applicable, to be received with
respect to each Telecom Group Share, specifying the shares or the combination of
such shares to be delivered, the Optional Conversion Percentage and other
details as to the calculation thereof, (iv) the place or places where
certificates for Telecom Group Shares to be redeemed, properly endorsed or
assigned for transfer (unless the Company waives such requirement) are to be
surrendered for delivery of certificates for Special Common Shares, shares of
another class or classes of Tracking Stock or a combination thereof, and (v) the
number of outstanding Telecom Group Shares and the Number of Shares Issuable to
Third Parties, including the number of such shares which are issuable as
Committed Acquisition Shares and the number of Telecom Group Shares into or for
which outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, of such Convertible Securities are Pre-Distribution
Convertible Securities). Such notice will be sent not less than 25 Trading Days
nor more than 35 Trading Days prior to the conversion date.
NOTICE UPON REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY. If the Company
determines to redeem the Telecom Group Shares into shares of a Qualifying
Subsidiary as described above under "--Redemption in Exchange for Stock of
Subsidiary," the Company will promptly cause to be given to each holder of
Telecom Group Shares a notice setting forth (i) a statement that all outstanding
Telecom Group Shares will be redeemed in exchange for shares of a Qualifying
Subsidiary, (ii) the anticipated redemption date (which will not be more than 90
Trading Days following the press release that publicly announces such
redemption), (iii) the Adjusted Outstanding Interest Fraction for Telecom Group
Shares as of a recent date preceding the date of such notice, (iv) the place or
places where certificates for Telecom Group Shares to be redeemed, properly
endorsed or assigned for transfer (unless the Company waives such requirement),
are to be surrendered for delivery of certificates for shares of common stock of
the Qualifying Subsidiary, and (v) the number of outstanding Telecom Group
Shares and the Number of Shares Issuable to Third Parties, including the number
of such shares which are issuable as Committed Acquisition Shares and the number
of Telecom Group Shares into or for which outstanding Convertible Securities are
then convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof (and stating which, if any, of such Convertible
Securities are Pre-Distribution Convertible Securities). Such notice will be
sent not less than 25 Trading Days nor more than 35 Trading Days prior to the
redemption date.
GENERAL PROVISIONS RELATING TO CONVERSIONS OR REDEMPTIONS. In each case in
which a notice is required to be given to holders of outstanding Telecom Group
Shares in accordance with the "--Procedures Relating to Disposition Rights" or
"--Procedures Relating to Conversion or Redemption of Telecom Group Shares"
(other than a notice to holders of shares selected for a partial redemption),
notice shall also be given,
104
<PAGE>
within the required time period, to each holder of Convertible Securities that
are convertible into or exercisable or exchangeable for Telecom Group Shares
(unless provision for such notice is otherwise made pursuant to the terms of
such Convertible Securities). Such notice shall include, in addition to all of
the information set forth in the corresponding notice to holders of Telecom
Group Shares, a statement to the effect that the holders of such Convertible
Securities will be entitled to receive the dividend, participate in the
redemption of shares following a Disposition with respect to Telecom Group
Shares or in the selection of shares for conversion or redemption, participate
in the conversion of shares or participate in the redemption of shares only if
such holder appropriately converts, exercises or exchanges such Convertible
Securities on or prior to the record date for the dividend, redemption date,
date fixed for selection of shares to be redeemed or conversion date, as
applicable, set forth in such notice. In the case of a conversion or redemption
of Telecom Group Shares, the notice to holders of Convertible Securities shall
also state what, if anything, such holders will be entitled to receive pursuant
to the terms of such Convertible Securities if such holders convert, exercise or
exchange such Convertible Securities following the conversion date or redemption
date, as applicable.
All notices required to be given under this section and as described under
"--Procedures Relating to Disposition Rights" and "--Procedures Relating to
Conversion or Redemption of the Telecom Group Shares," will be sent to a holder
by first class mail, postage prepaid, at the holder's address as the same
appears on the transfer books of the Company. Neither the failure to mail any
notice to any particular holder of Telecom Group Shares or of Convertible
Securities nor any defect therein will affect the sufficiency thereof with
respect to any other holder of outstanding Telecom Group Shares or of
Convertible Securities, or the validity of any redemption.
The Company will not be required to issue or deliver fractional shares of
any class of capital stock or any fractional securities to any holder of Telecom
Group Shares upon any conversion or redemption, dividend or other distribution
described above. In connection with the determination of the number of shares of
any class of capital stock that is issuable or the amount of securities that is
deliverable to any holder of record upon any conversion or redemption, dividend
or other distribution (including any fractions of shares or securities), the
Company may aggregate the number of Telecom Group Shares held at the relevant
time by such holder of record. If the number of shares of any class of capital
stock or the amount of securities remaining to be issued or delivered to any
holder of Telecom Group Shares is a fraction, the Company will, if such fraction
is not issued or delivered to such holder, pay a cash adjustment in respect of
such fraction in an amount equal to the fair market value of such fraction on
the fifth Trading Day prior to the date such payment is to be made (without
interest). For purposes of the preceding sentence, "fair market value" of any
fraction will be (i) in the case of any fraction of a share of capital stock of
the Company, the product of such fraction and the Market Value of one share of
such capital stock and (ii) in the case of any other fractional security, such
value as is determined by the Board.
No adjustments in respect of dividends will be made upon the conversion or
redemption of any Telecom Group Shares; provided, however, that if the
conversion or redemption date with respect to Telecom Group Shares is subsequent
to the record date for the payment of a dividend or other distribution thereon
or with respect thereto, the holders of Telecom Group Shares at the close of
business on such record date will be entitled to receive the dividend or other
distribution payable on or with respect to such shares on the date set for
payment of such dividend or other distribution, notwithstanding a conversion or
redemption by the Company of such shares or the Company's default in payment of
the dividend or distribution due on such date.
Before any holder of Telecom Group Shares will be entitled to receive
certificates representing shares of any kind of capital stock, cash, securities
or other property or combination thereof to be received by such holder with
respect to any conversion or redemption of Telecom Group Shares, such holder is
required to surrender at such place as the Company will specify certificates for
such shares, properly endorsed or assigned for transfer (unless the Company
waives such requirement). The Company will as soon as practicable after
surrender of certificates representing Telecom Group Shares deliver to the
person
105
<PAGE>
for whose account such shares were so surrendered, or to the nominee or nominees
of such person, certificates representing the number of whole shares of the kind
of capital stock or cash, securities or other property or combination thereof to
which such person is entitled, together with any payment for fractional
securities referred to above. The Company will not be required to register (i) a
transfer of any Telecom Group Shares for a period of up to 15 Trading Days
preceding the conversion or redemption date or (ii) any Telecom Group Shares
selected for redemption.
From and after any applicable conversion or redemption date, all rights of a
holder of Telecom Group Shares that were converted or redeemed will cease except
for the right, upon surrender of the certificates representing Telecom Group
Shares, to receive certificates representing shares of the kind and amount of
capital stock or cash, securities or other property or combination thereof for
which such Telecom Group Shares were converted or redeemed, together with any
payment for fractional securities, and such holder will have no other or further
rights in respect of the Telecom Group Shares so converted or redeemed,
including, but not limited to, any rights with respect to any capital stock,
cash, securities or other property which are reserved or otherwise designated by
the Company as being held for the satisfaction of the Company's obligations to
pay or deliver any capital stock, cash, securities or other property upon the
conversion, exercise or exchange of any Convertible Securities outstanding or
with respect to any other Shares Issuable to Third Parties related to the
conversion or redemption of Telecom Group Shares as of the date of such
redemption. No holder of a certificate that, immediately prior to the applicable
conversion or redemption date for Telecom Group Shares, represented Telecom
Group Shares which were converted or redeemed will be entitled to receive any
dividend or other distribution with respect to shares of any kind of capital
stock or other securities into or in exchange for which the Telecom Group Shares
were converted or redeemed until surrender of such holder's certificate for a
certificate or certificates representing shares of such kind of capital stock or
other securities. Upon such surrender, there will be paid to the holder the
amount of any dividends or other distributions (without interest) which
theretofore became payable with respect to a record date after the conversion
date or redemption date, as the case may be, but that were not paid by reason of
the foregoing, with respect to the number of whole shares of the kind of capital
stock or other securities represented by the certificate or certificates issued
upon such surrender.
The Company will pay any and all documentary, stamp or similar issue or
transfer taxes that may be payable in respect of the issue or delivery of any
shares of capital stock or other securities on the conversion or redemption of
Telecom Group Shares. The Company will not, however, be required to pay any tax
that may be payable in respect of any transfer involved in the issue and
delivery of any shares of capital stock or other securities in a name other than
that in which the Telecom Group Shares so converted or redeemed were registered
and no such issue or delivery will be made unless and until the person
requesting such issue has paid to the Company the amount of any such tax, or has
established to the satisfaction of the Company that such tax has been paid.
EFFECT OF CONVERSION OR REDEMPTION ON SECURITIES CONVERTIBLE INTO TELECOM
GROUP SHARES. Unless the provisions of the security provide specifically to the
contrary, after any conversion or redemption date on which all outstanding
Telecom Group Shares were converted or redeemed by the Company, any Telecom
Group Shares that would be issuable on conversion, exercise or exchange of any
pre-conversion or pre-redemption securities which are convertible, exercisable
or exchangeable for Telecom Group Shares will, immediately upon issuance
pursuant to such conversion, exercise or exchange and without any notice or any
other action on the part of the Company or its Board or the holder of such
security, be converted or redeemed in exchange for, as applicable, the kind and
amount of shares of capital stock, cash, securities or other property that a
holder of such pre-conversion or pre-redemption securities would have been
entitled to receive as a result of the conversion or redemption had such
pre-conversion or pre-redemption securities been converted, exercised or
exchanged immediately prior to such conversion or redemption.
If Convertible Securities, as well as any other obligations to deliver
Telecom Group Shares to third parties, including obligations to deliver
Committed Acquisition Shares, remain outstanding at the time of any redemption
of all outstanding Telecom Group Shares following the Disposition of all (not
merely
106
<PAGE>
substantially all) of the properties and assets of the Telecom Group, the
proportionate interest in the Fair Value of the Net Proceeds of the Disposition
to be distributed to the holders of Telecom Group Shares will be determined on
the basis of the Adjusted Outstanding Interest Fraction for the Telecom Group.
Such determination will result in the allocation to the TDS Group of a portion
of such Fair Value of the Net Proceeds, in addition to the portion attributable
to any Retained Interest, sufficient to provide for the post-redemption delivery
of the portion of the consideration (if any) deliverable by the Company on any
conversion, exercise, exchange or delivery of Convertible Securities, Committed
Acquisition Shares or otherwise, that is in substitution for Telecom Group
Shares that would have been issuable upon such conversion, exercise, exchange or
delivery if it had occurred prior to the redemption of all outstanding Telecom
Group Shares.
Similarly, if Convertible Securities, as well as any other obligations to
deliver Telecom Group Shares to third parties, including obligations to deliver
Committed Acquisition Shares, remain outstanding at the time of any redemption
of all the outstanding Telecom Group Shares in exchange for stock of any one or
more Qualifying Subsidiaries of the Company which hold all of the assets and
liabilities of the Telecom Group, the number of shares of such subsidiaries
deliverable in redemption of the outstanding Telecom Group Shares will be
determined on the basis of the Adjusted Outstanding Interest Fraction for the
Telecom Group, resulting in the allocation to the TDS Group of a portion of the
shares of such subsidiaries, in addition to the number of shares so allocated in
respect of any Retained Interest, sufficient to provide for the post-redemption
delivery of the portion of the consideration (if any) deliverable by the Company
upon any conversion, exercise, or exchange or delivery of Convertible
Securities, Committed Acquisition Shares or otherwise, that is in substitution
for Telecom Group Shares that would have been issuable upon such conversion,
exercise, exchange or delivery if it had occurred prior to such redemption of
all outstanding Telecom Group Shares.
ANTITAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE
CLASSIFIED BOARD. The Restated Certificate provides that the Board will be
divided into three classes and that each class will be elected for a three-year
term. As a result, approximately one-third of the Board will be elected each
year. Classification of the Board expands the time required to change the
composition of a majority of the Board and may tend to discourage a proxy
contest or other takeover bid of the Company.
CONSIDERATION OF COMMUNITY INTERESTS IN ACQUISITION PROPOSALS. Article VIII
of the Restated Certificate provides that, when evaluating any proposal or offer
of another party to (i) make a tender or exchange offer for any equity of the
Company; (ii) merge or consolidate the Company with another corporation; or
(iii) purchase or otherwise acquire all or substantially all of the properties
and assets of the Company, the Board may, in connection with the exercise of its
judgment in determining what is in the best interests of the Company and its
shareholders, give due consideration to all factors the directors deem relevant.
Such factors may include, without limitation, (a) the effects on the
customers of the Company or any of its subsidiaries or on such other
constituencies of the Company or its subsidiaries that the Board considers
relevant under the circumstances, (b) not only the consideration (after taking
into account corporate and shareholder taxes) being offered in relation to the
then current market price for the Company's outstanding shares of capital stock,
but also the Board's estimate of the future value of the Company (including the
unrealized value of its properties and assets) as an independent going concern,
(c) the purpose of the Company and any of its subsidiaries to provide quality
products and services on a long-term basis and (d) the long-term as well as
short-term interests of the corporation and its shareholders, including the
possibility that such interests may be best served by the continued independence
of the Company. If, on the basis of such factors, the Board determines that a
proposal or offer to acquire or merge the Company, or to sell its assets, is not
in the best interests of the Company, it may reject the proposal or offer. If
the Board determines to reject any such proposal or offer, the Board shall have
no obligation to facilitate, to remove any barriers to, or to refrain from
impeding, the proposal or offer, except
107
<PAGE>
as may be required by applicable law. Except to the extent required by
applicable law, the consideration of any or all of such factors shall not be a
violation of any duty of the directors to the shareholders or a group of
shareholders, even if the directors reasonably determine that any such factor or
factors outweigh the financial or other benefits to the corporation or a
shareholder or group of shareholders.
This provision may serve to discourage or make more difficult a change in
control of the Company without the support of the Board and could, under certain
circumstances, prevent shareholders from profiting from an increase in the
market value of their shares as a result of a change in control of the Company
by delaying or preventing such change in control. See "Risk Factors--Risks
Related to Capital Structure and the Telecom Group Shares--Anti-Takeover
Considerations."
SECTION 203 OF DGCL. The Restated Certificate currently provides that TDS
elects not to be governed by Section 203 of the DGCL. Since Section 203 is not
applicable to TDS, it may be possible for a person to acquire the Series A
Common Shares held by the TDS Voting Trust and to immediately complete a
business combination with TDS, without complying with any of the exceptions to
Section 203. The trustees of the TDS Voting Trust have advised the Company that
they have no current plans or intentions of disposing of such Series A Common
Shares. The Board has proposed an amendment to the Restated Certificate which
would cause TDS to be subject to the provisions of Section 203 of the DGCL. See
"--Proposed Amendments to Restated Certificate."
PROPOSED AMENDMENTS TO RESTATED CERTIFICATE
On April 17, 1998, the Board of Directors of TDS determined to take certain
action at the 1998 Annual Meeting of Shareholders, currently expected to occur
in July 1998. The Board of Directors will submit a proposal to shareholders to
consider certain amendments to the Restated Certificate that would improve its
corporate governance provisions. The amendments to be considered at the 1998
Annual Meeting of shareholders are as follows:
1. Paragraph (g) would be added to Section B.8 of Article IV of the
Restated Certificate as follows:
"(g) The Corporation shall not merge with or consolidate with any other
corporation or other entity in a transaction which requires a vote of the
shareholders of the Corporation under the DGCL unless, in addition to the
vote required by the DGCL, such merger or consolidation is also approved by
holders of a majority of the Common Shares and the Series A Common Shares,
each voting separately as a class."
The effect of the addition of the above section would be that any merger or
consolidation of TDS which requires a shareholder vote under the DGCL will also
require a class vote by a majority of the holders of the Common Shares and
Series A Common Shares each voting separately as a class.
2. Paragraph 3 of Section A of Article IV of the Restated Certificate
would be amended to delete the references to "Common Shares" and "Series A
Common Shares" in such paragraph, as follows [deletions are shown in
brackets]:
"3. The number of authorized [Common Shares, Series A Common Shares,]
Special Common Shares, Cellular Group Common Shares, Telecom Group Common
Shares, Aerial Group Common Shares or Undesignated Shares may be increased
or decreased at any time or from time-to-time (but not below the number of
such shares then outstanding in such class, respectively) by the affirmative
vote of the holders of a majority of the voting power of shares of capital
stock of the Corporation entitled to vote on all matters (not including
shares entitled to vote only in the election of directors or as otherwise
required by law, including Section 242(b)(2) of the DGCL) pursuant to
paragraph 8(c) of Section B of this Article IV."
108
<PAGE>
The effect of the above referenced deletions would be that, under the DGCL,
any increase or decrease in the authorized number of Common Shares will require
a class vote by a majority of the holders of Common Shares and that any increase
or decrease in the authorized number of Series A Common Shares would require a
class vote by a majority of the holders of Series A Common Shares.
3. Paragraph (f) of Section B.17 of Article IV of the Restated
Certificate, which is repeated below in brackets, would be deleted, and
paragraphs (g) and (h) thereof would be redesignated as paragraphs (f) and
(g), respectively.
[(f) In accordance with Section 203(b)(3) of the DGCL, the Corporation
expressly elects not to be governed by Section 203 of the DGCL.]
The effect of the deletion of the above referenced section would be to cause
TDS to be subject to the provisions of Section 203 of the DGCL.
MANAGEMENT AND ALLOCATION POLICIES
The Company's Board has the authority to determine the nature and extent of
the communications and other businesses to be owned or operated from time to
time by each Group. Accordingly, the expansion of the business of TDS Telecom
beyond the ownership and operation of its ILECs and its existing CLEC and data
and Internet services will require the consent of the Board. Although the Board
will determine any proposed expansion on a case-by-case basis, it is the Board's
current intent to permit TDS Telecom to pursue additional CLEC initiatives in
cities in which it determines the proximity to existing TDS Telecom facilities
and service areas and economic and other relevant factors warrant the
investment. It is also the Board's current intent to permit TDS Telecom to
expand its data and Internet services in targeted markets when economic,
competitive and other relevant factors warrant the investment. The Board intends
that any businesses, opportunities, assets and liabilities attributed to the
Telecom Group in the future would not include businesses, opportunities, assets
and liabilities of the TDS Group, the Cellular Group or the Aerial Group. The
Company could determine to pursue further business opportunities through one
Group instead of the other Groups, or jointly through more than one of the
Groups. The decision to allocate certain resources and financial support to a
Group other than the Telecom Group may adversely affect the ability of the
Telecom Group to obtain funds sufficient to implement its business strategies.
The Company will prepare and include in its filings with the SEC under the
Exchange Act consolidated financial statements of the Company and financial
statements of the Telecom Group (for so long as shares of the Telecom Group are
outstanding), the Cellular Group (for so long as shares of the Cellular Group
are outstanding), the Aerial Group (for so long as shares of the Aerial Group
are outstanding) and the TDS Group (for so long as any shares of Tracking Stock
are outstanding). The financial statements of each Group, taken together and
after giving effect to inter-Group eliminations, would effectively comprise the
consolidated financial statements of the Company. The financial statements of
the Telecom Group will principally reflect the financial position, results of
operations and cash flows of the Telecom Group. Consistent with the Restated
Certificate and applicable policies, the Telecom Group financial information
could also include allocated portions of individual assets and liabilities that
are not separately identified with the operations of a specific Group.
Notwithstanding allocations of assets and liabilities for the purpose of
preparing the Telecom Group's financial statements, holders of Telecom Group
Shares would continue to be subject to risks associated with an investment in
the Company and all of its businesses, assets and liabilities.
Cash management, taxes and allocation of principal corporate activities
among the Groups will be based upon methods that management of the Company
believes to be reasonable and will be reflected in the respective Group
financial information as follows:
DEBT OR PREFERRED STOCK. Any debt incurred or preferred stock issued by
the Company will be attributed to a Group by the Board based on the use of
proceeds thereof and other factors. All debt
109
<PAGE>
incurred or preferred stock issued by the Company's subsidiaries will
(unless the Board otherwise provides) be specifically attributed to and
reflected on the financial statements of the Group that includes the entity
which incurred the debt or issued the preferred stock. The Board could,
however, determine from time to time that debt incurred or preferred stock
issued by entities included in a Group should be specifically attributed to
and reflected on the combined financial statements of one of the other
Groups to the extent that the debt is incurred or the preferred stock is
issued for the benefit of such other Group.
ISSUANCE OF TRACKING STOCK. After the initial issuance of shares of
Tracking Stock, (a) all financial impacts of issuances of additional shares
of stock, the proceeds of which are attributed to the Telecom Group, will be
to such extent reflected in the financial statements of the Telecom Group,
and (b) all financial impacts of issuances of stock, the proceeds of which
are attributed to the TDS Group or one of the other Groups in respect of a
reduction in any Retained Interest or Inter-Group Interest of the Telecom
Group will be to such extent reflected in the financial statements of the
TDS Group or such other Group, as the case may be. Financial impacts of
dividends or other distributions on the Telecom Group Shares will be
attributed entirely to the Telecom Group, except that dividends or other
distributions will (if at the time there is a Retained Interest or an
Inter-Group Interest in the Telecom Group) result in the TDS Group or the
Group with the Retained Interest or Inter-Group Interest, as the case may
be, being credited, and the Telecom Group being charged (in addition to the
charge for the dividend or other distribution paid on the outstanding
Telecom Group Shares), with an amount equal to the product of (x) the
aggregate amount of such dividend or other distribution paid or distributed
in respect of the outstanding Telecom Group Shares and (y) a fraction, the
numerator of which is the Retained Interest Fraction or the Inter-Group
Interest Fractions (if any), as the case may be, and the denominator of
which is the Outstanding Interest Fraction for such Telecom Group Shares.
Financial impacts of repurchases of stock the consideration for which is
charged to the Telecom Group will be to such extent reflected in the
financial statements of the Telecom Group, and financial impacts of
repurchases of stock the consideration for which is charged to the TDS Group
or another Group will be to such extent reflected in the financial
statements of the TDS Group or such other Group and will result in the
creation of a, or an increase in any then existing, Retained Interest or
Inter-Group Interest, as the case may be, in such other Group.
CASH TRANSFERS. To the extent cash needs of one Group exceed cash
provided by such Group, one of the other Groups may transfer funds to such
Group. The Company has provided and will continue to provide centralized
cash management functions under which cash receipts of certain entities
attributed to the other Groups will be remitted to the TDS Group and certain
cash disbursements of the other Groups will be funded by the TDS Group on a
daily basis. Such transfers of funds among the Groups will be reflected as
borrowings or, if determined by the Board, reflected as the creation of a,
or an increase in any then existing, Retained Interest or an Inter-Group
Interest of the TDS Group or such other Group, as the case may be, in such
recipient Group or, in the case of a reverse transfer from such recipient
Group, reflected as a reduction in the Retained Interest or Inter-Group
Interest in such recipient Group. There are no specific criteria for
determining when a transfer will be reflected as borrowings or as an
increase or reduction in a Retained Interest or an Inter-Group Interest. The
Board expects to make such determinations, either in specific instances or
by setting generally applicable policies from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives of
the Groups, the investment objectives of the Groups, the availability, cost
and time associated with alternative financing sources, prevailing interest
rates and general economic conditions.
LOANS. Loans from one Group to another Group will bear interest at such
rates and have such repayment schedules and other terms as are established
from time to time by, or pursuant to procedures established by, the Board.
The Board expects to make such determinations, either in specific instances
or by setting generally applicable policies from time to time, after
consideration of
110
<PAGE>
such factors as it deems relevant, including, without limitation, the needs
of the Company, the financing needs and objectives of the Groups, the
investment objectives of the Groups, the availability, cost and time
associated with alternative financing sources, prevailing interest rates and
general economic conditions.
RETAINED INTEREST OR INTER-GROUP INTEREST. In the event of a transfer of
funds or other assets from one Group to another Group that the Board has
determined to reflect as creating or increasing the Retained Interest or an
Inter-Group Interest of such other Group, the Number of Shares Issuable with
Respect to Retained Interest in such Tracking Group or the applicable
Inter-Group Interest in the Issuer Group would be increased by an amount
determined by dividing the amount of funds or the value of the assets
transferred by the Market Value of an Issuer Group Tracking Share as of the
date of such transfer, and the applicable Retained Interest Fraction or the
applicable Inter-Group Interest Fraction, as the case may be, would be
increased and the applicable Outstanding Interest Fraction would be
decreased accordingly. In the event of a transfer of funds or other assets
from one Group to another Group that the Board has determined to reflect as
a decrease in the Retained Interest or an Inter-Group Interest of such other
Group, the Number of Shares Issuable with Respect to Retained Interest or
the applicable Inter-Group Interest in the Issuer Group would be decreased
by an amount determined by dividing the amount of funds or the value of the
assets transferred by the Market Value of an Issuer Group Tracking Share as
of the date of such transfer, and the applicable Retained Interest Fraction
or the applicable Inter-Group Interest Fraction, as the case may be, would
be decreased and the applicable Outstanding Interest Fraction would be
increased accordingly.
FINANCIAL STATEMENT PRESENTATION. The balance sheets of the Telecom
Group will reflect any net loans to or borrowings from the other Groups
based on actual or estimated costs. Similarly, the respective statements of
operations of each of the Groups will reflect interest income or expense, as
the case may be, associated with any such loans or borrowings and the
respective statements of cash flows of each of the Groups would reflect
changes in the amounts of any such loans or borrowings deemed outstanding.
Amounts borrowed by the Telecom Group from another Group will be reflected
on the Telecom Group's financial statements as indebtedness to the
applicable lender.
SERVICES BY TDS GROUP. Certain corporate general and administrative
costs (including, but not limited to, certain corporate, legal, finance,
accounting, tax, data processing, employee benefit and insurance costs) will
be charged to the Telecom Group at rates set at the beginning of each year
based on projected utilization for that year, based on actual costs incurred
or based on another reasonable method of allocation. The balance of such
costs will be reflected in the financial statements of the TDS Group. The
utilization-based or other allocation-based charges will be set at levels
that corporate management believes to be reasonable, taking into account
relevant factors, including the costs that the Telecom Group might incur for
comparable services on a stand-alone basis. Certain other corporate general
and administrative costs related specifically to management of the Telecom
Group will be allocated entirely to the Telecom Group. The scope of the
services charged to the Telecom Group on an allocated basis could be
adjusted from time to time depending on various factors, including the
extent to which it is determined that services should instead be performed
directly by employees of entities attributed to the Telecom Group or by
outside vendors.
INTER-GROUP SERVICES. Certain companies with operations that would be
attributed to one Group may from time to time provide services to companies
attributed to the Telecom Group, and certain companies attributed to the
Telecom Group may provide use of facilities to companies attributed to one
or more other Groups. Generally, services and rights to use facilities
provided pursuant to contractual arrangements to which a member of the
Telecom Group that is not a wholly-owned subsidiary of the Company is a
party will continue to be provided in accordance with the terms of such
arrangements. Charges for other services and rights to use facilities will
be allocated at levels that corporate management believes to be reasonable,
taking into account relevant factors, including the costs that the Telecom
Group might incur for comparable services on a stand-alone basis.
111
<PAGE>
TAXES. The Board expects to follow a tax allocation policy with respect
to the Telecom Group which is similar to the policies which are expected to
be followed for U.S. Cellular and Aerial. Under this policy, in general, TDS
Telecom would continue to join in the filing of consolidated income tax
returns with TDS and its subsidiaries which are part of the TDS affiliated
group for tax purposes. Provided that the Telecom Group continues to have
taxable income, the Telecom Group will be required to reimburse the TDS
Group for Federal income taxes paid by the TDS affiliated group in an amount
equal to the greater of the Federal income tax liability of the Telecom
Group calculated as if it were a separate affiliated group, or the tax
calculated using the average tax rate (before taking into account tax
credits) of the TDS affiliated group. In the event that the Telecom Group
incurs any tax losses which it cannot utilize, the tax benefits of such
losses would be allocated to the TDS Group, and the TDS Group would be
required to reimburse the Telecom Group at such time that it would be able
to utilize such tax benefits as a stand-alone entity.
Notwithstanding the policies described above, determinations with respect to
the transfer of funds from one Group to one of the other Groups will be made at
the discretion of the Board, except to the extent that the Company is
contractually obligated to make a transfer of funds to an entity included in a
Group. In making such determination, the Board may also consider regulatory
requirements, including those imposed by the public utility commissions of
various states and the FCC. Nothing in the foregoing policies (as opposed to any
such contractual obligation) obligates the Board to cause a Group to provide
funds to one of the other Groups if the Board determines that it is in the best
interests of the Company not to do so.
The above management and allocation policies could be modified or rescinded
by the Board, in its sole discretion, without approval of shareholders, although
there is no present intention to do so. The Board could also adopt additional
policies depending upon the circumstances. The Board intends that any
determination it might make to modify or rescind such policies, or to adopt
additional policies, including any such decision that could have disparate
effects upon holders of different classes or series of common stock, would be
made by the Board considering the best interests of the Company and its
shareholders.
Any determinations made by the Board under any provision described above
will be final and binding on all shareholders of the Company, except as may
otherwise be required by law. Such a determination would not be binding only if
it were established that the determination was made in breach of a fiduciary
duty of the Board.
THE RETAINED INTERESTS
If and when additional shares of one of the Tracking Stocks are issued
(E.G., a public offering), the Board will identify whether the issuance is for
the benefit of that Tracking Group or the TDS Group or both. If the issuance is
for the benefit of a Tracking Group, the proceeds would be attributed to such
Tracking Group and the shares issued would come from authorized but unissued
shares of the Tracking Group, which would proportionately dilute the existing
Outstanding Interest and the corresponding Retained Interest. If the issuance is
for the benefit of the Retained Interest, the proceeds would be attributed to
the TDS Group and the Retained Interest would be reduced accordingly. The
Retained Interest in a Tracking Group may change pursuant to such issuances as
well as any transfers of cash or other property between the TDS Group and the
Tracking Group.
With respect to transfers of cash or other property between the TDS Group
and the Tracking Groups, there are no specific criteria for determining when
such a transfer will be reflected as a borrowing or as an increase or reduction
in a Retained Interest. The Board expects to make such determinations, either in
specific instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant, including,
without limitation, the needs of the Company, the financing needs and objectives
of the Groups, the investment objectives of the Groups, the availability, cost
and time associated with alternative financing sources, prevailing interest
rates and general economic conditions.
112
<PAGE>
The Retained Interest in any Tracking Group may change pursuant to any
subsequent transfers of cash or other property from the Company to the Tracking
Group which are specifically designated by the Board as being made to alter the
Retained Interest (in contrast to transfers made for other consideration such as
transfers as loans or in purchase and sale transactions) or if outstanding
shares of a Tracking Group are retired or otherwise cease to be outstanding
following their purchase with funds attributed to the TDS Group.
The amount of the Retained Interest for a Tracking Group at any point in
time will be expressed in terms of the "Number of Shares Issuable with Respect
to Retained Interest," which is intended to provide a measure of any Retained
Interest on a basis comparable to an investment in Tracking Stock.
The Retained Interest in the Telecom Group will not be represented by issued
and outstanding Telecom Group Shares. None of the Number of Shares Issuable with
Respect to Retained Interest would be represented by outstanding Telecom Group
Shares and, therefore, would not be entitled to any voting rights. Accordingly,
the Company will not have any voting rights with respect to any Retained
Interest, and the outcome of any vote of the Telecom Group Shares would be
determined by the holders of the outstanding Telecom Group Shares. In addition,
outstanding Telecom Group Shares that are held by majority-owned subsidiaries of
the Company (as to which the Company owns a majority of the shares entitled to
vote in the election of directors) would not, in accordance with the DGCL, be
entitled to vote on matters presented to shareholders or be counted for quorum
purposes.
The Board could, in its sole discretion, determine from time to time to have
the Company contribute cash or other property as additional equity to the
Telecom Group or any other Tracking Group, and have this be reflected as an
increase in the Number of Shares Issuable with Respect to Retained Interest. In
such event, the Retained Interest Fraction with respect to the Telecom Group or
any other such Tracking Group will increase and the related Outstanding Interest
Fraction will decrease accordingly. The Board could, in its sole discretion,
also determine from time to time to transfer cash or other property of the
Telecom Group or any other Tracking Group to the TDS Group and have such
transfer reflected as a reduction in the Retained Interest, in which case the
Number of Shares Issuable with Respect to Retained Interest would be decreased.
In such event, such Retained Interest Fraction would decrease and the related
Outstanding Interest Fraction would increase accordingly. The Board could, in
its sole discretion, determine to make contributions or other transfers referred
to in this paragraph after consideration of such factors as it deems relevant,
including, without limitation, the needs of the Company, the financing needs and
objectives of each of the Groups, the investment objectives of the Groups, the
availability, cost and time associated with alternative financing sources,
prevailing interest rates and general economic conditions.
In general, if the Retained Interest is increased by a transfer of funds or
other assets from the TDS Group to the Telecom Group or any other Tracking
Group, the Number of Shares Issuable with Respect to Retained Interest would be
increased by an amount determined by dividing the amount of funds or value of
assets transferred by the Market Value of a Telecom Group Share or any other
share of Tracking Stock of any other such Group as of the date of such transfer.
Any transfer of funds or other assets from the Telecom Group or any other
Tracking Group to the TDS Group in respect of a decrease in the Number of Shares
Issuable with Respect to Retained Interest would be similarly calculated. To the
extent outstanding Telecom Group Shares or any other shares of Tracking Stock
are retired or otherwise cease to be outstanding following their purchase with
funds attributed to the TDS Group, the Number of Shares Issuable with Respect to
Retained Interest would increase on a share-for-share basis. Telecom Group
Shares or any other Tracking Stock purchased with funds attributed to the TDS
Group which remain outstanding (as a result of being held by a subsidiary
included in the TDS Group) would not increase the Retained Interest but would
represent an outstanding interest in the common shareholders' equity value of
the TDS Group attributable to the Telecom Group or any such Tracking Group. The
Number of Shares Issuable with Respect to Retained Interest, if any, would also
(i) be adjusted from time to time as appropriate to reflect (a) subdivisions (by
stock split or otherwise) and combinations (by reverse stock split
113
<PAGE>
or otherwise) of the Telecom Group Shares or any other Tracking Stock, (b)
dividends or distributions payable in Telecom Group Shares or any other shares
of Tracking Stock to holders of the Telecom Group Shares or any other such
Tracking Stock and (c) reclassifications of the Telecom Group Shares or any
other Tracking Stock and (ii) be decreased by the number of Telecom Group Shares
or shares of any other Tracking Stock (a) issued upon conversion, exercise or
exchange of Convertible Securities that are attributed to the TDS Group or (b)
issued by the Company as a dividend or distribution or by reclassification or
exchange to holders of Common Shares, Series A Common Shares or Special Common
Shares.
For financial reporting purposes, Telecom Group Shares or shares of Tracking
Stock acquired by subsidiaries of the TDS Group which remain outstanding
following such acquisition would be combined with the Number of Shares Issuable
with Respect to Retained Interest, if any, and reported as part of the TDS
Group's interest in the Telecom Group or the related Tracking Group. Any
differences between such reported interest and any then existing Retained
Interest would be reconcilable by adding to any then existing Retained Interest
the number of outstanding Telecom Group Shares or shares of Tracking Stock held
by subsidiaries of the TDS Group. Because these shares would still be
outstanding for purposes of the receipt of dividends and payment of redemption
or liquidation amounts, the TDS Group would obtain substantially the same
economic benefits from such outstanding shares as it would have received had
such shares been retired or otherwise ceased to be outstanding following their
purchase and added to the Number of Shares Issuable with Respect to Retained
Interest.
The authorized Telecom Group Shares in excess of the total number of shares
outstanding will be available for issuance or sale without further approval by
the Company's shareholders and may be issued at any time at prices that would
dilute the value of the outstanding Telecom Group Shares. Whenever Telecom Group
Shares are subsequently issued or sold by the Company, the Company will identify
(i) the number of Telecom Group Shares issued and sold that represent a Retained
Interest, if any, the sale of which shares will reduce the Number of Shares
Issuable with Respect to Retained Interest on a share-for-share basis and the
net proceeds of which sale will be reflected entirely in the combined financial
statements of the TDS Group, and (ii) the number of such shares that represent
an additional equity interest in the Telecom Group, the sale of which shares
will reduce the available Telecom Group Shares and the net proceeds of which
sale will be reflected entirely in the financial statements of the Telecom
Group. The Board expects to make such determination, in its sole discretion,
after consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives of the
Telecom Group and the other Groups, the investment objectives of the Telecom
Group and the other Groups, the availability, cost and time associated with
alternative financing sources, prevailing interest rates and general economic
conditions.
In the event of any dividend or other distribution paid or distributed in
respect of the outstanding Telecom Group Shares (other than in shares of any
other Tracking Stock, which will result in the adjustment to the Number of
Shares Issuable with Respect to Retained Interest), the TDS Group's combined
financial statements would be credited, and the Telecom Group's financial
statements would be charged (in addition to the charge for such dividend or
other distribution paid upon outstanding Telecom Group Shares), with an amount
equal to the product of (i) the aggregate amount of such dividend or other
distribution paid or distributed in respect of outstanding Telecom Group Shares
(including any dividend related to the Fair Value of the Net Proceeds from the
Disposition of all or substantially all of the assets and properties of a
Tracking Group), times (ii) a fraction, the numerator of which is the Retained
Interest Fraction and the denominator of which is the Outstanding Interest
Fraction for the Telecom Group.
If Telecom Group Shares are retired or otherwise cease to be outstanding
following their purchase with funds attributed to the TDS Group, the Number of
Shares Issuable with Respect to Retained Interest would increase on a
share-for-share basis and the related Retained Interest Fraction would increase
and the related Outstanding Interest Fraction would decrease accordingly. If the
purchase of Telecom Group Shares were made with funds attributed to the Telecom
Group, the Number of Shares Issuable with
114
<PAGE>
Respect to Retained Interest would not be increased, but the Retained Interest
Fraction would increase and the Outstanding Interest Fraction would decrease
accordingly. The Board would, in its sole discretion, determine whether
purchases of Telecom Group Shares should be made with consideration attributed
to the TDS Group or one of the other Tracking Stock Groups, by considering such
factors as it deems relevant, including, without limitation, the needs of the
Company, the financing needs and objectives of the Telecom Group and the other
Groups, the investment objectives of the the Telecom Group and the other Groups,
the availability, cost and time associated with alternative financing sources,
prevailing interest rates and general economic conditions.
If the Number of Shares Issuable with Respect to Retained Interest is
reduced to zero as a result of any combination of one or more of issuances or
sales of Telecom Group Shares for the benefit of the TDS Group or other events,
Telecom Group Shares could no longer be issued or sold by the Company for the
benefit of the TDS Group unless a further Retained Interest is subsequently
created or some other appropriate allocation is made. If the net proceeds of any
issuance or sale by the Company of Telecom Group Shares are allocated to any
other Tracking Group, the Number of Shares Issuable with Respect to Retained
Interest would not be reduced, but the Retained Interest Fraction would decrease
and the Outstanding Interest Fraction would increase accordingly.
The "Outstanding Interest Fraction" represents the percentage interest in
the common shareholders' equity value of the Company attributable to a Tracking
Group that is represented at any time by the outstanding shares of Tracking
Stock, and the "Retained Interest Fraction" represents any remaining percentage
interest in the common shareholders' equity value of the Company attributable to
a Tracking Group that is attributed to the TDS Group by virtue of a Retained
Interest. Assuming no Inter-Group Interest Fractions, the sum of the Outstanding
Interest Fraction and the Retained Interest Fraction for a Tracking Group will
always equal 100%. Should an Inter-Group Interest Fraction exist, the sum of
such Inter-Group Interest Fraction(s), the Outstanding Interest Fraction and the
Retained Interest Fraction, if any, for a Tracking Group will always equal 100%.
See "Certain Definitions."
INTER-GROUP INTERESTS
Initially, it is contemplated that no Tracking Group would have an
Inter-Group Interest in any other Tracking Group. It is possible that one or
more Inter-Group Interests could develop at some time in the future. For
example, as the result of an inter-Group transfer of assets from the Telecom
Group to the Cellular Group, the Telecom Group could acquire an interest in the
Cellular Group. In such a hypothetical event, the Telecom Group would have an
Inter-Group Interest in the Cellular Group for the benefit of the holders of the
Telecom Group Shares. A Tracking Group may not have an Inter-Group Interest in
the TDS Group.
An Inter-Group Interest in a Tracking Group would be created only if a
transfer of cash or other property from one of the Tracking Groups to another
Tracking Group is specifically designated by the Board as being made to create
an Inter-Group Interest (in contrast to transfers made for other consideration,
such as cash transfers representing borrowings or in cash purchase or sale
transactions) or if outstanding shares of a Tracking Group are retired or
otherwise cease to be outstanding following their purchase with funds attributed
to one of the Tracking Groups.
With respect to transfers of cash or other property between the Tracking
Groups, there are no specific criteria for determining when such a transfer will
be reflected as an increase or reduction in borrowings between Tracking Groups
or as a creation of, or an increase or reduction in, an Inter-Group Interest.
The Board expects to make such determinations, either in specific instances or
by setting generally applicable policies from time to time, after consideration
of such factors as it deems relevant, including, without limitation, the needs
of the Company, the financing needs and objectives of the Tracking Groups, the
investment objectives of the Tracking Groups, the availability, cost and time
associated with alternative financing sources, prevailing interest rates and
general economic conditions.
115
<PAGE>
For illustrative purposes hereof, the Tracking Group acquiring an
Inter-Group Interest in one of the other Groups will be referred to as the
"Investor Group" and the Tracking Group in which an Inter-Group Interest is
being acquired will be referred to as the "Issuer Group."
The amount of any Inter-Group Interest of the Investor Group in the Issuer
Group (the "Inter-Group Interest in Issuer Group") at any point in time would be
expressed in terms of the "Number of Shares Issuable with Respect to Inter-Group
Interest" in the Issuer Group, which is intended to provide a measure of any
Inter-Group Interest of the Investor Group in the Issuer Group on a basis
comparable to an investment in shares of Tracking Stock of the Issuer Group (the
"Issuer Group Shares").
The Board could, in its sole discretion, determine from time to time to have
the Company contribute cash or other property of the Investor Group as
additional equity to the Issuer Group, which would increase the Number of Shares
Issuable with Respect to Inter-Group Interest in Issuer Group as described
below. In such event, the Inter-Group Interest Fraction will increase and the
Issuer Group Outstanding Interest Fraction will decrease accordingly. The Board
could, in its sole discretion, also determine from time to time to transfer cash
or other property of the Issuer Group from the Issuer Group to the Investor
Group in respect of a reduction in its Inter-Group Interest in the Issuer Group,
in which case the Number of Shares Issuable with Respect to the Inter-Group
Interest would be decreased as described below. In such event, the Inter-Group
Interest Fraction would decrease and the Issuer Group Outstanding Interest
Fraction would increase accordingly. The Board could, in its sole discretion,
determine to make contributions or other transfers referred to in this paragraph
after consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives of the
each of the Groups, the investment objectives of the Groups, the availability,
cost and time associated with alternative financing sources, prevailing interest
rates and general economic conditions.
If an Inter-Group Interest in the Issuer Group is created by a transfer of
funds or other assets from the Investor Group to the Issuer Group, the Number of
Shares Issuable with Respect to the Inter-Group Interest in the Issuer Group
would be increased by an amount determined by dividing the amount of funds or
value of assets transferred by the Market Value of an Issuer Group Share as of
the date of such transfer. In the event a subsequent transfer of funds or other
assets from the Investor Group to the Issuer Group is determined by the Board to
be made in respect of an increase in the Inter-Group Interest in the Issuer
Group, the Number of Shares Issuable with Respect to the Inter-Group Interest in
the Issuer Group would be increased by an amount determined by dividing the
amount of the additional funds or value of the additional assets transferred by
the Market Value of an Issuer Group Share as of the date of such transfer. Any
decrease in the Number of Shares Issuable with Respect to the Inter-Group
Interest in the Issuer Group resulting from a transfer of funds or other assets
from the Issuer Group to the Investor Group determined by the Board to be made
in respect of such a transfer would be similarly calculated.
To the extent outstanding Issuer Group Shares are retired or otherwise cease
to be outstanding following their purchase with funds attributed to the Investor
Group, the Number of Shares Issuable with Respect to the Inter-Group Interest in
the Issuer Group would increase on a share-for-share basis. Issuer Group Shares
purchased with funds attributed to the Investor Group which remain outstanding
(as a result of being held by a subsidiary included in the Investor Group) would
not create an Inter-Group Interest or increase any then existing Inter-Group
Interest in the Issuer Group but would represent an outstanding interest in the
common shareholders' equity value of the Company attributable to the Issuer
Group.
The Number of Shares Issuable with Respect to the Inter-Group Interest in
the Issuer Group, if any, would also (i) be adjusted from time to time as
appropriate to reflect (a) subdivisions (by stock split or otherwise) and
combinations (by reverse stock split or otherwise) of the Issuer Group Shares,
(b) dividends or distributions payable in Issuer Group Shares to holders of
Issuer Group Shares and (c) reclassifications of Issuer Group Shares and (ii) be
decreased by the number of Issuer Group Shares (a) issued upon conversion,
exercise or exchange of Convertible Securities that are attributed to the
Investor Group or (b) issued by the Company as a dividend or distribution or by
reclassification or exchange to holders of
116
<PAGE>
Investor Group Shares. The Inter-Group Interest in the Issuer Group, if any,
would not be represented by outstanding Issuer Group Shares and would have no
voting rights.
For financial reporting purposes, shares of Tracking Stock acquired by
subsidiaries of the Company included in an Investor Group which remain
outstanding following such acquisition would be combined with the Investor
Group's Number of Shares Issuable with Respect to Inter-Group Interest in the
Issuer Group, if any, and reported as the Investor Group's interest in the
Issuer Group. Any differences between such reported interest and any then
existing Inter-Group Interest in the Issuer Group Shares would be reconcilable
by adding to any then existing Inter-Group Interest the number of outstanding
Issuer Group Shares held by the consolidated subsidiaries of the Company
included in the Investor Group. Because these shares would still be outstanding
for purposes of the receipt of dividends and payment of redemption or
liquidation amounts, the Investor Group would obtain substantially the same
economic benefits from such outstanding shares as it would have received had
such shares been retired or otherwise ceased to be outstanding following their
purchase and added to the Investor Group's Number of Shares Issuable with
Respect to the Inter-Group Interest in the Issuer Group.
The authorized Issuer Group Shares in excess of the total number of shares
outstanding will be available for issuance or sale without further approval by
the Company's shareholders and may be issued at any time at prices that would
dilute the value of the outstanding Issuer Group Shares. If there is an Inter-
Group Interest in the future, whenever Issuer Group Shares are subsequently
issued or sold by the Company, the Company will identify (i) the number of
Issuer Group Shares issued and sold that represent the Inter-Group Interest, if
any, the sale of which shares will reduce the Number of Shares Issuable with
Respect to the Inter-Group Interest in the Issuer Group on a share-for-share
basis and the net proceeds of which sale will be reflected entirely in the
combined financial statements of the Investor Group, and (ii) the number of such
shares that represent an additional equity interest in the Issuer Group, the
sale of which shares will reduce the available shares of the Issuer Group and
the net proceeds of which sale will be reflected entirely in the combined
financial statements of the Issuer Group. The Board expects to make such
determination, in its sole discretion, after consideration of such factors as it
deems relevant, including, without limitation, the needs of the Company, the
financing needs and objectives of the Groups, the investment objectives of the
Groups, the availability, cost and time associated with alternative financing
sources, prevailing interest rates and general economic conditions.
In the event of any dividend or other distribution paid or distributed in
respect of the outstanding Issuer Group Shares, (other than in Issuer Group
Shares, which will result in the adjustment to the Number of Shares Issuable
with Respect to Retained Interest in the Issuer Group), an Investor Group's
combined financial statements would be credited, and the Issuer Group's combined
financial statements would be charged (in addition to the charge for such
dividend or other distribution paid upon outstanding Issuer Group Shares), with
an amount equal to the product of (i) the aggregate amount of such dividend or
other distribution paid or distributed in respect of outstanding Issuer Group
Shares (including any dividend related to the Fair Value of the Net Proceeds
from the Disposition of all or substantially all of the assets and properties of
the Issuer Group), times (ii) a fraction, the numerator of which is the
Inter-Group Interest Fraction in the Issuer Group and the denominator of which
is the Issuer Group Outstanding Interest Fraction (as defined below).
If Issuer Group Shares are retired or otherwise cease to be outstanding
following their purchase with funds attributed to the Investor Group, the Number
of Shares Issuable with Respect to Inter-Group Interest in the Issuer Group
would increase on a share-for-share basis and the Issuer Group Inter-Group
Interest Fraction (as defined below) would increase and the Issuer Group
Outstanding Interest Fraction would decrease accordingly. If the purchase of
Issuer Group Shares were made with funds attributed to the Issuer Group, the
Number of Shares Issuable with Respect to Inter-Group Interest in the Issuer
Group would not be increased, but the Issuer Group Inter-Group Interest Fraction
would increase and the Issuer Group Outstanding Interest Fraction would decrease
accordingly. The Board would, in its sole discretion, determine whether
purchases of Tracking Stock of one Group should be made with consideration
117
<PAGE>
attributed to such Group, the TDS Group or one of the other Tracking Groups, by
considering such factors as it deems relevant, including, without limitation,
the needs of the Company, the financing needs and objectives of the Groups, the
investment objectives of the Groups, the availability, cost and time associated
with alternative financing sources, prevailing interest rates and general
economic conditions.
If the Number of Shares Issuable with Respect to Inter-Group Interest is
reduced to zero as a result of any combination of one or more issuances or sales
of Issuer Group Shares for the benefit of the Investor Group, Issuer Group
Shares could no longer be issued or sold by the Company for the account of the
Investor Group unless a further Inter-Group Interest in the Issuer Group is
subsequently created or unless some other appropriate allocation is made. If the
net proceeds of any issuance or sale by the Company of Issuer Group Shares are
allocated to the Issuer Group, the Number of Shares Issuable with Respect to
Inter-Group Interest in the Issuer Group would not be reduced, but the
Inter-Group Interest Fraction in the Issuer Group would decrease and the Issuer
Group Outstanding Interest Fraction would increase accordingly.
The "Issuer Group Outstanding Interest Fraction" represents the percentage
interest in the common shareholders' equity value of the Company attributable to
the Issuer Group that is represented at any time by the outstanding Issuer Group
Shares, and the "Issuer Group Inter-Group Interest Fraction" represents any
percentage interest in the common shareholders' equity value of the Company
attributable to the Issuer Group that is attributed to the Investor Group by
virtue of an Inter-Group Interest. The sum of: (i) the Issuer Group Retained
Interest, if any, (ii) Issuer Group Outstanding Interest Fraction and (iii) the
Issuer Group Inter-Group Interest Fractions, would always equal 100% for any
Issuer Group. See "--Certain Definitions."
CERTAIN DEFINITIONS
As used in this Prospectus, unless the context requires otherwise, the
following terms have the meanings specified below:
"ADJUSTED OUTSTANDING INTEREST FRACTION," as of any date, means, with
respect to a particular class of Tracking Stock, a fraction the numerator of
which is the aggregate number of shares of such class of Tracking Stock
outstanding on such date and the denominator of which is the sum of (a) such
aggregate number of outstanding shares, (b) the Number of Shares Issuable with
Respect to Retained Interest for such class of Tracking Stock as of such date,
(c) the aggregate Number of Shares Issuable with Respect to Inter-Group Interest
by all other Tracking Groups in such Tracking Stock, if any, and (d) the Number
of Shares Issuable to Third Parties with respect to such Tracking Stock.
"ADJUSTMENT DATE," means the date which is ten Trading Days before the
record date for each annual meeting of shareholders of the Company.
"AERIAL" means Aerial Communications, Inc., a Delaware corporation.
"AERIAL GROUP" means, as of any date that any Aerial Group Shares have been
issued and continue to be outstanding: (a) the interest of the Company or of any
of its subsidiaries in Aerial and its subsidiaries (including any successor
thereto by merger, consolidation or sale of all or substantially all of its
assets, whether or not in connection with a Related Business Transaction) and
their businesses, assets and liabilities, (b) all businesses, assets and
liabilities of the Company or any of its subsidiaries to the extent attributed
to the Aerial Group by the Board, whether or not such businesses, assets or
liabilities are businesses, assets and liabilities of Aerial or its subsidiaries
(or a successor as described in clause (a) of this sentence), (c) all
businesses, assets and liabilities contributed or otherwise transferred to the
Aerial Group from the TDS Group or any of the other Tracking Groups, (d) the
interest of the Company or any of its subsidiaries in the businesses, assets and
liabilities acquired by the Company or any of its subsidiaries for the Aerial
Group, as determined by the Board, (e) a proportionate undivided interest in
each and every business, asset and liability attributed to another Tracking
Group equal to the Inter-Group Interest
118
<PAGE>
Fraction, if any, of the Aerial Group in such other Tracking Group and (f) such
adjustments to the foregoing as may be contemplated by the Restated Certificate
or which may be determined in good faith by the Board.
"AERIAL MERGER" means the proposed merger between Aerial and a wholly-owned
subsidiary of TDS pursuant to which Aerial Group Shares would be issued in
exchange for all outstanding Common Shares of Aerial not owned by TDS and Aerial
would become a wholly-owned subsidiary of TDS.
"AMEX" means the American Stock Exchange.
"AVAILABLE DIVIDEND AMOUNT," as of any date, means, with respect to any
Tracking Group, the product of the Outstanding Interest Fraction of such
Tracking Group and either (a) the excess of (i) an amount equal to the total
assets of such Tracking Group less the total liabilities (not including
preferred stock) of such Tracking Group as of such date over (ii) the aggregate
par value of, or any greater amount determined to be capital in respect of, all
outstanding shares of such class of Tracking Stock and each class or series of
Preferred Shares or Undesignated Shares attributed to such Tracking Group or (b)
in case there is no such excess, an amount equal to Company Earnings (Losses)
attributable to such Tracking Group (if positive) for the fiscal year in which
such date occurs and/or the preceding fiscal year. The Available Dividend Amount
is intended to be similar to an amount equal to the product of the Outstanding
Interest Fraction and the amount that would be legally available for the payment
of dividends on shares of Tracking Stock under Delaware law if the related
Tracking Group were a separate Delaware corporation. The "Available Dividend
Amount" as of any date, means, with respect to the TDS Group, the greater of (x)
the amount of all surplus (as defined in the DGCL) of the Company or, if there
is no surplus, the net profits (as contemplated by the DGCL) of the Company for
the fiscal year in which such date occurs and/or the preceding fiscal year (if
positive), less the sum of the Available Dividend Amounts of all of the Tracking
Groups, or (y) an amount equal to the sum of the Retained Interest Available
Dividend Amounts (if positive) with respect to all of the Tracking Groups, plus,
without duplication, either (a) the excess of (i) an amount equal to the total
assets of the TDS Group less the total liabilities (not including preferred
stock) of the TDS Group as of such date over (ii) the aggregate par value of, or
any greater amount determined to be capital in respect of, all outstanding
Series A Common Shares, Common Shares and any issued Special Common Shares, and
each class or series of Preferred Shares or Undesignated Shares attributed to
the TDS Group or (b) in case there is no such excess, an amount equal to Company
Earnings (Losses) attributable to the TDS Group (if positive) for the fiscal
year in which such date occurs and/or the preceding fiscal year.
"BOARD" means the Board of Directors of the Company.
"CELLULAR GROUP" means, as of any date that any Cellular Group Shares have
been issued and continue to be outstanding: (a) the interest of the Company or
of any of its subsidiaries in U.S. Cellular and its subsidiaries (including any
successor thereto by merger, consolidation or sale of all or substantially all
of its assets, whether or not in connection with a Related Business Transaction)
and their respective businesses, assets and liabilities, (b) all businesses,
assets and liabilities of the Company or any of its subsidiaries to the extent
attributed to the Cellular Group by the Board, whether or not such businesses,
assets or liabilities are businesses, assets and liabilities of U.S. Cellular or
any of its subsidiaries (or a successor as described in clause (a) of this
sentence), (c) all businesses, assets and liabilities contributed or otherwise
transferred to the Cellular Group from the TDS Group or any of the other
Tracking Groups, (d) the interest of the Company or any of its subsidiaries in
the businesses, assets and liabilities acquired by the Company or any of its
subsidiaries for the Cellular Group, as determined by the Board, (e) a
proportionate undivided interest in each and every business, asset and liability
attributed to another Tracking Group equal to the Inter-Group Interest Fraction,
if any, of the Cellular Group in such other Tracking Group and (f) such
adjustments to the foregoing as may be contemplated by the Restated Certificate
or which may be determined in good faith by the Board.
119
<PAGE>
"COMMITTED ACQUISITION SHARES" as of any date, means (a) Common Shares that
the Company had, prior to such date, agreed to issue in connection with
acquisitions, but as of such date had not been issued, and (b) Common Shares
that are issuable upon conversion, exercise or exchange of Convertible
Securities that the Company had, prior to such date, agreed to issue in
connection with acquisitions, but as of such date had not been issued, in each
case including obligations of the Company to issue Cellular Group Shares,
Telecom Group Shares and Aerial Group Shares as a result of the Distribution
pursuant to anti-dilution provisions in the acquisition agreements providing for
the issuance of Common Shares or Convertible Securities which are convertible
into or exercisable or exchangeable for Common Shares, without duplication of
any Common Shares issuable upon conversion, exercise or exchange of Convertible
Securities.
"COMMON SHARES" means the Common Shares, par value $.01 per share, of the
Company.
"COMMON STOCK" means shares of capital stock of the Company designated as
common stock, including Series A Common Shares, Common Shares, Special Common
Shares, Cellular Group Shares, Telecom Group Shares and Aerial Group Shares.
"COMPANY" means Telephone and Data Systems, Inc., a Delaware corporation.
"COMPANY EARNINGS (LOSS)" for any period, with respect to any Group, means
the net earnings or loss of such Group for such period determined on a basis
consistent with the determination of the net earnings or loss of such Group for
such period as presented in the combined financial statements of such Group for
such period, including income and expenses of the Company attributed to the
operations of such Group on a substantially consistent basis, including without
limitation, corporate, general and administrative costs, net interest and income
taxes.
"CONVERTIBLE SECURITIES" means any securities of the Company, including
preferred stock, options and other rights (other than common stock), that are
convertible into, exchangeable for or evidence the right to purchase any shares
of any series of common stock, whether upon conversion, exercise or exchange,
pursuant to anti-dilution provisions of such securities or otherwise.
"DGCL" means the Delaware General Corporation Law.
"DISPOSITION" means the sale, transfer, assignment or other disposition
(whether by merger, consolidation, sale or contribution of assets or stock or
otherwise) of all or substantially all of the properties or assets of a Tracking
Group, as described under "--Disposition of Assets of a Tracking Group."
"DISTRIBUTION" means the contemplated distribution of all or any part of the
Telecom Group Shares, the Cellular Group Shares and/or Aerial Group Shares to be
made to the holders of Common Shares and Series A Common Shares, as described
hereunder.
"FAIR VALUE OF NET PROCEEDS" means, as of any date, with respect to any
Disposition of any of the business, assets and liabilities of a Tracking Group,
an amount, if any, equal to the fair value of the gross proceeds of such
Disposition less any payment of, or reasonable provision for, (a) any taxes
related to the Disposition or in respect of any resulting dividend or
redemption, including deferred taxes, but not including any deductions or other
offsets which may be available to the Company which are not attributed to such
Tracking Group, (b) any transaction costs, including, without limitation, any
legal, investment banking and accounting fees and expenses and (c) any
liabilities and other obligations (contingent or otherwise) of, or attributed
to, that Tracking Group, including, without limitation, obligations with respect
to committed acquisitions and Convertible Securities attributed to the Tracking
Group, any indemnity or guarantee obligations incurred in connection with the
Disposition or any liabilities for future purchase price adjustments, and any
preferential amounts plus any accumulated and unpaid dividends and other
obligations in respect of Preferred Shares attributed to such Tracking Group
(without duplication). For purposes of this definition, any businesses, assets
and liabilities of the affected Tracking Group which the
120
<PAGE>
Board determines to retain after such Disposition shall be deemed to constitute
"reasonable provision" for such amount of taxes, costs and liabilities
(contingent or otherwise). To the extent the proceeds of any Disposition include
any securities or other property other than cash, the Board shall determine the
fair value of such securities or property, including for the purpose of
determining comparable value thereof if the Board determines to pay a dividend
or redemption price in cash or securities or other property as provided under
the terms of the Tracking Stock.
"GROUP" means the Telecom Group, the Aerial Group, the Cellular Group, and
the TDS Group and any other Group so designated by the Board.
"INTER-GROUP INTEREST," as of any date, means that part of the Company's
equity interest in a Tracking Group which is retained (or subsequently acquired)
by the Company and attributed to a Group other than the TDS Group.
"INTER-GROUP INTEREST FRACTION," as of any date, with respect to any
Investor Group, means a fraction the numerator of which is the Number of Shares
Issuable with Respect to an Inter-Group Interest in an Issuer Group by such
Investor Group as of such date, and the denominator of which is the sum of (a)
the aggregate Number of Shares Issuable with Respect to Inter-Group Interest in
such Issuer Group by all Investor Groups as of such date, (b) the aggregate
number of shares of Tracking Stock of such Issuer Group outstanding as of such
date and (c) the Number of Shares Issuable with Respect to Retained Interest in
such Issuer Group as of such date.
"ISSUER GROUP" means a Tracking Group in which there is an Inter-Group
Interest by an Investor Group.
"INVESTOR GROUP" means a Tracking Group which holds an Inter-Group Interest
in an Issuer Group.
"LIQUIDATION UNIT" means the number or fraction associated with each share
of common stock which determines the proportionate amount of assets such share
is entitled to upon the liquidation, dissolution or winding-up of the Company as
described under "Description of Capital Stock--Liquidation Rights."
"MARKET CAPITALIZATION" of any class or series of capital stock of the
Company on any Trading Day means the product of (a) the Market Value of one
share of such class or series on such Trading Day and (b) the number of shares
of such class or series outstanding on such Trading Day.
"MARKET VALUE" of a share of any class or series of capital stock of the
Company on any day means the average of the high and low reported sale prices
regular way of a share of such class or series on such day (if such day is a
Trading Day, and if such day is not a Trading Day, on the Trading Day
immediately preceding such day) or in case no such reported sale takes place on
such Trading Day the average of the reported closing bid and asked prices
regular way of a share of such class or series on such Trading Day, in either
case on the American Stock Exchange or such other national securities exchange
or the Nasdaq National Market on which such class or series is listed, or if the
shares of such class or series are not quoted on the American Stock Exchange or
any other national securities exchange or the Nasdaq National Market on such
Trading Day, the average of the closing bid and asked prices of a share of such
class or series in the over-the-counter market on such Trading Day as furnished
by any New York Stock Exchange member firm selected from time to time by the
Company, or if such closing bid and asked prices are not made available by any
such New York Stock Exchange member firm on such Trading Day, the market value
of a share of such class or series as determined by the Board; provided, that if
the Special Common Shares or Series A Common Shares are not trading on a
national securities exchange or the Nasdaq National Market, and if bid and asked
prices are not available for the Special Common Shares or the Series A Common
Shares, the Market Value of a Special Common Share or a Series A Common Share,
as applicable, shall be deemed to be the same as a Common Share for purposes of
determining Market Value under "Description of Terms of Tracking Stock--Voting
Rights, --Dispositions of Assets of a Tracking Group, --Conversion at Option of
the Company and --Liquidation"; and provided further, that for
121
<PAGE>
purposes of determining Market Values under "Description of Terms of Tracking
Stock--Voting Rights, --Disposition of Assets of a Tracking Group, --Conversion
at Option of the Company and --Liquidation," (a) the "Market Value" of a share
of any series of common stock on any day prior to the "ex" date or any similar
date for any dividend or distribution paid or to be paid with respect to such
series of common stock will be reduced by the fair market value of the per share
amount of such dividend or distribution as determined by the Board and (b) the
"Market Value" of a share of any series of common stock on any day prior to (i)
the effective date of any subdivision (by stock split or otherwise) or
combination (by reverse stock split or otherwise) of outstanding shares of such
series of common stock or (ii) the "ex" date or any similar date for any
dividend or distribution with respect to any such series of common stock in
shares of such series of common stock, will be appropriately adjusted to reflect
such subdivision, combination, dividend or distribution.
"NUMBER OF SHARES ISSUABLE WITH RESPECT TO INTER-GROUP INTEREST" means, with
respect to any Tracking Group (for purposes of this definition, the "Issuer
Group"), the number of Issuer Group Shares (the "Issuer Group Shares") which are
attributed to, and that could be issued or sold by the Company for the benefit
of, another Tracking Group (for purposes of this definition, the "Investor
Group"). Initially, the Number of Shares Issuable with Respect to Inter-Group
Interest in each Tracking Group shall be zero, and shall from time to time
thereafter, as applicable, be:
(a) adjusted as appropriate to reflect subdivisions (by stock split or
otherwise) and combinations (by reverse stock split or otherwise) of the
Issuer Group Shares and dividends or distributions of Issuer Group Shares to
the holders thereof and other reclassifications of the Issuer Group Shares
and similar transactions;
(b) decreased (but not to less than zero) by (i) the aggregate number of
Issuer Group Shares issued or sold by the Company, for cash, securities or
other property, the proceeds of which are attributed to the Investor Group,
(ii) the aggregate number of Issuer Group Shares issued or delivered upon
conversion, exercise or exchange of Convertible Securities (other than
Pre-Distribution Convertible Securities), the proceeds of which are
attributed to the Investor Group, (iii) the aggregate number of Issuer Group
Shares issued or delivered by the Company as a dividend or distribution to
holders of shares of the Investor Group, (iv) the aggregate number of Issuer
Group Shares issued or delivered upon the conversion, exercise or exchange
of any Convertible Securities (other than Pre-Distribution Convertible
Securities) issued or delivered by the Company as a dividend or distribution
or by reclassification or exchange to holders of shares of the Investor
Group, and (v) the aggregate number of Issuer Group Shares (rounded, if
necessary, to the nearest whole number), equal to the aggregate fair value
(as determined by the Board) of assets or properties attributed to the
Issuer Group that are transferred from the Issuer Group to the Investor
Group in consideration of a reduction in the Number of Shares Issuable with
Respect to Inter-Group Interest by the Investor Group in the Issuer Group,
divided by the Market Value of one Issuer Group Share as of the date of such
transfer;
(c) increased by (i) the aggregate number of any Issuer Group Shares
which are retired or otherwise cease to be outstanding following their
purchase with funds attributed to the Investor Group and (ii) a number
(rounded, if necessary, to the nearest whole number) equal to the fair value
(as determined by the Board) of assets or properties theretofore attributed
to the Investor Group that are contributed to the Issuer Group in
consideration of an increase in the Number of Shares Issuable with Respect
to Inter-Group Interest in the Issuer Group by the Investor Group, divided
by the Market Value of one Issuer Group Share as of the date of such
contribution; and
(d) adjusted as may be appropriate to reflect other transactions between
the Issuer Group and the Investor Group, as determined in good faith by the
Board.
122
<PAGE>
Whenever a change in the Number of Shares Issuable with Respect to
Inter-Group Interest with respect to any Group occurs, the Company shall
prepare and file a statement of such change with the Secretary of the
Company.
"NUMBER OF SHARES ISSUABLE WITH RESPECT TO RETAINED INTEREST" means the
number of shares of a class of Tracking Stock of a Tracking Group (for purposes
of this definition, the "Issuer Group") that are attributed to, and could be
issued or sold by the Company for the account of, the TDS Group in respect of a
Retained Interest by the TDS Group in such Issuer Group. The Number of Shares
Issuable with Respect to Retained Interest shall initially be determined by the
Board, and shall from time to time thereafter, as applicable, be:
(a) adjusted as appropriate to reflect subdivisions (by stock split or
otherwise) and combinations (by reverse stock split or otherwise) of the
Issuer Group Shares, and dividends or distributions of Issuer Group Shares
to the holders thereof and other reclassifications of Issuer Group Shares
and similar transactions;
(b) decreased (but not to less than zero) by (i) the aggregate number of
Issuer Group Shares issued or sold by the Company, for cash, securities or
other property, the proceeds of which are attributed to the TDS Group, (ii)
the aggregate number of Issuer Group Shares issued or delivered upon
conversion, exercise or exchange of Convertible Securities (including
Pre-Distribution Convertible Securities), the proceeds of which are
attributed to the TDS Group, (iii) the aggregate number of Issuer Group
Shares issued or delivered by the Company as a dividend or distribution to
holders of Common Shares, Series A Common Shares or Special Common Shares,
(iv) the aggregate number of Issuer Group Shares issued or delivered upon
the conversion, exercise or exchange of any Convertible Securities issued or
delivered by the Company as a dividend or distribution or by
reclassification or exchange to holders of shares of Common Shares, Series A
Common Shares or Special Common Shares, and (v) the aggregate number of
Issuer Group Shares (rounded, if necessary, to the nearest whole number),
equal to the aggregate fair value (as determined by the Board) of assets or
properties attributed to the Issuer Group that are transferred from the
Issuer Group to the TDS Group in consideration of a reduction in the Number
of Shares Issuable with Respect to Retained Interest in the Issuer Group,
divided by the Market Value of one Issuer Group Share as of the date of such
transfer;
(c) increased by (i) the aggregate number of any Issuer Group Shares
which are retired or otherwise cease to be outstanding following their
purchase with funds attributed to the TDS Group and (ii) a number (rounded,
if necessary, to the nearest whole number) equal to the fair value (as
determined by the Board) of assets or properties theretofore attributed to
the TDS Group that are contributed to the Issuer Group in consideration of
an increase in the Number of Shares Issuable with Respect to Retained
Interest in the Issuer Group, divided by the Market Value of one Issuer
Group Share as of the date of such contribution; and
(d) adjusted as may be appropriate to reflect other transactions between
the Issuer Group and the TDS Group, as determined in good faith by the
Board.
Whenever a change in the Number of Shares Issuable with Respect to
Retained Interest in any Tracking Group occurs, the Company shall prepare
and file a statement of such change with the Secretary of the Company.
"NUMBER OF SHARES ISSUABLE TO THIRD PARTIES" means, as of any date, the
number of shares of any class of common stock which represent Shares Issuable to
Third Parties, as may be determined in good faith by the Board, considering any
relevant factors, including whether the holders of Convertible Securities would
receive an economic benefit from the conversion, exercise or exchange of such
Convertible Securities which exceeds the economic cost thereof, or the economic
benefit of not converting, exercising or exchanging such Convertible Securities.
123
<PAGE>
"OUTSTANDING INTEREST," as of any date, means, with respect to any class of
Tracking Stock, that part of the Company's interest in a Tracking Group which is
represented by outstanding shares of such Tracking Stock.
"OUTSTANDING INTEREST FRACTION," as of any date, shall mean, with respect to
any class of Tracking Stock, a fraction the numerator of which is the aggregate
number of shares of such class of Tracking Stock outstanding on such date and
the denominator of which is the sum of (a) such aggregate number of shares, (b)
the Number of Shares Issuable with Respect to Retained Interest of such class of
Tracking Stock as of such date and (c) the aggregate Number of Shares Issuable
with Respect to Inter-Group Interest by all other Tracking Groups in such
Tracking Stock, if any.
"PRE-DISTRIBUTION CONVERTIBLE SECURITIES" means Convertible Securities that
are outstanding on the record date for the Distribution and are, prior to such
date, convertible into or exercisable or exchangeable for either Common Shares
or Series A Common Shares, assuming the record date for the Distribution of
Telecom Group Shares, Cellular Group Shares and Aerial Group Shares is the same
date. If the record date for the distribution of any such shares is not the same
date, the Board shall determine which Convertible Securities issued after the
first record date relating to any part of the Distribution shall represent
Pre-Distribution Convertible Securities.
"PREFERRED SHARES" means the Preferred Shares, par value $.01 per share, of
the Company.
"PUBLIC HOLDERS" means holders of shares of Tracking Stocks, any issued
Special Common Shares, Preferred Shares issued before October 31, 1981 and
Common Shares.
"QUALIFYING SUBSIDIARY" or "QUALIFYING SUBSIDIARIES" means a Subsidiary or
Subsidiaries of the Company (a) in which (i) the Company's ownership and voting
interest is sufficient to satisfy the requirements of the Internal Revenue
Service for a distribution of the Company's interest in such Subsidiary to the
holders of common stock of the Company that is tax-free to such holders or (ii)
the Company owns, directly or indirectly, all of the issued and outstanding
capital stock and (b) which currently or at any time in the future hold(s) all
of the assets and liabilities attributed to a Tracking Group.
"RECAPITALIZATION" means the Offerings, the Distribution, the Aerial Merger
and the U.S. Cellular Merger.
"REINCORPORATION" means the merger of a predecessor of TDS with and into TDS
with TDS surviving the merger, pursuant to which TDS became a Delaware
corporation.
"RELATED BUSINESS TRANSACTION" means any Disposition of all or substantially
all of the properties and assets of a Tracking Group in which the Company
receives as proceeds of such Disposition primarily equity securities (including,
without limitation, capital stock, convertible securities, partnership or
limited partnership interests and other types of equity securities, without
regard to the voting power or contractual or other management or governance
rights related to such equity securities) of the purchaser or acquiror of such
assets and properties of such Tracking Group, any entity which succeeds (by
merger, formation of a joint venture enterprise or otherwise) to such assets and
properties of such Tracking Group or a third party issuer, which purchaser,
acquiror or other issuer is engaged or proposes to engage primarily in one or
more businesses similar or complementary to the businesses conducted by such
Tracking Group prior to such Disposition, as determined in good faith by the
Board.
"RESTATED CERTIFICATE" means the Restated Certificate of Incorporation of
the Company.
"RETAINED INTEREST," as of any date, means that part of the Company's equity
interest in a Tracking Group, which is retained (or subsequently acquired) by
the Company and attributed to the TDS Group for the benefit of the Common
Shares, Series A Common Shares and any issued Special Common Shares.
124
<PAGE>
"RETAINED INTEREST AVAILABLE DIVIDEND AMOUNT," as of any date, means, with
respect to any Tracking Group, an amount (not less than zero) which is equal to
the product of (a) a fraction, the numerator of which is the Retained Interest
Fraction and the denominator of which is the Outstanding Interest Fraction with
respect to such Tracking Group multiplied by (b) the Available Dividend Amount
of such Tracking Group.
"RETAINED INTEREST FRACTION," as of any date, means, with respect to any
class of Tracking Stock, a fraction the numerator of which is the Number of
Shares Issuable with Respect to Retained Interest of such class of Tracking
Stock as of such date and the denominator of which is the sum of (a) such Number
of Shares Issuable with Respect to Retained Interest as of such date, (b) the
aggregate Number of Shares Issuable with Respect to Inter-Group Interest by all
other Tracking Groups in such Tracking Stock, if any, and (c) the aggregate
number of shares of such class of Tracking Stock outstanding as of such date.
"SERIES A COMMON SHARES" means the Series A Common Shares, par value $.01
per share, of the Company.
"SHARES ISSUABLE TO THIRD PARTIES" means, as of any date, shares of any
class of common stock which are issuable (a) as Committed Acquisition Shares,
(b) pursuant to the conversion, exercise or exchange of Convertible Securities
or (c) otherwise.
"SUBSIDIARY" means, with respect to any person or entity, any corporation or
partnership 50% or more of whose outstanding voting securities or partnership
interests, as the case may be, are directly or indirectly owned by such person
or entity.
"TDS" means Telephone and Data Systems, Inc., a Delaware corporation.
"TDS GROUP" means, as of any date that any shares of any class of Tracking
Stock have been issued and continue to be outstanding: (a) the interest of the
Company and all of its subsidiaries, (including any successors thereto by
merger, consolidation or sale of all or substantially all of its assets) and
their respective businesses, assets and liabilities, other than (except as
provided in clause (e) of this definition) the interest of the Company and its
subsidiaries in Aerial and its subsidiaries, TDS Telecom and its subsidiaries,
U.S. Cellular and its subsidiaries, and any other subsidiaries attributed by the
Board to a Group other than the TDS Group (including any successors thereto by
merger, consolidation or sale of all or substantially all of its assets, whether
or not in connection with a Related Business Transaction) and their respective
businesses, assets and liabilities; (b) all businesses, assets and liabilities
of the Company or any of its subsidiaries to the extent attributed to the TDS
Group by the Board, whether or not such businesses, assets or liabilities are
businesses, assets and liabilities of the TDS Group or any of its subsidiaries
(or a successor as described in clause (a) of this sentence); (c) all
businesses, assets and liabilities contributed or otherwise transferred to the
TDS Group from any of the Tracking Groups; (d) the interest of the Company or
any of its subsidiaries in the businesses, assets and liabilities acquired by
the Company or any of its subsidiaries for the TDS Group, as determined by the
Board; (e) a proportionate undivided interest in each and every business, asset
and liability attributed to a Tracking Group equal to the Retained Interest
Fraction of the TDS Group in such other Tracking Group; and (f) such other
businesses, assets and liabilities and such adjustments to the foregoing as may
be contemplated hereby or which may be approved by the Board.
"TDS GROUP SHARES" means the Series A Common Shares, Common Shares and any
issued Special Common Shares of the Company and any other shares designated as
TDS Group Shares by the Board.
"TDS TELECOM" means TDS Telecommunications Corporation, a Delaware
corporation.
"TDS VOTING TRUST" means the voting trust which expires June 30, 2009, that
controls a majority of the voting power of TDS in the election of directors and
all other matters.
125
<PAGE>
"TELECOM GROUP" means, as of any date that any Telecom Group Shares have
been issued and continue to be outstanding: (a) the interest of the Company or
of any of its subsidiaries in TDS Telecom, and its subsidiaries (including any
successor thereto by merger, consolidation or sale of all or substantially all
of its assets, whether or not in connection with a Related Business Transaction)
and their respective businesses, assets and liabilities, (b) all businesses,
assets and liabilities of the Company or any of its subsidiaries to the extent
attributed to the Telecom Group by the Board, whether or not such businesses,
assets or liabilities are businesses, assets and liabilities of TDS Telecom or
any of its subsidiaries (or a successor as described in clause (a) of this
sentence), (c) all businesses, assets and liabilities contributed or otherwise
transferred to the Telecom Group from the TDS Group or any other Tracking Group,
(d) the interest of the Company or any of its subsidiaries in the businesses,
assets and liabilities acquired by the Company or any of its subsidiaries for
the Telecom Group, as determined by the Board, (e) a proportionate undivided
interest in each and every business, asset and liability attributed to another
Tracking Group equal to the Inter-Group Interest Fraction, if any, of the
Telecom Group in such other Tracking Group and (f) such adjustments to the
foregoing as may be contemplated by the Restated Certificate or which may be
determined in good faith by the Board.
"TRACKING GROUP" means the Aerial Group, the Cellular Group and the Telecom
Group, and any other business group designated as a Tracking Group by the Board.
"TRACKING STOCK" means the Aerial Group Shares, the Cellular Group Shares
and the Telecom Group Shares, and any other shares of capital stock of the
Company which the Board designates as Tracking Stock.
"TRADING DAY" means each weekday other than a day on which the relevant
class of common stock of the Company is not traded on any national securities
exchange or quoted on the Nasdaq National Market or on the over-the- counter
market.
"UNDESIGNATED SHARES" means the Undesignated Shares, par value $.01 per
share, of TDS to be authorized by the Restated Certificate.
"U.S. CELLULAR" means United States Cellular Corporation, a Delaware
corporation.
"U.S. CELLULAR MERGER" means the proposed merger between U.S. Cellular and a
wholly-owned subsidiary of TDS pursuant to which Cellular Group Shares would be
issued in exchange for all outstanding Common Shares of U.S. Cellular not owned
by TDS and U.S. Cellular would become a wholly-owned subsidiary of TDS.
126
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain United States federal
income and estate tax considerations with respect to the acquisition, ownership
and disposition of Telecom Group Shares. It is based on the Internal Revenue
Code of 1986, as amended to the date hereof (the "Code"), Treasury Department
regulations, published positions of the Internal Revenue Service (the "Service")
and court decisions now in effect, all of which are subject to change, which may
be retroactive in effect. This discussion does not address all aspects of United
States federal income taxation that may be relevant to a decision to invest in
Telecom Group Shares and does not deal with state, local and non-United States
taxation. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-UNITED STATES INCOME
AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF TELECOM GROUP
SHARES.
CLASSIFICATION OF TELECOM GROUP SHARES AS STOCK OF THE COMPANY
In the opinion of Sidley & Austin, counsel to the Company, the Telecom Group
Shares will be treated for United States federal income tax purposes as stock of
the Company and will not be "section 306 stock" within the meaning of the Code.
The Service announced in 1987 that it was studying and would not issue advance
rulings on the classification of an instrument that has certain voting and
liquidation rights in an issuing corporation but the dividend rights of which
are determined by reference to the earnings of a segregated portion of the
issuing corporation's assets, including assets held by a subsidiary. In 1995 the
Service withdrew such stock from its list of matters under consideration and
reiterated that it would not issue advance rulings regarding such stock. There
are no court decisions or other authorities that bear directly on transactions
similar to the Offerings. It is possible, therefore, that the Service could
assert that the Telecom Group Shares represent property other than stock of the
Company. If such shares were treated as property other than stock of the
Company, (i) the Company or its subsidiaries would recognize a significant
taxable gain on the sale of the Telecom Group Shares, in an amount equal to the
excess of the fair market value of such property over its federal income tax
basis to the Company or such subsidiaries and (ii) the Company could lose its
ability to file consolidated federal income tax returns with TDS Telecom (one
consequence being that dividends paid or deemed to be paid by TDS Telecom to the
Company would be taxable to the Company, subject to any applicable dividends
received deduction). As indicated above, however, it is the opinion of counsel
that the Service would not prevail in any such assertion.
NON-U.S. HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Telecom
Group Shares by a Non-U.S. Holder. "Non-U.S. Holder" means any person that is a
foreign corporation, a nonresident alien individual, a foreign partnership, or a
foreign estate or trust (as such terms are defined in the Code). In general, an
individual is a nonresident alien individual with respect to a calendar year if
he or she is not a United States citizen (and in certain circumstances is not a
former United States citizen) and, with respect to such calendar year (i) has at
no time had the privilege of residing permanently in the United States and (ii)
is not present in the United States a specified number of days in the current
year and the prior two years. U.S. resident aliens are subject to United States
federal income taxation as if they were U.S. citizens.
DIVIDENDS
In general, dividends paid to a Non-U.S. Holder of Telecom Group Shares will
be subject to withholding of United States federal income tax at a rate of 30%
of the gross amount of such dividends or such lower rate as may be provided by
an applicable income tax treaty between the United States and the country of
which the Non-U.S. Holder is a tax resident, unless (i) the dividends are
effectively connected
127
<PAGE>
with the conduct of a trade or business of the Non-U.S. Holder within the United
States or (ii) if a tax treaty applies, the dividends are attributable to a
United States permanent establishment maintained by the Non-U.S. Holder. For
dividend payments made prior to the effective date of certain pending United
States Treasury Regulations, currently expected to be January 1, 2000 (the
"Effective Date"), a Non-U.S. Holder generally must file a Form 4224 in order to
avoid withholding with respect to dividends that are effectively connected with
such Non-U.S. Holder's conduct of a trade or business in the United States.
However, for purposes of determining whether tax is to be withheld at a 30% rate
or at a reduced rate as specified by an applicable tax treaty, the Company
ordinarily will presume that dividends paid to a holder with an address in a
foreign country are paid to a resident in such country absent knowledge that
such presumption is not warranted, and dividends paid to a holder with an
address within the United States generally will be presumed to be paid to a
holder who is a United States person and will not be subject to such withholding
(although such payment might be subject to backup withholding as described
below) unless the Company has actual knowledge that the holder is a Non-U.S.
Holder. Under certain circumstances (for example, payments within the United
States), a Non-U.S. Holder is required to file Form 1001 to claim the benefit of
a reduced withholding rate provided by an applicable income tax treaty.
For dividend payments made on or after the Effective Date, subject to
certain transition rules, a Non-U.S. Holder generally will have to file Form W-8
(in the case of both effectively connected income and income qualifying for
treaty benefits) unless, in the case of dividends paid to or through an account
maintained outside the United States at a financial institution, certain
documentary evidence procedures are followed. A Non-U.S. Holder that does not
file Form W-8 generally will be subject to withholding at a 31% rate under the
backup withholding rules described below, rather than at a 30% rate or a reduced
rate under an income tax treaty, except that the 30% rate will apply in the case
of dividends paid to or through an account maintained outside the United States
at a financial institution if the payor does not have actual knowledge that the
payee is a United States person. Special rules apply to determine whether, for
purposes of determining the applicability of a tax treaty, dividends paid to a
Non-U.S. Holder that is an entity should be treated as paid to the entity or
those holding an interest in that entity.
Dividends received by a Non-U.S. Holder that are effectively connected with
the conduct of a trade or business within the United States or, if a tax treaty
applies, are attributable to a United States permanent establishment, are
subject to United States federal income tax on a net income basis (that is,
after allowance for applicable deductions) at applicable graduated individual or
corporate rates. Any such dividends received by a Non-U.S. Holder that is a
corporation may, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.
A Non-U.S. Holder eligible for a reduced rate of withholding of United
States federal income tax may obtain a refund of any excess amounts withheld by
timely filing an appropriate claim for refund with the Service.
GAIN ON DISPOSITION OF TELECOM GROUP SHARES
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Telecom Group Shares unless (i) (a) the gain is effectively connected with a
trade or business conducted by the Non-U.S. Holder within the United States, or
(b) if an income tax treaty applies, the gain is attributable to a United States
permanent establishment maintained by the Non-U.S. Holder, (ii) in the case of a
Non-U.S. Holder who is an individual and holds the Telecom Group Shares as a
capital asset, such holder is present in the United States for 183 or more days
in the taxable year of the sale or other disposition and certain other
conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to
certain provisions of the Code applicable to United States expatriates, or (iv)
the Company is or has been a "United States real property holding corporation"
(a "USRPHC") for United States federal income tax purposes at any time within
the shorter of the five- year period preceding such disposition or the period
such Non-U.S. Holder held the Telecom Group Shares. If the Company
128
<PAGE>
were, or were to become, a USRPHC, gains realized upon a disposition of Telecom
Group Shares by a Non-U.S. Holder that did not directly or indirectly own more
than 5% of the Telecom Group Shares during the shorter of the periods described
above generally would not be subject to United States federal income tax so long
as the Telecom Group Shares are "regularly traded" on an established securities
market within the meaning of applicable United States Treasury regulations. The
Company does not believe that it is a USRPHC as of the date hereof, although it
has not determined or established whether it will be a USRPHC in the future.
If a Non-U.S. Holder who is an individual falls under clause (i) above, such
individual generally will be taxed on the net gain derived from a sale under
applicable graduated United States federal income tax rates. If a Non-U.S.
Holder who is an individual falls under clause (ii) above, such individual
generally will be subject to a flat 30% tax on the gain derived from a sale,
which may be offset by certain United States capital losses (notwithstanding the
fact that such individual is not considered a resident alien of the United
States). Thus, individual Non-U.S. Holders who have spent (or expect to spend)
more than a de minimis period of time in the United States in the taxable year
in which they contemplate a sale of Telecom Group Shares are urged to consult
their tax advisors prior to the sale in order to determine the likely U.S. tax
consequences of such sale.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it generally will be taxed on its net gain under applicable graduated
United States federal income tax rates and, in addition, will be subject to the
branch profits tax equal to 30% of its "effectively connected earnings and
profits" within the meaning of the Code for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable income
tax treaty.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, the Company must report to the Service the amount of dividends
paid on Telecom Group Shares, the name and address of the recipient, and the
amount, if any, of tax withheld. A custodian, broker or other agent acting on
behalf of the owner of Telecom Group Shares may similarly be required to report
to the Service the amount of proceeds from their sale. Pursuant to tax treaties
or other agreements, the Service may make these information reports available to
tax authorities in the recipient's country of residence. Backup withholding at
the rate of 31% may apply to payments subject to information reporting
(including dividends and proceeds of sale) made to persons that fail to furnish
certain identifying information in accordance with the United States information
reporting requirements.
Backup withholding and information reporting will not apply to payments of
dividends on Telecom Group Shares or gross proceeds of a sale of Telecom Group
Shares if (i) the beneficial owner of Telecom Group Shares certifies under
penalties of perjury that it is a Non-U.S. Holder (for example, by providing the
payor a Form W-8), (ii) payment is made to an "exempt recipient" (which term
includes corporations) or (iii) an exemption is otherwise established.
Unless the beneficial owner of Telecom Group Shares establishes an
exemption, backup withholding and information reporting generally will both
apply to payments of (i) dividends on Telecom Group Shares paid prior to the
Effective Date, to an address within the United States, (ii) dividends on
Telecom Group Shares paid on or after the Effective Date, and not paid to or
through an account maintained outside the United States at a financial
institution and (iii) gross proceeds of a sale of Telecom Group Shares effected
within the United States.
Unless the beneficial owner of Telecom Group Shares establishes an
exemption, information reporting (but not backup withholding) will apply to
payments of (i) dividends on Telecom Group Shares paid on or after the Effective
Date, to or through an account maintained outside the United States at a
financial institution and (ii) gross proceeds of a sale of Telecom Group Shares
effected outside the United States through a financial institution that is a
U.S. Connected Person, in each case only if such financial institution does not
maintain documentary evidence in its records that the beneficial owner is a
Non-U.S.
129
<PAGE>
Holder and certain other conditions are met. A "U.S. Connected Person" is a
person that is, for United States federal income tax purposes, (i) a United
States person, (ii) a "controlled foreign corporation," (iii) a foreign person,
50% or more of whose gross income for certain periods is derived from activities
that are effectively connected with the conduct of a trade or business in the
United States or (iv) for payments made on or after the Effective Date, a
foreign partnership (a) one or more of whose partners are United States persons
who, in the aggregate, hold more than 50% of the income or capital interest in
the partnership at any time during its tax year or (b) engaged at any time
during its tax year in the conduct of a trade or business in the United States.
However, backup withholding will apply to any such payments if such financial
institution has actual knowledge that the payee is a United States person.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be allowed as a refund or a credit against such
holder's U.S. federal income tax liability provided the required information is
furnished in a timely manner to the Service.
FEDERAL ESTATE TAX
An individual Non-U.S. Holder who is treated as the owner of Telecom Group
Shares at the time of such individual's death or has made certain lifetime
transfers of an interest in Telecom Group Shares will be required to include the
value of such Telecom Group Shares in such individual's gross estate for United
States federal estate tax purposes and may be subject to United States federal
estate tax, unless an applicable tax treaty provides otherwise.
130
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions in the U.S. Underwriting
Agreement dated the date hereof, each of the underwriters of the United States
and Canadian offering of Telecom Group Shares named below (the "U.S.
Underwriters"), for whom Credit Suisse First Boston Corporation, Smith Barney
Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Goldman, Sachs &
Co. are acting as the Representatives (the "Representatives"), has severally
agreed to purchase, and the Company has agreed to sell to each U.S. Underwriter,
Telecom Group Shares which equal the number of shares set forth opposite the
name of such U.S. Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
Credit Suisse First Boston Corporation.............................................................
Smith Barney Inc...................................................................................
Donaldson, Lufkin & Jenrette Securities Corporation................................................
Goldman, Sachs & Co. ..............................................................................
-------------
Total............................................................................................
-------------
-------------
</TABLE>
The U.S. Underwriting Agreement provides that the obligations of the U.S.
Underwriters are subject to certain conditions precedent and that the U.S.
Underwriters will be obligated to purchase all the Telecom Group Shares offered
hereby in the United States and Canada (other than those shares covered by the
over-allotment option described below) if any are purchased. The U.S.
Underwriting Agreement provides that, in the event of a default by a U.S.
Underwriter, in certain circumstances the purchase commitments of non-defaulting
U.S. Underwriters may be increased or the U.S. Underwriting Agreement may be
terminated.
Under the terms and subject to the conditions contained in the International
Underwriting Agreement dated the date hereof, each of the managers of the
concurrent international offering of Common Stock named below (the "Managers"),
for whom Credit Suisse First Boston (Europe) Limited, Smith Barney Inc.,
Donaldson, Lufkin & Jenrette International and Goldman Sachs International are
acting as lead managers (the "Lead Managers"), has severally agreed to purchase,
and the Company has agreed to sell to each Manager, Telecom Group Shares which
equal the number of shares set forth opposite the name of such Manager below:
<TABLE>
<CAPTION>
NUMBER OF
MANAGER SHARES
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
Credit Suisse First Boston (Europe) Limited........................................................
Smith Barney Inc...................................................................................
Donaldson, Lufkin & Jenrette International.........................................................
Goldman Sachs International........................................................................
-------------
Total............................................................................................
-------------
-------------
</TABLE>
The International Underwriting Agreement provides that the obligations of
the Managers are subject to certain conditions precedent and that the Managers
will be obligated to purchase all the Telecom Group Shares offered hereby
outside the United States and Canada (other than those shares covered by the
over-allotment option described below) if any are purchased. The International
Underwriting Agreement provides that, in the event of a default by a Manager, in
certain circumstances the purchase commitments of the non-defaulting Managers
may be increased or the International Underwriting Agreement may be terminated.
The closing under the U.S. Underwriting Agreement is a condition to the closing
under the International Underwriting Agreement, and vice versa.
The U.S. Underwriters and the Managers (collectively, the "Underwriters")
initially propose to offer part of the Telecom Group Shares directly to the
public at the public offering price set forth on the cover page of this
Prospectus and part to certain dealers at a price that represents a concession
not in excess of
131
<PAGE>
$ per share below the public offering price. The U.S. Underwriters and the
Managers may allow, and such dealers may re-allow, a concession not in excess of
$ per share to the other U.S. Underwriters or Managers, respectively, or to
certain other dealers. After the initial public offering the, public offering
price and such concessions may be changed by the U.S. Underwriters and the
Managers.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
2,025,000 additional shares of Common Stock at the public offering price set
forth on the cover page of this Prospectus less underwriting discounts and
commissions. The Underwriters may exercise such option to purchase additional
shares solely for the purpose of covering over-allotments, if any, incurred in
connection with the sale of the shares offered hereby. To the extent such option
is exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares set forth opposite such Underwriter's name in the
preceding tables bears to the aggregate total number of shares in such tables.
The Company, the U.S. Underwriters and the Managers have agreed to indemnify
each other against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments they may be required to make in
respect thereof.
The Company and each of its executive officers and directors have agreed
that, for a period of 180 days after the date of this Prospectus, they will not,
without the prior written consent of the Representatives, offer, sell, contract
to sell or otherwise dispose of any Telecom Group Shares (or any securities
convertible into or exercisable or exchangeable for Telecom Group Shares) or
grant any options or warrants to purchase Telecom Group Shares except (a) in the
case of the Company, (i) grants of options and issuances and sales of Telecom
Group Shares issued pursuant to any employee or director stock option plan,
stock ownership plan or stock purchase plan or pursuant to a dividend
reinvestment plan, (ii) issuances of any Telecom Group Shares upon the
conversion of securities outstanding on the date of the Underwriting Agreement,
and (iii) Telecom Group Shares issued in the Distribution, and (b) in the case
of directors, executive officers and stockholders of the Company, Telecom Group
Shares disposed of as bona fide gifts or pledges where the recipients of such
gifts or the pledges, as the case may be, agree in writing with Smith Barney
Inc. to be bound by the terms of such agreement.
The U.S. Underwriters and the Managers have entered into an Agreement
Between U.S. Underwriters and Managers pursuant to which each U.S. Underwriter
has agreed that, as part of the distribution of the shares offered in the
United States and Canadian offering (i) it is not purchasing any such shares for
the account of anyone other than a U.S. or Canadian Person and (ii) it has not
offered or sold, and will not, offer, sell, resell or deliver, directly or
indirectly, any of such shares or distribute any prospectus relating to the
Untied States and Canadian offering outside the United States or Canada or to
anyone other than a U.S. or Canadian Person. In addition, each Manager has
agreed that as part of the distribution of the shares offered in the
international offering: (i) it is not purchasing any such shares for the account
of any U.S. or Canadian Person and (ii) it has not offered or sold, and will not
offer, sell, resell or deliver, directly or indirectly, any of such shares or
distribute any prospectus relating to the international offering in the United
States or Canada or to any U.S. or Canadian Person. Each Manager has also agreed
that it will offer to sell shares only in compliance with all relevant
requirements of any applicable laws. Neither the U.S. Underwriters nor the
Managers are obligated to purchase from the other any unsold Telecom Group
Shares.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement Between U.S. Underwriters
and Managers, including: (i) certain purchases and sales between the U.S.
Underwriters and the Managers, (ii) certain offers, sales, resales, deliveries
or distributions to or through investment advisors or other persons exercising
investment discretion, (iii) purchases, offers or sales by a U.S. Underwriter
who is also acting as Manager or by a Manager who is also acting as a U. S.
132
<PAGE>
Underwriter and (iv) other transactions specifically approved by the
Representatives and the Lead Managers. As used herein, "U.S. or Canadian Person"
means any resident or national of the United States or Canada, any corporation,
partnership or other entity created or organized in or under the laws of the
United States or Canada or any estate or trust the income of which is subject to
United States or Canadian income taxation regardless of the source of its income
(other than the foreign branch of any U.S. or Canadian Person), and includes any
United States or Canadian branch of a person other than a U.S. or Canadian
Person.
Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the relevant province of Canada in
which such offer is made.
Each of the Managers and the U.S. Underwriters severally represents and
agrees that: (i) it has not offered or sold and prior to the date six months
after the date of issue of the Telecom Group Shares will not offer or sell any
Telecom Group Shares to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply with
all applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Telecom Group Shares in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received by
it in connection with the issue of the Telecom Group Shares to a person who is
of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such
document may otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction by the Company or
the Managers that would permit an offering to the general public of the shares
offered hereby in any jurisdiction other than the United States.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
TDS has made an application for listing the Telecom Group Shares on AMEX
under the symbol "TLG."
Pursuant to the Agreement Between U.S. Underwriters and Managers, sales may
be made between the U.S. Underwriters and the Managers of such number of shares
as may be mutually agreed. The price of any shares so sold shall be the public
offering price as then in effect for shares being sold by the U.S. Underwriters
and the Managers, less all or any part of the selling concession, unless
otherwise determined by mutual agreement. To the extent that there are sales
between the U.S. Underwriters and the Managers pursuant to the Agreement Between
U.S. Underwriters and Managers, the number of shares initially available for
sale by the U.S. Underwriters and by the Managers may be more or less than the
number of shares appearing on the front cover of this Prospectus. Neither the
U.S. Underwriters nor the Managers are obligated to purchase from the other any
unsold Telecom Group Shares.
Prior to the Offerings, there has not been any public market for the Telecom
Group Shares. Consequently, the initial public offering price for the Telecom
Group Shares included in the Offerings has been determined by negotiations
between the Company and the Representatives. Among the factors considered in
determining such price were the history of and prospects for the Telecom Group's
business and the industry in which it competes, an assessment of the Telecom
Group's management and the present state of the Telecom Group's development, the
past and present revenues and earnings of the Telecom Group, the prospects for
growth of the Telecom Group's revenues and earnings, the current state of the
economy in the United States and the current level of economic activity in the
industry in which the
133
<PAGE>
Telecom Group competes and in related or comparable industries, and currently
prevailing conditions in the securities markets, including current market
valuations of publicly traded companies which are comparable to the Telecom
Group.
In connection with the Offerings, the Representatives on behalf of the U.S.
Underwriters and the Managers may purchase and sell the Telecom Group Shares in
the open market in accordance with Regulation M under the Exchange Act. These
transactions may include over-allotment and stabilizing transactions and
purchases to cover syndicate short positions created in connection with the
Offerings. Stabilizing transactions consist of certain bids or purchases for the
purpose of preventing or retarding a decline in the market price of the Telecom
Group Shares; and syndicate short positions involve the sale by the Underwriters
of a greater number of Telecom Group Shares than they are required to purchase
from the Company in the Offerings. The Representatives also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the securities sold in the Offerings for their
account may be reclaimed by the syndicate if such securities are repurchased by
the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Telecom Group
Shares, which may be higher than the price that might otherwise prevail in the
open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the AMEX, in the over-the-counter
market or otherwise, and, if commenced, may be discontinued at any time.
At the Company's request, the U.S. Underwriters have agreed to make
available up to 600,000 Telecom Group Shares for sale at the public offering
price to officers, directors, employees and certain other persons associated
with the Company. The number of Telecom Group Shares available for sale to the
general public will be reduced to the extent that these persons purchase such
shares. Any such shares not purchased will be offered by the U.S. Underwriters
to the general public on the same basis as the other shares offered hereby.
LEGAL MATTERS
Certain legal matters relating to the securities offered hereby will be
passed upon for TDS by Sidley & Austin, Chicago, Illinois. The Company is
controlled by a voting trust. Walter C.D. Carlson, a trustee and beneficiary of
the voting trust and a director of the Company and certain subsidiaries of the
Company, Michael G. Hron, the Secretary of the Company and certain subsidiaries
of the Company, William S. DeCarlo, the Assistant Secretary of the Company and
certain subsidiaries of the Company, Stephen P. Fitzell, the Secretary of
certain subsidiaries of the Company, and Sherry S. Treston, the Assistant
Secretary of certain subsidiaries of the Company, are partners of Sidley &
Austin. Certain legal matters relating to the securities offered hereby will be
passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York.
EXPERTS
The audited consolidated financial statements of TDS and the audited
financial statements of the TDS Telecommunications Group included in this Form
S-3 registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports included herein. The financial
statements referred to above have been included in reliance upon the authority
of such firm as an expert in accounting and auditing in giving said reports.
134
<PAGE>
[ALTERNATE PAGE FOR U.S. PROSPECTUS]
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Telecom Group Shares in Canada is being made only on
a private placement basis exempt from the requirement that TDS prepares and
files a prospectus with the securities regulatory authorities in each province
where trades of Telecom Group Shares are effected. Accordingly, any resale of
the Telecom Group Shares in Canada must be made in accordance with applicable
securities laws which will vary depending on the relevant jurisdiction, and
which may require resales to be made in accordance with available statutory
exemptions or pursuant to a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Purchasers are advised to seek legal
advice prior to any resale of the Telecom Group Shares.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Telecom Group Shares in Canada who receives a purchase
confirmation will be deemed to represent to TDS and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Telecom Group Shares
without the benefit of a prospectus qualified under such securities laws, (ii)
where required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the SECURITIES ACT (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Telecom Group Shares to whom the SECURITIES ACT (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Telecom Group Shares acquired by such purchaser pursuant to this offering.
Such report must be in the form attached to British Columbia Securities
Commission Blanket Order BOR #95/17, a copy of which may be obtained from TDS.
Only one such report must be filed in respect of the Telecom Group Shares
acquired on the same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Telecom Group Shares should consult their own legal
and tax advisors with respect to the tax consequences of an investment in the
Telecom Group Shares in their particular
135
<PAGE>
circumstances and with respect to the eligibility of the Telecom Group Shares
for investment by the purchaser under relevant Canadian Legislation.
136
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
TDS TELECOMMUNICATIONS GROUP
Audited Financial Statements:
Report of Independent Public Accountants............................................................... F-2
Statements of Income................................................................................... F-3
Statements of Cash Flows............................................................................... F-4
Balance Sheets......................................................................................... F-5
Notes to Financial Statements.......................................................................... F-7
Unaudited Interim Financial Statements:
Statements of Income................................................................................... F-21
Statements of Cash Flows............................................................................... F-22
Balance Sheets......................................................................................... F-23
Notes to Financial Statements.......................................................................... F-25
TELEPHONE AND DATA SYSTEMS, INC.
Audited Financial Statements:
Report of Independent Public Accountants............................................................... F-28
Consolidated Statements of Income...................................................................... F-29
Consolidated Statements of Cash Flows.................................................................. F-30
Consolidated Balance Sheets............................................................................ F-31
Consolidated Statements of Common Stockholders' Equity................................................. F-33
Notes to Consolidated Financial Statements............................................................. F-34
Unaudited Interim Financial Statements:
Consolidated Statements of Income...................................................................... F-67
Consolidated Statements of Cash Flows.................................................................. F-68
Consolidated Balance Sheets............................................................................ F-69
Notes to Consolidated Financial Statements............................................................. F-71
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Telephone and Data Systems, Inc.:
We have audited, the accompanying balance sheets of the TDS
Telecommunications Group (representing a business unit of Telephone and Data
Systems, Inc.) as of December 31, 1996 and 1997, and the related statements of
income and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the management of
Telephone and Data Systems, Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the TDS Telecommunications
Group as of December 31, 1996 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 28, 1998
F-2
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING REVENUES
Telephone Revenues
Local service............................................................. $ 95,184 $ 110,501 $ 122,826
Network access and long distance.......................................... 195,575 213,113 235,725
Miscellaneous............................................................. 41,528 48,299 53,829
---------- ---------- ----------
Total Telephone Revenues................................................ 332,287 371,913 412,380
Other services.............................................................. 23,764 24,747 33,516
Intercompany revenues....................................................... (1,210) (1,058) (1,693)
---------- ---------- ----------
Total Operating Revenues................................................ 354,841 395,602 444,203
---------- ---------- ----------
OPERATING EXPENSES
Telephone Expenses
Network operations........................................................ 54,964 67,521 80,487
Depreciation and amortization............................................. 74,758 85,575 95,278
Customer operations....................................................... 46,818 53,764 65,167
Corporate operations...................................................... 58,998 62,276 68,454
---------- ---------- ----------
Total Telephone Expenses................................................ 235,538 269,136 309,386
Other services.............................................................. 22,273 24,816 37,897
Intercompany expenses....................................................... (1,210) (1,058) (1,693)
---------- ---------- ----------
Total Operating Expenses................................................ 256,601 292,894 345,590
---------- ---------- ----------
OPERATING INCOME.............................................................. 98,240 102,708 98,613
---------- ---------- ----------
OTHER INCOME AND (EXPENSES)
Interest and dividend income................................................ 6,895 5,942 5,510
Interest and dividend income--affiliated.................................... 7,950 8,945 9,252
Cellular investment income.................................................. 4,039 7,556 5,553
Amortization of license related to cellular investment...................... (957) (1,156) (564)
Allowance for funds used during construction................................ 682 825 686
Gain on sale of investments................................................. 4,094 -- 722
Other (expenses), net....................................................... (1,909) (1,869) (3,630)
---------- ---------- ----------
20,794 20,243 17,529
---------- ---------- ----------
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES............................... 119,034 122,951 116,142
---------- ---------- ----------
Interest expense............................................................ 37,765 39,317 39,542
Interest expense--affiliate................................................. 22,883 22,255 23,609
---------- ---------- ----------
60,648 61,572 63,151
---------- ---------- ----------
INCOME BEFORE INCOME TAXES.................................................... 58,386 61,379 52,991
Income tax expense............................................................ 24,231 25,685 22,603
---------- ---------- ----------
NET INCOME.................................................................... $ 34,155 $ 35,694 $ 30,388
---------- ---------- ----------
---------- ---------- ----------
Proforma (Unaudited): See Note 2
Net Income Attributable to TDS Group through Retained Interest................ $ 8,539 $ 8,924 $ 7,597
Net Income Attributable to TDS
Telecommunications Group Common Shares...................................... $ 25,616 $ 26,770 $ 22,791
Weighted Average TDS Telecommunications Group Shares Outstanding.............. 38,304 40,309 40,141
Earnings per TDS Telecommunications Group Share............................... $ 0.67 $ 0.66 $ 0.57
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-3
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................... $ 34,155 $ 35,694 $ 30,388
Add (Deduct) adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization.......................................... 77,355 88,459 98,066
Deferred income taxes, net............................................. (3,172) (1,510) 2,439
Cellular investment income............................................. (4,039) (7,556) (5,553)
Gain on sale of investments............................................ (4,094) -- (722)
Other noncash expense.................................................. 28,844 29,188 28,387
Change in accounts receivable.......................................... (7,663) (3,925) (9,260)
Change in accounts payable............................................. (4,943) (4,013) (461)
Change in accrued federal income taxes................................. 5,625 2,135 (8,890)
Change in other accrued taxes.......................................... 2,873 135 (879)
Change in other assets and liabilities................................. (2,166) 62 1,412
----------- ----------- -----------
122,775 138,669 134,927
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowing................................................. 25,563 34,056 30,097
Repayment of long-term debt.............................................. (17,769) (26,390) (16,942)
Change in notes payable.................................................. (5,118) 11,663 4,402
Dividends paid........................................................... (16,828) (24,824) (18,100)
----------- ----------- -----------
(14,152) (5,495) (543)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures..................................................... (104,372) (144,440) (151,460)
Proceeds from investment sales........................................... 10,091 5,942 2,085
Acquisitions, excluding cash acquired.................................... 2,351 32 2,015
Change in temporary cash investments and marketable securities........... 29,126 (2,879) 11,177
Investment in cellular partnerships...................................... 452 1,557 2,021
Change in investments.................................................... 1,518 (2,991) 824
----------- ----------- -----------
(60,834) (142,779) (133,338)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 47,789 (9,605) 1,046
CASH AND CASH EQUIVALENTS
Beginning of period.................................................... 145,351 193,140 183,535
----------- ----------- -----------
End of period.......................................................... $ 193,140 $ 183,535 $ 184,581
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents
General funds..................................................................... $ 33,519 $ 22,640
Affiliated cash equivalents....................................................... 150,016 161,941
------------ ------------
183,535 184,581
Temporary cash investments.......................................................... 39,383 21,658
Construction funds.................................................................. 1,405 775
Accounts receivable
Customers......................................................................... 25,821 33,482
Connecting companies.............................................................. 37,363 40,548
Affiliated........................................................................ 2,004 1,213
Other............................................................................. 6,260 5,971
Notes receivable--affiliated........................................................ 3,660 3,746
Other current assets................................................................ 12,305 13,559
------------ ------------
311,736 305,533
------------ ------------
INVESTMENTS
Franchise and other costs in excess of underlying book value of subsidiaries, net of
accumulated amortization of $29,705 and $34,942, respectively..................... 182,281 180,683
Cellular investments................................................................ 57,241 48,562
Marketable securities............................................................... 17,626 23,729
Other investments................................................................... 12,703 12,451
------------ ------------
269,851 265,425
------------ ------------
TELECOMMUNICATIONS PLANT
In service and under construction, substantially at original cost................... 1,293,779 1,420,890
Less accumulated depreciation....................................................... 524,418 590,123
------------ ------------
769,361 830,767
------------ ------------
OTHER ASSETS AND DEFERRED CHARGES..................................................... 1,981 4,323
------------ ------------
TOTAL ASSETS.......................................................................... $ 1,352,929 $ 1,406,048
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
BALANCE SHEETS
LIABILITIES AND GROUP EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt................................................... $ 13,554 $ 14,816
Notes payable--affiliated........................................................... 25,039 28,181
Accounts payable
Connecting companies.............................................................. 17,852 13,833
Affiliated........................................................................ 4,305 2,411
Other............................................................................. 23,904 26,475
Advance bills and customer deposits................................................. 5,423 5,329
Accrued federal income taxes due TDS................................................ 9,849 103
Other accrued taxes................................................................. 8,426 7,764
Accrued compensation................................................................ 3,394 7,386
Other............................................................................... 6,644 5,440
------------ ------------
118,390 111,738
------------ ------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability................................................... 57,217 60,550
Postretirement benefits obligation other than pensions.............................. 10,804 10,668
Other............................................................................... 14,064 12,079
------------ ------------
82,085 83,297
------------ ------------
LONG-TERM DEBT
Affiliated.......................................................................... 239,538 255,302
Other, excluding current portion.................................................... 547,290 548,558
------------ ------------
786,828 803,860
------------ ------------
MINORITY INTEREST IN SUBSIDIARIES..................................................... 21,810 23,394
------------ ------------
TDS TELECOMMUNICATIONS GROUP EQUITY................................................... 343,816 383,759
------------ ------------
TOTAL LIABILITIES AND GROUP EQUITY.................................................... $ 1,352,929 $ 1,406,048
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS
The TDS Telecommunications Group ("Telecom Group") primarily consists of TDS
Telecommunications Corporation and its subsidiaries ("TDS Telecom"), a wholly
owned subsidiary of Telephone and Data Systems, Inc. ("TDS") which operates
landline telephone companies. The Telecom Group may in the future also include
such other assets and liabilities of TDS as the Board of Directors of TDS may
determine to attribute to the Telecom Group and such other businesses, assets
and liabilities as TDS or any of its subsidiaries may in the future acquire for
the Telecom Group, as determined by the Board of Directors of TDS.
(1) PROPOSED TDS CORPORATE RESTRUCTURING
The board of directors of Telephone and Data Systems, Inc. (the "TDS Board")
has adopted a proposal which, if approved by TDS shareholders and implemented by
the TDS Board, would authorize the TDS Board to issue three new classes of
common stock and change the state of incorporation of TDS from Iowa to Delaware
(the "Tracking Stock Proposal"). The three new classes of stock are intended to
separately reflect the performance of TDS's cellular telephone, landline
telephone and personal communications services businesses ("Tracking Stocks").
Under the Tracking Stock Proposal, one of the three new classes of common
stock created by TDS would be designated as TDS Telecommunications Group Common
Shares (the "Telecom Group Shares"). The Telecom Group Shares, when issued, are
intended to reflect the separate performance of the TDS Telecommunications Group
(the "Telecom Group"), which primarily consists of TDS's interest in TDS
Telecommunications Corporation.
Subject to the approval of the Tracking Stock Proposal by TDS shareholders,
TDS intends to offer and sell Telecom Group Shares in a public offering for
cash, subject to prevailing market and other conditions (the "Telecom Public
Offering"), and allocate the net proceeds thereof to the Telecom Group. TDS also
intends to distribute two-thirds of a Telecom Group Share in the form of a stock
dividend with respect to each outstanding Series A Common Share and Common Share
of TDS (the "Distribution").
Subsequent to TDS shareholder approval of the Tracking Stock Proposal, cash
management, taxes and allocation of principal corporate activities between TDS
and the Telecom Group would be based upon methods that TDS management believes
to be reasonable and would be reflected in the Telecom Group's financial
information. Many of the policies would continue the arrangements which
presently exist between TDS and the Telecom Group.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of the Telecom Group conform to generally accepted
accounting principles. The accounting records of the telephone subsidiaries are
maintained in accordance with the uniform systems of accounts prescribed by the
regulatory bodies under whose jurisdiction the subsidiaries operate.
BASIS OF PRESENTATION
The financial statements of the Groups comprise all of the accounts included
in the corresponding consolidated financial statements of Telephone and Data
Systems, Inc. The separate Telecom Group financial statements give effect to the
management and accounting policies that would be applicable upon implementation
of the Tracking Stock Proposal.
The separate Group financial statements have been prepared on a basis that
management believes to be reasonable and appropriate and include (1) the
historical financial position, results of operations and
F-7
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
cash flows of the businesses that comprise each of the Groups, (2) any assets
and liabilities (including contingent liabilities) which have been attributed to
any Group from any other Group, and (3) with respect to the TDS Group, the
Retained Interest in each of the Tracking Groups. The effects of the issuance of
the Tracking Stocks have not been reflected in these historical financial
statements.
Financial effects arising from the Cellular Group, the Telecom Group, the
Aerial Group or the TDS Group that affect the consolidated results of operations
or financial condition of TDS could affect the results of operations or
financial condition of the Cellular Group, the Telecom Group, the Aerial Group
or the TDS Group, or could affect the market price of any or all classes of
Common Stock. In addition, any net losses of TDS or the Cellular Group, the
Telecom Group, the Aerial Group or the TDS Group, and dividends or distributions
on, or repurchases of, any class of Common Stock will reduce the assets of TDS
legally available for payment of dividends on any class of Common Stock.
Accordingly, TDS's consolidated financial statements should be read in
conjunction with the Telecom Group financial information.
The management and accounting policies applicable to the preparation of the
financial statements of the Telecom Group could be modified or rescinded by the
Board, in its sole discretion and without the approval of shareholders, although
there is no present intention to do so. The Board could also adopt additional
policies depending upon the circumstances. Any determination by the Board to
modify or rescind such policies, or to adopt additional policies, including any
such decision that could have disparate effects upon the holders of different
series of common stock, would be made by the Board in good faith and in the
honest belief that such decision is in the best interests of Telephone and Data
Systems, Inc. In addition, generally accepted accounting principles require that
changes in accounting policy must be preferable (in accordance with such
principles) to the policy previously in place.
Following the Distribution, subject to the legal and contractual
restrictions on the payment of dividends, the Board currently intends to
establish an annual dividend on the TDS Common Shares and Series A Common Shares
in an amount equal to $0.11 per share. The Board also currently intends to
establish an annual dividend on the Telecom Group Shares in an amount equal to
$0.50 per share. (Based on the expected distribution ratio of two-thirds of a
Telecom Group Share for each existing Common Share and Series A Common Share,
the dividend on Telecom Group Shares would equate to a per share dividend of
$0.33 per existing Common Share and Series A Common Share. The total of the
dividend on TDS Common Shares and Series A Common Shares of $0.11 and the
equivalent dividend on Telecom Group Shares of $0.33 equals the existing current
annual dividend on the existing Common Shares and Series A Common Shares of
$0.44.) Future dividends on the shares of common stock will be payable when, as
and if declared by the Board out of the lesser of (1) all funds of TDS legally
available therefor and (2) the available dividend amount with respect to the
relevant Group.
Funds of TDS legally available for the payment of dividends ("Surplus")
(approximately $1,966 million as of December 31, 1997, based on the financial
statements) is an amount approximately equal to the Total Common and Preferred
Equity of TDS less the par or stated value of all shares of common and preferred
stock outstanding (204,922,000 shares as of December 31, 1997 after the
Distribution). With respect to any Tracking Group, the Available Dividend Amount
(approximately $287 million for the Telecom Group as of December 31, 1997, based
on the financial statements) is an amount approximately equal to the Outstanding
Interest Fraction of such Tracking Group (approximately 75% after the
Distribution) times the respective Tracking Group Equity less the par value of
the respective outstanding Tracking Group Shares.
F-8
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, TDS will prepare
and file with the Securities and Exchange Commission consolidated financial
statements of TDS and financial statements of the Cellular Group, the Telecom
Group and the Aerial Group for so long as the respective Tracking Stock is
outstanding, and the TDS Group for as long as any Tracking Stock is outstanding.
Although the financial statements of the Cellular Group, the Telecom Group, the
Aerial Group and the TDS Group will separately report the assets, liabilities
(including contingent liabilities) and shareholders' equity of TDS attributed to
the Cellular Group, the Telecom Group, the Aerial Group and the TDS Group, such
attribution will not affect the legal title to such assets or responsibility for
such liabilities. Holders of the Cellular Group, the Telecom Group and the
Aerial Group Common Shares will be, and holders of TDS Common Shares and Series
A Common Shares will continue to be, shareholders of TDS. TDS and its
subsidiaries will each continue to be responsible for their respective
liabilities.
(A) NATURE OF OPERATIONS
The Telecom Group operates 106 telephone companies serving 515,500 access
lines in 28 states. The Telecom Group also operates a long-distance company, an
Internet access provider, a structured wiring business and a competitive local
exchange company. The Telecom Group expands its operations through internal
access line growth, acquisitions, new services and entry into new territories.
(B) PRINCIPLES APPLIED IN THE FINANCIAL STATEMENTS
The financial statements include the accounts of TDS Telecom and its
majority-owned subsidiaries since acquisition and certain other telephone
companies, assets and liabilities attributed to the Telecom Group, as determined
by the Board of Directors of TDS. All material transactions between companies
within the Telecom Group have been eliminated. Investments in entities in which
the Telecom Group does not have a controlling interest are generally accounted
for using the equity method.
The Telecom Group includes as investments in subsidiaries the value of the
consideration given and all direct and incremental costs relating to
acquisitions accounted for as purchases. All costs relating to unsuccessful
negotiations for acquisitions are expensed.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain amounts reported in prior years have been reclassified to conform to
current period presentation.
(C) CASH AND CASH EQUIVALENTS, TEMPORARY CASH INVESTMENTS AND MARKETABLE
SECURITIES
Cash and cash equivalents consists of cash and those short-term,
highly-liquid investments with original maturities of three months or less.
Those investments with original maturities of more than three months to 12
months are classified as temporary cash investments. Temporary cash investments
are stated at cost, which approximates market. Those investments with original
maturities of more than 12 months
F-9
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are classified as marketable securities. Marketable non-equity securities are
stated at amortized cost and held to maturity.
Affiliated cash equivalents consist of cash invested with TDS. The
investments earn interest at a rate equal to the average monthly rate paid on
cash invested in the general cash management program (5.84% at December 31,
1997).
The carrying amount of Cash and Cash Equivalents and Temporary Investments
approximate face value due to the short-term nature of the investments.
Marketable equity securities are stated at fair value. The market value of all
marketable securities was $17.6 million and $23.7 million at December 31, 1996
and 1997, respectively.
(D) NOTES RECEIVABLE--AFFILIATED
Rural Development Acquisition Corporation ("RDAC"), a wholly owned
subsidiary of TDS Telecom, has loaned $3.7 million to certain rural cable and
service companies (subsidiaries of TDS) at December 31, 1996 and 1997, bearing
interest at the prime rate plus 1/2 percent (9.0% at December 31, 1997). RDAC's
intent is to further the interests of rural telecommunications companies by
investing in telecommunications projects and acquisitions located in rural
areas.
(E) MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost or market.
(F) INVESTMENTS
Franchise and other costs include the costs in excess of the underlying book
value of acquired telephone companies. Costs aggregating $205.5 million and
$209.1 million at December 31, 1996 and 1997, respectively, relating to
acquisitions since November 1, 1990, are being amortized on a straight-line
basis over a 40-year period. Amortization amounted to $4.4 million, $4.9 million
and $5.2 million in 1995, 1996 and 1997, respectively. Costs in excess of
underlying book value relating to acquisitions initiated before November 1,
1970, aggregating $6.5 million, are not being amortized. Included in franchise
and other costs is approximately $143 million and $135 million at December 31,
1996 and 1997, respectively, of goodwill related to various acquisitions
structured to be tax-free.
Cellular investments includes amounts invested in cellular entities and
costs incurred in acquiring cellular interests.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cellular Entities.......................................................................... $ 13,317 $ 8,913
Cellular License Costs, net of amortization................................................ 43,924 39,649
--------- ---------
$ 57,241 $ 48,562
--------- ---------
--------- ---------
</TABLE>
The Telecom Group follows the equity method of accounting, which recognizes
the Telecom Group's proportionate share of the income and losses accruing to it
under the terms of its partnership or
F-10
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shareholder agreements, for its more significant investments ($12.4 million and
$8.1 million at December 31, 1996 and 1997, respectively). Income and losses
from these entities are reflected in the income statements on a pretax basis. At
December 31, 1997, the cumulative share of income from minority cellular
investments accounted for under the equity method was approximately $10.8
million, of which $6.9 million was undistributed. The cost method of accounting
is followed for those insignificant minority interests ($898,000) and $783,000
at December 31, 1996 and 1997, respectively).
Cellular license costs consist of costs incurred in acquiring minority
interests in cellular entities which have been awarded Federal Communications
Commission ("FCC") licenses to provide cellular service. These costs include all
direct and incremental costs relating to acquiring these interests. These costs
are capitalized and amortized through charges to expense over 40 years.
Amortization amounted to $957,000, $1.2 million and $564,000 in 1995, 1996 and
1997, respectively. Accumulated amortization of cellular license costs was $1.5
million and $1.8 million at December 31, 1996 and 1997, respectively.
(G) IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Telecom Group implemented the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Under SFAS No. 121, the Telecom Group is required to review long-lived
assets and certain identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the book value of a long-lived asset is
not recoverable. An impairment loss would be recognized whenever the review
demonstrates that the book value of a long-lived asset is not recoverable. The
implementation of SFAS No. 121 did not have an impact on the Telecom Group's
financial position or results of operations.
(H) REVENUE RECOGNITION
The Telecom Group's revenues are recognized when earned. Network access and
long-distance services are furnished jointly with other companies, primarily
AT&T and the Bell Operating Companies. Compensation for interstate access
services is based on tariffed access charges to interstate long-distance
carriers as filed by the National Exchange Carrier Association with the Federal
Communications Commission on behalf of the Telecom Group. Compensation for
intrastate toll and access services is based on tariffed access charges, cost
separation studies, nationwide average schedules or special settlement
arrangements with intrastate long-distance carriers. Network access and
long-distance revenues based on cost separation studies represent estimates
pending completion and acceptance of final cost studies. Management believes
that recorded amounts represent reasonable estimates of the final amounts.
(I) PRO FORMA NET INCOME AND EARNINGS PER SHARE
Pro forma net income attributable to the Telecom Group and to the TDS Group
through the Retained Interest assumes that the Telecom Public Offering has not
taken place and therefore 75% of Net Income is attributable to the Telecom Group
Shares and 25% of Net Income is attributable to the Retained Interest for the
TDS Group.
Pro forma earnings per share was computed based on the weighted average TDS
Telecommunications Group Shares outstanding during the periods, adjusted to give
retroactive effect to the Distribution of TDS
F-11
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Telecommunications Group Shares in conjunction with Telephone and Data Systems,
Inc. proposed restructuring, as if the restructuring had occurred at January 1,
1995.
(J) SUPPLEMENTAL CASH FLOW DISCLOSURES
TDS has historically purchased controlling interests in telephone companies
in exchange for stock, cash and deferred cash payments. TDS has then attributed
the telephone subsidiary to the Telecom Group, which increased TDS's equity
interest attributable to the Telecom Group.
TDS acquired five telephone companies in 1995, five telephone companies in
1996 and one telephone company in 1997. In conjunction with these acquisitions,
the following assets were acquired, liabilities assumed and equity was
attributed to the Telecom Group. Also, in September 1996, the Telecom Group
transferred interests in 13 cellular markets held by various telephone
subsidiaries to TDS.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Telecommunications plant, net................................................. $ 20,804 $ 48,764 $ 7,669
Franchise and other costs in excess of underlying book value of
subsidiaries................................................................ 25,263 25,603 2,452
Cellular minority interests and licenses...................................... 7,952 (20,071) 8,200
Long-term debt................................................................ (5,943) (22,978) (4,857)
Deferred credits.............................................................. (995) (6,239) (802)
Other assets and liabilities, excluding cash and cash equivalents............. (3,079) 7,963 688
TDS Telecommunications Group Equity........................................... (46,353) (33,074) (15,365)
---------- ---------- ----------
(Increase) in cash and cash equivalents due to acquisition.................... $ (2,351) $ (32) $ (2,015)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table summarizes interest paid, income taxes paid and certain
noncash transactions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest paid.................................................................... $ 20,562 $ 23,198 $ 23,367
Income taxes paid................................................................ 33,099 43,064 46,078
Additions to telecommunications plant financed through
accounts payable............................................................... $ 3,233 $ 4,319 $ 3,034
</TABLE>
The Board of Directors of TDS attributed TDS long-term debt to the Telecom
Group. The long-term debt and the related interest expense of $21.6 million,
$21.8 million and $21.8 million for 1995, 1996 and 1997, respectively, were
recorded as noncash transactions through TDS Telecommunications Group Equity.
(3) INCOME TAXES
For federal income tax purposes, the Telecom Group is included in the TDS
consolidated tax return. For financial reporting purposes, the Telecom Group
computes its federal income tax as if it were not a member of the TDS
consolidated group, but filed a separate return.
F-12
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAXES (CONTINUED)
The provision for income taxes consists of an amount for taxes currently
payable and a provision for tax consequences deferred to future periods.
Deferred income taxes are provided for certain temporary differences principally
due to use of accelerated depreciation for income tax purposes. Investment tax
credits resulting from investments in telecommunications plant and equipment
prior to January 1, 1986, have been deferred and are being amortized to income
over the service lives of the related property.
Tax provisions charged to expense for the years ended December 31, 1995,
1996 and 1997 are summarized below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision:
Current........................................................................ $ 21,768 $ 21,037 $ 16,364
Deferred....................................................................... (2,120) (134) 2,784
State income tax provision:
Current........................................................................ 7,029 6,494 5,901
Deferred....................................................................... (673) (47) (944)
Amortization of deferred investment tax credits.................................. (1,773) (1,665) (1,502)
--------- --------- ---------
Total Income tax expense..................................................... $ 24,231 $ 25,685 $ 22,603
--------- --------- ---------
--------- --------- ---------
</TABLE>
The statutory federal income tax rate is reconciled to the Telecom Group's
effective income tax rate below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate.................................................. 35.0% 35.0% 35.0%
State income taxes, net of federal benefit......................................... 5.4 5.1 5.7
Amortization of intangibles........................................................ 1.8 2.1 2.7
Amortization of deferred investment tax credits.................................... (2.3) (2.1) (2.8)
Effects of corporations not in consolidated federal tax return..................... 2.5 1.9 3.5
Other.............................................................................. (0.9) (0.2) (1.4)
--- --- ---
Effective income tax rate.......................................................... 41.5% 41.8% 42.7%
--- --- ---
--- --- ---
</TABLE>
Deferred income taxes are provided for the temporary differences between the
amount of the Telecom Group's assets and liabilities for financial reporting
purposes and their tax bases. The Telecom Group's current net deferred tax
liability totaled $(191,000) and $179,000 as of December 31, 1996 and 1997,
respectively.
F-13
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAXES (CONTINUED)
The temporary differences that gave rise to the noncurrent deferred tax
assets and liabilities as of December 31, 1996 and 1997, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred Tax Asset:
Postretirement benefits.............................................. $ 3,558 $ 3,558
Acquisition cost amortization........................................ 4,885 5,578
Regulatory........................................................... 2,064 2,184
Other................................................................ -- 447
--------- ---------
Total Deferred Tax Asset........................................... 10,507 11,767
--------- ---------
Deferred Tax Liability:
Property, plant and equipment........................................ 66,821 72,051
Other................................................................ 903 266
--------- ---------
Total Deferred Tax Liability....................................... 67,724 72,317
--------- ---------
Net Deferred Income Tax Liability.................................... $ 57,217 $ 60,550
--------- ---------
--------- ---------
</TABLE>
The Telecom Group has recorded deferred income tax liabilities related to
temporary differences not deferred under rate-making policy. As of December 31,
1997 a corresponding net regulatory asset of $612,000 has been established to
reflect future rate treatment for the temporary differences. This amount is
being amortized over the lives of the related temporary differences.
(4) GAIN ON SALES OF INVESTMENTS
The Telecom Group sold a telephone company, a cellular interest and various
marketable securities in 1995 for aggregate consideration of $10.1 million,
resulting in a pre-tax gain of $4.1 million. The Telecom Group sold a cellular
interest, a cable company and various marketable securities in 1997 for
aggregate consideration of $2.1 million, resulting in a pre-tax gain of
$722,000.
(5) TELECOMMUNICATIONS PLANT
Telecommunications plant in service and under construction is stated at the
original cost of construction including the capitalized costs of certain taxes,
payroll-related expenses, and an allowance for funds used during construction
("AFUDC"). AFUDC, a noncash item of nonoperating income, totaled $682,000,
$825,000 and $686,000 in 1995, 1996 and 1997, respectively. The composite
weighted average rates were 9.3%, 7.3% and 5.5% in 1995, 1996 and 1997,
respectively. The amount of such allowance has varied principally as a result of
changes in the level of construction work in progress and in the cost of
capital.
Renewals and betterments of units of property are added to
telecommunications plant in service. The original cost of depreciable property
retired is removed from plant in service and, together with removal cost less
any salvage realized, is charged to accumulated depreciation. Repairs and
renewals of minor items of property are charged to plant operations expense. No
gain or loss is recognized in connection with ordinary retirements of
depreciable property.
F-14
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) TELECOMMUNICATIONS PLANT (CONTINUED)
Depreciation is provided for financial reporting purposes using the
straight-line method over the estimated useful lives of the assets. Composite
depreciation rates, as applied to the average cost of depreciable property were
7.1%, 7.2% and 7.4% for 1995, 1996 and 1997, respectively.
The following table summarizes the telecommunications plant in service and
under construction at December 31, 1996 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and Buildings................................................ $ 67,181 $ 67,203
Central Office Equipment.......................................... 372,008 399,016
Cable and Wire.................................................... 639,537 719,945
Furniture and Office Equipment.................................... 77,046 112,921
Vehicles and Other Equipment...................................... 39,928 42,632
Plant Under Construction.......................................... 59,213 52,677
Non-regulated investments and Other............................... 38,866 26,496
------------ ------------
$ 1,293,779 $ 1,420,890
------------ ------------
------------ ------------
</TABLE>
The Telecom Group's telephone operations follow accounting for regulated
enterprises prescribed by SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation." The Telecom Group periodically reviews the criteria for
applying these provisions to determine whether continuing application of SFAS
No. 71 is appropriate. The Telecom Group believes that such criteria are still
being met and, therefore, has no current plans to change its method of
accounting.
In analyzing the effect of discontinuing the application of SFAS No.71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles and, therefore, any adjustments to
telecommunications plant would be immaterial, as would be the write-off of
regulatory assets and liabilities.
(6) NOTES PAYABLE--AFFILIATED
The Telecom Group had notes payable to a wholly owned subsidiary of TDS and
to TDS (included in the TDS Group) totaling $25.0 million and $28.2 million at
December 31, 1996 and 1997, respectively.
Interest on notes payable is accrued at the prime rate plus 1/2 percent (for
a rate of 9.0% at December 31, 1997). The carrying amounts of notes payable
approximate fair values due to the short-term nature of these instruments.
F-15
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) LONG-TERM DEBT
Long-term debt as of December 31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
RUS, RTB, and FFB Mortgage Notes, due through 2031
Various rates averaging 5.4%, 5.4% and 5.5% in 1995, 1996 and 1997,
respectively...................................................... $ 308,371 $ 313,012
Other long-term notes,
0% to 12.6%, due through 2009....................................... 10,601 8,722
---------- ----------
Telecom Group debt.................................................... 318,972 321,734
Less current portion................................................ 13,322 14,577
---------- ----------
Total Telecom Group long-term debt.................................... 305,650 307,157
---------- ----------
Telephone and Data Systems, Inc. (Parent)
Medium-term notes, 8% to 10%, due through 2025...................... 239,200 239,200
Purchase contracts and other long-term notes, 9% to 14%, due through
2003.............................................................. 2,672 2,440
---------- ----------
241,872 241,640
Less current portion................................................ 232 239
---------- ----------
Total parent debt..................................................... 241,640 241,401
---------- ----------
Total long-term debt.................................................. 547,290 548,558
Long-term debt--affiliated............................................ 239,538 255,302
---------- ----------
$ 786,828 $ 803,860
---------- ----------
---------- ----------
</TABLE>
Long-term debt includes the debt of the parent company, TDS totaling $241.9
million and $241.6 million at December 31, 1996 and 1997, respectively, which
was attributed to the Telecom Group by the Board of Directors of TDS. The Medium
Term Notes ("MTNs") carry original maturities of 12 to 30 years, maturing at
various times from 2003 to 2025. The MTNs may be redeemed by TDS at par value
beginning in 1999.
TDS has also attributed certain other long-term debt (Long-term
debt--affiliated) to the Telecom Group from the TDS Group. Such debt is being
treated as an unsecured interest bearing instrument at an interest rate equal to
1/2% above the prime rate until the principal amount becomes due. Interest at a
rate equal to 2 1/2% above such prime rate would accrue on any overdue principal
or overdue installment of interest. No principal will be payable until maturity,
January 4, 1999. TDS has also attributed the tax benefit relating to the
interest expense of all attributed debt to the Telecom Group.
The RUS, RTB and FFB Mortgage Notes issued under certain loan agreements
with the Rural Utilities Service ("RUS"), Rural Telephone Bank ("RTB"), and
Federal Financing Bank ("FFB"), agencies of the United States of America, are to
be repaid in equal monthly or quarterly installments covering principal and
interest beginning six months to three years after dates of issue and expiring
through 2031. The agreements with the RUS, RTB and FFB provide for additional
borrowings of up to $112.0 million. Substantially all telephone plant is pledged
under RUS and RTB mortgage notes and various other obligations of the
subsidiaries.
F-16
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) LONG-TERM DEBT (CONTINUED)
The annual requirements for principal payments on long-term debt are
approximately $14.8 million, $15.2 million, $15.0 million, $14.7 million and
$15.0 million for the years 1998 through 2002, respectively.
The estimated fair value of the Telecom Group's non-affiliated long-term
debt was $515.8 million and $565.7 million at December 31, 1996 and 1997,
respectively. The fair value was estimated using discounted cash flow analysis
based on the Telecom Group's current incremental borrowing rates for similar
types of borrowing arrangements.
(8) TDS TELECOMMUNICATIONS GROUP EQUITY
The changes in the TDS Telecommunications Group equity for the periods
presented is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at the beginning of period....................... $ 228,800 $ 265,387 $ 343,816
Net income............................................... 34,155 35,694 30,388
Dividends to TDS......................................... (16,828) (71,719) (32,701)
Equity contributions..................................... 19,260 114,454 42,256
---------- ---------- ----------
Balance at the end of period............................. $ 265,387 $ 343,816 $ 383,759
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Telecom Group transferred interests in 13 cellular markets held by
various telephone subsidiaries to TDS in September 1996. Such cellular
interests, with an aggregate book value of $47.2 million, were transferred by
TDS Telecom to TDS via dividends.
(9) EMPLOYEE BENEFIT PLANS
(A) PENSION PLAN
The Telecom Group participates in a qualified noncontributory defined
contribution pension plan sponsored by TDS which provides pension benefits for
most of the employees of the Telecom Group. Under this plan pension benefits and
costs are calculated separately for each participant and are funded currently.
TDS also sponsors an unfunded non-qualified deferred compensation plan to
supplement pension plan benefits to offset the reduction of benefits caused by
the limitation on annual employee compensation under the tax laws. Employees of
certain of the telephone subsidiaries not covered by the pension plan are
covered under other pension plans or receive direct pension payment.
Total pension costs of the Telecom Group were $2.7 million, $2.8 million and
$3.6 million in 1995, 1996 and 1997, respectively.
(B) OTHER POSTRETIREMENT BENEFITS
TDS sponsors two defined benefit postretirement plans that cover most of the
employees of the Telecom Group. One plan provides medical benefits and the other
plan provides life insurance benefits. Both plans are contributory, with retiree
contributions adjusted annually. The medical plan anticipates future cost
sharing changes that are consistent with TDS's intent to increase retiree
contributions by the health care cost trend rate. An amount not to exceed 25% of
the total contribution to the pension plan will be contributed to fund the cost
of the medical benefits annually. An additional contribution equal to a
F-17
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) EMPLOYEE BENEFIT PLANS (CONTINUED)
reasonable amortization of the past service cost may be made without regard to
the 25% limitation described above. TDS will limit overall contributions to the
aggregate accruals recorded by its subsidiaries.
The following table sets forth the plans' funded status reconciled with the
amount shown in the Telecom Group's consolidated balance sheet at December 31,
1997.
<TABLE>
<CAPTION>
LIFE HEALTH
INSURANCE CARE
PLAN PLAN TOTAL
----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................... $ 1,888 $ 4,948 $ 6,836
Fully eligible active plan participants.................... 578 2,375 2,953
Other active plan participants............................. 1,039 9,303 10,342
----------- --------- ---------
3,505 16,626 20,131
Plan assets at fair value.................................... 1,554 11,642 13,196
----------- --------- ---------
Accumulated postretirement benefit obligation in excess of
plan assets................................................ 1,951 4,984 6,935
Unrecognized prior service cost.............................. (290) (1,801) (2,091)
Unrecognized net gain from past experience different from
that assumed and from changes in assumptions............... 797 5,027 5,824
----------- --------- ---------
Accrued postretirement benefit cost at December 31, 1997..... $ 2,458 $ 8,210 $ 10,668
----------- --------- ---------
----------- --------- ---------
</TABLE>
Net postretirement cost for 1995, 1996 and 1997 includes the following
components:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service Cost..................................................... $ 429 $ 695 $ 774
Interest cost on accumulated postretirement benefit obligation... 911 1,049 1,265
Actual return on plan assets..................................... (549) (648) (565)
Net amortization and deferral.................................... 231 104 (297)
--------- --------- ---------
Net postretirement cost.......................................... $ 1,022 $ 1,200 $ 1,177
--------- --------- ---------
--------- --------- ---------
</TABLE>
For measurement purposes, a 9.6% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1997; the rate was assumed
to decrease over six years to 6.1% and to remain at 6.1% thereafter. The assumed
rate of return on plan assets was 8.0%. The health care cost trend rate
assumption has a significant effect on the amounts reported. Increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1997, by $3.3 million and the aggregate of the service and interest cost
components of postretirement expense for the year then ended by $465,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0%.
F-18
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) PRO FORMA ACQUISITION EFFECTS
TDS purchased and subsequently attributed to the Telecom Group five
telephone companies in 1996 and one telephone company in 1997. Assuming that
these transfers had taken place on January 1, 1996, unaudited proforma results
of operations would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating revenues.................................................... $ 405,597 $ 447,213
Net income............................................................ $ 37,501 $ 31,154
---------- ----------
---------- ----------
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
The primary purpose of the Telecom Group's construction and expansion
program is to provide for normal growth, to upgrade telephone service, to expand
into new communications areas and to take advantage of service-enhancing and
cost-reducing technological developments. Telephone construction expenditures
are estimated to be approximately $140 million during 1998, including about $50
million for new digital switches and other switching facilities and $35 million
for improvements to outside plant facilities, $25 million for systems
development and $20 million for other services, primarily CLEC expenditures.
LEASE COMMITMENTS
The Telecom Group has leases for office space and data processing equipment,
most of which are classified as operating leases. For the years 1995, 1996 and
1997, rent expense for noncancelable, long-term leases was $1.6 million, $1.8
million and $1.2 million, respectively, and rent expense under cancelable,
short-term leases was $2.4 million, $3.1 million and $3.3 million, respectively.
At December 31, 1997, the aggregate minimum rental commitments under
noncancelable, long-term operating leases were as follows:
<TABLE>
<CAPTION>
MINIMUM FUTURE RENTAL
PAYMENTS
---------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
1998.................................................................... $ 1,619
1999.................................................................... 1,609
2000.................................................................... 1,589
2001.................................................................... 1,571
2002.................................................................... 113
Thereafter.............................................................. $ 47
</TABLE>
LEGAL PROCEEDINGS
The Telecom Group is involved in legal proceedings before various state and
federal courts from time-to-time. Management does not believe that any of such
proceedings should have a material adverse impact on the financial position or
results of operations of the Telecom Group.
F-19
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) RELATED PARTY TRANSACTIONS
The Telecom Group is billed for all services it receives from TDS,
consisting primarily of information processing and general management services.
Such billings are based on expenses specifically identified to the Telecom Group
and on allocations of common expenses. Such allocations are based on the
relationship of the Telecom Group's assets, employees, investment in plant and
expenses to the total assets, employees, investment in plant and expenses of
TDS. Management believes the method used to allocate common expenses is
reasonable and that all expenses and costs applicable to the Telecom Group are
reflected in the accompanying financial statements on a basis which is
representative of what they would have been if the Telecom Group operated on a
stand-alone basis. Billings to the Telecom Group from TDS totaled $28.4 million,
$21.2 million and $28.0 million in 1995, 1996 and 1997, respectively.
The Telecom Group transferred interests in 13 cellular markets held by
various telephone subsidiaries to TDS in September 1996. Such cellular
interests, with an aggregate book value of $47.2 million, were transferred by
TDS Telecom to TDS via dividends.
Long-term debt includes the debt of the parent company, TDS totaling $241.9
million and $241.6 million at December 31, 1996 and 1997, respectively, which
was attributed to the Telecom Group by the Board of Directors of TDS.
TDS has also attributed certain other long-term debt (Long-term
debt-affiliated) to the Telecom Group from the TDS Group. Such debt is being
treated as an unsecured interest bearing instrument at an interest rate equal to
1/2% above the prime rate until the principal amount becomes due. Interest at a
rate equal to 2 1/2% above such prime rate would accrue on any overdue principal
or overdue installment of interest. No principal will be payable until maturity,
January 4, 1999. TDS has also attributed the tax benefit relating to the
interest expense of all attributed debt to the Telecom Group.
F-20
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING REVENUES
Telephone Revenues
Local service......................................................................... $ 29,861 $ 32,551
Network access and long distance...................................................... 56,592 60,846
Miscellaneous......................................................................... 12,179 13,897
---------- ----------
Total Telephone Revenues.......................................................... 98,632 107,294
Other services.......................................................................... 7,171 9,400
Intercompany revenues................................................................... (232) (479)
---------- ----------
Total Operating Revenues.......................................................... 105,571 116,215
---------- ----------
OPERATING EXPENSES
Telephone Expenses
Network operations.................................................................... 18,030 20,678
Depreciation and amortization......................................................... 23,293 26,007
Customer operations................................................................... 14,897 17,509
Corporate operations.................................................................. 15,456 18,948
---------- ----------
Total Telephone Expenses.......................................................... 71,676 83,142
Other Services.......................................................................... 7,220 13,237
Intercompany expenses................................................................... (232) (479)
---------- ----------
Total Operating Expenses.......................................................... 78,664 95,900
---------- ----------
OPERATING INCOME.......................................................................... 26,907 20,315
OTHER INCOME AND (EXPENSES)
Interest and dividend income............................................................ 1,209 1,388
Interest and dividend income affiliated................................................. 2,133 2,386
Cellular investment income, net of license cost amortization............................ 1,291 1,302
Allowance for funds used during construction............................................ 144 174
Gain on sale of investments............................................................. -- 37,111
Other (expenses), net................................................................... (326) (945)
---------- ----------
4,451 41,416
---------- ----------
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES........................................... 31,358 61,731
INTEREST EXPENSE
Interest expense........................................................................ 10,013 9,949
Interest expense--affiliate............................................................. 5,790 4,831
---------- ----------
15,803 14,780
INCOME BEFORE INCOME TAXES................................................................ 15,555 46,951
Income tax expense...................................................................... 6,634 18,332
---------- ----------
NET INCOME................................................................................ $ 8,921 $ 28,619
---------- ----------
---------- ----------
Pro forma: (Unaudited--See Note 6)
Net Income Attributable to TDS Group through Retained Interest............................ $ 2,230 $ 7,155
Net Income Attributable to TDS Telecommunications
Group Common Shares..................................................................... $ 6,691 $ 21,464
Weighted Average TDS Telecommunications Group Shares Outstanding.......................... 40,789 40,500
Earnings per TDS Telecommunciations Group Shares.......................................... $ 0.16 $ 0.53
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-21
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.............................................................................. $ 8,921 $ 28,619
Add (Deduct) adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization......................................................... 23,858 26,816
Deferred income taxes, net............................................................ 2,117 14,182
Cellular investment income, net....................................................... (1,291) (1,302)
Gain on sale of investments........................................................... -- (37,111)
Other non-cash expense................................................................ 6,725 1,126
Change in accounts receivable......................................................... (1,880) 1,508
Change in accounts payable............................................................ (7,347) (2,135)
Change in accrued interest............................................................ 239 8,663
Change in accrued federal income taxes................................................ (9,735) (6,484)
Change in other accrued taxes......................................................... (1,305) 216
Change in other assets and liabilities................................................ (1,873) (1,649)
---------- ----------
18,429 32,449
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowing................................................................ 960 1,848
Repayment of long-term debt............................................................. (1,869) (5,324)
Change in notes payable................................................................. 2,169 16,889
Other financing activities.............................................................. (65) (96)
---------- ----------
1,195 13,317
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................................................... (23,599) (30,739)
Change in temporary cash investments and marketable securities.......................... (1,075) 12,190
Change in notes receivable--affiliate................................................... (70) 2,277
Other investing activities.............................................................. 484 823
---------- ----------
(24,260) (15,449)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... (4,635) 30,317
CASH AND CASH EQUIVALENTS
Beginning of period................................................................... 183,535 184,581
---------- ----------
End of period......................................................................... $ 178,900 $ 214,898
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-22
<PAGE>
THE TDS TELECOMMUNCIATIONS GROUP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents
General funds.................................................................... $ 22,640 $ 52,907
Affiliated cash equivalents...................................................... 161,941 161,991
------------ ------------
184,581 214,898
Temporary cash investments......................................................... 21,658 15,909
Construction funds................................................................. 775 734
Accounts receivable
Customers........................................................................ 33,482 32,064
Connecting companies............................................................. 40,548 40,662
Affiliated....................................................................... 1,213 1,111
Other............................................................................ 5,971 6,450
Notes receivable--affiliated....................................................... 3,746 1,469
FIT receivable..................................................................... -- 6,380
Materials and supplies............................................................. 10,064 11,036
Other current assets............................................................... 3,495 4,102
------------ ------------
305,533 334,815
------------ ------------
INVESTMENTS
Franchise and other costs in excess of underlying book values of subsidiaries, net
of accumulated amortization of $34,942 and $36,236, respectively................. 180,683 184,791
Cellular investments............................................................... 48,562 34,992
Marketable equity securities....................................................... 1,622 59,456
Marketable non-equity securities................................................... 22,107 15,881
Other investments.................................................................. 12,451 11,652
------------ ------------
265,425 306,772
------------ ------------
TELECOMMUNICATIONS PLANT
In service and under construction.................................................. 1,420,890 1,457,685
Less accumulated depreciation...................................................... 590,123 616,706
------------ ------------
830,767 840,979
------------ ------------
OTHER ASSETS AND DEFERRED CHARGES.................................................... 4,323 4,387
------------ ------------
TOTAL ASSETS......................................................................... $1,406,048 $ 1,486,953
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-23
<PAGE>
THE TDS TELECOMMUNCIATIONS GROUP
BALANCE SHEETS
LIABILITIES AND GROUP EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt.................................................. $ 14,816 $ 15,074
Notes payable--affiliates.......................................................... 28,181 28,861
Accounts payable
Connecting companies............................................................. 13,833 14,182
Affiliated....................................................................... 2,411 4,549
Other............................................................................ 26,475 21,695
Advance bills and customer deposits................................................ 5,329 5,419
Accrued interest
Affiliated....................................................................... 342 3,519
Other............................................................................ 662 6,158
Accrued federal income taxes due TDS............................................... 103 --
Other accrued taxes................................................................ 7,764 7,772
Accrued compensation............................................................... 7,386 3,122
Other.............................................................................. 4,436 4,276
------------ ------------
111,738 114,627
------------ ------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability.................................................. 60,550 78,412
Post-retirement benefits obligation other than pensions............................ 10,668 11,001
Other.............................................................................. 12,079 12,663
------------ ------------
83,297 102,076
------------ ------------
LONG-TERM DEBT
Affiliated......................................................................... 255,302 271,164
Other, excluding current portion................................................... 548,558 549,401
------------ ------------
803,860 820,565
------------ ------------
MINORITY INTEREST IN SUBSIDIARIES.................................................... 23,394 23,153
------------ ------------
TDS TELECOMMUNICATIONS GROUP EQUITY, including unrealized gains on securities of $683
and $5,917, respectively............................................................ 383,759 426,532
------------ ------------
TOTAL LIABILITIES AND GROUP EQUITY................................................... $1,406,048 $ 1,486,953
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-24
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS
The TDS Telecommunications Group ("Telecom Group") primarily consists of TDS
Telecommunications Corporation and its subsidiaries ("TDS Telecom"), a wholly
owned subsidiary of TDS which operates landline telephone companies.
(1) BASIS OF PRESENTATION
The interim, unaudited financial statements included herein have been
prepared by TDS, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although TDS believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these interim,
unaudited financial statements be read in conjunction with the audited financial
statements and the notes thereto included elsewhere in this Registration
Statement.
The accompanying unaudited financial statements contain all adjustments
(consisting of only normal recurring items) necessary to present fairly the
financial position as of December 31, 1997 and March 31, 1998, and the results
of operations and cash flows for the three months ended March 31, 1997 and 1998.
The results of operations for the three months ended March 31, 1997 and 1998,
are not necessarily indicative of the results to be expected for the full year.
(2) RECLASSIFICATIONS
Certain amounts reported in prior periods have been reclassified to conform
to the current period presentation.
(3) MARKETABLE EQUITY SECURITIES
The following table lists the Telecom Group's marketable equity securities
at March 31, 1998.
<TABLE>
<CAPTION>
FAIR CUMULATIVE NET
MARKET ORIGINAL UNREALIZED TAX UNREALIZED
VALUE COST GAIN EFFECT GAIN
--------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment in AirTouch......................... $ 52,863 $ 48,475 $ 4,388 $ 1,793 $ 2,595
Other.......................................... 6,593 1,142 5,451 2,129 3,322
--------- --------- ----------- --------- -----------
$ 59,456 $ 49,617 $ 9,839 $ 3,922 $ 5,917
--------- --------- ----------- --------- -----------
--------- --------- ----------- --------- -----------
</TABLE>
The cumulative unrealized gain, net of taxes, is included in TDS
Telecommunications Group Equity.
(4) GAINS ON SALE OF INVESTMENTS
Gains on the sale of investments in 1998 primarily reflect gains on the sale
of two minority cellular investments to AirTouch Communications, Inc.
("AirTouch") for AirTouch common shares.
(5) OTHER COMPREHENSIVE INCOME
In 1998, the Telecom Group adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130"), which
requires companies to report all of the changes in shareholder's equity, except
those resulting from investment by owners or distribution to owners
("Comprehensive Income"). The Telecom Group's Comprehensive Income includes Net
Income and Unrealized
F-25
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) OTHER COMPREHENSIVE INCOME (CONTINUED)
Gains from Marketable Equity Securities that are classified as
"available-for-sale". The following table summarizes the Telecom Group's
Comprehensive Income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Net Income........................................................................ $ 8,921 $ 28,619
Other Comprehensive Income--Unrealized gains on securities, net of tax of
$3,457.......................................................................... -- 5,234
--------- ---------
Comprehensive Income.............................................................. $ 8,921 $ 33,853
--------- ---------
--------- ---------
</TABLE>
(6) PRO FORMA NET INCOME AND EARNINGS PER SHARE
Pro forma net income attributable to the Telecom Group and to the TDS Group
through the Retained Interest assumes that the Telecom Public Offering has not
taken place and therefore 75% of net income is attributable to the Telecom Group
Shares and 25% of Net Income is attributable to the Retained Interest for the
TDS Group.
Pro forma earnings per share was computed based on the weighted average TDS
Telecommunications Group Shares outstanding during the periods, adjusted to give
retroactive effect to the Distribution of TDS Telecommunications Group Shares in
conjunction with Telephone and Data Systems, Inc. proposed restructuring, as if
the restructuring has occurred at January 1, 1997.
(7) SUPPLEMENTAL CASH FLOW INFORMATION
Cash and cash equivalents include cash and those short-term, highly liquid
investments with original maturities of three months or less. Those investments
with original maturities of more than three months to twelve months are
classified as temporary investments. Temporary investments are stated at cost,
which approximates market. Those investments with original maturities of more
than 12 months are classified as marketable securities and are stated at
amortized cost.
F-26
<PAGE>
THE TDS TELECOMMUNICATIONS GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
The Telecom Group acquired one telephone company in the first quarter of
1998. In conjunction with this acquisition, the following assets were acquired
and liabilities assumed and Common Shares issued.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998
-------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Property, plant and equipment...................................................... $ 7,825
Franchise costs.................................................................... 5,304
Long-term debt..................................................................... (4,634)
Deferred credits................................................................... (1,359)
Other assets and liabilities, excluding cash and cash equivalents.................. 1,340
TDS Common Shares issued and issuable.............................................. (8,725)
-------
Increase in cash due to acquisitions............................................. $ (249)
-------
-------
</TABLE>
The following table summarizes interest and income taxes paid, and other
noncash transactions.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Interest Paid................................................................... $ 5,712 $ 8,232
Income Taxes Paid............................................................... $ 17,778 $ 9,614
</TABLE>
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Telephone and Data Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Telephone
and Data Systems, Inc. (an Iowa corporation) and Subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of operations, common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Telephone and Data Systems,
Inc. and Subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 28, 1998 (except with respect
to the matters discussed in Note 5,
"American Paging Merger"; and in Note
16, as to which the date is February
18, 1998)
F-28
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
----------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
OPERATING REVENUES
Cellular.................................................................... $ 480,316 $ 680,068 $ 876,965
Telephone................................................................... 354,841 395,602 444,203
PCS......................................................................... -- -- 55,952
Radio paging................................................................ 107,150 104,187 94,413
----------- --------- ---------
942,307 1,179,857 1,471,533
----------- --------- ---------
OPERATING EXPENSES
Cellular.................................................................... 437,561 592,702 747,422
Telephone................................................................... 256,601 292,894 345,590
PCS......................................................................... -- -- 252,503
Radio paging................................................................ 116,147 140,813 129,720
----------- --------- ---------
810,309 1,026,409 1,475,235
----------- --------- ---------
OPERATING INCOME (LOSS)....................................................... 131,998 153,448 (3,702)
----------- --------- ---------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest and dividend income................................................ 13,024 15,569 13,660
Cellular investment income, net of license cost amortization................ 40,666 54,799 77,620
Gain on sale of cellular interests and other investments.................... 86,625 138,735 41,438
PCS development costs....................................................... (7,829) (43,950) (21,614)
Other (expense) income, net................................................. (2,771) 2,727 (3,938)
Minority share of loss (income)............................................. (25,858) (26,690) 6,813
----------- --------- ---------
103,857 141,190 113,979
----------- --------- ---------
INCOME BEFORE INTEREST AND INCOME TAXES....................................... 235,855 294,638 110,277
Interest expense.............................................................. 50,848 42,853 89,744
Minority interest in income of subsidiary trust............................... -- -- 1,523
----------- --------- ---------
INCOME BEFORE INCOME TAXES.................................................... 185,007 251,785 19,010
Income tax expense............................................................ 81,029 123,646 28,559
----------- --------- ---------
NET INCOME (LOSS)............................................................. 103,978 128,139 (9,549)
Preferred Dividend Requirement................................................ (2,509) (1,957) (1,892)
----------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON......................................... $ 101,469 $ 126,182 $ (11,441)
----------- --------- ---------
----------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES (000S)......................................... 57,456 60,464 60,211
EARNINGS PER COMMON SHARE--BASIC.............................................. $ 1.77 $ 2.09 $ (0.19)
----------- --------- ---------
----------- --------- ---------
EARNINGS PER COMMON SHARE--DILUTED............................................ $ 1.74 $ 2.07 $ (0.19)
----------- --------- ---------
----------- --------- ---------
DIVIDENDS PER COMMON AND SERIES A COMMON SHARE................................ $ 0.38 $ 0.40 $ 0.42
----------- --------- ---------
----------- --------- ---------
Pro forma (unaudited): (Note 1)
Net income Attributable to Common Stocks
United States Cellular Group Shares......................................... $ 60,522 $ 78,562 $ 67,706
TDS Telecommunications Group Shares......................................... 25,616 26,770 22,791
Aerial Communications Group Shares.......................................... (4,851) (24,733) (153,014)
TDS Common and Series A Common Shares....................................... $ 20,182 $ 45,583 $ 51,076
Weighted Average Common Shares Outstanding
United States Cellular Group Shares......................................... 57,456 60,464 60,211
TDS Telecommunications Group Shares......................................... 38,304 40,309 40,141
Aerial Communications Group Shares.......................................... 38,304 40,309 40,141
TDS Common and Series A Common Shares....................................... 57,456 60,464 60,211
Earnings per Common Share
United States Cellular Group Shares......................................... $ 1.05 $ 1.30 $ 1.12
TDS Telecommunications Group Shares......................................... 0.67 0.66 0.57
Aerial Communications Group Shares.......................................... (0.13) (0.61) (3.81)
TDS Common and Series A Common Shares....................................... $ 0.35 $ 0.75 $ 0.85
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-29
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................................... $ 103,978 $ 128,139 $ (9,549)
Add (Deduct) adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization......................................... 191,504 231,075 301,556
Deferred taxes........................................................ 19,603 75,015 17,236
Investment income..................................................... (43,188) (57,947) (83,395)
Minority share of income (loss)....................................... 25,858 26,690 (6,813)
Gain on sale of cellular interests and other investments.............. (86,625) (138,735) (41,438)
Noncash interest expense.............................................. 12,761 17,042 24,289
Other noncash expense................................................. 16,946 24,022 16,561
Change in accounts receivable......................................... (33,346) (28,687) (41,900)
Change in materials and supplies...................................... (2,999) (2,395) (25,827)
Change in accounts payable............................................ (11,630) 23,531 32,498
Change in accrued taxes............................................... 6,252 (8,249) 7,612
Change in other assets and liabilities................................ 11,762 5,493 15,677
------------ ------------ ------------
210,876 294,994 206,507
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings............................................. 334,323 15,846 260,099
Repayment of long-term debt........................................... (30,734) (34,200) (121,958)
Change in notes payable............................................... 80,351 (27,133) 368,858
Trust preferred securities............................................ -- -- 144,788
Dividends paid........................................................ (23,972) (26,231) (27,193)
Proceeds from the issuance of subsidiaries' stock..................... -- 195,265 --
Repurchase of Common Shares........................................... -- -- (69,942)
Other financing activities............................................ 9,506 1,349 (7,064)
------------ ------------ ------------
369,474 124,896 547,588
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................................. (359,996) (550,204) (786,317)
Investments in cellular investment entities and license costs......... (25,025) (23,134) (20,084)
Distributions from investments........................................ 9,062 25,453 56,413
Investments in PCS licenses........................................... (326,035) (26,548) (5,034)
Proceeds from investment sales........................................ 197,558 221,542 84,230
Acquisitions, net of cash acquired.................................... (53,770) (31,019) (128,979)
Change in temporary investments and marketable securities............. 11,871 (30,797) 36,422
Other investing activities............................................ (3,632) (2,666) 2,629
------------ ------------ ------------
(549,967) (417,373) (760,720)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................... 30,383 2,517 (6,625)
CASH AND CASH EQUIVALENTS
Beginning of period................................................... 24,733 55,116 57,633
------------ ------------ ------------
End of period......................................................... $ 55,116 $ 57,633 $ 51,008
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-30
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................................................. $ 57,633 $ 51,008
Temporary investments................................................................. 61,664 24,559
Construction funds.................................................................... 1,405 775
Accounts receivable
Due from customers, less allowance of $6,090 and $15,102, respectively.............. 97,093 148,811
Other, principally connecting companies............................................. 84,119 98,487
Materials and supplies, at average cost............................................... 29,125 55,127
Other................................................................................. 15,031 29,517
------------ ------------
346,070 408,284
------------ ------------
INVESTMENTS
Cellular license costs, net of amortization........................................... 1,088,409 1,190,917
Cellular minority interests........................................................... 206,390 138,367
Broadband PCS license acquisition costs, net of amortization.......................... 322,420 319,918
Franchise and other costs in excess of the underlying book value of subsidiaries, net
of amortization..................................................................... 181,845 180,669
Other investments..................................................................... 144,840 142,713
------------ ------------
1,943,904 1,972,584
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Cellular
In service and under construction..................................................... 846,005 1,212,575
Less accumulated depreciation......................................................... 195,251 272,322
------------ ------------
650,754 940,253
------------ ------------
Telephone
In service and under construction, substantially at original cost..................... 1,293,779 1,420,890
Less accumulated depreciation......................................................... 524,418 590,123
------------ ------------
769,361 830,767
------------ ------------
PCS
In service and under construction..................................................... 324,703 642,122
Less accumulated depreciation......................................................... 1,980 38,018
------------ ------------
322,723 604,104
------------ ------------
Radio Paging
In service and under construction..................................................... 113,000 118,275
Less accumulated depreciation......................................................... 61,528 75,045
------------ ------------
51,472 43,230
------------ ------------
Other
In service and under construction..................................................... 82,781 96,809
Less accumulated depreciation......................................................... 48,202 49,510
------------ ------------
34,579 47,299
------------ ------------
1,828,889 2,465,653
------------ ------------
OTHER ASSETS AND DEFERRED CHARGES..................................................... 82,106 125,080
------------ ------------
$ 4,200,969 $ 4,971,601
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-31
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and preferred shares................................ $ 38,197 $ 16,115
Notes payable......................................................................... 160,537 527,587
Accounts payable...................................................................... 205,427 239,783
Advance billings and customer deposits................................................ 32,434 33,640
Accrued interest...................................................................... 11,777 18,284
Accrued taxes......................................................................... 3,194 6,961
Accrued compensation.................................................................. 10,279 23,386
PCS microwave relocation costs........................................................ 17,046 7,354
Other................................................................................. 30,376 32,775
------------ ------------
509,267 905,885
------------ ------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability..................................................... 183,792 202,680
Postretirement benefits obligation other than pensions................................ 11,451 11,364
Other................................................................................. 19,663 21,602
------------ ------------
214,906 235,646
------------ ------------
LONG-TERM DEBT, excluding current portion............................................. 982,232 1,264,218
------------ ------------
REDEEMABLE PREFERRED SHARES, excluding current portion................................ 280 180
------------ ------------
MINORITY INTEREST in subsidiaries..................................................... 432,343 416,566
------------ ------------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST
HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES (a).................................. -- 150,000
------------ ------------
NONREDEEMABLE PREFERRED SHARES........................................................ 29,000 30,987
------------ ------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share; authorized 100,000,000 shares; issued and
outstanding 54,237,180 and 54,443,260 shares, respectively.......................... 54,237 54,443
Series A Common Shares, par value $1 per share; authorized 25,000,000 shares; issued
and outstanding 6,916,546 and 6,936,277 shares, respectively........................ 6,917 6,936
Common Shares issuable, 30,977 and 10,480 shares, respectively........................ 1,461 499
Capital in excess of par value........................................................ 1,661,093 1,664,432
Treasury Shares, at cost, 794,576 shares.............................................. -- (30,682)
Retained earnings..................................................................... 309,233 272,491
------------ ------------
2,032,941 1,968,119
------------ ------------
$ 4,200,969 $ 4,971,601
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(a) As described in Note 9, the sole asset of TDS Capital I is $154.6 million
principal amount of 8.5% subordinated debentures due 2037 from TDS.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-32
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A COMMON CAPITAL IN
COMMON COMMON SHARES EXCESS OF TREASURY RETAINED
SHARES SHARES ISSUABLE PAR VALUE SHARES EARNINGS
--------- ----------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE, DECEMBER 31, 1994................. $ 47,938 $ 6,887 $ 1,995 $ 1,288,453 $ -- $ 127,765
Net Income................................. -- -- -- -- -- 103,978
Dividends
Common and Series A Common Shares........ -- -- -- -- -- (21,910)
Preferred Shares......................... -- -- -- -- -- (2,507)
Acquisitions............................... 2,948 -- -- 125,231 -- --
Dividend reinvestment, incentive and
benefit plans............................ 186 18 -- 6,994 -- --
Conversion of Preferred Shares............. 43 -- -- (2,962) -- --
Conversion of Series A Common Shares....... 12 (12) -- -- -- --
Shares issued pursuant to acquisition
agreements............................... 10 -- (499) 489 -- --
Other...................................... -- -- -- (692) -- --
--------- ----------- ----------- ------------ ---------- ----------
BALANCE, DECEMBER 31, 1995................. 51,137 6,893 1,496 1,417,513 -- 207,326
Net Income................................. -- -- -- -- -- 128,139
Dividends
Common and Series A Common Shares........ -- -- -- -- -- (24,274)
Preferred Shares......................... -- -- -- -- -- (1,958)
Acquisitions............................... 2,635 -- 464 110,648 -- --
Dividend reinvestment, incentive and
benefit plans............................ 100 27 -- 4,487 -- --
Conversion of Preferred Shares............. 352 -- -- 4,422 -- --
Conversion of Series A Common Shares....... 3 (3) -- -- -- --
Shares issued pursuant to acquisition
agreements............................... 10 -- (499) 489 -- --
Gain on sale of subsidiary stock........... -- -- -- 114,056 -- --
Other...................................... -- -- -- 9,478 -- --
--------- ----------- ----------- ------------ ---------- ----------
BALANCE, DECEMBER 31, 1996................. 54,237 6,917 1,461 1,661,093 -- 309,233
Net (Loss)................................. -- -- -- -- -- (9,549)
Dividends
Common and Series A Common Shares........ -- -- -- -- -- (25,300)
Preferred Shares......................... -- -- -- -- -- (1,893)
Acquisitions............................... -- -- -- 3,601 39,084 --
Repurchase Common Shares................... -- -- -- -- (69,942) --
Dividend reinvestment, incentive and
benefit plans............................ 122 19 -- 4,707 176 --
Conversion of Preferred Shares............. 68 -- -- 1,419 -- --
Shares issued pursuant to acquisition
agreements............................... 16 -- (723) 707 -- --
Other...................................... -- -- (239) (7,095) -- --
--------- ----------- ----------- ------------ ---------- ----------
BALANCE, DECEMBER 31, 1997................. $ 54,443 $ 6,936 $ 499 $ 1,664,432 $ (30,682) $ 272,491
--------- ----------- ----------- ------------ ---------- ----------
--------- ----------- ----------- ------------ ---------- ----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-33
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--PROPOSED CORPORATE RESTRUCTURING
The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal which, if approved by shareholders and implemented by the
Board, would authorize the Board to issue three new classes of common stock and
change the state of incorporation of the Company from Iowa to Delaware (the
"Tracking Stock Proposal"). The three new classes of stock are intended to
separately reflect the performance of the Company's cellular telephone, landline
telephone and personal communications services businesses ("Tracking Stocks").
The Tracking Stocks are intended to result in greater market recognition of
the value (individually and collectively) of the Company and of the Company's
three principal business groups ("Tracking Groups"), thereby enhancing
shareholder value over the long term, while at the same time enabling the
Company's businesses to preserve the benefits of being part of a consolidated
enterprise. The Tracking Stock Proposal is intended to:
- provide the Company with greater flexibility in raising capital and making
acquisitions, using equity securities specifically related to the Tracking
Groups,
- enable the Company to more effectively tailor employee benefit plans to
provide incentives to employees of the Tracking Groups,
- provide shareholders with the opportunity to invest in separate securities
that specifically reflect the underlying businesses, depending upon their
investment objectives, and
- permit shareholders to continue to invest in all of the TDS businesses
through the Common Shares and the Series A Common Shares.
The Cellular Group Shares, when issued, are intended to reflect the separate
performance of the Cellular Group, which consists of the Company's interest in
United States Cellular Corporation, a subsidiary of the Company. The Telecom
Group Shares, when issued, are intended to reflect the separate performance of
the Telecom Group, which primarily consists of the Company's interest in TDS
Telecommunications Corporation, a subsidiary of the Company. The Aerial Group
Shares, when issued, are intended to reflect the separate performance of the
Aerial Group, which consists of the Company's interest in Aerial Communications,
Inc., a subsidiary of the Company.
Subject to approval of the Tracking Stock Proposal by shareholders, the
Company proposes to:
- offer and sell Telecom Group Shares in a public offering for cash, subject
to prevailing market and other conditions (the "Telecom Public Offering"),
and allocate the net proceeds thereof to the Telecom Group,
- issue Cellular Group Shares in exchange for all of the Common Shares of
U.S. Cellular which are not owned by the Company, subject to approval by
the board of directors and the shareholders of U.S. Cellular (the "U.S.
Cellular Merger"),
- issue Aerial Group Shares in exchange for all of the Common Shares of
Aerial which are not owned by the Company, subject to approval by the
board of directors and the shareholders of Aerial (the "Aerial Merger"),
and
- distribute one Cellular Group Share, two-thirds of a Telecom Group Share
and two-thirds of an Aerial Group Share in the form of a stock dividend
with respect to each outstanding Series A Common Share and Common Share of
the Company (the "Distribution").
F-34
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--PROPOSED CORPORATE RESTRUCTURING (CONTINUED)
It is currently expected that the Distribution would take place in July 1998
or later, after the completion of the Telecom Public Offering, the U.S. Cellular
Merger and the Aerial Merger.
The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the Cellular Group,
the Telecom Group and the Aerial Group to the extent of the Retained Interest in
the respective groups, and to reflect the performance of the other assets and
businesses attributed to the TDS Group.
If the Tracking Stock Proposal is approved by the shareholders and
implemented by the Board, following the issuance of the Tracking Stocks, the
Company will prepare and file with the Securities and Exchange Commission,
consolidated financial statements of the Company and financial statements of the
Cellular Group, the Telecom Group and the Aerial Group for so long as the
respective Tracking Stock is outstanding and the TDS Group for as long as any
Tracking Stock is outstanding.
For additional information regarding the Tracking Stock Proposal, see
"Proposed Corporate Restructuring" in Management's Discussion and Analysis of
Results of Operations and Financial Condition.
PRO FORMA EARNINGS PER SHARE
Pro forma net income attributable to the United States Cellular Group, the
TDS Telecommunications Group, the Aerial Communications Group and to the TDS
Group through Retained Interest assumes that the U.S. Cellular Merger, Aerial
Merger and the Telecom Public Offering has not taken place and therefore 75% of
net income of each Group (except for the TDS Group) is attributable to the
United States Cellular Group Shares, the TDS Telecommunications Group Shares and
the Aerial Communications Group Shares and 25% of net income is attributable to
the Retained Interest for the TDS Group. A portion of the net income in the
United States Cellular Group and the Aerial Communications Group is allocated to
the minority public shareholders of the respective Groups prior to attributing
the net income to the Groups and the TDS Group through Retained Interest.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Telephone and Data Systems, Inc. ("TDS" or "the Company") is a diversified
telecommunications company which, at December 31, 1997, provided high-quality
telecommunications services to approximately 3.2 million cellular telephone,
telephone, personal communications services ("PCS") and radio paging customers
in 37 states and the District of Columbia. The Company conducts substantially
all of its cellular telephone operations through its currently 81.1%-owned
subsidiary, United States Cellular Corporation, its telephone operations through
its currently wholly owned subsidiary, TDS Telecommunications Corporation, its
PCS operations through its currently 82.5%-owned subsidiary, Aerial
Communicatons, Inc., and its radio paging operations through its currently
81.9%-owned subsidiary, American Paging, Inc. ("American Paging"). See Note
14--Business Segment Information for summary financial information on each
business segment.
The Company has an agreement with a nonaffiliated third party to contribute
assets and certain liabilities of American Paging to a newly formed company. See
Note 5--Acquisitions, Exchanges and Divestitures.
F-35
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The financial statements of the Groups comprise all of the accounts included
in the corresponding consolidated financial statements of Telephone and Data
Systems, Inc. The separate Cellular Group, Telecom Group, Aerial Group and TDS
Group financial statements give effect to the management and accounting policies
that would be applicable upon implementation of the Tracking Stock Proposal.
Subject to the completion of the U.S. Cellular Merger and the Aerial Merger, TDS
intends to terminate certain intercompany agreements between TDS and U.S.
Cellular and Aerial, respectively. Thereafter, some or all of the relationships
between TDS and such subsidiaries would be determined solely by methods that
management of TDS believes to be reasonable. Many of such policies would
continue the arrangements which presently exist between TDS and U.S. Cellular or
Aerial pursuant to the intercompany agreements, but TDS would have no
contractual obligation to continue such policies after the intercompany
agreements have been terminated.
The separate Group financial statements have been prepared on a basis that
management believes to be reasonable and appropriate and include (1) the
historical financial position, results of operations and cash flows of the
businesses that comprise each of the Groups, (2) any assets and liabilities
(including contingent liabilities) which have been attributed to any Group from
any other Group, and (3) with respect to the TDS Group, the Retained Interest in
each of the Tracking Groups. The effects of the issuance of the Tracking Stocks
have not been reflected in these historical financial statements.
Financial effects arising from the Cellular Group, the Telecom Group, the
Aerial Group or the TDS Group that affect the consolidated results of operations
or financial condition of TDS could affect the results of operations or
financial condition of the Cellular Group, the Telecom Group, the Aerial Group
or the TDS Group, or could affect the market price of any or all classes of
Common Stock. In addition, any net losses of TDS or the Cellular Group, the
Telecom Group, the Aerial Group or the TDS Group, and dividends or distributions
on, or repurchases of, any class of Common Stock will reduce the assets of TDS
legally available for payment of dividends on any class of Common Stock.
Accordingly, TDS's consolidated financial statements should be read in
conjunction with the Cellular Group, the Telecom Group, the Aerial Group and the
TDS Group financial information.
The management and accounting policies applicable to the preparation of the
financial statements of each Group could be modified or rescinded by the Board,
in its sole discretion and without the approval of shareholders, although there
is no present intention to do so. The Board could also adopt additional policies
depending upon the circumstances. Any determination by the Board to modify or
rescind such policies, or to adopt additional policies, including any such
decision that could have disparate effects upon the holders of different series
of common stock, would be made by the Board in good faith and in the honest
belief that such decision is in the best interests of Telephone and Data
Systems, Inc. In addition, generally accepted accounting principles require that
changes in accounting policy must be preferable (in accordance with such
principles) to the policy previously in place.
Following the Distribution, subject to the legal and contractual
restrictions on the payment of dividends, the Board currently intends to
establish an annual dividend on the TDS Common Shares and Series A Common Shares
in an amount equal to $.11 per share. The Board also currently intends to
establish an annual dividend on the Telecom Group Shares in an amount equal to
$.50 per share. (Based on the expected distribution ratio of two-thirds of a
Telecom Group Share for each existing Common Share and Series A Common Share,
the dividend on Telecom Group Shares would equate to a per share dividend
F-36
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of $.33 per existing Common Share and Series A Common Share. The total of the
dividend on TDS Common Shares and Series A Common Shares of $.11 and the
equivalent dividend on Telecom Group Shares of $.33 equals the existing current
annual dividend on the existing Common Shares and Series A Common Shares of
$.44.) With regard to the Cellular Group Shares and the Aerial Group Shares, the
Board currently intends to retain future earnings, if any, for the development
of the businesses of the Cellular Group and Aerial Group, respectively, and does
not anticipate paying dividends on the Cellular Group Shares or the Aerial Group
Shares in the foreseeable future. Future dividends on the shares of common stock
will be payable when, as and if declared by the Board out of the lesser of (1)
all funds of TDS legally available therefor and (2) the available dividend
amount with respect to the relevant Group.
Funds of TDS legally available for the payment of dividends ("Surplus")
(approximately $1,966 million as of December 31, 1997, based on the financial
statements) is an amount approximately equal to the Total Common and Preferred
Equity of TDS less the par or stated value of all shares of common and preferred
stock outstanding (204,922,000 shares as of December 31, 1997 after the
Distribution). With respect to any Tracking Group, the Available Dividend Amount
(approximately $1,222 million for the Cellular Group, $287 million for the
Telecom Group and $144 million for the Aerial Group as of December 31, 1997,
based on the financial statements) is an amount approximately equal to the
Outstanding Interest Fraction of such Tracking Group (approximately 75% after
the Distribution) times the respective Tracking Group Equity less the par value
of the respective outstanding Tracking Group Shares. With respect to the TDS
Group, the Available Dividend Amount (approximately $602 million as of December
31, 1997) is an amount approximately equal to the greater of a) an amount
(approximately $313 million) which is approximately equal to the Surplus of TDS
less the sum of all Available Dividend Amounts of all Tracking Groups or b) an
amount (approximately $602 million) which is approximately equal to the TDS
Group Equity and Preferred Stock less the par or stated value of all Common and
Series A Common Shares and Preferred Shares outstanding.
If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, TDS will prepare
and file with the Securities and Exchange Commission consolidated financial
statements of TDS and financial statements of the Cellular Group, the Telecom
Group and the Aerial Group for so long as the respective Tracking Stock is
outstanding, and the TDS Group for as long as any Tracking Stock is outstanding.
Although the financial statements of the Cellular Group, the Telecom Group, the
Aerial Group and the TDS Group will separately report the assets, liabilities
(including contingent liabilities) and shareholders' equity of TDS attributed to
the Cellular Group, the Telecom Group, the Aerial Group and the TDS Group, such
attribution will not affect the legal title to such assets or responsibility for
such liabilities. Holders of the Cellular Group, the Telecom Group and the
Aerial Group Common Shares will be, and holders of TDS Common Shares and Series
A Common Shares will continue to be, shareholders of TDS. TDS and its
subsidiaries will each continue to be responsible for their respective
liabilities.
PRINCIPLES OF CONSOLIDATION
The accounting policies of TDS conform to generally accepted accounting
principles. The consolidated financial statements include the accounts of TDS,
its majority-owned subsidiaries since acquisition and the cellular partnerships
in which TDS has a majority general partnership interest. All material
intercompany items have been eliminated. Investments in entities in which the
Company does not have a controlling interest are generally accounted for using
the equity method.
F-37
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TDS includes as investments in subsidiaries the value of the consideration
given and all direct and incremental costs relating to acquisitions accounted
for as purchases. All costs relating to unsuccessful negotiations for
acquisitions are expensed.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain amounts reported in prior years have been reclassified to conform to
current period presentation.
CASH AND CASH EQUIVALENTS AND TEMPORARY INVESTMENTS
Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. Those investments
with original maturities of more than three months to 12 months are classified
as temporary investments. Temporary investments are stated at cost. Those
investments with original maturities of more than 12 months are classified as
marketable securities and are stated at amortized cost.
The carrying amounts of Cash and Cash Equivalents and Temporary Investments
approximate fair value due to the short-term nature of these investments.
INVESTMENTS
Cellular license costs consist of costs incurred in acquiring Federal
Communications Commission ("FCC") licenses or minority interests which have been
awarded FCC licenses to provide cellular service. These costs include amounts
paid to license applicants and owners of interests in cellular entities awarded
licenses and all direct and incremental costs relating to acquiring the
licenses. These costs are capitalized and amortized through charges to expense
over 40 years upon commencement of operations. Amortization amounted to $27.8
million, $28.5 million and $29.8 million in 1995, 1996 and 1997, respectively.
Accumulated amortization of cellular license costs was $112.2 million and $129.6
million at December 31, 1996 and 1997, respectively. Included in cellular
license costs is approximately $322 million and $281 million at December 31,
1996 and 1997, respectively, of goodwill related to various acquisitions
structured to be tax-free.
Cellular minority interests consist of cellular entities in which TDS holds
a minority interest. The Company follows the equity method of accounting, which
recognizes TDS's proportionate share of the income and losses accruing to it
under the terms of its partnership or shareholder agreements where the Company's
ownership interest equals or exceeds 3% ($196.0 million and $135.5 million at
December 31, 1996 and 1997, respectively). Income and losses from these entities
are reflected in the consolidated income statements on a pretax basis. At
December 31, 1997, the cumulative share of income from minority cellular
investments accounted for under the equity method was $263.3 million, of which
$121.9 million was undistributed. The cost method of accounting is followed for
certain minority interests where the Company's ownership interest is less than
3% ($10.4 million and $2.8 million at December 31, 1996 and 1997, respectively).
F-38
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Broadband PCS license costs consist of costs incurred in acquiring PCS
licenses ($284.9 million) and capitalized interest ($39.7 million). These costs
are amortized over 40 years upon commencement of operations. Amortization
amounted to $4.7 million in 1997. Accumulated amortization of Broadband PCS
license costs was $4.7 million at December 31, 1997.
Franchise and other costs include the costs in excess of the underlying book
value of acquired telephone companies. Costs aggregating $205.1 million and
$209.1 million at December 31, 1996 and 1997, respectively, relating to
acquisitions since November 1, 1970, are being amortized on a straight-line
basis over a 40-year period. Amortization amounted to $4.4 million, $4.9 million
and $5.2 million in 1995, 1996 and 1997, respectively. Accumulated amortization
of excess cost was $29.6 million and $34.9 million at December 31, 1996 and
1997, respectively. Costs in excess of the underlying book value relating to
acquisitions initiated before November 1, 1970, aggregating $6.5 million, are
not being amortized. Included in franchise and other costs is approximately $143
million and $135 million at December 31, 1996 and 1997, respectively, of
goodwill related to various acquisitions structured to be tax-free.
Other investments consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Narrowband PCS license costs.......................................... $ 60,304 $ 60,304
Minority investments.................................................. 23,633 25,073
Long-term notes receivable............................................ 14,974 10,691
Rural Telephone Bank Stock, at cost................................... 6,639 7,175
Marketable equity securities.......................................... 2,673 1,621
Marketable non-equity securities...................................... 29,735 31,024
Other................................................................. 6,882 6,825
---------- ----------
$ 144,840 $ 142,713
---------- ----------
---------- ----------
</TABLE>
At December 31, 1997, the cumulative share of income from minority
investments accounted for under the equity method was $6.3 million, of which
$3.9 million was undistributed.
The Company's investment in debt securities with original maturities of more
than 12 months are classified as marketable non-equity securities and
held-to-maturity. They are stated at amortized cost.
F-39
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Information regarding the Company's marketable non-equity securities is
summarized below.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Held-to-Maturity
U.S. Treasury and other U.S. government corporations and agencies
Aggregate Fair Value
Current............................................................................... $ 46,622 $ 10,025
Noncurrent............................................................................ 29,882 31,921
Amortized Cost Basis
Current............................................................................... 46,603 10,529
Noncurrent............................................................................ 29,735 31,024
Gross Unrealized Holding Gains.......................................................... 174 393
Gross Unrealized Holding Losses......................................................... $ 8 $ --
</TABLE>
The noncurrent investments have contractual maturities of more than one to
five years at December 31, 1996 and 1997. No sales or transfers of securities
classified as held-to-maturity occurred during 1996 and 1997.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company implemented the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Under SFAS No. 121, the Company is required to review long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the book value of a long-lived asset is not
recoverable. An impairment loss would be recognized whenever the review
demonstrates that the book value of a long-lived asset is not recoverable. The
implementation of SFAS No. 121 did not have an impact on the Company's financial
position or results of operations.
REVENUE RECOGNITION
TDS's revenues are recognized when earned. TDS's telephone subsidiaries
participate in revenue pools with other telephone companies for interstate
revenue and for certain intrastate revenue. Such pools are funded by toll
revenue and/or access charges within state jurisdiction and by access charges in
the interstate market. Revenues earned through the various pooling processes are
initially recorded based on the Company's estimates.
ADVERTISING COSTS
The Company expenses advertising costs as incurred.
EARNINGS PER COMMON SHARE
The Company adopted SFAS No. 128, "Earnings per Share," effective December
31, 1997. Earnings per Common Share amounts for 1995 and 1996 have been restated
to conform to current period
F-40
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
presentation. The effect of this accounting change was to increase Earnings per
Common Share--Basic by $.03 and $.01 in 1995 and 1996, respectively. The
adoption of SFAS No. 128 had no effect on Earnings per Common Share--Diluted.
The amounts used in computing Earnings per Common Share and the effect on
income and the weighted average number of Common and Series A Common Shares of
dilutive potential common stock are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS AND SHARES IN THOUSANDS)
<S> <C> <C> <C>
Net Income (Loss)............................................................. $ 103,978 $ 128,139 $ (9,549)
Less: Preferred Dividends..................................................... (2,509) (1,957) (1,892)
---------- ---------- ----------
Net Income (Loss) Available to Common used in Earnings per Share--Basic....... 101,469 126,182 (11,441)
Reduction in preferred dividends if Preferred Shares converted into Common
Shares...................................................................... 998 671 --
Minority Income Adjustment.................................................... (271) (152) (100)
---------- ---------- ----------
Net Income (Loss) Available to Common used in Earnings per Share--Diluted..... $ 102,196 $ 126,701 $ (11,541)
---------- ---------- ----------
---------- ---------- ----------
Weighted Average Number of Common Shares used in Earnings per Share--Basic.... 57,456 60,464 60,211
Effect of Dilutive Securities:
Common Shares outstanding if Preferred Shares converted..................... 1,033 543 --
Stock Options and Stock Appreciation Rights................................. 159 165 --
Common Shares issuable...................................................... 33 28 --
---------- ---------- ----------
Weighted Average Number of Common Shares used in Earnings per
Share--Diluted.............................................................. 58,681 61,200 60,211
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
For 1995 and 1996, Preferred Shares convertible into 477,000 and 428,000
Common Shares, respectively, were not included in computing diluted Earnings per
Common Share because their effects were antidilutive. For 1997, Preferred Shares
convertible into 917,000 Common Shares, 130,000 stock options and stock
appreciation rights and 15,000 Common Shares issuable in the future were not
included in computing diluted Earnings per Common Share because their effects
were antidilutive.
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.
F-41
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL CASH FLOW DISCLOSURES
Following are supplemental cash flow disclosures for interest and income
taxes paid, acquisitions and certain noncash transactions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest paid................................................................... $ 49,475 $ 52,835 $ 70,741
Income taxes paid............................................................... 60,515 67,967 10,743
Common Shares issued for conversion of Preferred Shares......................... 948 4,602 1,487
Increase in PCS network equipment and prepaid infrastructure costs through the
issuance of long-term debt and interim financing.............................. -- 100,000 84,335
Additions to property, plant and equipment financed through accounts payable and
accrued expenses.............................................................. $ 3,943 $ 87,109 $ 46,104
</TABLE>
TDS has acquired operating telephone companies, certain cellular licenses
and operating companies and certain other assets since January 1, 1995. In
conjunction with these acquisitions, the following assets were acquired and
liabilities assumed, and Common Shares and Preferred Shares issued:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Property, plant and equipment................................................ $ 56,132 $ 55,692 $ 120,365
Cellular licenses............................................................ 129,510 95,447 137,409
(Decrease) increase in investment in cellular minority interests............. 977 (3,641) (89,205)
Franchise and other costs.................................................... 25,657 17,679 2,452
Long-term debt............................................................... (9,254) (22,979) (4,857)
Deferred credits............................................................. (538) (6,205) 1,104
Other assets and liabilities, excluding cash and cash equivalents............ (8,084) 8,188 7,396
Common Shares issued and issuable............................................ (127,836) (113,128) (42,685)
Preferred Shares issued...................................................... -- -- (3,000)
U.S. Cellular Common Shares issued and issuable.............................. (12,794) (34) --
---------- ---------- ----------
Decrease in cash due to acquisitions......................................... $ 53,770 $ 31,019 $ 128,979
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-42
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES
TDS files a consolidated federal income tax return. Income tax provisions
charged to net income are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal....................................................................... $ 44,690 $ 31,356 $ 4,533
State......................................................................... 16,736 17,275 6,790
Deferred:
Federal....................................................................... 19,253 67,040 13,302
State......................................................................... 2,386 10,072 4,453
Amortization of deferred investment tax credits................................. (2,036) (2,097) (519)
--------- ---------- ---------
Total income tax expense........................................................ $ 81,029 $ 123,646 $ 28,559
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
Investment tax credits resulting from investments in telephone plant and
equipment have been deferred and are being amortized over the service lives of
the related property.
A reconciliation of income tax expense and the amount computed by applying
the statutory federal income tax rate (35%) to income before income taxes is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal income tax rate............................................... $ 64,752 $ 88,125 $ 6,653
State income taxes, net of federal benefit...................................... 12,067 17,358 6,958
Amortization of license acquisition costs and costs in excess of
book value.................................................................... 4,440 4,280 5,276
Dividend exclusion and other permanent items.................................... (250) 377 752
Amortization of deferred investment tax credits................................. (1,850) (2,014) (519)
Effects of corporations not included in consolidated federal tax
return........................................................................ 2,035 2,351 1,409
Sale of cellular interests...................................................... -- 12,337 5,549
Rate difference of federal net operating loss................................... -- -- 1,246
Regulatory adjustment........................................................... 595 624 101
Deferred investment tax credit.................................................. 197 365 399
Other differences, net.......................................................... (957) (157) 735
--------- ---------- ---------
Income tax expense.............................................................. $ 81,029 $ 123,646 $ 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 $2.7 million and $3.7
million as of December 31, 1996 and 1997, respectively. The net current deferred
tax asset primarily represents the deferred tax effects of unearned revenues.
F-43
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES (CONTINUED)
The temporary differences that gave rise to the noncurrent deferred tax
assets and liabilities as of December 31, 1996 and 1997, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred Tax Asset:
Net operating loss carryforwards.................................... $ 17,055 $ 55,363
Taxes on acquisitions............................................... -- 54,134
Alternative minimum tax credit carryforward......................... 10,433 21,205
Postretirement benefits............................................. 4,819 4,819
Amortization of deferred charges.................................... 10,990 1,614
Other............................................................... 4,069 3,511
---------- ----------
47,366 140,646
Less valuation allowance.............................................. (16,891) (29,001)
---------- ----------
Net Deferred Tax Asset.............................................. 30,475 111,645
---------- ----------
Deferred Tax Liability:
Property, plant and equipment....................................... 86,056 134,672
Investment in equity securities..................................... 40,540 64,603
Licenses............................................................ 38,656 55,756
Partnership investments............................................. 26,965 25,687
Capitalized interest................................................ 17,810 18,721
Other............................................................... 4,240 14,886
---------- ----------
Total Deferred Tax Liability.......................................... 214,267 314,325
---------- ----------
Net Deferred Income Tax Liability................................... $ 183,792 $ 202,680
---------- ----------
---------- ----------
</TABLE>
At December 31, 1997, TDS had $21.2 million of federal alternative minimum
tax credit carryforward available to offset regular income tax payable in future
years. TDS had $60.5 million of federal net operating loss carryforward
(generating a $19.9 million deferred tax asset) at December 31, 1997, expiring
in 2012 which is available to offset future consolidated taxable income. In
addition, TDS had $496.7 million of state net operating loss carryforward
(generating a $35.5 million deferred tax asset) at December 31, 1997, expiring
between 1997 and 2012 which is available to offset future taxable income
primarily of the individual subsidiaries which generated the loss. A valuation
allowance was established for the state operating loss carryforwards since it is
more likely than not that a portion will expire before such carryforwards can be
utilized.
NOTE 4--PROPERTY PLANT AND EQUIPMENT
CELLULAR
Cellular property, plant and equipment is stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets. The provision for depreciation as a percentage of depreciable property,
plant and equipment was 10.0%, 10.4% and 10.3% in 1995, 1996 and 1997,
respectively.
F-44
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--PROPERTY PLANT AND EQUIPMENT (CONTINUED)
Cellular property, plant and equipment in service and under construction
consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating plant and equipment....................................... $ 641,600 $ 923,480
Buildings and leasehold improvements................................ 86,533 136,023
Office furniture, equipment and vehicles............................ 71,674 89,987
Land................................................................ 46,198 63,085
---------- ------------
$ 846,005 $ 1,212,575
---------- ------------
---------- ------------
</TABLE>
TELEPHONE
Telephone property, plant and equipment is stated at the original cost of
construction including the capitalized costs of certain taxes, payroll-related
expenses, and an allowance for funds used during construction ("AFUDC"). AFUDC,
a noncash item of nonoperating income, totaled $682,000, $825,000 and $686,000
in 1995, 1996 and 1997, respectively. The composite weighted average rates were
9.3%, 7.3% and 5.5% in 1995, 1996 and 1997, respectively. The amount of such
allowance has varied principally as a result of changes in the level of
construction work in process and in the cost of capital.
Renewals and betterments of units of property are added to telephone plant
in service. The original cost of depreciable property retired is removed from
plant in service and, together with removal cost less any salvage realized, is
charged to accumulated depreciation. Repairs and renewals of minor items of
property are included in plant operations expense. No gain or loss is recognized
on ordinary retirements of depreciable telephone property.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Composite depreciation rates, as applied to the
average cost of depreciable property were 7.1%, 7.2% and 7.4% in 1995, 1996 and
1997, respectively.
Telephone property, plant and equipment in service and under construction
consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and buildings................................................ $ 67,181 $ 67,203
Central office equipment.......................................... 372,008 399,016
Cable and wire.................................................... 639,537 719,945
Furniture and office equipment.................................... 77,046 112,921
Vehicles and other equipment...................................... 39,928 42,632
Plant under construction.......................................... 59,213 52,677
Non-regulated investments and other............................... 38,866 26,496
------------ ------------
$ 1,293,779 $ 1,420,890
------------ ------------
------------ ------------
</TABLE>
The Company's telephone operations follow accounting for regulated
enterprises prescribed by SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation." Management periodically reviews the
F-45
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--PROPERTY PLANT AND EQUIPMENT (CONTINUED)
criteria for applying these provisions to determine whether continuing
application of SFAS No. 71 is appropriate. Management believes that such
criteria are still being met and therefore has no current plans to change its
method of accounting.
In analyzing the effect of discontinuing the application of SFAS No. 71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles and therefore, any adjustments to
telecommunications plant would be immaterial, as would be the write-off of
regulatory assets and liabilities.
PCS
PCS property, plant and equipment is stated at original cost. Depreciation
is provided using the straight-line method over the estimated useful lives of
the assets. The provision for depreciation as a percentage of depreciable
property, plant and equipment was 2.2%, 20.2% and 10.9% in 1995, 1996 and 1997,
respectively.
PCS property, plant and equipment in service and under construction consists
of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Network............................................................... $ -- $ 514,525
Information systems................................................... 15,951 83,950
Office equipment...................................................... 3,180 15,800
Leasehold improvements and other...................................... 1,442 8,466
Work in process....................................................... 233,830 19,381
Prepaid network infrastructure costs.................................. 70,300 --
---------- ----------
$ 324,703 $ 642,122
---------- ----------
---------- ----------
</TABLE>
Work in process includes expenditures for the design, construction and
testing of the Company's PCS networks as well as the cost to relocate dedicated
private microwave links currently operating in the Company's spectrum in its PCS
markets. Work in process also includes the costs associated with developing
information systems. The Company capitalized interest on certain of its work in
process expenditures totaling $1.2 million and $6.0 million in 1996 and 1997,
respectively. When assets are placed in service, the Company transfers the
assets to the appropriate property and equipment category.
Prepaid network infrastructure costs include the excess of the proceeds from
the sale of notes over the Company's current obligations (i.e. financed
purchases under a Credit Agreement with Nokia Telecomunications, Inc.) to Nokia.
The Company paid Nokia for a portion of 1997 equipment purchases by reducing the
amount of the prepaid balance by the cost of the equipment purchased. Nokia paid
the Company monthly interest on the unused portion of the note proceeds.
RADIO PAGING
Radio Paging property, plant and equipment is stated at original cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. The provision for depreciation as a
F-46
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--PROPERTY PLANT AND EQUIPMENT (CONTINUED)
percentage of depreciable property, plant and equipment was 22.1%, 27.9% and
24.6% in 1995, 1996 and 1997, respectively.
Radio Paging property, plant and equipment in service and under construction
consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Subscriber devices.................................................... $ 39,714 $ 41,059
Terminals and transmitters............................................ 44,251 48,181
Computer equipment.................................................... 16,595 16,402
Furniture and fixtures................................................ 10,314 10,515
Other................................................................. 2,126 2,118
---------- ----------
$ 113,000 $ 118,275
---------- ----------
---------- ----------
</TABLE>
OTHER
Other property, plant and equipment is stated at original cost. Depreciation
is provided using the straight-line method over the estimated useful lives of
assets. The provision for depreciation as a percentage of depreciable property,
plant and equipment was 10.0%, 15.9% and 12.3% in 1995, 1996 and 1997,
respectively.
Other property, plant and equipment in service and under construction
consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Computer equipment...................................................... $ 42,682 $ 54,062
Furniture and fixtures.................................................. 15,772 18,710
Cable, printing and other equipment..................................... 11,737 12,138
Work in progress........................................................ 5,055 11,899
Capital leases.......................................................... 7,535 --
--------- ---------
$ 82,781 $ 96,809
--------- ---------
--------- ---------
</TABLE>
Certain costs relating to the development of computer software for internal
use are capitalized and are amortized over the estimated five-year life of the
software.
F-47
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--ACQUISITIONS, EXCHANGES AND DIVESTITURES
During 1995, 1996 and 1997, TDS and its subsidiaries completed the following
business combinations:
<TABLE>
<CAPTION>
CONSIDERATION
---------------------------
TDS AND USM
COMMON STOCK,
AND TDS
PREFERRED
CASH SHARES
---------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Acquisitions During 1995
Cellular interests................................................................ $ 41,885 $ 94,542
Telephone interests............................................................... 250 46,087
Paging interests.................................................................. 5,656 --
Acquisitions During 1996
Cellular interests................................................................ $ 13,596 $ 42,499
Telephone interests............................................................... 17,423 70,663
Acquisitions During 1997
Cellular interests................................................................ $ 128,828 $ 32,486
Telephone interests............................................................... 151 13,200
---------- -------
</TABLE>
Assuming that these acquisitions had taken place on January 1, 1996,
unaudited pro forma results of operations from continuing operations would have
been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Operating Revenues.................................................................... $ 1,277,309 $ 1,576,361
Net Income............................................................................ 142,078 11,680
Earnings per Common Share--Basic...................................................... 2.29 0.19
Earnings per Common Share--Diluted.................................................... $ 2.27 $ 0.19
------------ ------------
</TABLE>
EXCHANGE OF MARKETS WITH BELLSOUTH
In October 1997, U.S. Cellular completed an exchange with BellSouth
Corporation. Pursuant to the exchange, U.S. Cellular received majority interests
representing 4.0 million population equivalents in exchange for majority
interests representing 2.0 million population equivalents, minority interests
representing 1.2 million population equivalents and a net amount of $86.7
million in cash. The majority interests U.S. Cellular received are in 12 markets
adjacent to its Iowa/Missouri and Wisconsin/Illinois/Indiana clusters.
SALES OF CELLULAR AND OTHER INVESTMENTS
The $86.6 million gain in 1995 reflects the sales and exchanges of
non-strategic cellular and other investments. U.S. Cellular sold its majority
interests in six markets and its minority interests in six markets during 1995.
These sales, along with the sales of marketable equity securities and certain
other investments by TDS, generated net cash proceeds of $197.6 million.
The $138.7 million gain in 1996 reflects the sales of non-strategic cellular
and other investments. U.S. Cellular sold its majority interests in eight
markets and minority interests in two other markets, received
F-48
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--ACQUISITIONS, EXCHANGES AND DIVESTITURES (CONTINUED)
cash from the settlement of two separate legal matters and received cash in an
exchange of markets with another cellular operator. Aerial sold its majority
interests in two markets. These transactions, along with the sales of certain
other investments by TDS, generated net cash proceeds of $221.5 million.
The $41.4 million gain in 1997 reflects the sales of non-strategic cellular
and other investments. U.S. Cellular sold its majority interests in one market
and one market partition, minority interests in two other markets and received
cash from the settlement of a legal matter. These sales, along with the sales of
certain other investments by TDS, generated net cash proceeds of $84.2 million.
PENDING SALES OF MINORITY INTERESTS
In December 1997, the Company announced that AirTouch Communications, Inc.
("AirTouch") will acquire interests owned by U.S. Cellular and TDS in cellular
systems in 11 markets. AirTouch will issue approximately 5,000,000 shares of its
common stock and pay approximately $54.2 million in cash to U.S. Cellular and
TDS in exchange for these interests, which represent approximately 900,000
population equivalents. U.S. Cellular has also entered into an agreement to sell
its minority interests in two other markets for $37.6 million in cash.
Management expects that it will record a significant pretax gain upon the
completion of the sales transaction. The sales are expected to be completed in
the first half of 1998.
AMERICAN PAGING MERGER
In December 1997, the Company announced an agreement with TSR Paging, Inc.
("TSR") to combine their respective paging businesses. On February 10, 1998, the
board of directors of American Paging approved a merger agreement providing for
the acquisition by TDS of all of the issued and outstanding shares of American
Paging not owned by TDS for cash in an amount equal to $2.50 per share,
approximately $9.1 million in total. Upon consummation of the merger, TDS will
contribute substantially all of the assets and certain, limited liabilities of
American Paging, and TSR will contribute all of its assets and liabilities to a
new limited liability company. The asset contribution agreement provides that,
subject to adjustment, TDS will have a 30% interest and TSR will have a 70%
interest in the new company. The formation of the new company, while subject to
a number of conditions, including consummation of the merger and regulatory
approvals, is expected to occur in the first half of 1998. TDS will adopt the
equity method of accounting for its investment in the new company. TDS will not
have any funding requirements once the combination is completed.
F-49
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--ACQUISITIONS, EXCHANGES AND DIVESTITURES (CONTINUED)
The following table summarizes the assets and liabilities which TDS would
contribute to the new company.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Current assets
Cash...................................................................................... $ 3,058
Temporary investments..................................................................... 61
Accounts receivable....................................................................... 9,051
Inventory................................................................................. 6,851
Other..................................................................................... 1,076
Property, plant and equipment, net.......................................................... 41,762
Narrowband PCS license...................................................................... 60,901
Other investments........................................................................... 429
Deferred assets............................................................................. 10,959
Current liabilities
Accounts payable.......................................................................... (942)
Advance billings and customer deposits.................................................... (6,827)
Accrued taxes............................................................................. (42)
--------
$ 126,337
--------
--------
</TABLE>
NOTE 6--NOTES PAYABLE
TDS has used short-term debt to finance its investments in PCS and radio
paging operations, for acquisitions and for general corporate purposes.
Long-term debt and equity financing from time to time, including sales of debt
and equity securities by subsidiaries, have reduced such short-term debt.
Proceeds from the issuance of long-term debt and equity securities retired
$131.4 million, $131.2 million and $241.4 million of short-term debt in 1995,
1996 and 1997, respectively. Proceeds from the sales of non-strategic cellular
and other investments from time to time in 1995, 1996 and 1997 have also been
used to retire short-term debt.
TDS had $644.2 million of bank lines of credit for general corporate
purposes at December 31, 1997, all of which were committed. Unused amounts of
such lines totaled $117.9 million, all of which were committed. These line of
credit agreements provide for borrowings at negotiated rates up to the prime
rate.
U.S. Cellular had $500.0 million of bank lines of credit for general
corporate purposes as of December 31, 1997, all of which were unused. These line
of credit agreements provide for borrowings at the London InterBank Offered Rate
("LIBOR") plus 26.5 basis points, due quarterly.
The carrying amount of short-term debt approximates fair value due to the
short-term nature of these instruments.
F-50
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--NOTES PAYABLE (CONTINUED)
Information concerning notes payable is shown in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at end of period............................................... $ 184,320 $ 160,537 $ 527,587
Weighted average interest rate at end of period........................ 6.3% 6.0% 6.3%
Maximum amount outstanding during the period........................... $ 184,320 $ 204,140 $ 587,683
Average amount outstanding during the period (1)....................... $ 139,671 $ 112,341 $ 407,965
Weighted average interest rate during the period (1)................... 6.4% 5.8% 6.1%
---------- ---------- ----------
</TABLE>
- ------------------------
(1) The average was computed based on month-end balances.
F-51
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Telephone and Data Systems, Inc. (Parent)
Medium-term notes, 8% to 10%, due through 2025...................................... $ 239,200 $ 239,200
Purchase contracts and other long-term notes, 9% to 14%, due through 2003........... 3,175 2,440
------------ ------------
Total Parent...................................................................... 242,375 241,640
------------ ------------
Subsidiaries
RUS, RTB and FFB Mortgage Notes, due through 2031, various rates averaging 5.4% in
1995, 5.4% in 1996 and 5.5% in 1997............................................... 308,371 313,012
------------ ------------
6% zero coupon convertible redeemable debentures, maturing in 2015.................. 745,000 745,000
Unamortized discount................................................................ (494,893) (479,670)
------------ ------------
250,107 265,330
------------ ------------
7.25% notes, maturing in 2007....................................................... -- 250,000
------------ ------------
Vendor financing, approximating 90-day Commercial Paper Rate plus 1.4% due through
2002.............................................................................. 103,654 --
------------ ------------
8.34% zero coupon notes, maturing in 2006........................................... 226,245 226,245
Unamortized discount................................................................ (122,502) (114,161)
------------ ------------
103,743 112,084
------------ ------------
Interim vendor financing............................................................ -- 84,355
------------ ------------
Other long-term notes, 0% to 12.6%, due through 2009................................ 10,601 12,613
------------ ------------
Total Subsidiaries................................................................ 776,476 1,037,394
------------ ------------
Total long-term debt.................................................................. 1,018,851 1,279,034
------------ ------------
Less current portion................................................................ 36,619 14,816
------------ ------------
Total long-term debt.................................................................. $ 982,232 $ 1,264,218
------------ ------------
------------ ------------
</TABLE>
The Medium-Term Notes ("MTNs") carry original maturities of 12 to 30 years,
maturing at various times from 2003 to 2025. The MTNs may be redeemed by the
Company at par value beginning in 1999.
The RUS, RTB and FFB Mortgage Notes issued under certain loan agreements
with the Rural Utilities Service ("RUS"), Rural Telephone Bank ("RTB") and
Federal Financing Bank ("FFB"), agencies of the United States of America, are to
be repaid in equal monthly or quarterly installments covering principal and
interest beginning six months to three years after dates of issue and expiring
through 2031. Substantially all telephone plant is pledged under RUS and RTB
mortgage notes and various other obligations of the telephone subsidiaries.
U.S. Cellular sold $745 million principal amount at maturity of 20-year zero
coupon 6% yield to maturity convertible redeemable debt in June 1995 with
proceeds to the Company of $221.5 million. The unsecured notes are due in 2015
and there is no periodic payment of interest. The notes are convertible at
F-52
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LONG-TERM DEBT (CONTINUED)
any time into 9.475 U.S. Cellular Common Shares per $1,000 of notes. Beginning
in 2000, U.S. Cellular may redeem, or the holder may call, the notes at the
issue price plus accrued interest.
U.S. Cellular sold $250 million principal amount of 7.25% unsecured senior
notes in 1997 with proceeds to the Company of $247.0 million. The notes are due
2007 and interest is payable semi-annually. Beginning 2004, U.S. Cellular may
redeem the notes at principal amount plus accrued interest. U.S. Cellular used a
portion of the net proceeds to repay the outstanding vendor financing balance.
U.S. Cellular had financing arrangements with an equipment vendor for
cellular system equipment and construction costs. The borrowings were
collateralized by a secured interest in some or all of the assets of U.S.
Cellular's operating subsidiaries. Borrowings had terms of seven years at an
interest rate of 1.4% over the 90-day Commercial Paper Rate (for a rate of 7.03%
at December 31, 1996).
Aerial sold $226 million principal amount at maturity of 10-year zero coupon
8.34% yield to maturity debt in 1996 at an issue price of $100 million. The
unsecured notes are due in 2006 and there is no periodic payment of interest.
The proceeds were paid to Aerial's equipment vendor in satisfaction of all then
outstanding and future obligations up to $100 million. The notes are fully and
unconditionally guaranteed by TDS. The notes are subject to optional redemption
beginning in 2001 at redemption prices which reflect original issue discount
accrued since issuance.
The annual requirements for principal payments on long-term debt are
approximately $14.8 million, $15.8 million, $15.6 million, $15.3 million and
$15.2 million for the years 1998 through 2002, respectively.
The carrying value and estimated fair value of the Company's Long-term Debt
were approximately equal at December 31, 1996 and 1997, respectively. The fair
value of the Company's long-term debt was estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
NOTE 8--MINORITY INTEREST IN SUBSIDIARIES
The following table summarizes the minority shareholders' and partners'
interests in the equity of consolidated subsidiaries.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Cellular
U.S. Cellular shareholders'......................................... $ 285,835 $ 305,478
U.S. Cellular subsidiaries' partners'............................... 48,715 53,908
---------- ----------
334,550 359,386
Aerial shareholders'.................................................. 75,897 33,692
TDS Telecom telephone subsidiaries'................................... 21,810 23,293
Other................................................................. 86 195
---------- ----------
$ 432,343 $ 416,566
---------- ----------
---------- ----------
</TABLE>
F-53
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--MINORITY INTEREST IN SUBSIDIARIES (CONTINUED)
SALE OF STOCK BY SUBSIDIARIES
Aerial issued 12.3 million Common Shares in 1996 in an initial public
offering (at a price of $17 per share). The initial public offering reduced
TDS's ownership percentage from 100% to 82.8%. The Aerial Common Share offering
was recorded at a fair market value which was more than TDS's book value
investment in Aerial. TDS adjusted its book value investment as a result of this
issue and increased capital in excess of par value $114.1 million in 1996.
NOTE 9-- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES
In November 1997, TDS Capital I, a subsidiary trust (the "Trust") of TDS,
issued 6,000,000 of its 8.5% Company-Obligated Mandatorily Redeemable Preferred
Securities (the "Preferred Securities") at $25 per Preferred Security. Net
proceeds from the issuance totaled $144.8 million and were used to retire short-
term debt.
The sole asset of TDS Capital I is $154.6 million principal amount of TDS's
8.5% Subordinated Debentures due December 31, 2037. There is a full and
unconditional guarantee by TDS of the Trust's obligations under the Preferred
Securities issued by the Trust. However, TDS's obligations are subordinate and
junior in right of payment to certain other indebtedness of TDS. TDS has the
right to defer payments of interest on the Subordinated Debentures by extending
the interest payment period, at any time, for up to 20 consecutive quarters. If
interest payments on the Subordinated Debentures are so deferred, distributions
on the Preferred Securities will also be deferred. During any deferral,
distributions will continue to accrue with interest thereon. In addition, during
any such deferral, TDS may not declare or pay any dividend or other distribution
on, or redeem or purchase, any of its common stock.
The Subordinated Debentures are redeemable by TDS, in whole or in part, from
time to time, on or after November 18, 2002, or, in whole but not in part, at
any time in the event of certain income tax circumstances. If the Subordinated
Debentures are redeemed, the Trust must redeem Preferred Securities on a pro
rata basis having an aggregate liquidation amount equal to the aggregate
principal amount of the Subordinated Debentures so redeemed. In the event of the
dissolution, winding up or termination of the Trust, the holders of Preferred
Securities will be entitled to receive, for each Preferred Security, a
liquidation amount of $25 plus accrued and unpaid distributions thereon to the
date of payment, unless, in connection with the dissolution, winding up or
termination, Subordinated Debentures are distributed to the holders of the
preferred securities.
NOTE 10--PREFERRED SHARES
TDS Cumulative Voting Preferred Shares have a stated value of $100 per
share. The 5,000,000 authorized Preferred Shares are issuable in series by the
Board of Directors who establish the terms of the issue. Those issues which
contain mandatory redemption features or which are redeemable at the option of
the holder are classified as Redeemable Preferred Shares. Those issues which are
not redeemable or which are redeemable at the option of TDS are classified as
Nonredeemable Preferred Shares.
F-54
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--PREFERRED SHARES (CONTINUED)
REDEEMABLE PREFERRED SHARES
Redeemable Preferred Shares include outstanding series of TDS Cumulative
Voting Preferred Shares with mandatory redemption features or which are
redeemable at the option of the holder. At December 31, 1997, 14,794 shares of
Redeemable Preferred Shares were outstanding, redeemable at $100 per share.
The annual requirements for redemption of Redeemable Preferred Shares are
$1,299,100, $103,000 and $77,300 for the years 1998 through 2000, respectively.
The following is a schedule of the Redeemable Preferred Shares' activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period................................. $ 25,001 $ 15,093 $ 1,858
Add:
Stock dividends............................................ 546 113 --
Less:
Redemption of preferred.................................... (9,608) (9,456) (359)
Conversion of preferred.................................... -- (3,872) --
Expiration of redemption feature........................... (839) (20) (20)
Change in redemption feature............................... (7) -- --
--------- --------- ---------
15,093 1,858 1,479
Less current portion......................................... 13,506 1,578 1,299
--------- --------- ---------
Balance, end of period....................................... $ 1,587 $ 280 $ 180
--------- --------- ---------
--------- --------- ---------
</TABLE>
NONREDEEMABLE PREFERRED SHARES
Nonredeemable Preferred Shares include outstanding series of TDS Cumulative
Voting Preferred Shares which have no mandatory redemption features. At December
31, 1997, 309,873 shares of Nonredeemable Preferred Shares were outstanding.
Outstanding Nonredeemable Preferred Shares are generally redeemable at the
option of TDS at $100 per share, plus accrued and unpaid dividends. At December
31, 1997, certain series of Preferred Shares are convertible into TDS Common
Shares. (See Note 11--Convertible Preferred Shares)
The following is a schedule of the Nonredeemable Preferred Shares activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period................................. $ 29,819 $ 29,710 $ 29,000
Add:
Acquisition................................................ -- -- 3,000
Reclassification from Redeemable Preferred Shares.......... 839 20 20
Less:
Conversion of preferred.................................... (948) (730) (1,031)
Redemption of preferred.................................... -- -- (2)
</TABLE>
F-55
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--PREFERRED SHARES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
--------- --------- ---------
Balance, end of period....................................... $ 29,710 $ 29,000 $ 30,987
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 11--COMMON STOCK
COMMON STOCK ACQUISITIONS
During 1995, 1996 and 1997, TDS issued 2,947,777, 2,634,408 and 998,783
Common Shares, respectively, for the acquisition of cellular and telephone
interests. The 1997 Common Shares issued for acquisitions are reissued Treasury
Shares. (See Common Share Repurchase Program)
COMMON SHARES ISSUABLE
A certain acquisition agreement requires TDS to deliver 10,480 Common Shares
in 1998.
DIVIDEND REINVESTMENT, INCENTIVE AND COMPENSATION PLANS
The following table summarizes Common and Series A Common Shares issued for
the employee stock ownership plans and dividend reinvestment plans described
below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Common Shares
Tax-deferred savings plan.................................. 40,624 36,269 32,354
Dividend reinvestment plan................................. 105,001 28,827 25,273
Stock-based compensation plans............................. 40,025 35,273 64,367
--------- --------- ---------
185,650 100,369 121,994
--------- --------- ---------
--------- --------- ---------
Series A Common Shares
Dividend reinvestment plan................................. 17,855 26,445 19,731
--------- --------- ---------
--------- --------- ---------
</TABLE>
TAX-DEFERRED SAVINGS PLAN. TDS had reserved 78,558 Common Shares for issue
under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing plan
pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code.
Participating employees have the option of investing their contributions in TDS
Common Shares, U.S.Cellular Common Shares, Aerial Common Shares, American Paging
Common Shares or five nonaffiliated funds.
DIVIDEND REINVESTMENT PLANS. TDS had reserved 460,742 Common Shares for
issue under the Automatic Dividend Reinvestment and Stock Purchase Plan and
172,523 Series A Common Shares for issue under the Series A Common Share
Automatic Dividend Reinvestment Plan. These plans enable holders of TDS's Common
Shares and Preferred Shares to reinvest cash dividends in newly issued Common
Shares and holders of Series A Common Shares to reinvest cash dividends in newly
issued Series A Common Shares. The purchase price of the shares is 95% of the
market value, based on the
F-56
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMON STOCK (CONTINUED)
average of the daily high and low sales prices for TDS's Common Shares on the
American Stock Exchange for the ten trading days preceding the date on which the
purchase is made.
STOCK-BASED COMPENSATION PLANS
TDS had reserved 1,291,107 Common Shares for options granted and to be
granted to key employees. TDS has established certain plans that provide for the
grant of stock options to officers and employees. The options are exercisable
over a specified period not in excess of ten years. The options expire from 1998
to 2006 or the date of the employee's termination of employment, if earlier.
TDS accounts for stock options, stock appreciation rights ("SARs") and
employee stock purchase plans under Accounting Principles Board ("APB") Opinion
No. 25. No compensation costs have been recognized for the stock option and
employee stock purchase plans. Compensation expense for SARs, measured on the
difference between the year-end market price of the Common Shares and SAR
prices, was $408,000, $263,000 and $91,000 in 1995, 1996 and 1997, respectively.
Had compensation cost for all plans been determined consistent with SFAS No.
123, the Company's net income (loss) and earnings per share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
----------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Income (Loss)
As Reported........................................... $ 103,978 $ 128,139 $ (9,549)
Pro Forma............................................. 103,316 126,495 (13,506)
Earnings per Common Share-Basic
As Reported........................................... 1.77 2.09 (0.19)
Pro Forma............................................. 1.75 2.06 (0.26)
Earnings per Common Share-Diluted
As Reported........................................... 1.74 2.07 (0.19)
Pro Forma............................................. $ 1.73 $ 2.05 $ (0.26)
----------- ---------- ----------
</TABLE>
Because SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
F-57
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMON STOCK (CONTINUED)
A summary of the status of the Company's stock option plans at December 31,
1995, 1996 and 1997 and changes during the years ended is presented in the table
and narrative below:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE
SHARES OPTION PRICES FAIR VALUES
----------- ------------- -----------
<S> <C> <C> <C>
Stock Options:
Outstanding January 1, 1995 (172,689 exercisable)...... 485,597 $ 30.25
Granted.............................................. 59,995 $ 38.67 $ 14.84
Exercised............................................ (26,101) $ 5.52
Cancelled............................................ (3,046) $ 43.32
-----------
Outstanding December 31, 1995 (240,160 exercisable).... 516,445 $ 32.47
Granted.............................................. 89,228 $ 41.00 $ 13.30
Exercised............................................ (11,025) $ 13.10
Cancelled............................................ (3,210) $ 39.89
-----------
Outstanding December 31, 1996 (405,996 exercisable).... 591,438 $ 34.08
Granted.............................................. 68,137 $ 43.90 $ 10.61
Exercised............................................ (43,824) $ 19.51
Cancelled............................................ (41,243) $ 40.78
Outstanding December 31, 1997 (492,917 exercisable).... 574,508 $ 35.87
-----------
-----------
</TABLE>
STOCK OPTIONS. The fair value of each option grant was estimated on the
date of the grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1995, 1996 and 1997,
respectively: risk-free interest rates of 6.6%, 5.6% and 6.1%; expected dividend
yields of 1.0%, 1.0% and 1.0%; expected lives of 6.9 years, 5.1 years and 5.0
years and expected volatility of 25.0%, 20.5% and 19.2%.
STOCK APPRECIATION RIGHTS allowed the grantee to receive an amount in cash
or Common Shares, or a combination thereof, equivalent to the difference between
the exercise price and the fair market value of the Common Shares on the
exercise date. The following table summarizes the SARs outstanding at $4.43 to
$36.60 per share. These rights expired March 1997. The fair value of each stock
appreciation right grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995, 1996 and 1997, respectively: risk-free
interest rates of 5.5%, 5.2% and 4.9%; expected dividend yields of 1.0%, 1.0%
and 1.0%; expected lives of 0.7 year, 0.2 year and 0.1 year; and expected
volatility of 20.2%, 18.4% and 20.5%.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Outstanding beginning of period............................... 12,096 16,034 10,070
Granted..................................................... 8,174 5,923 630
Exercised................................................... (4,236) (11,887) (10,700)
--------- --------- ---------
Outstanding end of period..................................... 16,034 10,070 --
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-58
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMON STOCK (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN. TDS had reserved 159,816 Common Shares for
sale to the employees of TDS and its subsidiaries. The fair value of the
employees' purchase rights was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants rights in 1996 and 1997, respectively: risk-free
interest rate of 5.6% and 5.6%; expected dividend yield of 1.0% and 1.0%;
expected lives of 0.5 year and 1.2 years; and expected volatility of 15.3% and
16.9%.
CONVERTIBLE PREFERRED SHARES
TDS convertible Preferred Shares are convertible into 932,011 Common Shares.
(See Note 10-- Nonredeemable Preferred Shares) TDS issued 40,734, 347,707 and
56,365 Common Shares in 1995, 1996 and 1997, respectively, for TDS preferred
shares converted and 3,781 and 11,345 Common Shares in 1996 and 1997,
respectively, for subsidiary preferred stock converted.
SERIES A COMMON SHARES
The holders of Common Shares and the outstanding Preferred Shares are
entitled to one vote per share. The holders of Series A Common Shares are
entitled to ten votes per share. Series A Common Shares are convertible, on a
share-for-share basis, into Common Shares. TDS has reserved 6,936,277 Common
Shares for possible issuance upon such conversion.
COMMON SHARE REPURCHASE PROGRAM
In December 1996, the Company authorized the repurchase of up to 3.0 million
TDS Common Shares over a period of three years. The Company plans to finance the
repurchase program using internally generated funds and borrowings under
short-term lines of credit. The Company may use repurchased shares to fund
acquisitions and for other corporate purposes. Subject to prevailing market
conditions, purchases may be made from time to time through open market
purchases or at negotiated prices in private transactions. The actual number of
Common Shares which may be repurchased will be subject to the trading price of
the Common Shares, the Company's financial position and other factors.
Through December 31, 1997, the Company purchased 1,798,100 Common Shares for
$69.9 million. The Company reissued 1,003,524 Common Shares primarily for
acquisitions.
F-59
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company sponsors two qualified noncontributory defined contribution
pension plans. One plan (the "TDS Plan") provides benefits for the employees of
TDS, TDS Telecom and substantially all of the telephone company subsidiaries.
(Employees of certain telephone subsidiaries are covered under other pension
plans or receive direct pension payments.) The other plan provides pension
benefits for U.S. Cellular and Aerial employees. Under these plans, pension
costs are calculated separately for each participant and are funded currently.
TDS also sponsors an unfunded non-qualified deferred compensation plan to
supplement the benefits under these plans to offset the reduction of benefits
caused by the limitation on annual employee compensation under the tax laws.
Total pension costs were $4.6 million, $4.6 million and $5.3 million in
1995, 1996 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. The Company will limit overall contributions to the aggregate
accruals recorded by its subsidiaries. The Company's postretirement medical and
life insurance plans are currently underfunded. Total contributions to fund
postretirement medical and life insurance plans were $3.1 million, $2.2 million
and $1.9 million in 1995, 1996 and 1997, respectively.
The following table sets forth the plans' funded status reconciled with the
amount shown in the Company's consolidated balance sheet at December 31, 1997:
<TABLE>
<CAPTION>
LIFE
INSURANCE HEALTH CARE
PLAN PLAN TOTAL
------------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................ $ 2,002 $ 5,196 $ 7,198
Fully eligible active plan participants................................. 588 2,427 3,015
Other active plan participants.......................................... 1,111 10,015 11,126
------ ----------- ---------
3,701 17,638 21,339
Plan assets at fair value................................................. 1,635 12,969 14,604
------ ----------- ---------
Accumulated postretirement benefit obligation in excess of plan assets.... 2,066 4,669 6,735
Unrecognized prior service cost........................................... (290) (1,801) (2,091)
Unrecognized net gain from past experience different from that assumed and
from changes in assumptions............................................. (34) 6,754 6,720
------ ----------- ---------
Accrued postretirement benefit cost at December 31, 1997.................. $ 1,742 $ 9,622 $ 11,364
------ ----------- ---------
------ ----------- ---------
</TABLE>
F-60
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--EMPLOYEE BENEFIT PLANS (CONTINUED)
Net postretirement cost for 1995, 1996 and 1997 includes the following
components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost......................................................................... $ 588 $ 796 $ 875
Interest cost on accumulated postretirement benefit obligation....................... 1,082 1,125 1,346
Actual return on plan assets......................................................... (656) (753) (632)
Net amortization and deferral........................................................ 204 99 (344)
--------- --------- ---------
Net postretirement cost.............................................................. $ 1,218 $ 1,267 $ 1,245
--------- --------- ---------
--------- --------- ---------
</TABLE>
For measurement purposes, a 9.6% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1997; the rate was assumed
to decrease over six years to 6.1% and to remain at 6.1% thereafter. The assumed
rate of return on plan assets was 8.0%. The health care cost trend rate
assumption has a significant effect on the amounts reported. Increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1997, by $3.5 million and the aggregate of the service and interest cost
components of postretirement expense for the year then ended by $506,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0%.
NOTE 13--COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
The primary purpose of TDS's construction and expansion program is to
provide for normal growth, to upgrade communications service, to expand into new
communication areas, and to take advantage of service-enhancing and
cost-reducing technological developments. The cellular capital additions budget
totals approximately $330 million for 1998, including about $240 million for new
cell sites and about $90 million for various information systems initiatives.
The telephone capital additions budget totals approximately $140 million for
1998, including about $50 million for new digital switches and other switching
facilities and $35 million for improvements to outside plant facilities. The PCS
capital additions budget totals approximately $75 million for 1998, including
$20 million for cell sites, $25 million for switching equipment and $15 million
for systems development.
PENDING ACQUISITIONS
At December 31, 1997, TDS and U.S. Cellular have entered into definitive
agreements to acquire a majority interest in one cellular market, the remaining
minority interest in one cellular market already controlled by U.S. Cellular and
one telephone company for an aggregate consideration of approximately $62.0
million, primarily cash and TDS Common Shares.
LEASE COMMITMENTS
TDS and its subsidiaries have leases for certain cellular plant facilities,
office space and data processing equipment, most of which are classified as
operating leases. For the years 1995, 1996 and 1997, rent expense for
noncancelable, long-term leases was $13.6 million, $20.9 million and $36.9
million,
F-61
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--COMMITMENTS AND CONTINGENCIES (CONTINUED)
respectively, and rent expense under cancelable, short-term leases was $7.5
million, $7.6 million and $8.7 million, respectively. At December 31, 1997, the
aggregate minimum rental commitments under noncancelable, long-term operating
leases were as follows:
<TABLE>
<CAPTION>
MINIMUM FUTURE
RENTAL PAYMENTS
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
1998.................................................................... $ 38,594
1999.................................................................... 34,476
2000.................................................................... 30,490
2001.................................................................... 28,367
2002.................................................................... 18,960
Thereafter.............................................................. $ 96,578
-------
</TABLE>
LEGAL PROCEEDINGS
The Company is involved in legal proceedings before the FCC and various
state and federal courts from time to time. Management does not believe that any
of such proceedings should have a material adverse impact on the financial
position or results of operations of the Company.
On December 29, 1997, a party which claims to be a holder of U.S. Cellular
Common Shares, filed a putative class action complaint on behalf of common
stockholders of U.S. Cellular in the Court of Chancery of the State of Delaware
in New Castle County. The complaint names as defendants TDS, U.S. Cellular and
the directors of U.S. Cellular. The complaint alleges a breach of fiduciary
duties by the defendents and seeks to have the U.S. Cellular Merger enjoined or,
if it is consummated, to have it rescinded and to recover unspecified damages,
fees and expenses. A virtually identical complaint has been filed by an
individual. None of the defendants have been served with this complaint.
On January 5, 1998, an individual, who claims to be a holder of Aerial
Common Shares, filed a putative class action complaint on behalf of common
stockholders of Aerial in the Court of Chancery of the State of Delaware in New
Castle County. The complaint names as defendants, TDS, Aerial and the directors
of TDS and Aerial. The complaint alleges a breach of fiduciary duties by the
defendants and seeks to have the Aerial Merger enjoined or, if it is
consummated, to have it rescinded and to recover unspecified damages, fees and
expenses. A virtually identical complaint has been filed by a second individual.
None of the defendants have been served with this complaint.
The Company intends to vigorously defend against these lawsuits.
F-62
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--BUSINESS SEGMENT INFORMATION
TDS's businesses are classified into four principal segments: Cellular,
Telephone, PCS and Radio Paging operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenues
Cellular....................................................... $ 480 $ 680 $ 877
Telephone...................................................... 355 396 444
PCS............................................................ -- -- 56
Paging......................................................... 107 104 95
--------- --------- ---------
Total........................................................ $ 942 $ 1,180 $ 1,472
--------- --------- ---------
--------- --------- ---------
Operating Income (Loss)
Cellular....................................................... $ 43 $ 87 $ 130
Telephone...................................................... 98 103 99
PCS............................................................ -- -- (197)
Paging......................................................... (9) (37) (36)
--------- --------- ---------
Total........................................................ $ 132 $ 153 $ (4)
--------- --------- ---------
--------- --------- ---------
Depreciation and Amortization Expense
Cellular....................................................... $ 90 $ 109 $ 132
Telephone...................................................... 77 88 98
PCS............................................................ -- -- 39
Paging......................................................... 25 34 33
--------- --------- ---------
Total........................................................ $ 192 $ 231 $ 302
--------- --------- ---------
--------- --------- ---------
Identifiable Assets
Cellular....................................................... $ 1,891 $ 2,117 $ 2,549
Telephone...................................................... 1,058 1,181 1,221
PCS............................................................ 318 638 961
Paging......................................................... 159 153 136
Parent and Other............................................... 43 112 105
--------- --------- ---------
Total........................................................ $ 3,469 $ 4,201 $ 4,972
--------- --------- ---------
--------- --------- ---------
Capital Expenditures
Cellular....................................................... $ 211 $ 248 $ 319
Telephone...................................................... 104 144 151
PCS............................................................ 9 113 275
Paging......................................................... 27 33 19
Parent and Other............................................... 9 12 22
--------- --------- ---------
Total........................................................ $ 360 $ 550 $ 786
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-63
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--INVESTMENTS IN UNCONSOLIDATED ENTITIES
The following summarizes the unaudited combined assets, liabilities and
equity, and the unaudited results of operations of the cellular and telephone
companies in which TDS's investments are accounted for by the equity method.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Assets
Current assets........................................................... $ 325 $ 425
Due from affiliates...................................................... 6 3
Property and other....................................................... 1,122 1,159
--------- ---------
$ 1,453 $ 1,587
--------- ---------
--------- ---------
Liabilities and Equity
Current liabilities...................................................... $ 278 $ 287
Due to affiliates........................................................ 21 38
Deferred credits......................................................... 3 9
Long-term debt........................................................... 42 70
Partners' capital and stockholders' equity............................... 1,109 1,183
--------- ---------
$ 1,453 $ 1,587
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN MILIONS)
<S> <C> <C> <C>
Results of Operations
Revenues...................................................... $ 1,174 $ 1,395 $ 1,740
Costs and expenses............................................ (808) (958) (1,256)
Other income.................................................. 8 7 5
Interest expense.............................................. (6) (6) (10)
Income taxes.................................................. (5) (3) (6)
Extraordinary item............................................ -- (2) --
--------- --------- ---------
Net income.................................................... $ 363 $ 433 $ 473
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 16--SUBSEQUENT EVENTS
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES
In February 1998, TDS Capital II, a subsidiary trust of TDS, issued
6,000,000 of its 8.04% Company-Obligated Manditorily Redeemable Preferred
Securities at $25 per Preferred Security. Net proceeds from the issuance totaled
$145 million and were used to retire short-term debt. The sole asset of TDS
Capital II is $154.6 million principal amount of TDS's 8.04% Subordinated
Debentures due March 31, 2038 or such date to which the maturity is extended by
TDS, but in no event later than March 31, 2047. The Subordinated Debentures are
redeemable by TDS, in whole or in part, from time to time, on or after March 31,
2003, or, in whole but not in part, at any time in the event of certain income
tax circumstances. All other terms and conditions are identical to those of TDS
Capital I. (See Note 9--Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Company Subordinated Debentures)
F-64
<PAGE>
NOTE 16--SUBSEQUENT EVENTS (CONTINUED)
AERIAL 8.05% ZERO COUPON NOTES
Aerial sold $100 million principal amount at maturity of 10-year zero coupon
8.05% yield to maturity debt in February 1998 at an issue price of $100 million.
The unsecured notes are due in 2008 and there is no periodic payment of
interest. The proceeds were paid to Aerial's equipment vendor in satisfaction of
all then outstanding and future obligations up to $100 million. The notes are
fully and unconditionally guaranteed by TDS. The notes are subject to optional
redemption beginning in 2003 at redemption prices which reflect original issue
discount accrued since issuance. These notes will replace the $84.4 million of
Interim vendor financing. (See Note 7--Long-Term Debt)
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
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>
1996
Operating Revenues............................................... $ 259,063 $ 293,701 $ 308,548 $ 318,545
Operating Income................................................. 30,957 49,081 41,263 32,147
Gain on Sale of Cellular and Other Investments................... 41,758 86,494 7,797 2,686
Net Income....................................................... 33,689 59,692 22,669 12,089
Net Income Available to Common................................... 33,190 59,201 22,185 11,606
From Operations................................................ 12,882 18,720 19,256 10,852
From Gains..................................................... $ 20,308 $ 40,481 $ 2,929 $ 754
Weighted Average Common Shares (000s)............................ 59,035 60,610 61,084 61,127
Earnings per Common Share-Basic.................................. $ 0.56 $ 0.98 $ 0.36 $ 0.19
Earnings per Common Share-Diluted................................ 0.56 0.97 0.36 0.19
From Operations................................................ 0.22 0.31 0.32 0.18
From Gains..................................................... $ 0.34 $ 0.66 $ 0.04 $ 0.01
1997
Operating Revenues............................................... $ 314,735 $ 356,344 $ 388,122 $ 412,332
Operating Income (Loss).......................................... 41,941 7,354 (3,990) (49,007)
Gain on Sale of Cellular and Other Investments................... -- 10,598 13,767 17,073
Net Income (Loss)................................................ 9,617 6,821 9,019 (35,006)
Net Income (Loss) Available to Common............................ 9,136 6,351 8,549 (35,476)
From Operations................................................ 9,136 2,344 106 (38,940)
From Gains..................................................... $ -- $ 4,007 $ 8,443 $ 3,464
Weighted Average Common Shares (000s)............................ 61,184 60,051 59,511 60,099
Earnings per Common Share-Basic.................................. $ 0.15 $ 0.11 $ 0.14 $ (0.59)
Earnings per Common Share-Diluted................................ 0.15 0.11 0.14 (0.59)
From Operations................................................ 0.15 0.04 -- (0.65)
From Gains..................................................... $ -- $ 0.07 $ 0.14 $ 0.06
</TABLE>
Note: Certain 1996 amounts were reclassified for current period presentation.
Net Income Available to Common for 1996 and 1997 included significant gains from
the sales of cellular and other investments. The table above summarizes the
effect of the gains on Net Income (Loss) Available to Common and Earnings per
Common Share--Diluted.
F-65
<PAGE>
Management believes there exists a seasonality at U.S. Cellular in both service
revenues, which tend to increase more slowly in the first and fourth quarters,
and operating expenses, which tend to be higher in the fourth quarter due to
increased marketing activities and customer growth. This seasonality may cause
operating income to vary from quarter to quarter.
Aerial began commercial service in 1997 which resulted in Aerial's revenue and
expenses being included in operating income. The significant decrease in
Operating Income (Loss) and Net Income (Loss) beginning in the second quarter of
1997 is primarily a result of the commencement of PCS operations.
F-66
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
(DOLLARS IN
THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
OPERATING REVENUES
U.S. Cellular............................................................................. $ 184,584 $ 245,157
TDS Telecom............................................................................... 105,571 116,215
Aerial.................................................................................... -- 30,746
--------- ---------
290,155 392,118
--------- ---------
OPERATING EXPENSES
U.S. Cellular............................................................................. 161,139 212,002
TDS Telecom............................................................................... 78,664 95,900
Aerial.................................................................................... -- 100,059
--------- ---------
239,803 407,961
--------- ---------
Operating Income (Loss) from Ongoing Operations........................................... 50,352 (15,843)
American Paging Operating (Loss).......................................................... (8,411) (11,406)
--------- ---------
OPERATING INCOME (LOSS)..................................................................... 41,941 (27,249)
--------- ---------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest and dividend income.............................................................. 3,418 3,437
Cellular investment income, net of license cost amortization.............................. 17,920 13,605
Gain on sale of cellular interests and other investments.................................. -- 221,442
PCS development costs..................................................................... (21,614) --
Other income (expense), net............................................................... (1,637) (3,049)
Minority share of income.................................................................. (2,759) (11,553)
--------- ---------
(4,672) 223,882
--------- ---------
INCOME BEFORE INTEREST AND INCOME TAXES..................................................... 37,269 196,633
Interest expense............................................................................ 13,814 31,613
Minority interest in income of subsidiary trust............................................. -- 4,896
--------- ---------
INCOME BEFORE INCOME TAXES.................................................................. 23,455 160,124
Income tax expense.......................................................................... 13,838 85,954
--------- ---------
NET INCOME.................................................................................. 9,617 74,170
Preferred Dividend Requirement.............................................................. (481) (440)
--------- ---------
NET INCOME AVAILABLE TO COMMON.............................................................. $ 9,136 $ 73,730
--------- ---------
--------- ---------
WEIGHTED AVERAGE COMMON SHARES (000S)....................................................... 61,184 60,750
EARNINGS PER COMMON SHARE--BASIC............................................................ $ 0.15 $ 1.21
--------- ---------
EARNINGS PER COMMON SHARE--DILUTED.......................................................... $ 0.15 $ 1.20
--------- ---------
--------- ---------
DIVIDENDS PER COMMON AND SERIES A COMMON SHARE.............................................. $ 0.105 $ 0.11
--------- ---------
--------- ---------
PRO FORMA (UNAUDITED): (NOTE 2)
Net income Attributable to Common Stocks
United States Cellular Group Shares....................................................... $ 11,210 $ 78,913
TDS Telecommunications Group Shares....................................................... 6,691 21,464
Aerial Communications Group Shares........................................................ (13,868) (53,760)
TDS Common and Series A Common Shares..................................................... $ 5,103 $ 27,113
Weighted Average Common Shares Outstanding
United States Cellular Group Shares....................................................... 61,184 60,750
TDS Telecommunications Group Shares....................................................... 40,789 40,500
Aerial Communications Group Shares........................................................ 40,789 40,500
TDS Common and Series A Common Shares..................................................... 61,184 60,750
Earnings per Common Share
United States Cellular Group Shares....................................................... $ 0.18 $ 1.30
TDS Telecommunications Group Shares....................................................... 0.16 0.53
Aerial Communications Group Shares........................................................ (0.34) (1.33)
TDS Common and Series A Common Shares..................................................... $ 0.08 $ 0.45
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-67
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................................................. $ 9,617 $ 74,170
Add (Deduct) adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization......................................................... 62,028 99,673
Deferred taxes........................................................................ 3,730 79,114
Investment income..................................................................... (19,154) (14,551)
Minority share of income.............................................................. 2,759 11,553
Gain on sale of cellular interests and other investments.............................. -- (221,442)
Noncash interest expense.............................................................. 5,805 8,424
Other noncash expense................................................................. 5,240 4,166
Change in accounts receivable......................................................... (185) (61)
Change in accounts payable............................................................ (8,598) (12,945)
Change in accrued taxes............................................................... 4,988 1,276
Change in accrued interest............................................................ (4,259) (8,853)
Change in other assets and liabilities................................................ (7,243) 7,589
---------- ----------
54,728 28,113
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings............................................................... 2,840 1,848
Repayments of long-term debt............................................................ (8,373) (5,496)
Change in notes payable................................................................. 140,866 (75,670)
Trust preferred securities.............................................................. -- 145,050
Dividends paid.......................................................................... (6,880) (7,141)
Repurchase of Common Shares............................................................. (28,878) --
Purchase of subsidiary common stock..................................................... (9,801) (5,738)
Other financing activities.............................................................. 1,106 1,365
---------- ----------
90,880 54,218
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................................................... (169,024) (125,314)
Investments in and advances to cellular minority partnerships........................... (6,146) (5,430)
Distributions from partnerships......................................................... 9,297 4,554
Investments in PCS licenses............................................................. (4,745) --
Proceeds from investment sales.......................................................... -- 96,432
Acquisitions, net of cash acquired...................................................... -- (52,275)
Change in temporary investments and marketable securities............................... 25,478 18,630
Other investing activities.............................................................. (2,239) (3,135)
---------- ----------
(147,379) (66,538)
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,771) 15,793
CASH AND CASH EQUIVALENTS--
Beginning of period..................................................................... 57,633 51,008
---------- ----------
End of period........................................................................... $ 55,862 $ 66,801
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-68
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................................... $ 51,008 $ 66,801
Temporary investments....................................................... 24,559 17,429
Accounts receivable from customers and others............................... 247,298 240,066
Materials and supplies, at average cost, and other current assets........... 85,419 62,285
----------------- --------------
408,284 386,581
----------------- --------------
INVESTMENTS
Cellular license acquisition costs, net..................................... 1,190,917 1,175,668
Cellular minority interests................................................. 138,367 105,427
PCS license acquisition costs, net.......................................... 319,918 317,917
Franchise costs and other costs in excess of the underlying book value of
subsidiaries, net......................................................... 180,669 184,839
Marketable equity securities................................................ 1,621 248,482
Other investments........................................................... 141,092 190,256
----------------- --------------
1,972,584 2,222,589
----------------- --------------
PROPERTY, PLANT AND EQUIPMENT
Cellular, net............................................................... 940,253 955,550
Telephone, net.............................................................. 830,767 840,979
PCS, net.................................................................... 604,104 618,937
Radio paging, net........................................................... 43,230 --
Other, net.................................................................. 47,299 35,780
----------------- --------------
2,465,653 2,451,246
----------------- --------------
OTHER ASSETS AND DEFERRED CHARGES............................................. 125,080 140,692
----------------- --------------
$ 4,971,601 $ 5,201,108
----------------- --------------
----------------- --------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-69
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, (UNAUDITED)
1997 MARCH 31, 1998
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and preferred shares...................... $ 16,115 $ 16,091
Notes payable............................................................... 527,587 450,615
Accounts payable............................................................ 239,783 211,370
Advance billings and customer deposits...................................... 33,640 29,218
Accrued interest............................................................ 18,284 9,441
Accrued taxes............................................................... 6,961 8,360
Other current liabilities................................................... 63,515 54,012
-------------- -----------------
905,885 779,107
-------------- -----------------
DEFERRED LIABILITIES AND CREDITS.............................................. 235,646 323,863
-------------- -----------------
LONG-TERM DEBT, excluding current portion..................................... 1,264,218 1,292,311
-------------- -----------------
REDEEMABLE PREFERRED SHARES, excluding current portion........................ 180 175
-------------- -----------------
MINORITY INTEREST in subsidiaries............................................. 416,566 419,564
-------------- -----------------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES (a)..................... 150,000 300,000
-------------- -----------------
NONREDEEMABLE PREFERRED SHARES................................................ 30,987 27,924
-------------- -----------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share....................................... 54,443 54,737
Series A Common Shares, par value $1 per share.............................. 6,936 6,936
Common Shares issuable (10,480 and 12,584 shares, respectively)............. 499 549
Capital in excess of par value.............................................. 1,663,749 1,667,551
Unrealized gains on securities.............................................. 683 18,628
Treasury Shares, at cost (794,576 and 770,132 shares, respectively)......... (30,682) (29,768)
Retained earnings........................................................... 272,491 339,531
-------------- -----------------
1,968,119 2,058,164
-------------- -----------------
$ 4,971,601 $ 5,201,108
-------------- -----------------
-------------- -----------------
</TABLE>
(a) As described in Note 5, the sole asset of TDS Capital I is $154.6 million
principal amount of 8.5% subordinated debentures due 2037 from TDS. The sole
asset of TDS Capital II is $154.6 million principal amount of 8.04% subordinated
debentures due 2038 from TDS.
The accompanying notes to financial statements are an integral part of these
statements.
F-70
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested that
these consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K.
The accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring items) necessary to present
fairly the financial position as of December 31, 1997 and March 31, 1998, and
the results of operations and cash flows for the three months ended March 31,
1997 and 1998. The results of operations for the three months ended March 31,
1997 and 1998, are not necessarily indicative of the results to be expected for
the full year.
NOTE 2. PROPOSED CORPORATE RESTRUCTURING
At a Special Meeting on April 27, 1998, Shareholders of the Company approved
a proposal (the "Tracking Stock Proposal") and two related proposals which
would, among other things, change the state of incorporation of TDS from Iowa to
Delaware and permit TDS to issue shares of tracking stock which are intended to
reflect the performance of the Company's interest in its three principal
business units: TDS Telecom, U.S. Cellular and Aerial. The reincorporation of
TDS into Delaware is expected to take place in mid to late May, following the
receipt of regulatory approvals.
On April 17, 1998, the Board of Directors of the Company determined to take
certain action at the 1998 Annual Meeting of Shareholders, subject to approval
by shareholders of the Tracking Stock Proposal on April 27, 1998. Since the
Tracking Stock Proposal was approved at the Special Meeting on April 27, 1998,
the Board of Directors will submit a proposal to shareholders at the Company's
1998 Annual Meeting, currently expected to occur in July 1998, to consider
certain amendments to the Restated Certificate of Incorporation of TDS Delaware
(the "Restated Certificate"), which are intended to improve the corporate
governance provisions of the Tracking Stock Proposal in certain respects. The
amendments that will be considered at the 1998 Annual Meeting are as follows:
1. The Restated Certificate would be amended to require a vote by the
holders of a majority of the Common Shares and Series A Common Shares,
each voting separately as a class, in connection with any merger or
consolidation of TDS that requires a shareholder vote.
2. The Restated Certificate would be amended to require a class vote by the
holders of a majority of the Common Shares to increase the authorized
number of Common Shares, and to require a class vote by the holders of a
majority of the Series A Common Shares to increase the authorized number
of Series A Common Shares.
3. The Restated Certificate would be amended to provide that TDS would be
subject to the provisions of Section 203 of the Delaware General
Corporation Law.
In connection with the Tracking Stock Proposal, TDS had made offers to each
of U.S. Cellular and Aerial to acquire the common stock of such corporations
which TDS does not own, in exchange for
F-71
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. PROPOSED CORPORATE RESTRUCTURING (CONTINUED)
tracking stock of TDS which would be intended to reflect the separate
performance of U.S. Cellular and Aerial, respectively.
TDS has held several meetings and substantive negotiations with the special
committee of the board of directors of Aerial relating to the proposed Aerial
Merger. Following the most recent meeting with TDS, the special committee of the
board of directors of Aerial advised TDS that it had determined to recommend
that the board of directors of Aerial reject the offer by TDS to acquire the
publicly-held shares of Aerial which TDS does not own. The Aerial special
committee has advised TDS that it would be prepared to consider a revised
proposal which "contains increased protections designed to preserve Aerial's
inherent value for its public stockholders and also embodies an increased equity
interest in the Aerial Group tracking stock for the Aerial public stockholders."
TDS intends to make a revised proposal to the Aerial special committee and to
continue to seek an agreement to acquire the Aerial Common Shares that it does
not own on mutually acceptable terms.
With respect to the U.S. Cellular Merger, TDS has met once with, but has not
yet held substantive negotiations with, the special committee of the board of
directors of U.S. Cellular, which is continuing to conduct due diligence.
However, the special committee of the board of directors of U.S. Cellular has
expressed significant reservations relating to the offer by TDS to acquire the
publicly-held shares of U.S. Cellular that TDS does not own. TDS intends to
continue to seek an agreement to acquire the U.S. Cellular Common Shares that it
does not own on mutually acceptable terms.
PRO FORMA EARNINGS PER SHARE
Pro forma net income attributable to the United States Celluar Group, the
TDS Telecommunications Group, the Aerial Communications Group and to the TDS
Group through Retained Interest assumes that the U.S. Cellular Merger, Aerial
Merger and the Telecom Public Offering has not taken place and therefore 75% of
net income of each Group (except for the TDS Group) is attributable to the
United States Cellular Group Shares, the TDS Telecommunications Group Shares and
the Aerial Communications Group Shares and 25% of net income is attributable to
the Retained Interest for the TDS Group. A portion of the net income in the
United States Cellular Group and the Aerial Communications Group is allocated to
the minority public shareholders of the respective Groups prior to attributing
the net income to the Groups and the TDS Group through Retained Interest.
NOTE 3. AMERICAN PAGING
TDS completed the transfer of substantially all of the assets and certain,
limited liabilities of American Paging, Inc. to TSR Wireless Holdings, LLC
pursuant to a previously announced asset contribution agreement. American
Paging's revenues totaled $24.6 million and $17.8 million for the three months
ended March 31, 1997 and 1998, respectively, and expenses totaled $33.0 million
and $29.2 million, respectively. Effective in the second quarter of 1998, TDS
will follow the equity method of accounting for its interest in TSR Wireless
Holdings, LLC and will report these results as a component of Investment and
Other Income (Expense).
F-72
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. MARKETABLE EQUITY SECURITIES
The following table lists the Company's marketable equity securities at
March 31, 1998.
<TABLE>
<CAPTION>
CUMULATIVE NET
FAIR MARKET ORIGINAL UNREALIZED TAX UNREALIZED
VALUE COST GAIN EFFECT GAIN
----------- ---------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment in AirTouch................ $ 241,889 $ 217,946 $ 23,943 $ 8,637 $ 15,306
Other................................. 6,593 1,142 5,451 2,129 3,322
----------- ---------- ----------- --------- -----------
$ 248,482 $ 219,088 $ 29,394 $ 10,766 $ 18,628
----------- ---------- ----------- --------- -----------
----------- ---------- ----------- --------- -----------
</TABLE>
The cumulative unrealized gain, net of taxes, is included in Common
Shareholders' Equity.
NOTE 5. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES
In February 1998, TDS Capital II, a subsidiary trust (the "Trust") of TDS,
issued 6,000,000 of its 8.04% Company-Obligated Mandatorily Redeemable Preferred
Securities (the "Preferred Securities") at $25 per Preferred Security. Net
proceeds from the issuance totaled $145.1 million and were used to retire
short-term debt.
The sole asset of TDS Capital II is $154.6 million principal amount of TDS's
8.04% Subordinated Debentures due March 31, 2038 or such date to which the
maturity is extended by TDS, but in no event later than March 31, 2047. There is
a full and unconditional guarantee by TDS of the Trust's obligations under the
Preferred Securities issued by the Trust. However, TDS's obligations are
subordinate and junior in right of payment to certain other indebtedness of TDS.
TDS has the right to defer payment of interest on the Subordinated Debentures by
extending the interest payment period, at any time, for up to 20 consecutive
quarters. If interest payment on the Subordinated Debentures are so deferred,
distributions on the Preferred Securities will also be deferred. During any
deferral, distributions will continue to accrue with interest thereon. In
addition, during any such deferral, TDS may not declare or pay any dividend or
other distribution on, or redeem or purchase, any of its common stock.
The Subordinated Debentures are redeemable by TDS, in whole or in part, from
time to time, on or after March 31, 2003, or, in whole but not in part, at any
time in the event of certain income tax circumstances. If the Subordinated
Debentures are redeemed, the Trust must redeem Preferred Securities on a pro
rata basis having an aggregate liquidation amount equal to the aggregate
principal amount of the Subordinated Debentures so redeemed. In the event of the
dissolution, winding up or termination of the Trust the holders of Preferred
Securities will be entitled to receive, for each Preferred Security, a
liquidation amount of $25 plus accrued and unpaid distributions thereon to the
date of payment, unless, in connection with the dissolution, winding up or
termination, Subordinated Debentures are distributed to the holders of the
Preferred Securities.
The Preferred Securities are accounted for and reported in the Company's
financial statements in the same manner as the 8.5% Trust Originated Preferred
Securities issued by TDS Capital I in 1997.
F-73
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LONG-TERM DEBT
Aerial sold $220 million principal amount at maturity of 10-year zero coupon
8.05% yield to maturity debt in February 1998 at an issue price of $100 million.
The unsecured notes are due in 2008 and there is no periodic payment of
interest. The proceeds were paid to Aerial's equipment vendor in satisfaction of
all then outstanding obligations and future obligations up to $100 million. The
notes are fully and unconditionally guaranteed by TDS. The notes are subject to
optional redemption beginning in 2003 at redemption prices which reflect
original issue discount accrued since issuance.
NOTE 7. GAINS FROM SALE OF CELLULAR INTERESTS AND OTHER INVESTMENTS
Gains from the sale of cellular interest and other investments in 1998
primarily reflects gains recorded on the sale of the Company's minority
interests in twelve markets to AirTouch Communications Inc. ("AirTouch") for
AirTouch common shares and cash.
NOTE 8. OTHER COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," ("SFAS No. 130"), which requires
companies to report all of the changes in shareholder's equity, except those
resulting from investment by owners or distribution to owners ("Comprehensive
Income"). The Company's Comprehensive Income includes Net Income and Unrealized
Gains from Marketable Equity Securities that are classified as "available-for-
sale". The following table summarizes the Company's Comprehensive Income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Net Income......................................................................... $ 9,617 $ 74,170
Other Comprehensive Income--Unrealized gains on securities, net of tax of
$10,301.......................................................................... -- 17,944
--------- ---------
$ 9,617 $ 92,114
--------- ---------
--------- ---------
</TABLE>
NOTE 9. EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share," effective December
31, 1997. Earnings per Common Share for March 31, 1997 has been restated to
conform to current period presentation.
F-74
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. EARNINGS PER SHARE (CONTINUED)
The amounts used in computing Earnings per Common Share and the effect on
income and the weighted average number of Common and Series A Common Shares of
dilutive potential common stock are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------
(DOLLARS AND SHARES IN
THOUSANDS)
<S> <C> <C>
Net Income....................................................................... $ 9,617 $ 74,170
Less: Preferred Dividends........................................................ (481) (440)
------- -------
Net Income Available to Common used in Earnings per Share--Basic................. 9,136 73,730
Reduction in preferred dividends if Preferred Shares converted into Common
Shares......................................................................... -- 402
Minority income adjustment....................................................... (51) (51)
------- -------
Net Income Available to Common used in Earnings per Share--Diluted............... $ 9,085 $ 74,081
------- -------
------- -------
Weighted Average Number of Common Shares used in Earnings per Share--Basic....... 61,184 60,750
Effect of Dilutive Securities:
Common Shares outstanding if Preferred Shares converted........................ -- 927
Stock options and stock appreciation rights.................................... 137 136
Common Shares issuable......................................................... 27 14
------- -------
Weighted Average Number of Common Shares used in Earnings per Share--Diluted..... 61,348 61,827
------- -------
------- -------
</TABLE>
For 1997, Preferred Shares convertible into 951,000 Common Shares were not
included in computed diluted Earnings per Common 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.
NOTE 10. ACQUISITION EFFECTS
Assuming that acquisitions accounted for as purchases during the period
January 1, 1997, to March 31, 1998, had taken place on January 1, 1997,
unaudited pro forma results of operations from continuing operations would have
been as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Operating revenues.............................................................. $ 313,361 $ 392,118
Net income...................................................................... 11,001 74,115
Earnings per share--Basic....................................................... 0.17 1.21
Earnings per share--Diluted..................................................... $ 0.17 $ 1.20
</TABLE>
F-75
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SUPPLEMENTAL CASH FLOW INFORMATION
Cash and cash equivalents include cash and those short-term, highly liquid
investments with original maturities of three months or less. Those investments
with original maturities of more than three months to twelve months are
classified as temporary investments. Temporary investments are stated at cost,
which approximates market. Those investments with original maturities of more
than 12 months are classified as marketable securities and are stated at
amortized cost.
TDS acquired certain cellular licenses, operating companies and telephone
companies in 1998. In conjunction with these acquisitions, the following assets
were acquired and liabilities assumed and Common Shares issued.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
-------------------
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C>
Property, plant and equipment...................................................... $ 7,825
Cellular licenses.................................................................. 34,080
Equity method investment in cellular interests..................................... 4,927
Franchise costs.................................................................... 5,304
Long-term debt..................................................................... (4,634)
Deferred credits................................................................... (991)
Other assets and liabilities, excluding cash and cash equivalents.................. 7,972
Decrease in Minority interest...................................................... 7,820
Common Shares issued............................................................... (10,028)
--------
Decrease in cash due to acquisitions............................................... $ 52,275
--------
--------
</TABLE>
The following table summarizes interest and income taxes paid, and other
noncash transactions.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
(DOLLAR IN
THOUSANDS)
<S> <C> <C>
Interest Paid..................................................................... $ 19,231 $ 31,089
Income Taxes Paid................................................................. 4,209 8,347
Common Shares issued by TDS for conversion of TDS Preferred Stock................. $ 261 $ 3,063
</TABLE>
NOTE 12. BUSINESS SEGMENT INFORMATION
The following tables summarize business segment information for the three
months ended or at March 31, 1997, and 1998.
F-76
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. BUSINESS SEGMENT INFORMATION (CONTINUED)
U.S. CELLULAR OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED OR AT
MARCH 31,
--------------------------
1997 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating Revenues
Local service............................................................. $ 121,027 $ 170,085
Inbound roaming........................................................... 45,340 46,206
Long-distance and other................................................... 18,217 28,866
------------ ------------
184,584 245,157
------------ ------------
Operating Expenses
System operations......................................................... 31,229 36,943
Marketing and selling..................................................... 37,802 50,001
Cost of equipment sold.................................................... 17,994 20,748
General and administrative................................................ 43,953 59,043
Depreciation.............................................................. 21,509 35,920
Amortization.............................................................. 8,652 9,347
------------ ------------
161,139 212,002
------------ ------------
Operating Income............................................................ $ 23,445 $ 33,155
------------ ------------
------------ ------------
Additions to property, plant and equipment.................................. $ 53,062 $ 69,093
Identifiable assets......................................................... $ 2,164,997 $ 2,714,381
</TABLE>
AERIAL OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED OR AT
MARCH 31,
--------------------------
1997 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating Revenues $ -- $ 30,746
------------ ------------
Operating Expenses
Systems operations........................................................ -- 15,016
Marketing and selling..................................................... -- 17,432
Cost of equipment sold.................................................... -- 22,820
General and administrative................................................ -- 14,196
Customer service.......................................................... -- 10,899
Depreciation.............................................................. -- 17,807
Amortization.............................................................. -- 1,889
------------ ------------
-- 100,059
------------ ------------
Operating (Loss) $ -- $ (69,313)
------------ ------------
------------ ------------
Additions to property, plant and equipment.................................. $ 84,608 $ 29,685
Identifiable assets......................................................... $ 738,741 $ 962,886
</TABLE>
F-77
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. BUSINESS SEGMENT INFORMATION (CONTINUED)
TDS TELECOM OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED OR AT
MARCH 31,
--------------------------
1997 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Telephone Operations
Operating Revenues
Local service........................................................... $ 29,861 $ 32,551
Network access and long-distance........................................ 56,592 60,846
Miscellaneous........................................................... 12,179 13,897
------------ ------------
98,632 107,294
------------ ------------
Operating Expenses
Network operations...................................................... 18,030 20,678
Depreciation and Amortization........................................... 23,293 26,007
Customer operations..................................................... 14,897 17,509
Corporate and other..................................................... 15,456 18,948
------------ ------------
71,676 83,142
------------ ------------
Telephone Operating Income................................................ 26,956 24,152
------------ ------------
Other Operations
Revenues.................................................................. 7,171 9,400
Expenses.................................................................. 7,220 13,237
------------ ------------
Other Operating Income.................................................... (49) (3,837)
------------ ------------
Intercompany Eliminations
Revenues.................................................................. (232) (479)
Expenses.................................................................. (232) (479)
------------ ------------
Operating Income............................................................ $ 26,907 $ 20,315
------------ ------------
------------ ------------
Additions to property, plant and equipment.................................. $ 23,904 $ 30,739
Identifiable assets......................................................... $ 1,173,614 $ 1,305,207
</TABLE>
OTHER OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED OR AT
MARCH 31,
------------------------
1997 1998
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Additions to property, plant and equipment
Other...................................................................... $ 7,450 $ (4,203)
Identifiable assets
Other...................................................................... $ 238,514 $ 218,634
</TABLE>
F-78
<PAGE>
ANNEX A
ILLUSTRATION OF CERTAIN TERMS
The following illustrations demonstrate the method of calculation of the
Retained Interest and an Inter-Group Interest in any Tracking Group which the
Company may create, and the application of certain terms based on the
assumptions set forth herein. For purposes hereof, the Telecom Group is used as
an example to illustrate the application of certain terms applicable to all
Tracking Stocks and Tracking Groups. Also for purposes of illustration, 90
million shares are used as the number of authorized Telecom Group Shares, 54
million shares are used as the number of Telecom Group Shares issued in the
Offerings and the Distribution, 14 million shares are used as the Number of
Shares Issuable with Respect to Retained Interest in the Telecom Group
immediately following the Distribution and the Offerings and 1.5 million shares
are used as the pre-Distribution Number of Shares Issuable to Third Parties.
Unless otherwise specified, each illustration below should be read independently
as if none of the other transactions illustrated herein had occurred. Actual
calculations may be slightly different due to rounding. The following
illustrations are not intended to be complete and are qualified in their
entirety by the more detailed information contained in the Prospectus and the
Exhibits thereto. Please note that the following illustrations are purely
hypothetical and the numbers used herein (including assumptions of market
values) were chosen to simplify the calculations and are not intended to
represent estimates of actual numbers or values. Capitalized terms used herein
have the respective meanings ascribed to them in the Prospectus.
At any given time, the Outstanding Interest Fraction, which represents the
percentage interest in the equity value of the Company attributable to the
Telecom Group that is represented by the outstanding Telecom Group Shares, will
be equal to the quotient of:
Outstanding Telecom Group Shares
------------------------------------
Outstanding Telecom Group Shares + Number of Shares Issuable with Respect to
Retained Interest in the Telecom Group + Number of Shares Issuable with Respect
to Inter-Group Interest(s) in the Telecom Group by other Tracking Group(s)
The balance of the equity of the Telecom Group is represented by the
Retained Interest held by the TDS Group and any other Tracking Group's
Inter-Group Interest in such Tracking Group.
At any given time, the Retained Interest Fraction, which represents the
percentage interest in the equity value of the Company attributable to the
Telecom Group that is attributable to the TDS Group, will be equal to the
quotient of:
Number of Shares Issuable with Respect to Retained Interest in the Telecom
Group.
------------------------------------
Outstanding Telecom Group Shares + Number of Shares Issuable with Respect to
Retained Interest in such the Telecom Group + Number of Shares Issuable with
Respect to Inter-Group Interest(s) in the Telecom Group by other Tracking
Group(s).
At any given time, the Inter-Group Interest Fraction, which represents the
percentage interest in the equity value of the Company attributable to the
Telecom Group that is attributed to other Tracking Groups, will be equal to the
quotient of:
Number of Shares Issuable with Respect to Inter-Group Interest in the Telecom
Group.
------------------------------------
Outstanding Telecom Group Shares + Number of Shares Issuable with Respect to
Retained Interest in the Telecom Group + Number of Shares Issuable with Respect
to Inter-Group Interest(s) in the Telecom Group by other Tracking Group(s).
For a particular Tracking Group, the sum of the Outstanding Interest
Fraction, the Retained Interest Fraction and the Inter-Group Interest
Fraction(s) will always equal 100%.
<PAGE>
The Adjusted Outstanding Interest Fraction is a measure that differs from
the Outstanding Interest Fraction in that it takes into account the dilutive
effect of certain convertible securities and options, shares committed for
acquisitions or otherwise. It is used instead of the Outstanding Interest
Fraction in certain situations and would be equal to the quotient of:
Outstanding Telecom Group Shares
------------------------------------
Outstanding Telecom Group Shares + Number of Shares Issuable with Respect to
Retained Interest in the Telecom Group + Number of Shares Issuable with Respect
to Inter-Group Interest(s) in the Telecom Group by other Tracking Group(s) +
Number of Telecom Group Shares Issuable to Third Parties.
PURCHASES OF TELECOM GROUP SHARES
The following two illustrations reflect the purchase by the Company of 5
million Telecom Group Shares, which are retired or otherwise cease to be
outstanding following their purchase. For purposes of these illustrations, it is
assumed that no Inter-Group Interest in the Telecom Group exists.
A. PURCHASE WITH TRACKING GROUP FUNDS
Assume all such shares are identified as having been purchased with funds
attributed to the Telecom Group, with the Telecom Group being charged with the
consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding...................... 54 million
Shares purchased.............................................. (5) million
Total shares issued and outstanding after purchase............ 49 million
</TABLE>
- The Number of Shares Issuable with Respect to Retained Interest in the
Telecom Group by the TDS Group would not be changed by the purchase of any
shares of Telecom Group Shares which are purchased with funds attributed
to the Telecom Group.
- The Telecom Group Outstanding Interest Fraction would be 78%, calculated
as follows:
49 million
-------------------------
49 million + 14 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 22% in the Telecom Group.
- In this case, the TDS Group would be credited, and the Telecom Group would
be charged, with an amount equal to 28% (representing the ratio of the
Retained Interest Fraction (22%) to the Telecom Group Outstanding Interest
Fraction (78%)) of the aggregate amount of any dividend or other
distribution paid on the outstanding shares of Telecom Group Shares (other
than a dividend or other distribution payable in shares of Telecom Group
Shares or in certain other securities). If, for example, a dividend of $1
per share were declared and paid on the 49 million shares of Telecom Group
Shares outstanding (an aggregate of $49 million), the TDS Group would be
credited with $14 million, and the Telecom Group would be charged with
that amount in addition to the $49 million dividend on the outstanding
Telecom Group Shares (a total of $63 million).
- The Company would have 41 million authorized and unissued shares of
Telecom Group Shares (90 million minus 49 million issued and outstanding).
A-2
<PAGE>
B. PURCHASE WITH TDS GROUP FUNDS
Assume all such shares are identified as having been purchased with funds
attributed to the TDS Group, with the TDS Group being charged with the
consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding...................... 54 million
Shares purchased.............................................. (5) million
Total shares issued and outstanding after purchase............ 49 million
</TABLE>
- The Number of Shares Issuable with Respect to Retained Interest would be
increased by the number of shares of Telecom Group Shares which are so
purchased with funds attributed to the TDS Group.
<TABLE>
<S> <C>
The Number of Shares Issuable with Respect to Retained
Interest prior to purchase.................................. 14 million
Shares purchased.............................................. 5 million
Number of Shares Issuable with Respect to Retain Interest
after purchase.............................................. 19 million
</TABLE>
- The Telecom Group Outstanding Interest Fraction would be 72%, calculated
as follows:
49 million
-------------------------
49 million + 19 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 28% in the Telecom Group.
- In this case, the TDS Group would be credited, and the Telecom Group would
be charged, with an amount equal to 39% (representing the ratio of the
Retained Interest Fraction (28%) to the Telecom Group Outstanding Interest
Fraction (72%)) of the aggregate amount of any dividend or other
distribution paid on the outstanding shares of Telecom Group Shares (other
than a dividend or other distribution payable in shares of Telecom Group
Shares or in certain other securities). If, for example, a dividend of $1
per share were declared and paid on the 49 million shares of Telecom Group
Shares outstanding (an aggregate of $49 million), the TDS Group would be
credited with $28 million, and the Telecom Group would be charged with
that amount in addition to the $49 million dividend on the outstanding
Telecom Group Shares (a total of $77 million).
- The Company would have 41 million authorized and unissued Telecom Group
Shares (90 million minus 49 million issued and outstanding).
TRANSFERS OF ASSETS BETWEEN THE TDS GROUP AND THE TELECOM GROUP
A. CONTRIBUTION OF ASSETS FROM THE TDS GROUP TO THE TELECOM GROUP
The following illustration reflects the contribution by the TDS Group to the
Telecom Group of $60 million of assets attributed to the TDS Group in return for
an increase in the Retained Interest on a date on which the Market Value of the
Telecom Group Shares is $20 per share and the Number of Shares Issuable with
Respect to Retained Interest is 14 million.
A-3
<PAGE>
<TABLE>
<S> <C>
54
Shares previously issued and outstanding......................... million
Newly issued shares.............................................. --
54
Total shares issued and outstanding after contribution........... million
</TABLE>
- The Number of Shares Issuable with Respect to Retained Interest would be
increased to reflect the contribution to the Telecom Group of assets
theretofore attributed to the TDS Group. The increase in the Number of
Shares Issuable with Respect to Retained Interest would be calculated by
dividing the value of the contribution by the per share Market Value of
the Telecom Group Shares. Thus, the $60 million contribution by the TDS
Group to the Telecom Group would result in an increase of 3 million shares
(an amount equal to $60 million divided by $20).
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Retained Interest
prior to contribution....................................... 14 million
Adjustment to reflect contribution to the Telecom Group of
assets attributed to the TDS Group ($60 divided by $20)..... 3 million
Number of Shares Issuable with Respect to Retained Interest
after contribution.......................................... 17 million
</TABLE>
- The Telecom Group Outstanding Interest Fraction would be 76%, calculated
as follows:
54 million
-------------------------
54 million + 17 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 24% in the Telecom Group.
- In this case, the TDS Group would be credited, and the Telecom Group would
be charged, with an amount equal to 32% (representing the ratio of the
Retained Interest Fraction (24%) to the Telecom Group Outstanding Interest
Fraction (76%)) of the aggregate amount of any dividend or other
distribution paid on the outstanding Telecom Group Shares (other than a
dividend or other distribution payable in Telecom Group Shares or in
certain other securities).
- The Company would have 36 million authorized and unissued Telecom Group
Shares (90 million minus 54 million issued and outstanding).
B. TRANSFER OF ASSETS FROM A TRACKING GROUP TO THE TDS GROUP
The following illustration reflects the transfer by the Telecom Group to the
TDS Group of $60 million of assets attributed to the Telecom Group in return for
a reduction in the Retained Interest on a date on which the Market Value of the
Telecom Group Shares is $20 per share and the Number of Shares Issuable with
Respect to Retained Interest is 14 million.
<TABLE>
<S> <C>
54
Shares previously issued and outstanding......................... million
Shares purchased................................................. --
54
Total shares issued and outstanding after transfer............... million
</TABLE>
- The Number of Shares Issuable with Respect to Retained Interest would be
decreased to reflect the contribution to the TDS Group of assets
theretofore attributed to the Telecom Group. The decrease in the Number of
Shares Issuable with Respect to Retained Interest would be calculated by
dividing the value of the contribution by the per share Market Value of
the Telecom Group
A-4
<PAGE>
Shares. Thus, the $60 million contribution by the Telecom Group to the TDS
Group would result in a decrease of 3 million shares (an amount equal to
$60 million divided by $20).
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Retained Interest
prior to transfer........................................... 14 million
Adjustment to reflect transfer to the TDS Group of assets
attributed to the Telecom Group ($60 divided by $20)........ (3) million
Number of Shares Issuable with Respect to Retained Interest
after transfer.............................................. 11 million
</TABLE>
The Telecom Group will not make transfers of assets to the TDS Group in
reduction of the Retained Interest if the effect would be to reduce the Number
of Shares Issuable with Respect to Retained Interest to less than zero. The
Telecom Group cannot have an Inter-Group Interest in the TDS Group.
- The Telecom Group Outstanding Interest Fraction would be 83%, calculated
as follows:
54 million
-------------------------
54 million + 11 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 17% in the Telecom Group.
- In this case, the TDS Group would be credited, and the Telecom Group would
be charged, with an amount equal to 20% (representing the ratio of the
Retained Interest Fraction (17%) to the Telecom Group Outstanding Interest
Fraction (83%)) of the aggregate amount of any dividend or other
distribution paid on the outstanding Telecom Group Shares (other than a
dividend or other distribution payable in Telecom Group Shares or in
certain other securities).
- The Company would have 36 million authorized and unissued Telecom Group
Shares (90 million minus 54 million issued and outstanding).
FUTURE OFFERINGS OF TRACKING GROUP STOCK
The following illustrations reflect the sale by the Company of 10 million
Telecom Group Shares on a date on which the Number of Shares Issuable with
Respect to Retained Interest is 14 million shares.
A. OFFERING FOR TRACKING GROUP
The following example assumes all such Telecom Group Shares issued pursuant
to the offering are identified as issued for the account of the Telecom Group,
with the net proceeds credited to the Telecom Group:
<TABLE>
<S> <C>
Shares previously issued and outstanding...................... 54 million
Newly issued shares........................................... 10 million
Total shares issued and outstanding after offering............ 64 million
</TABLE>
- The Number of Shares Issuable with Respect to Retained Interest would not
be changed by the issuance of any Telecom Group Shares for the account of
the Telecom Group.
A-5
<PAGE>
- The Outstanding Interest Fraction would be 82%, calculated as follows:
64 million
-------------------------
64 million + 14 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 18% in the Telecom Group.
- The Company would have 26 million authorized and unissued Telecom Group
Shares remaining (90 million minus 64 million issued and outstanding).
B. OFFERING FOR THE TDS GROUP
The following example assumes all such Telecom Group Shares issued pursuant
to the offering are identified as issued for the account of the TDS Group with
respect to the Retained Interest, with the net proceeds credited to the TDS
Group:
<TABLE>
<S> <C>
Shares previously issued and outstanding...................... 54 million
Newly issued shares........................................... 10 million
Total shares issued and outstanding after offering............ 64 million
</TABLE>
- The Number of Shares Issuable with Respect to Retained Interest would
decrease by the number of Telecom Group Shares issued for the account of
the TDS Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Retained Interest
prior to offering........................................... 14 million
Shares issued in offering..................................... (10) million
Number of Shares Issuable with Respect to Retained Interest
after offering.............................................. 4 million
</TABLE>
- The Telecom Group Outstanding Interest Fraction would be 94%, calculated
as follows:
64 million
-------------------------
64 million + 4 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 6% in the Telecom Group.
- The Company would have 26 million authorized and unissued Telecom Group
Shares (90 million minus 64 million issued and outstanding).
OFFERINGS OF CONVERTIBLE SECURITIES FOLLOWING THE DISTRIBUTION
If the Company were to issue any debt or preferred stock which was
convertible into Telecom Group Shares, the Retained Interest Fraction and the
Outstanding Interest Fraction would be unchanged at the time of such issuance.
If any Telecom Group Shares were issued upon the conversion of such Convertible
Security, however, then the Retained Interest Fraction and the Outstanding
Interest Fraction would be affected in a manner similar to that shown above
under "Offering for the Telecom Group", if such Convertible Security were
attributed to the Telecom Group, or under "Offering for the TDS Group," if
A-6
<PAGE>
such Convertible Security were attributed to the TDS Group. The conversion,
exercise or exchange of Pre-Distribution Convertible Securities will be
attributed to the TDS Group.
TELECOM GROUP COMMON STOCK DIVIDENDS
The following illustrations reflect stock dividends of Telecom Group Shares
on the outstanding Telecom Group Shares, and on the outstanding TDS Group
Shares, respectively, on a date on which the Number of Shares Issuable with
Respect to Retained Interest is 14 million shares.
A. TRACKING STOCK DIVIDEND ON TRACKING GROUP SHARES
The following example assumes that the Company declares a stock dividend of
one-third of one Telecom Group Share on each outstanding Telecom Group Share.
<TABLE>
<S> <C>
Shares previously issued and outstanding...................... 54 million
Newly issued shares........................................... 18 million
Total shares issued and outstanding after dividend............ 72 million
</TABLE>
- The Number of Shares Issuable with Respect to Retained Interest would be
increased proportionately to reflect the stock dividend payable in Telecom
Group Shares to holders of Telecom Group Shares.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Retained Interest
prior to dividend........................................... 14 million
Adjustment to reflect dividend on shares on outstanding
Telecom Group Shares........................................ 4.67 million
Number of Shares Issuable with Respect to Retained Interest 18.67
after dividend.............................................. million
</TABLE>
- The Telecom Group Outstanding Interest Fraction would be 79%, calculated
as follows:
72 million
---------------------------
72 million + 18.67 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 21% in the Telecom Group. The Telecom Group Outstanding Interest
Fraction and the Retained Interest Fraction would be unchanged from the
corresponding percentages prior to the dividend.
- The Company would have 18 million authorized and unissued Telecom Group
Shares remaining (90 million minus 72 million issued and outstanding).
B. TRACKING STOCK DIVIDEND ON TDS GROUP SHARES
The following example assumes that an aggregate of 60 million TDS Group
Shares are outstanding and the Company declares a stock dividend of one-tenth of
one Telecom Group Share on each outstanding TDS Group Share.
<TABLE>
<S> <C>
Telecom Group Shares previously issued and outstanding........ 54 million
Newly issued Telecom Group Shares............................. 6 million
Total Telecom Group Shares issued and outstanding after
dividend.................................................... 60 million
</TABLE>
A-7
<PAGE>
- Any dividend of Telecom Group Shares on the outstanding TDS Group Shares
will be treated as a dividend payable from the Number of Shares Issuable
with Respect to Retained Interest in the Telecom Group. As a result, the
Number of Shares Issuable with Respect to Retained Interest would decrease
by an amount equal to the number of Telecom Group Shares distributed on
the outstanding TDS Group Shares pursuant to the stock dividend.
<TABLE>
<S> <C>
Number of Telecom Group Shares Issuable with Respect to
Retained Interest prior to dividend......................... 14 million
Telecom Group Shares distributed on outstanding TDS Group
Shares...................................................... (6) million
Number of Telecom Group Shares Issuable with Respect to
Retained Interest after dividend............................ 8 million
</TABLE>
- The Company will not distribute to holders of TDS Group Shares as a
dividend a number of Telecom Group Shares exceeding the Number of Shares
Issuable with Respect to Retained Interest by the TDS Group in the Telecom
Group.
- The Telecom Group Outstanding Interest Fraction would be 60%, calculated
as follows:
60 million
------------------------
60 million + 8 million
The Retained Interest Fraction would accordingly represent a TDS Group
interest of 12% in the Telecom Group.
- The Company would have 30 million authorized and unissued Telecom Group
Shares remaining (90 million minus 60 million issued and outstanding).
CERTAIN CONVERSION, REDEMPTION AND SPECIAL DIVIDEND PROVISIONS
The following illustrations reflect (a) conversion of the Telecom Group
Shares at the option of the Company, (b) mandatory dividend, redemption or
conversion of the Telecom Group Shares following the Disposition of all or
substantially all of the properties and assets of the Telecom Group and (c)
redemption of all the Telecom Group Shares in exchange for stock of a subsidiary
holding all the assets and liabilities of the Telecom Group, in each case
assuming that (i) the number of outstanding Telecom Group Shares is 54 million
shares, (ii) the Number of Shares Issuable with Respect to Retained Interest is
14 million shares and (iii) the pre-Distribution Number of Shares Issuable to
Third Parties is 1.5 million.
A. CONVERSION AT THE OPTION OF THE COMPANY
The following example assumes that the Company elects to convert the Telecom
Group Shares into TDS Group Special Common Shares at the Optional Conversion
Percentage and the post-Distribution Number of Shares Issuable to Third Parties
(with respect to the Telecom Group) is 1.5 million.
- The Adjusted Outstanding Telecom Group Shares would be 71 million
(representing the sum of (i) the number of outstanding Telecom Group
Shares, (ii) the Number of Shares Issuable with Respect to Retained
Interest, (iii) the pre-Distribution Number of Shares Issuable to Third
Parties (with respect to the Telecom Group) and (iv) the post-Distribution
Number of Shares Issuable to Third Parties (with respect to the Telecom
Group)), calculated as follows:
54 million + 14 million + 1.5 million + 1.5 million
- If the Company elected to convert the Telecom Group Shares into Special
Common Shares, assuming that the Market Value of one Telecom Group Share
on each Trading Day during the
A-8
<PAGE>
twenty-Trading Day period ending on the 5th Trading Day prior to the date
of notice of such conversion is $20 and the Market Value of one Special
Common Share (or Common Share, if there is no public market value for the
Special Common Shares) on each Trading Day during such period is $10, the
Telecom Group Shares would be converted into Special Common Shares at a
ratio of 2.3 Special Common Shares for each Telecom Group Share
(representing 115% of the average daily ratio during such period of the
Market Value of one Telecom Group Share to the Market Value of one Special
Common Share). The Optional Conversion Percentage is fixed at 115% for the
first five years after the initial issuance date of the applicable
Tracking Stock, and then declines 1% per year until it is 110% on the
ninth anniversary of the initial issuance date and for all periods
thereafter.
B. DISPOSITION OF ASSETS OF TRACKING GROUP
The following example assumes that a Disposition of all (not merely
substantially all) of the properties and assets of the Telecom Group occurs and
the Fair Value of the Net Proceeds from such Disposition equal $2 billion.
- If the Company elected to redeem all outstanding Telecom Group Shares, the
aggregate redemption price would be $1.52 billion (representing the
product of the Adjusted Outstanding Interest Fraction for the Telecom
Group and the Fair Value of the Net Proceeds of such Disposition),
calculated as follows:
<TABLE>
<S> <C>
54 million
X $2 billion
- --------------------------------------------
54 million + 14 million + 1.5 million +1.5
million
</TABLE>
In this case each outstanding Telecom Group Share would be redeemed in
exchange for $28.15 per share (representing the quotient of the aggregate
redemption price ($1.52 billion) and the number of outstanding Telecom Group
Shares (54 million)). If any Shares Issuable to Third Parties remain outstanding
at the time of any redemption of all outstanding Telecom Group Shares following
the disposition of all (not merely substantially all) of the properties and
assets of the Telecom Group, the proportionate interest in the Fair Value of the
Net Proceeds of the Disposition to be distributed to the holders of Telecom
Group Shares will be determined on the basis of the Adjusted Outstanding
Interest Fraction, which will result in the allocation to the TDS Group of a
portion of such Fair Value of the Net Proceeds, in addition to the portion
attributable to any Retained Interest in the Telecom Group, sufficient to
provide for the delivery of the portion of the consideration (if any)
deliverable by the Company with respect to the Shares Issuable to Third Parties.
- If the Company elected to convert the Telecom Group Shares into Special
Common Shares, assuming that the Market Value of one Telecom Group Share
on each Trading Day during the forty-Trading Day period beginning on the
11th Trading Day following the consummation of such Disposition is $20 and
the Market Value of one Special Common Share (or Common Share, if there is
no public market value for the Special Common Shares) on each Trading Day
during such period is $10, the Telecom Group Shares would be converted
into Special Common Shares at a ratio of 2.2 Special Common Shares for
each Telecom Group Share (representing 110% of the average daily ratio
during such period of the Market Value of one Telecom Group Share to the
Market Value of one Special Common Share).
The following example assumes that a Disposition of substantially all (but
not all) of the properties and assets of the Telecom Group occurs and the Fair
Value of the Net Proceeds from the Disposition equal $1 billion.
A-9
<PAGE>
- If the Company elected to pay a dividend to the holders of Telecom Group
Shares, the aggregate amount of the dividend would be $794 million
(representing the product of the Outstanding Interest Fraction and the
Fair Value of the Net Proceeds of the Disposition), calculated as follows:
<TABLE>
<S> <C>
54 million
X $1 billion
- --------------------
54 million + 14
million
</TABLE>
In this case, the TDS Group would be credited, and the Telecom Group would
be charged, with $206 million, an amount equal to 26% (representing the ratio of
the Retained Interest Fraction (21%) and the Outstanding Interest Fraction
(79%)) of the aggregate amount of such dividend.
- If the Company elected to redeem Telecom Group Shares, the aggregate
redemption price would be $794 million (representing the product of the
Outstanding Interest Fraction and the Fair Value of the Net Proceeds of
such Disposition), calculated as follows:
<TABLE>
<S> <C>
54 million
X $1 billion
- --------------------
54 million + 14
million
</TABLE>
In this case, assuming that the average Market Value of one Telecom Group
Share for the forty-Trading Day period beginning on the 11th Trading Day
following the consummation of such Disposition is $20, an aggregate of 40
million (equal to the quotient of the aggregate redemption price and such
average Market Value) outstanding Telecom Group Shares would be redeemed in
exchange for $20 per share.
- If the Company elected to convert Telecom Group Shares into Special Common
Shares, assuming that the Market Value of one Telecom Group Share on each
Trading Day during the forty-Trading Day period beginning on the 11th
Trading Day following the consummation of such Disposition was $20 and the
Market Value of one Special Common Share (or Common Share, if there is no
public market value for the Special Common Shares) on each Trading Day
during such period was $10, the Telecom Group Shares would be converted
into Special Common Shares at a ratio of 2.2 (representing 110% of the
average daily ratio during such period of the Market Value of one Telecom
Group Share to the Market Value of one share of Special Common Share)
Special Common Shares for each Telecom Group Share.
C. REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY
The following example assumes that the Company elects to redeem all of the
outstanding Telecom Group Shares in exchange for shares of common stock of TDS
Telecom and that TDS Telecom is a wholly-owned subsidiary of the Company. Prior
to the redemption, the Company would recapitalize TDS Telecom so that its
capital structure included shares which were substantially similar to the Series
A Common Shares, Common Shares and Special Common Shares and increase the number
of authorized shares to permit the redemption to take place. For this purpose,
assume that the total number of outstanding shares of common stock of TDS
Telecom is 71 million after such recapitalization, consisting of an appropriate
number of shares which correspond to the same number of shares of Series A
Common Shares, Common Shares and Special Common Shares which are then issued and
outstanding.
- In this case, Telecom Group Shares would be redeemed in exchange for an
aggregate number of shares of common stock of TDS Telecom corresponding to
Special Common Shares equal to
A-10
<PAGE>
54 million (representing the product of the Adjusted Outstanding Interest
Fraction and the number of shares of common stock of TDS Telecom),
calculated as follows:
<TABLE>
<S> <C>
54 million
X 71 million TDS Telecom Common Shares
- ----------------------
54 million + 14 million
+
1.5 million + 1.5
million
</TABLE>
In this case each outstanding Telecom Group Share would be redeemed in
exchange for one share of common stock of TDS Telecom corresponding to Special
Common Shares, and the Company would retain 17 million shares of common stock of
TDS Telecom corresponding to Series A Common Shares, Common Shares and Special
Common Shares. Of such shares, 3 million would correspond to Special Common
Shares and would be held by the TDS Group to be used in connection with Shares
Issuable to Third Parties. The remaining shares would be held by the TDS Group
for the benefit of the holders of TDS Group Shares or, alternatively, the Board
could elect to distribute such shares of TDS Telecom to the holders of TDS Group
Shares. In such event, holders of Series A Common Shares would receive TDS
Telecom shares corresponding to Series A Common Shares, holders of Common Shares
would receive TDS Telecom shares corresponding to Common Shares and holders of
Special Common Shares, if any, would receive TDS Telecom shares corresponding to
Special Common Shares.
A-11
<PAGE>
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH ITS RELATES, OR CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION TO AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Incorporation of Certain Documents by Reference........................... 3
Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary
Statement............................................................... 4
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 18
Use of Proceeds........................................................... 30
Dividend Policy........................................................... 30
Capitalization............................................................ 31
Selected Financial Information of the Telecom Group....................... 32
Telecom Group Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 34
Selected Consolidated Financial Information of Telephone and Data Systems,
Inc..................................................................... 45
Telephone and Data Systems, Inc. and Subsidiaries Management's Discussion
and Analysis of Results of Operations and Financial Condition........... 47
Business of the Telecom Group............................................. 67
Management of TDS Telecom................................................. 82
Description of Capital Stock.............................................. 85
Management and Allocation Policies........................................ 109
Certain Definitions....................................................... 118
Certain Federal Income Tax Consequences................................... 127
Underwriting.............................................................. 131
Legal Matters............................................................. 134
Experts................................................................... 134
Notice to Canadian Residents.............................................. 135
Index to Financial Statements............................................. F-1
</TABLE>
13,500,000 SHARES
[LOGO]
TDS TELECOMMUNICATIONS
GROUP COMMON SHARES
OF
TELEPHONE AND
DATA SYSTEMS, INC.
------------------------
P R O S P E C T U S
------------------------
JOINT GLOBAL COORDINATORS AND
BOOK RUNNERS
(IN ALPHABETICAL ORDER)
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
-----------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
- --------------------------------------------------------------------------------
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 15, 1998
INTERNATIONAL PROSPECTUS
13,500,000 SHARES
[LOGO]
TDS TELECOMMUNICATIONS GROUP COMMON SHARES
OF
TELEPHONE AND DATA SYSTEMS, INC.
Of the 13,500,000 TDS Telecommunications Group Common Shares ("Telecom Group
Shares") being offered hereby by Telephone and Data Systems, Inc. ("TDS" or the
"Company"), Telecom Group Shares are being offered in an international
offering outside the United States and Canada and Telecom Group Shares
are being offered in a concurrent offering in the United States and Canada. Such
offerings are collectively referred to herein as the "Offerings." The net
proceeds of the Offerings will be allocated to the Telecom Group (as defined
herein). Prior to the Offerings, there has been no public market for the Telecom
Group Shares. It is currently estimated that the initial public offering price
will be between $12.50 and $14.50 per share. The initial public offering price
and the aggregate underwriting discount per share are identical for both
Offerings. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price.
The Telecom Group Shares are a class of common stock of the Company and are
intended to reflect the separate performance of the Telecom Group, including the
Company's interest in TDS Telecommunications Corporation, a Delaware corporation
and a wholly-owned subsidiary of the Company ("TDS Telecom"), which concurrently
owns and operates landline telephone companies. The Telecom Group Shares are one
of five classes of common stock of the Company expected to be outstanding
following the Offerings and certain related transactions described herein.
Holders of Telecom Group Shares and the other classes of common stock of the
Company are holders of common stock of the Company and continue to be subject to
all the risks of an investment in the Company and all of its businesses, assets
and liabilities.
The other classes of common stock of the Company are the Common Shares, the
Series A Common Shares, the United States Cellular Group Common Shares
("Cellular Group Shares") and the Aerial Communications Group Common Shares
("Aerial Group Shares"). The Telecom Group Shares offered hereby, the Cellular
Group Shares and the Aerial Group Shares are collectively referred to herein as
the "Tracking Stocks." See "Description of Capital Stock" for a description of
the rights and privileges of shares of each class of TDS common stock.
The holders of Telecom Group Shares vote as a group together with the
holders of certain shares of preferred stock of the Company, the Common Shares,
the Cellular Group Shares and the Aerial Group Shares in the election of 25% of
the directors plus one additional director. Initially, holders of Telecom Group
Shares will have one vote per share. Thereafter, the number of votes which such
shares will have in such vote will vary based upon the average Market
Capitalization (as defined herein) of such class compared to the average Market
Capitalization of all shares held by the Public Holders (as defined herein). The
Telecom Group Shares are not entitled to vote on any other matters except as
required by law.
Subject to the dividend preference of shares of TDS preferred stock,
dividends on issued Telecom Group Shares will be paid at the discretion of the
Board of Directors of the Company and will be payable only out of the lesser of
(i) the assets of the Company legally available for the payment of dividends and
(ii) the Telecom Group's Available Dividend Amount (as defined herein), an
amount approximately equal to the product of the Outstanding Interest Fraction
(as defined herein) and the amount of assets that would be available for the
payment of dividends under Delaware law if the Telecom Group were a separate
subsidiary.
TDS has made an application for listing of the Telecom Group Shares on the
American Stock Exchange ("AMEX") under the symbol "TLG."
--------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS COMPANY (1)
<S> <C> <C> <C>
Per Share $ $ $
Total (2) $ $ $
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $675,000.
(2) The Company has granted to the International Managers and the U.S.
Underwriters a 30-day option to purchase up to an additional 2,025,000
Telecom Group Shares solely to cover over-allotments, if any. If the option
is exercised in full, the total Price to Public, the Underwriting Discounts
and Commissions, and the Proceeds to Company will total $ ,
$ , and $ , respectively. See "Underwriting."
The Telecom Group Shares offered by this Prospectus are offered by the
several International Managers named herein, subject to prior sale, when, as and
if delivered to and accepted by the International Managers and subject to such
International Managers' right to reject any order in whole or in part and to
withdraw, cancel or modify the offer without notice. It is expected that the
Telecom Group Shares will be available for delivery on or about , 1998
against payment in immediately available funds.
JOINT GLOBAL COORDINATORS AND BOOK RUNNERS
(IN ALPHABETICAL ORDER)
CREDIT SUISSE FIRST BOSTON SALOMON SMITH BARNEY INTERNATIONAL
-----------
DONALDSON, LUFKIN & JENRETTE GOLDMAN SACHS INTERNATIONAL
INTERNATIONAL
, 1998
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH ITS RELATES, OR CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION TO AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Incorporation of Certain Documents by Reference........................... 3
Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary
Statement............................................................... 4
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 18
Use of Proceeds........................................................... 30
Dividend Policy........................................................... 30
Capitalization............................................................ 31
Selected Financial Information of the Telecom Group....................... 32
Telecom Group Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 34
Selected Consolidated Financial Information of Telephone and Data Systems,
Inc..................................................................... 45
Telephone and Data Systems, Inc. Management's Discussion and Analysis of
Financial Conditions and Results of Operations and Financial
Condition............................................................... 47
Business of the Telecom Group............................................. 67
Management of TDS Telecom................................................. 82
Description of Capital Stock.............................................. 85
Management and Allocation Policies........................................ 109
Certain Definitions....................................................... 118
Certain Federal Income Tax Consequences................................... 127
Underwriters.............................................................. 131
Legal Matters............................................................. 134
Experts................................................................... 134
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
13,500,000 SHARES
[LOGO]
TDS TELECOMMUNICATIONS GROUP COMMON SHARES
OF
TELEPHONE AND
DATA SYSTEMS, INC.
-------------------------
P R O S P E C T U S
-------------------------
JOINT GLOBAL COORDINATORS AND BOOK RUNNERS
(IN ALPHABETICAL ORDER)
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY INTERNATIONAL
---------
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the issuance
and distribution of the securities being registered, other than underwriting
discounts and commissions. All of the amounts shown are estimated, except the
SEC registration fee.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 66,409
Legal fees and expenses........................................... 300,000
Printing and engraving............................................ 175,000
Fees of accountants............................................... 45,000
Blue Sky fees and expenses........................................ 25,000
American Stock Exchange Listing Fees.............................. 45,000
Miscellaneous..................................................... 18,591
---------
$ 675,000
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 145 ("Section 145") of General Corporation Law
of the State of Delaware (the "Delaware GCL") which provides for indemnification
of directors and officers in certain circumstances.
In accordance with Section 102(b)(7) of the Delaware GCL, the Registrant's
Restated Certificate of Incorporation provides that directors shall not be
personally liable for monetary damages for breaches of their fiduciary duty as
directors except for (i) breaches of their duty of loyalty to the Registrant or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or knowing violations of law, (iii) certain transactions
under Section 174 of the Delaware GCL (unlawful payment of dividends) or (iv)
transactions from which a director derives an improper personal benefit.
The Restated Certificate of Incorporation of the Registrant provides for
indemnification of directors and officers to the full extent provided by the
Delaware GCL, as amended from time to time. It states that the indemnification
provided therein shall not be deemed exclusive. The Registrant may maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Registrant, or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the Registrant would have the power to indemnify such person against such
expense, liability or loss, under the provisions of the Delaware GCL.
Pursuant to Section 145 and the Restated Certificate of Incorporation, the
Registrant maintains directors' and officers' liability insurance coverage.
ITEM 16. EXHIBITS.
A list of exhibits included as part of this Registration Statements is set
forth in the Exhibit Index appearing elsewhere herein and is incorporated herein
by reference.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated
II-1
<PAGE>
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial BONA
FIDE offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Chicago, State of Illinois, on May 13,
1998.
<TABLE>
<S> <C> <C>
TELEPHONE AND DATA SYSTEMS, INC.
By: /s/ LEROY T. CARLSON
-----------------------------------------
LeRoy T. Carlson
CHAIRMAN
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons on behalf of the registrant on this 13th day of May, 1998 in the
capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------ ---------------------------------------------------------------------------
<C> <S>
/s/ LEROY T. CARLSON
----------------------------
LeRoy T. Carlson Chairman and Director
*
----------------------------
LeRoy T. Carlson, Jr. President and Director (chief executive officer)
*
---------------------------- Executive Vice President-Finance and Director
Murray L. Swanson (principal financial officer)
*
----------------------------
Letitia G.C. Carlson Director
*
----------------------------
Rudolph E. Hornacek Director
*
----------------------------
James Barr III Director
*
----------------------------
Donald C. Nebergall Director
</TABLE>
<PAGE>
<TABLE>
<C> <S>
*
----------------------------
Herbert S. Wander Director
*
----------------------------
Walter C.D. Carlson Director
*
----------------------------
Donald R. Brown Director
*
----------------------------
George W. Off Director
*
----------------------------
Martin L. Solomon Director
*
----------------------------
Gregory J. Wilkinson Vice President and Controller (principal accounting officer)
</TABLE>
*By: /s/ LEROY T. CARLSON
-------------------------
LeRoy T. Carlson
ATTORNEY-IN-FACT
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of U.S. underwriting agreement
1.2 Form of international underwriting agreement
2.1 Agreement and Plan of Merger, dated as of March 6, 1998, between Telephone and Data Systems, Inc., an
Iowa corporation, and Telephone and Data Systems, Inc., a Delaware corporation(1)
4.1 Restated Certificate of Incorporation of the Registrant(1)
4.2 Restated By-Laws of the Registrant(1)
*4.3 Form of Certificate of TDS Telecommunications Group Common Shares
*5.1 Opinion of Sidley & Austin
*8.1 Opinion of Sidley & Austin
23.1 Consent of Arthur Andersen LLP
23.2 The consent of Sidley & Austin is contained in its opinions filed as Exhibit 5.1 and Exhibit 8.1 to this
Registration Statement
*24.1 Power of Attorney
</TABLE>
- ------------------------
* Previously filed
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-4 (Registration No. 333-42535) dated December 18, 1997, as
amended.
<PAGE>
__________ Shares
TELEPHONE AND DATA SYSTEMS, INC.
TDS Telecommunications Group Shares
INTERNATIONAL UNDERWRITING AGREEMENT
____________, 1998
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
As Lead Managers of the Several Managers
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Telephone and Data Systems, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell an aggregate of _________ shares (the
"Firm Shares") of its TDS Telecommunications Group Shares, $0.01 par value
per share (the "TDS Telecom Group Common Stock"), to the several Managers
named in Schedule I hereto (the "Managers") for whom Smith Barney Inc. and
Credit Suisse First Boston Corporation are acting as representatives (the
"Lead Managers"). The Company also proposes to sell to the Managers, upon
the terms and conditions set forth in Section 2 hereof, up to an additional
_______________ shares (the "Additional Shares") of Common Stock. The Firm
Shares and the Additional Shares are hereinafter collectively referred to as
the "Shares."
It is understood that the Company is concurrently entering into a U.S.
Underwriting Agreement, dated the date hereof (the "U.S. Underwriting
Agreement"), providing for the sale of __________ shares of the TDS Telecom
Group Common Stock (the "Firm U.S. Shares") (plus an option granted by the
Company to purchase up to an additional _____ shares of Common Stock (the
"Additional U.S. Shares") solely for the purpose of covering over-allotments)
through arrangements with certain underwriters in the United States and
Canada (the "U.S. Underwriters"), for whom Smith Barney Inc., Credit Suisse
First Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation
and Goldman, Sachs & Co. are acting as representatives (the
"Representatives"). All shares of Common Stock proposed to be offered to the
U.S. Underwriters pursuant to the U.S. Underwriting Agreement, including the
Firm U.S. Shares and the Additional U.S. Shares are herein called the U.S.
Shares. The Shares and the U.S. Shares, collectively, are herein called the
"Underwritten Shares."
<PAGE>
The Company also understands that the Lead Managers and the
Representatives have entered into an agreement (the "Agreement Between U.S.
Underwriters and Managers") contemplating the coordination of certain
transactions between the Managers and U.S. Underwriters and that, pursuant
thereto and subject to the conditions set forth therein, the Managers may
purchase from the U.S. Underwriters a portion of the U.S. Shares or sell to
the Representatives a portion of the Shares. The Company understands that
any such purchases and sales between the Managers and the U.S. Underwriters
shall be governed by the Agreement Between U.S. Underwriters and Managers and
shall not be governed by the terms of this Agreement or the U.S. Underwriting
Agreement.
The Company wishes to confirm as follows its agreements with you and the
other several Managers on whose behalf you are acting, in connection with the
several purchases of the Shares by the Managers.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-3 under the Act (the "registration
statement"), including prospectuses subject to completion relating to the
Underwritten Shares. The term "Registration Statement" as used in this
Agreement means the registration statement (including all financial schedules
and exhibits), as amended at the time it becomes effective, or, if the
registration statement became effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this
Agreement. If it is contemplated, at the time this Agreement is executed,
that a post-effective amendment to the registration statement will be filed
and must be declared effective before the offering of the Shares may
commence, the term "Registration Statement" as used in this Agreement means
the registration statement as amended by said post-effective amendment. If
an abbreviated registration statement is prepared and filed with the
Commission in accordance with Rule 462(b) under the Act (an "Abbreviated
Registration Statement"), the term "Registration Statement" as used in this
Agreement includes the Abbreviated Registration Statement. The term
"Prospectuses" as used in this Agreement means the prospectuses in the form
included in the Registration Statement, or, if the prospectuses included in
the Registration Statement omit information in reliance on Rule 430A under
the Act and such information is included in the prospectuses filed with the
Commission pursuant to Rule 424(b) under the Act, the term "Prospectuses" as
used in this Agreement means the prospectuses in the form included in the
Registration Statement as supplemented by the addition of the Rule 430A
information contained in the prospectuses filed with the Commission pursuant
to Rule 424(b). The term "Prepricing Prospectuses" as used in this Agreement
means the prospectuses subject to completion in the form included in the
registration statement at the time of the initial filing of the registration
statement with the Commission, and as such prospectuses shall have been
amended from time to time prior to the date of the Prospectuses.
2
<PAGE>
It is understood that two forms of Prepricing Prospectus and two forms
of Prospectus are to be used in connection with the offering and sale of the
Underwritten Shares: a Prepricing Prospectus and a Prospectus relating to
the U.S. Shares that are to be offered and sold in the United States (as
defined herein) or Canada (as defined herein) to U.S. or Canadian Persons
(the "U.S. Prepricing Prospectus" and the "U.S. Prospectus," respectively)
and a Prepricing Prospectus and a Prospectus relating to the Shares which are
to be offered and sold outside the United States or Canada to persons other
than U.S. or Canadian Persons (the "International Prepricing Prospectus" and
the "International Prospectus," respectively). The U.S. Prospectus and the
International Prospectus are herein collectively called the "Prospectuses,"
and the U.S. Prepricing Prospectus and the International Prepricing
Prospectus are herein called the "Prepricing Prospectuses." For purposes of
this Agreement: "U.S. or Canadian Person" means any resident or national of
the United States or Canada, any corporation, partnership or other entity
created or organized in or under the laws of the United States or Canada or
any estate or trust the income of which is subject to United States or
Canadian income taxation regardless of the source of its income (other than
the foreign branch of any U.S. or Canadian Person), and includes any United
States or Canadian branch of a person other than a U.S. or Canadian Person;
"United States" means the United States of America (including the states
thereof and the District of Columbia) and its territories, its possessions
and other areas subject to its jurisdiction; and "Canada" means Canada and
its territories, its possessions and other areas subject to its jurisdiction.
Any reference in this Agreement to the registration statement, the
Registration Statement, any Prepricing Prospectus or the Prospectuses shall
be deemed to refer to and include the documents incorporated by reference
therein pursuant to Item 12 of Form S-3 under the Act, as of the date of the
registration statement, the Registration Statement, such Prepricing
Prospectus or the Prospectuses, as the case may be, and any reference to any
amendment or supplement to the registration statement, the Registration
Statement, any Prepricing Prospectus or the Prospectus shall be deemed to
refer to and include any documents filed after such date under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") which, upon filing, are
incorporated by reference therein, as required by paragraph (b) of Item 12 of
Form S-3. As used herein, the term "Incorporated Documents" means the
documents which at the time are incorporated by reference in the registration
statement, the Registration Statement, any Prepricing Prospectus, the
Prospectuses, or any amendment or supplement thereto.
2. AGREEMENTS TO SELL AND PURCHASE. Subject to such adjustments as
you may determine in order to avoid fractional shares, the Company hereby
agrees, subject to all the terms and conditions
3
<PAGE>
set forth herein, to issue and sell to each Manager and, upon the basis of
the representations, warranties and agreements of the Company herein
contained and subject to all the terms and conditions set forth herein, each
Manager agrees, severally and not jointly, to purchase from the Company, at a
purchase price of $ per Share (the "purchase price per share"), the
number of Firm Shares which bears the same proportion to the aggregate number
of Firm Shares to be issued and sold by the Company as the number of Firm
Shares set forth opposite the name of such Manager in Schedule I hereto (or
such number of Firm Shares increased as set forth in Section 10 hereof) bears
to the aggregate number of Firm Shares to be sold by the Company.
The Company also agrees, subject to all the terms and conditions set
forth herein, to sell to the Managers, and, upon the basis of the
representations, warranties and agreements of the Company herein contained
and subject to all the terms and conditions set forth herein, the Managers
shall have the right to purchase from the Company, at the purchase price per
share, pursuant to an option (the "over-allotment option") which may be
exercised at any time and from time to time prior to 9:00 P.M., New York City
time, on the 30th day after the date of the U.S. Prospectus (or, if such 30th
day shall be a Saturday or Sunday or a holiday, on the next business day
thereafter when the American Stock Exchange is open for trading), up to an
aggregate of Additional Shares. Additional Shares may be purchased
only for the purpose of covering over-allotments made in connection with the
offering of the Firm Shares. Upon any exercise of the over-allotment option,
each Manager, severally and not jointly, agrees to purchase from the Company
the number of Additional Shares (subject to such adjustments as you may
determine in order to avoid fractional shares) which bears the same
proportion to the number of Additional Shares as the number of Firm Shares
set forth opposite the name of such Manager in Schedule I hereto (or such
number of Firm Shares increased as set forth in Section 10 hereof) bears to
the aggregate number of Firm Shares.
3. TERMS OF PUBLIC OFFERING. The Company has been advised by you that
the Managers propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement
have become effective as in your judgment is advisable and initially to offer
the Shares upon the terms set forth in the U.S. Prospectus.
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Managers of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M.,
New York City time, on , 1998 (the "Closing Date"). The place of
closing for the Firm Shares and the Closing Date may be varied by agreement
between you and the Company.
Delivery to the Managers of and payment for any Additional Shares to be
purchased by the Managers shall be made at the aforementioned office of Smith
Barney Inc. at such time on such date (the "Option Closing Date"), which may
be the same as the Closing
4
<PAGE>
Date but shall in no event be earlier than the Closing Date nor earlier than
two nor later than ten business days after the giving of the notice
hereinafter referred to, as shall be specified in a written notice from you
on behalf of the Managers to the Company of the Managers' determination to
purchase a number, specified in such notice, of Additional Shares. The place
of closing for any Additional Shares and the Option Closing Date for such
Shares may be varied by agreement between you and the Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such
denominations as you shall request prior to 9:30 A.M., New York City time, on
the second business day preceding the Closing Date or any Option Closing
Date, as the case may be. Such certificates shall be made available to you
in New York City for inspection and packaging not later than 9:30 A.M., New
York City time, on the business day next preceding the Closing Date or the
Option Closing Date, as the case may be. The certificates evidencing the
Firm Shares and any Additional Shares to be purchased hereunder shall be
delivered to you on the Closing Date or the Option Closing Date, as the case
may be, against payment of the purchase price therefor in immediately
available funds.
5. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Managers as follows:
(a) If, at the time this Agreement is executed and delivered, it
is necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may
commence, the Company will endeavor to cause the Registration Statement or
such post-effective amendment to become effective as soon as possible and
will advise you promptly and, if requested by you, will confirm such advice
in writing, when the Registration Statement or such post-effective amendment
has become effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectuses or for additional information; (ii) of the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of the suspension of qualification of the
Shares for offering or sale in any jurisdiction or the initiation of any
proceeding for such purpose; and (iii) within the period of time referred to
in paragraph (f) below, of any change in the Company's condition (financial
or other), business, properties, net worth or results of operations, or of
the happening of any event, which makes any statement of a material fact made
in the Registration Statement or the Prospectuses (as then amended or
supplemented) untrue or which requires the making of any additions to or
changes in the Registration Statement or the Prospectuses (as then amended or
supplemented) in order to state a material fact required by the Act or the
regulations thereunder to be stated therein or necessary in
5
<PAGE>
order to make the statements therein not misleading, or of the necessity to
amend or supplement the Prospectuses (as then amended or supplemented) to
comply with the Act or any other law. If at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration
Statement, the Company will make every reasonable effort to obtain the
withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge (i) five
signed copies of the registration statement as originally filed with the
Commission and of each amendment thereto, including financial statements and
all exhibits to the registration statement, (ii) such number of conformed
copies of the registration statement as originally filed and of each
amendment thereto, but without exhibits, as you may reasonably request, (iii)
such number of copies of the Incorporated Documents, without exhibits, as you
may reasonably request, and (iv) five copies of the exhibits to the
Incorporated Documents.
(d) The Company will not file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectuses or, prior
to the end of the period of time referred to in the first sentence in
paragraph (f) below, file any document which, upon filing becomes an
Incorporated Document, of which you shall not previously have been advised or
to which, after you shall have received a copy of the document proposed to be
filed, you shall reasonably object.
(e) Prior to the execution and delivery of this Agreement, the
Company has delivered to you, without charge, in such quantities as you have
reasonably requested, copies of each form of the International Prepricing
Prospectus. The Company consents to the use, in accordance with the
provisions of the Act and with the securities or Blue Sky laws of the
jurisdictions in which the Shares are offered by the several Managers and by
dealers, prior to the date of the International Prospectus, of each
International Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as a prospectus is
required by the Act to be delivered in connection with sales by any Manager
or dealer, the Company will deliver to each Manager and each dealer, without
charge, as many copies of the International Prospectus (and of any amendment
or supplement thereto) as you may reasonably request. The Company consents
to the use of the International Prospectus (and of any amendment or
supplement thereto) in accordance with the provisions of the Act and with the
securities laws of the jurisdictions in which the Shares are offered by the
several Managers and by all dealers to whom Shares may be sold, both in
connection with the offering and sale of the Shares and for such period of
time thereafter as the International Prospectus is required by the Act to be
delivered in connection with sales by any Manager or dealer. If during such
period of time any event shall occur that in the judgment of the
6
<PAGE>
Company or in the opinion of counsel for the Managers is required to be set
forth in the International Prospectus (as then amended or supplemented) or
should be set forth therein in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, or if
it is necessary to supplement or amend the International Prospectus (or to
file under the Exchange Act any document which, upon filing, becomes an
Incorporated Document) in order to comply with the Act or any other law, the
Company will forthwith prepare and, subject to the provisions of paragraph
(d) above, file with the Commission an appropriate supplement or amendment
thereto (or to such document), and will furnish to the Managers and dealers a
reasonable number of copies thereof.
(g) The Company will cooperate with you and with counsel for the
Managers in connection with the registration or qualification of the Shares
for offering and sale by the Managers and by dealers under the securities
laws of such jurisdictions as you may designate and will file such consents
to service of process or other documents necessary or appropriate in order to
effect such registration or qualification; provided that in no event shall
the Company be obligated to qualify to do business in any jurisdiction where
it is not now so qualified or to take any action which would subject it to
service of process in suits, other than those arising out of the offering or
sale of the Shares, in any jurisdiction where it is not now so subject.
(h) The Company will make generally available to its security
holders a consolidated earnings statement, which need not be audited,
covering a twelve-month period commencing after the effective date of the
Registration Statement and ending not later than 15 months thereafter, as
soon as practicable after the end of such period, which consolidated earnings
statement shall satisfy the provisions of Section ll(a) of the Act.
(i) During the period of three years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission, and (ii) from time to
time such other information concerning the Company as you may reasonably
request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 hereof or by notice given by you terminating
this Agreement pursuant to Section 10 or Section 11 hereof) or if this
Agreement shall be terminated by the Managers because of any failure or
refusal on the part of the Company to comply with the terms or fulfill any of
the conditions of this Agreement, the Company agrees to reimburse the Lead
Managers for all reasonable out-of-pocket expenses (including fees and
expenses of counsel for the Managers) incurred by you in connection herewith.
7
<PAGE>
(k) The Company will apply the net proceeds from the sale of the
Underwritten Shares substantially in accordance with the description set
forth in the Prospectuses.
(l) If Rule 430A of the Act is employed, the Company will timely
file the Prospectuses pursuant to Rule 424(b) under the Act and will advise
you of the time and manner of such filing.
(m) Except as provided in this Agreement, the Company will not
sell, contract to sell or otherwise dispose of any TDS Telecom Group Common
Stock or any securities convertible into or exercisable or exchangeable for
TDS Telecom Group Common Stock, or grant any options or warrants to purchase
TDS Telecom Group Common Stock, except as permitted as described in the
Prospectuses under the heading "Underwriting," for a period of 180 days after
the date of the Prospectuses, without the prior written consent of the
Representatives.
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of its
current executive officers and directors and by the trustee of the TDS Voting
Trust.
(o) Except as stated in this Agreement and in the Prepricing
Prospectuses and Prospectuses, the Company has not taken, nor will it take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of
any class of Common Stock to facilitate the sale or resale of the Shares.
(p) The Company will use its best efforts to have the shares of
Common Stock which it agrees to sell under this Agreement listed, subject to
notice of issuance, on the American Stock Exchange on or before the Closing
Date.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Manager that:
(a) Each International Prepricing Prospectus included as part of
the registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied
when so filed in all material respects with the provisions of the Act. The
Commission has not issued any order preventing or suspending the use of any
Prepricing Prospectus.
(b) The Company and the transactions contemplated by this
Agreement meet the requirements for using Form S-3 under the Act. The
registration statement in the form in which it became or becomes effective
and also in such form as it may be when any post-effective amendment thereto
shall become effective and the prospectuses and any supplement or amendment
thereto when filed with the Commission under Rule 424(b) under the Act,
complied or will comply in all material respects with the provisions of the
Act and will not at any such times contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make
8
<PAGE>
the statements therein not misleading, except that this representation and
warranty does not apply to statements in or omissions from the registration
statement or the prospectuses made in reliance upon and in conformity with
information relating to any Manager or U.S. Underwriter furnished to the
Company in writing by or on behalf of any Manager or U.S. Underwriter through
you expressly for use therein.
(c) The Incorporated Documents heretofore filed, when they were
filed (or, if any amendment with respect to any such document was filed, when
such amendment was filed), conformed in all material respects with the
requirements of the Exchange Act and the rules and regulations thereunder,
any further Incorporated Documents so filed will, when they are filed,
conform in all material respects with the requirements of the Exchange Act
and the rules and regulations thereunder; no such document when it was filed
(or, if an amendment with respect to any such document was filed, when such
amendment was filed), contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein not misleading; and no such further
document, when it is filed, will contain an untrue statement of a material
fact or will omit to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading.
(d) All the outstanding shares of each class of Common Stock of
the Company have been duly authorized and validly issued, are fully paid and
nonassessable and, except for the Series A Common Shares, are free of any
preemptive or similar rights; the Shares to be issued and sold by the Company
have been duly authorized and, when issued and delivered to the Managers
against payment therefor in accordance with the terms hereof, will be validly
issued, fully paid and nonassessable and free of any preemptive or similar
rights; and the capital stock of the Company conforms in all material
respects to the description thereof in the Registration Statement and the
Prospectuses.
(e) The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Delaware with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectuses, and is duly registered and qualified to conduct its business
and is in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not
have a material adverse effect on the condition (financial or other),
business, properties, net worth or results of operations of the Company and
the Subsidiaries (as hereinafter defined) taken as a whole.
(f) All the Company's subsidiaries required to be listed in an
exhibit are listed in an exhibit to the Company's Annual Report on Form 10-K
which is incorporated by reference into the Registration
9
<PAGE>
Statement. Each of the Company's subsidiaries (the "Subsidiaries") is a
corporation duly organized, validly existing and in good standing in the
jurisdiction of its incorporation, with full corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Registration Statement and the Prospectuses, and is duly
registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the conduct
of its business requires such registration or qualification, except where the
failure so to register or qualify does not have a material adverse effect on
the condition (financial or other), business, properties, net worth or
results of operations of the Company and its Subsidiaries taken as a whole;
all the outstanding shares of capital stock of each of the Subsidiaries have
been duly authorized and validly issued, are fully paid and nonassessable,
and are owned by the Company directly, or indirectly through one of the other
Subsidiaries, free and clear of any lien, adverse claim, security interest,
equity or other encumbrance.
(g) There are no legal or governmental proceedings pending or, to
the knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or to which
any of their respective properties is subject, that are required to be
described in the Registration Statement or the Prospectuses but are not
described as required, and there are no agreements, contracts, indentures,
leases or other instruments that are required to be described in the
Registration Statement or the Prospectuses or to be filed as an exhibit to
the Registration Statement or any Incorporated Document that are not
described or filed as required by the Act or the Exchange Act.
(h) Neither the Company nor any of the Subsidiaries is in
violation of its certificate or articles of incorporation or by-laws, or
other organizational documents, or of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of the
Subsidiaries or of any decree of any court or governmental agency or body
having jurisdiction over the Company or any of the Subsidiaries, which
violation would not have a material adverse effect on the condition
(financial or other), business, prospects, net worth or results of operations
of the TDS Telecommunications Group or the Company and the Subsidiaries taken
as a whole; or in default, in any respect material to the TDS
Telecommunications Group or the Company and the Subsidiaries taken as a whole
or the Company's ability to perform its obligations under this Agreement, in
the performance of any obligation, agreement or condition contained in any
bond, debenture, note or any other evidence of indebtedness or in any
material agreement, indenture, lease or other instrument to which the Company
or any of the Subsidiaries is a party or by which any of them or any of their
respective properties may be bound.
(i) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement or the U.S. Underwriting Agreement
by the Company nor the consummation by the
10
<PAGE>
Company of the transactions contemplated hereby or thereby (i) requires any
consent, approval, authorization or other order of or registration or filing
with, any court, regulatory body, administrative agency or other governmental
body, agency or official (except such as may be required for the registration
of the Shares under the Act and the Exchange Act and compliance with the
securities or Blue Sky laws of various jurisdictions) or conflicts or will
conflict with or constitutes or will constitute a breach of, or a default
under, the certificate or articles of incorporation or bylaws, or other
organizational documents, of the Company or any of the Subsidiaries or (ii)
conflicts or will conflict with or constitutes or will constitute a breach
of, or a default under, any material agreement, indenture, lease or other
instrument to which the Company or any of the Subsidiaries is a party or by
which any of them or any of their respective properties may be bound, or
violates or will violate any statute, law, regulation or filing or judgment,
injunction, order or decree applicable to the Company or any of the
Subsidiaries or any of their respective properties, or will result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any of the Subsidiaries pursuant to the terms of
any agreement or instrument to which any of them is a party or by which any
of them may be bound or to which any of the property or assets of any of them
is subject.
(j) The accountants, Arthur Andersen LLP, who have certified or
shall certify the financial statements included or incorporated by reference
in the Registration Statement and the Prospectuses (or any amendment or
supplement thereto) are independent public accountants as required by the
Act.
(k) The financial statements, together with related schedules and
notes, included or incorporated by reference in the Registration Statement
and the Prospectuses (and any amendment or supplement thereto), present
fairly the financial position, results of operations and changes in financial
position of each of (i) the Company and its consolidated Subsidiaries and
(ii) the TDS Telecommunications Group on the basis stated in the Registration
Statement at the respective dates or for the respective periods to which they
apply; such statements and related schedules and notes have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; and the other
financial information and data included or incorporated by reference in the
Registration Statement and the Prospectuses (and any amendment or supplement
thereto) are accurately presented and prepared on a basis consistent with
such financial statements and the books and records of the Company and the
Subsidiaries.
(l) The execution and delivery of, and the performance by the
Company of its obligations under, each of this Agreement and the U.S.
Underwriting Agreement have been duly and validly authorized by the Company,
and each of this Agreement and the U.S. Underwriting Agreement has been duly
executed and delivered by the Company and constitutes the valid and legally
binding agreement of the Company,
11
<PAGE>
enforceable against the Company in accordance with its terms, except as
rights to indemnity and contribution hereunder may be limited by federal or
state securities laws.
(m) Except as disclosed in the Registration Statement and the
Prospectuses (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectuses (or any amendment or supplement thereto),
neither the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the TDS Telecommunications
Group or the Company and the Subsidiaries taken as a whole, and there has not
been any change in the capital stock, or material increase in the short-term
debt or long-term debt, of the TDS Telecommunications Group or the Company
and the Subsidiaries taken as a whole, or any material adverse change, or any
development involving or which may reasonably be expected to involve, a
prospective material adverse change, in the condition (financial or other),
business, net worth or results of operations of the Company and the
Subsidiaries taken as a whole.
(n) Each of the Company and the Subsidiaries has good and
marketable title to all real property described in the Prospectuses as being
owned by it and good title to all other properties described in the
Prospectuses as being owned by it that are material to the business of the
Company and the Subsidiaries taken as a whole, free and clear of all liens,
claims, security interests or other encumbrances except such as are described
in the Registration Statement and the Prospectuses or in a document filed as
an exhibit to the Registration Statement or those which do not individually
or in the aggregate materially affect the value of such property and do not
interfere with the use of such property by the Company or the Subsidiaries
and all the property described in the Prospectuses as being held under lease
by each of the Company and the Subsidiaries is held by it under valid,
subsisting and enforceable leases.
(o) The Company has not distributed and, prior to the later to
occur of (i) the Closing Date and (ii) completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
Prepricing Prospectuses, the Prospectuses or other materials, if any,
permitted by the Act.
(p) The Company and each of the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own its respective properties and
to conduct its business in the manner described in the Prospectuses, subject
to such qualifications as may be set forth in the Prospectuses and except for
such permits, licenses, franchises and authorizations, the failure of which
to obtain would not, individually or in the aggregate, have a material
adverse effect on the condition (financial or other), business, prospects,
net worth or results of operations of the TDS Telecommunications Group or the
Company and the Subsidiaries taken as
12
<PAGE>
a whole; the Company and each of the Subsidiaries has fulfilled and performed
all its material obligations with respect to such permits and no event has
occurred which allows, or after notice or lapse of time would allow,
revocation or termination thereof or results in any other material impairment
of the rights of the holder of any such permit which such revocation,
termination or impairment would have a material adverse effect on the
condition (financial or other), business, prospects, net worth or results of
operations of the TDS Telecommunications Group or the Company and the
Subsidiaries taken as a whole, subject in each case to such qualification as
may be set forth in the Prospectuses; and, except as described in the
Prospectuses, none of such permits contains any restriction that is
materially burdensome to the TDS Telecommunications Group or the Company and
the Subsidiaries taken as a whole.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets
is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared
with existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(r) To the Company's knowledge, neither the Company nor any of its
Subsidiaries nor any employee or agent of the Company or any Subsidiary has
made any payment of funds of the Company or any Subsidiary or received or
retained any funds in violation of any law, rule or regulation, which
payment, receipt or retention of funds is of a character required to be
disclosed in the Prospectuses.
(s) The Company and each of the Subsidiaries have filed all tax
returns required to be filed, which returns are complete and correct, and
neither the Company nor any Subsidiary is in default in the payment of any
taxes which were payable pursuant to said returns or any assessments with
respect thereto.
(t) No holder of any security of the Company has any right to
require registration of shares of Common Stock or any other security of the
Company because of the filing of the registration statement or consummation
of the transactions contemplated by this Agreement.
(u) The Company and the Subsidiaries own or possess all patents,
trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade secrets
and rights described in the Prospectuses as being owned by them or any of
them or necessary for the conduct of their respective businesses, and the
Company is not aware of any claim to the contrary or any challenge by any
other person to the rights of the Company and the Subsidiaries with respect
to the foregoing.
13
<PAGE>
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each of you and each other Manager and each
person, if any, who controls any Manager within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act from and against any and all
losses, claims, damages, liabilities and expenses (including reasonable costs
of investigation) arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any International
Prepricing Prospectus or in the Registration Statement or the International
Prospectus or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with the information relating to
such Manager furnished in writing to the Company by or on behalf of any
Manager through you expressly for use in connection therewith; provided,
however, that the indemnification contained in this paragraph (a) with
respect to any International Prepricing Prospectus shall not inure to the
benefit of any Manager (or to the benefit of any person controlling such
Manager) on account of any such loss, claim, damage, liability or expense
arising from the sale of the Shares by such Manager to any person if a copy
of the International Prospectus shall not have been delivered or sent to such
person on or prior to written confirmation of such sale, and the untrue
statement or alleged untrue statement or omission or alleged omission of a
material fact contained in such International Prepricing Prospectus was
corrected in the International Prospectus, provided that the Company has
delivered the International Prospectus to the several Managers in requisite
quantity on a timely basis to permit such delivery or sending. The foregoing
indemnity agreement shall be in addition to any liability which the Company
may otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Manager or any person controlling any Manager in respect of which indemnity
may be sought against the Company, such Manager or such controlling person
shall promptly notify the parties against whom indemnification is being
sought (the "indemnifying parties"), and such indemnifying parties shall
assume the defense thereof, including the employment of counsel and payment
of all fees and expenses. Such Manager or any such controlling person shall
have the right to employ separate counsel in any such action, suit or
proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Manager or such
controlling person unless (i) the indemnifying parties have agreed in writing
to pay such fees and expenses, (ii) the indemnifying parties have failed to
assume the defense and employ counsel, or (iii) the named parties to any such
action, suit or proceeding (including any impleaded parties) include both
such Manager or such controlling person and the indemnifying parties and such
Manager or such controlling person shall have been advised by its counsel
that representation of such indemnified party and any
14
<PAGE>
indemnifying party by the same counsel would be inappropriate under
applicable standards of professional conduct (whether or not such
representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the indemnifying
party shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Manager or such controlling person). It is
understood, however, that the indemnifying parties shall, in connection with
any one such action, suit or proceeding or separate but substantially similar
or related actions, suits or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of only one separate firm of attorneys (in
addition to any local counsel) at any time for all such Managers and
controlling persons not having actual or potential differing interests with
you or among themselves, which firm shall be designated in writing by Smith
Barney Inc., and that all such fees and expenses shall be reimbursed as they
are incurred. The indemnifying parties shall not be liable for any
settlement of any such action, suit or proceeding effected without their
written consent, but if settled with such written consent, or if there be a
final judgment for the plaintiff in any such action, suit or proceeding, the
indemnifying parties agree to indemnify and hold harmless any Manager, to the
extent provided in the preceding paragraph, and any such controlling person
from and against any loss, claim, damage, liability or expense by reason of
such settlement or judgment.
(c) Each Manager agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, and any person who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the
same extent as the foregoing indemnity from the Company to each Manager, but
only with respect to information relating to such Manager furnished in
writing by or on behalf of such Manager through you expressly for use in the
Registration Statement, the International Prospectus or any International
Prepricing Prospectus, or any amendment or supplement thereto. If any
action, suit or proceeding shall be brought against the Company, any of its
directors, any such officer, or any such controlling person based on the
Registration Statement, the International Prospectus or any International
Prepricing Prospectus, or any amendment or supplement thereto, and in respect
of which indemnity may be sought against any Manager pursuant to this
paragraph (c), such Manager shall have the rights and duties given to the
Company by paragraph (b) above (except that if the Company shall have assumed
the defense thereof such Manager shall not be required to do so, but may
employ separate counsel therein and participate in the defense thereof, but
the fees and expenses of such counsel shall be at such Manager's expense),
and the Company, its directors, any such officer, and any such controlling
person shall have the rights and duties given to the Managers by paragraph
(b) above. The foregoing indemnity agreement shall be in addition to any
liability which any Manager may otherwise have.
15
<PAGE>
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party under paragraph (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages, liabilities or expenses
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Managers on the other hand
from the offering of the Shares, or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and the
Managers on the other in connection with the statements or omissions that
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Managers on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Managers, in each case
as set forth in the table on the cover page of the International Prospectus;
provided that, in the event that the Managers shall have purchased any
Additional Shares hereunder, any determination of the relative benefits
received by the Company, or the Managers from the offering of the Shares
shall include the net proceeds (before deducting expenses) received by the
Company, and the underwriting discounts and commissions received by the
Managers, from the sale of such Additional Shares, in each case computed on
the basis of the respective amounts set forth in the notes to the table on
the cover page of the International Prospectus. The relative fault of the
Company on the one hand and the Managers on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company on the
one hand or by the Managers on the other hand and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
(e) The Company and the Managers agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by a
pro rata allocation (even if the Managers were treated as one entity for such
purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in paragraph (d) above. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages, liabilities and expenses referred to in paragraph (d) above shall be
deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such indemnified party in connection
with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 7, no Manager
shall be required to contribute any amount in excess of the amount by which
the total price of the Shares
16
<PAGE>
underwritten by it and distributed to the public exceeds the amount of any
damages which such Manager has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Managers' obligations
to contribute pursuant to this Section 7 are several in proportion to the
respective numbers of Firm Shares set forth opposite their names in Schedule
I hereto (or such numbers of Firm Shares increased as set forth in Section 10
hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under
this Section 7 shall be paid by the indemnifying party to the indemnified
party as such losses, claims, damages, liabilities or expenses are incurred.
The indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Manager or any person controlling
any Manager, the Company, its directors or officers or any person controlling
the Company, (ii) acceptance of any Shares and payment therefor hereunder,
and (iii) any termination of this Agreement. A successor to any Manager or
any person controlling any Manager, or to the Company, its directors or
officers, or any person controlling the Company, shall be entitled to the
benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 7.
8. CONDITIONS OF MANAGERS' OBLIGATIONS. The several obligations of the
Managers to purchase the Firm Shares hereunder are subject to the following
conditions:
(a) If, at the time this Agreement is executed and delivered, it
is necessary for the registration statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may
commence, the registration statement or such post-effective amendment shall
have become effective not later than 5:30 P.M., New York City time, on the
date hereof, or at such later date and time as shall be consented to in
writing by you, and all filings, if any, required by Rules 424 and 430A under
the Act shall have been timely made; no stop order suspending the
effectiveness of the registration statement shall have been issued and no
proceeding for that purpose shall have been instituted or, to
17
<PAGE>
the knowledge of the Company or any Manager, threatened by the Commission,
and any request of the Commission for additional information (to be included
in the registration statement or the prospectuses or otherwise) shall have
been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
business, properties, net worth, or results of operations of the Company or
the Subsidiaries not contemplated by the Prospectuses, which in your opinion,
as Lead Managers of the several Managers, would materially adversely affect
the market for the Shares, or (ii) any event or development relating to or
involving the Company or any officer or director of the Company which makes
any statement made in the Prospectuses untrue or which, in the opinion of the
Company and its counsel or the Managers and their counsel, requires the
making of any addition to or change in the Prospectuses in order to state a
material fact required by the Act or any other law to be stated therein or
necessary in order to make the statements therein not misleading, if amending
or supplementing the Prospectuses to reflect such event or development would,
in your opinion, as Lead Managers of the several Managers, materially
adversely affect the market for the Shares.
(c) You shall have received on the Closing Date, an opinion of
Sidley & Austin, counsel for the Company, dated the Closing Date and
addressed to you, as Lead Managers of the several Managers, to the effect
that:
(i) The Company is a corporation duly incorporated and validly existing
in good standing under the laws of the State of Delaware with corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectuses (and
any amendment or supplement thereto), and is duly registered and qualified to
conduct its business and is in good standing in each jurisdiction or place
where the nature of its properties or the conduct of its business requires
such registration or qualification, except where the failure so to register
or qualify could not be reasonably expected to have a material adverse
effect on the condition (financial or other), business, properties, net worth
or results of operations of the Company and the Subsidiaries taken as a whole;
(ii) Each of United States Cellular Corporation, United States Cellular
Operating Company, United States Cellular Investment Company, TDS
Telecommunications Corporation and Aerial Communications, Inc. (the
"Significant Subsidiaries") is a corporation duly organized and validly
existing in good standing under the laws of the jurisdiction of its
organization, with full corporate power and authority to own, lease, and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectuses (and any amendment or supplement
thereto); and all the outstanding shares of capital stock
18
<PAGE>
of each of the Significant Subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable, and are owned by the Company
directly, or indirectly through one of the other Subsidiaries, free and clear
of any perfected security interest, or, to the knowledge of such counsel, any
other security interest, lien, adverse claim, equity or other encumbrance;
(iii) The authorized and outstanding capital stock of the Company is
as set forth under the caption "Capitalization" in the Prospectuses; and the
authorized capital stock of the Company conforms in all material respects as
to legal matters to the description thereof contained in the Prospectuses
under the caption "Description of Capital Stock";
(iv) All the shares of capital stock of the Company outstanding prior to
the issuance of the Shares to be issued and sold by the Company hereunder,
have been duly authorized and validly issued, and are fully paid and
nonassessable;
(v) The Underwritten Shares to be issued and sold to the U.S.
Underwriters and the Managers by the Company hereunder and under the
International Underwriting Agreement have been duly authorized and, when
issued and delivered to the U.S. Underwriters and the Managers against
payment therefor in accordance with the terms hereof and the terms of the
International Underwriting Agreement, will be validly issued, fully paid and
nonassessable and free of any preemptive, or to the knowledge of such
counsel, similar rights that entitle or will entitle any person to acquire
any Shares upon the issuance thereof by the Company;
(vi) The form of certificates for the Shares conforms to the
requirements of the Delaware General Corporation Law;
(vii) The Registration Statement and all post-effective amendments,
if any, have become effective under the Act and, to the best knowledge of
such counsel after reasonable inquiry, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose are pending before or contemplated by the
Commission; and any required filing of the Prospectuses pursuant to Rule
424(b) has been made in accordance with Rule 424(b);
(viii) The Company has corporate power and authority to enter into
this Agreement and the International Underwriting Agreement and to issue,
sell and deliver the Underwritten Shares to be sold by it to the U.S.
Underwriters and the Managers as provided herein and therein, and each of
this Agreement and the International Underwriting Agreement has been duly
authorized, executed and delivered by the Company;
(ix) To the knowledge of such counsel, neither the Company nor any of
the Significant Subsidiaries is in violation of its respective certificate or
articles of incorporation or bylaws, or other organizational documents, or is
in default in the performance
19
<PAGE>
of any material obligation, agreement or condition contained in any bond,
debenture, note or other evidence of indebtedness, except as may be disclosed
in the Prospectuses;
(x) Neither the offer, sale or delivery of the Shares, the execution,
delivery or performance of this Agreement or the International Underwriting
Agreement, compliance by the Company with the provisions hereof or thereof
nor consummation by the Company of the transactions contemplated hereby or
thereby conflicts or will conflict with or constitutes or will constitute a
breach of, or a default under, the certificate or articles of incorporation
or bylaws, or other organizational documents, of the Company or any of the
Significant Subsidiaries or any agreement, indenture, lease or other
instrument to which the Company or any of the Significant Subsidiaries is a
party or by which any of them or any of their respective properties is bound
that is an exhibit to the Registration Statement or to any Incorporated
Document, or is known to such counsel, or will result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of
the Company or any of the Subsidiaries, nor will any such action result in
any violation of any existing law, regulation, ruling (assuming compliance
with all applicable state securities and Blue Sky laws), judgment,
injunction, order or decree known to such counsel, applicable to the Company,
the Significant Subsidiaries or any of their respective properties;
(xi) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency, or official is required on the
part of the Company (except as have been obtained under the Act and the
Exchange Act or such as may be required under state securities or Blue Sky
laws governing the purchase and distribution of the Shares) for the valid
issuance and sale of the Underwritten Shares to the U.S. Underwriters and the
Managers as contemplated by this Agreement and the International Underwriting
Agreement;
(xii) The Registration Statement and the Prospectuses and any
supplements or amendments thereto (except for the financial statements and
the notes thereto and the schedules and other financial and statistical data
included therein, as to which such counsel need not express any opinion)
comply as to form in all material respects with the requirements of the Act;
and each of the Incorporated Documents (except for the financial statements
and the notes thereto and the schedules and other financial and statistical
data included therein, as to which counsel need not express any opinion)
complied as to form in all material respects with the Exchange Act and the
rules and regulations of the Commission thereunder at the time filed;
(xiii) To the knowledge of such counsel, (A) other than as described
or contemplated in the Prospectuses (or any supplement thereto), there are no
legal or governmental proceedings pending or threatened against the Company
or any of the Subsidiaries, or to
20
<PAGE>
which the Company or any of the Subsidiaries, or any of their property, is
subject, which are required to be described in the Registration Statement or
Prospectuses (or any amendment or supplement thereto) and (B) there are no
agreements, contracts, indentures, leases or other instruments, that are
required to be described in the Registration Statement or the Prospectuses
(or any amendment or supplement thereto) or to be filed as an exhibit to the
Registration Statement or any Incorporated Document that are not described or
filed as required, as the case may be;
(xiv) The statements in the Registration Statement and
Prospectuses, insofar as they are descriptions of contracts, agreements or
other legal documents, or refer to statements of law or legal conclusions,
including, but not limited to, the statements under the heading "Federal
Income Tax Consequences", are accurate in all material respects and present
fairly the information required to be shown;
(xv) Upon delivery of the Underwritten Shares pursuant to this Agreement
and the International Underwriting Agreement and payment therefor as
contemplated herein the U.S. Underwriters and the Managers will acquire good
and marketable title to the Shares free and clear of any lien, claim,
security interest, or other encumbrance, restriction on transfer or other
defect in title; and
Such opinion shall additionally state that although counsel
has not undertaken, except as otherwise indicated in their opinion, to
determine independently, and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements in the Registration
Statement, such counsel has participated in the preparation of the
Registration Statement and the Prospectuses, including review and discussion
of the contents thereof (including review and discussion of the contents of
all Incorporated Documents), and nothing has come to the attention of such
counsel that has caused them to believe that the Registration Statement
(including the Incorporated Documents) at the time the Registration Statement
became effective, or the Prospectuses, as of their date and as of the Closing
Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein not misleading
or that any amendment or supplement to the Prospectuses, as of its respective
date, and as of the Closing Date or the Option Closing Date, as the case may
be, contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading (it being
understood that such counsel need express no opinion with respect to the
financial statements and the notes thereto and the schedules and other
financial data included in the Registration Statement or the Prospectuses or
any Incorporated Document).
21
<PAGE>
Such opinion shall be limited to the laws of the State of New York, the
State of Illinois, the General Corporation Law of the State of Delaware and
the federal law of the United States (other than the Communications Act of
1934, as amended (the "Communications Act"), and the rules and regulations
thereunder).
(d) You shall have received on the Closing Date, an opinion of Koteen
and Naftalin, special counsel for the Company, dated the Closing Date and
addressed to you, as Lead Managers of the several Managers, to the effect
that:
(i) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, the Federal Communications
Commission (the "FCC"), is necessary or required for the due authorization,
execution or delivery by the Company of this Agreement or the International
Underwriting Agreement or for the performance by the Company of the
transactions contemplated under the Prospectuses, this Agreement, or the
International Underwriting Agreement.
(ii) The execution and delivery of this Agreement and the International
Underwriting Agreement, the issuance of the Underwritten Shares, the
compliance by the Company with all of the provisions of this Agreement and
the International Underwriting Agreement, and the consummation of the
transactions contemplated herein, therein and in the Registration Statement
and the Prospectuses (including the issuance and sale of the Underwritten
Shares) do not and will not, to such counsel's knowledge, conflict with or
result in any violation of, or the creation of any lien, charge or
encumbrance upon, the property or assets of the Company or, to such counsel's
knowledge, its Subsidiaries, under the Communications Act or any rule,
regulation, judgment, order or administrative or court decree issued, enacted
or promulgated thereunder; neither will any such action conflict with or have
a material adverse effect on any of the certificates, authorities, licenses
or permits, if any, issued or to be issued by the FCC to the Company or, to
such counsel's knowledge, any of the Company's Subsidiaries that enable them
to carry on the business and operations now operated by them and which are
material to the business of the Company and its consolidated subsidiaries
considered as one enterprise.
(iii) The information in the Registration Statement or the
Prospectuses purporting to describe FCC regulatory matters or the
Communications Act, to the extent that it constitutes matters of law,
summaries of legal matters or legal conclusions, has been reviewed by such
counsel and is correct in all material respects.
(iv) Although counsel has not undertaken, except as otherwise indicated
in their opinion, to determine independently, and does not assume any
responsibility for, the accuracy or completeness of the statements in the
Registration Statement, nothing has come to the attention of such counsel
that has caused them to believe that the descriptions of FCC regulatory
matters and the Communications Act contained in the Registration Statement
(including the Incorporated
22
<PAGE>
Documents) at the time the Registration Statement became effective, or the
Prospectuses, as of their date and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
descriptions of FCC regulatory matters and the Communications Act contained
in any amendment or supplement to the Prospectuses, as of its respective
date, and as of the Closing Date or the Option Closing Date, as the case may
be, contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading (it being
understood that such counsel need express no opinion with respect to the
financial statements and the notes thereto and the schedules and other
financial data included in the Registration Statement or the Prospectuses or
any Incorporated Document).
(e) You shall have received on the Closing Date an opinion of Skadden,
Arps, Slate, Meagher & Flom LLP, counsel for the Managers, dated the Closing
Date and addressed to you, as Lead Managers of the several Managers, with
respect to such matters as you may reasonably request.
(f) You shall have received letters addressed to you, as Lead Managers
of the several Managers, and dated the date hereof and the Closing Date from
Arthur Andersen LLP, independent certified public accountants, substantially
in the forms heretofore approved by you.
(g)(i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall
have been taken or, to the knowledge of the Company, shall be contemplated by
the Commission at or prior to the Closing Date; (ii) there shall not have
been any change in the capital stock of the Company nor any material increase
in the short-term or long-term debt of the Company (other than in the
ordinary course of business) from that set forth or contemplated in the
Registration Statement or the Prospectuses (or any amendment or supplement
thereto); (iii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectuses
(or any amendment or supplement thereto), except as may otherwise be stated
in the Registration Statement and Prospectuses (or any amendment or
supplement thereto), any material adverse change in the condition (financial
or other), business, properties, net worth or results of operations of the
Company and the Subsidiaries taken as a whole; (iv) the Company and the
Subsidiaries shall not have any liabilities or obligations, direct or
contingent (whether or not in the ordinary course of business), that are
material to the Company and the Subsidiaries, taken as a whole, other than
those reflected in the Registration Statement or the Prospectuses (or any
amendment or supplement thereto); and (v) all the representations and
warranties of the Company contained in Section 6 of this Agreement shall be
true and
23
<PAGE>
correct on and as of the date hereof and on and as of the Closing Date as if
made on and as of the Closing Date, and you shall have received a
certificate, dated the Closing Date and signed by the chief executive officer
and the chief financial officer of the Company (or such other officers as are
acceptable to you), to the effect set forth in this Section 8(g) and in
Section 8(h) hereof.
(h) The Company shall not have failed at or prior to the Closing Date
to have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(i) Prior to the Closing Date the Underwritten Shares shall have been
listed, subject to notice of issuance, on the American Stock Exchange.
(j) The closing under the U.S. Underwriting Agreement shall have
occurred concurrently with the closing hereunder on the Closing Date.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form
and substance to you and your counsel.
Any certificate or document signed by any officer of the Company and
delivered to you, as Lead Managers of the Managers, or to counsel for the
Managers, shall be deemed a representation and warranty by the Company to
each Manager as to the statements made therein.
The several obligations of the Managers to purchase Additional Shares
hereunder are subject to the satisfaction on and as of any Option Closing
Date of the conditions set forth in this Section 8, except that, if any
Option Closing Date is other than the Closing Date, the certificates,
opinions and letters referred to in paragraphs (c) through (g) shall be dated
the Option Closing Date in question and the opinions called for by paragraphs
(c), (d) and (e) shall be revised to reflect the sale of Additional Shares.
9. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it
of its obligations hereunder: (i) the preparation, printing or reproduction,
and filing with the Commission of the registration statement (including
financial statements and exhibits thereto), each Prepricing Prospectus, the
Prospectuses, and each amendment or supplement to any of them; (ii) the
printing (or reproduction) and delivery (including postage, air freight
charges and charges for counting and packaging) of such copies of the
registration statement, each Prepricing Prospectus, the Prospectuses, the
Incorporated Documents, and all amendments or supplements to any of them, as
may be reasonably requested for use in connection with the offering and sale
of the Shares; (iii) the preparation, printing, authentication, issuance and
delivery of certificates for the Shares, including any stamp taxes in
connection with the original issuance
24
<PAGE>
and sale of the Shares; (iv) the printing (or reproduction) and delivery of
this Agreement and all other agreements or documents printed (or reproduced)
and delivered in connection with the offering of the Shares; (v) the listing
of the Shares on the American Stock Exchange; (vi) the registration or
qualification of the Shares for offer and sale under the securities laws of
the several jurisdictions as provided in Section 5(g) hereof (including the
reasonable fees, expenses and disbursements of counsel for the U.S.
Underwriters and Managers relating thereto; (vii) the filing fees and the
fees and expenses of counsel for the U.S. Underwriters and Managers in
connection with any filings required to be made with the National Association
of Securities Dealers, Inc.; (viii) the transportation and other expenses
incurred by or on behalf of Company representatives in connection with
presentations to prospective purchasers of the Shares; and (ix) the fees and
expenses of the Company's accountants and the fees and expenses of counsel
(including local and special counsel) for the Company.
10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto;
or (ii) if, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may
commence, when notification of the effectiveness of the registration
statement or such post-effective amendment has been released by the
Commission. Until such time as this Agreement shall have become effective,
it may be terminated by the Company, by notifying you, or by you, as Lead
Managers of the several Managers, by notifying the Company.
If any one or more of the Managers shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing
Date, and the aggregate number of Shares which such defaulting Manager or
Managers are obligated but fail or refuse to purchase is not more than
one-tenth of the aggregate number of Shares which the Managers are obligated
to purchase on the Closing Date, each non-defaulting Manager shall be
obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule I hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Managers or in
such other proportion as you may specify in accordance with Section 20 of the
Master Agreement Among Underwriters of Smith Barney Inc., to purchase the
Shares which such defaulting Manager or Managers are obligated, but fail or
refuse, to purchase. If any one or more of the Managers shall fail or refuse
to purchase Shares which it or they are obligated to purchase on the Closing
Date and the aggregate number of Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares which the
Managers are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Company for the purchase of such Shares by one or
more non-defaulting Managers or other party or parties approved by you and
the Company are not made within 36 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Manager or
the Company. In any
25
<PAGE>
such case which does not result in termination of this Agreement, either you
or the Company shall have the right to postpone the Closing Date, but in no
event for longer than seven days, in order that the required changes, if any,
in the Registration Statement and the International Prospectus or any other
documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve any defaulting Manager from liability in respect
of any such default of any such Manager under this Agreement. The term
"Manager" as used in this Agreement includes, for all purposes of this
Agreement, any party not listed in Schedule I hereto who, with your approval
and the approval of the Company, purchases Shares which a defaulting Manager
is obligated, but fails or refuses, to purchase.
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
11. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Manager to the Company, by notice to the Company, if prior to the Closing
Date or any Option Closing Date (if different from the Closing Date and then
only as to the Additional Shares), as the case may be, (i) trading in
securities generally on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market shall have been suspended or
materially limited, (ii) a general moratorium on commercial banking
activities in New York or Illinois shall have been declared by either federal
or state authorities, or (iii) there shall have occurred any outbreak or
escalation of hostilities or other international or domestic calamity, crisis
or change in political, financial or economic conditions, the effect of which
on the financial markets of the United States is such as to make it, in your
judgment, impracticable or inadvisable to commence or continue the offering
of the Shares at the offering price to the public set forth on the cover page
of the International Prospectus or to enforce contracts for the resale of the
Shares by the Managers. Notice of such termination may be given to the
Company by telegram, telecopy or telephone and shall be subsequently
confirmed by letter.
12. INFORMATION FURNISHED BY THE MANAGERS. The statements set forth in
the last paragraph on the cover page, the stabilization legend on the inside
cover page, and the statements in the first, second and twelfth paragraphs
under the caption "Underwriting" in any International Prepricing Prospectus
and in the International Prospectus, constitute the only information
furnished by or on behalf of the Managers through you as such information is
referred to in Sections 6(b) and 7 hereof.
13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10 and
11 hereof, notice given pursuant to any provision of this Agreement shall be
in writing and shall be delivered (i) if to the Company, at the office of the
Company at ______________, Attention: ______________________; or (ii) if to
you, as Lead Managers of the several Managers, care of Smith Barney Inc., 388
Greenwich Street, New York, New York 10013, Attention: Manager, Investment
Banking Division.
26
<PAGE>
This Agreement has been and is made solely for the benefit of the
several Managers, the Company, its directors and officers, and the other
controlling persons referred to in Section 7 hereof and their respective
successors and assigns, to the extent provided herein, and no other person
shall acquire or have any right under or by virtue of this Agreement.
Neither the term "successor" nor the term "successors and assigns" as used in
this Agreement shall include a purchaser from any Manager of any of the
Shares in his status as such purchaser.
14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York applicable
to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
27
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company, and the several Managers.
Very truly yours,
TELEPHONE AND DATA SYSTEMS, INC.
By_______________________________
Chairman of the Board
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Managers named in Schedule I
hereto.
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED
DONALDSON, LUFKIN & JENRETTE INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
As Lead Managers of the Several Managers
By SMITH BARNEY INC.
By_____________________________
Managing Director
28
<PAGE>
SCHEDULE I
NAME OF COMPANY
<TABLE>
<CAPTION>
Number of
Manager Firm Shares
- ------- -----------
<S> <C>
Smith Barney Inc. . . . . . . . . . . . . . . .
Credit Suisse First
Boston (Europe) Limited . . . . . . . . . . .
Donaldson, Lufkin &
Jenrette International . . . . . . . . . . . .
Goldman Sachs International . . . . . . . . . . .
Total . . . . . . . . . . . . . . .
</TABLE>
29
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form S-3 Registration Statement of Telephone and Data Systems,
Inc. of our report dated January 28, 1998 (except with respect to the matters
discussed in Note 5, "American Paging Merger"; and in Note 16, as to which the
date is February 18, 1998) on the consolidated financial statements of Telephone
and Data Systems, Inc. and Subsidiaries, incorporated by reference in the
Telephone and Data Systems, Inc. Form 10-K for the year ended December 31, 1997
and to the incorporation by reference in this Form S-3 Registration Statement of
our report dated January 28, 1998, (except with respect to the matters discussed
in Note 5 "American Paging Merger"; and in Note 16, as to which the date is
February 18, 1998) on the financial statement schedules of Telephone and Data
Systems, Inc., included in the Telephone and Data Systems, Inc. Form 10-K for
the year ended December 31, 1997. We also consent to the incorporation by
reference of our reports dated January 28, 1998 on the financial statements of
the United States Cellular Group, the TDS Telecommunications Group and the TDS
Group for the year ended December 31, 1997, our report dated January 28, 1998
(except with respect to the matters discussed in Note 10, as to which the date
is February 5, 1998) on the financial statements of the Aerial Communications
Group and our report dated January 28, 1998 (except with respect to the matters
discussed in Note 5 "American Paging Merger"; and in Note 16, as to which the
date is February 18, 1998) on the consolidated financial statements of Telephone
and Data Systems, Inc. and Subsidiaries for the year ended December 31, 1997,
included in the Telephone and Data Systems, Inc. Proxy Statement/Prospectus on
Form S-4, as amended. We also consent to all references to our Firm included in
this Registration Statement.
ARTHUR ANDERSEN LLP
Chicago, Illinois
May 12, 1998
