-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FVrkExu8I3LDzrnoJroKX44xtP172rJWj9JkMKmPVeuzFCPlynJo6fc/3CQlQZ6P mGnkeTCLJ6eIGKzEmhHp0g== 0000912057-00-014576.txt : 20000331 0000912057-00-014576.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014576 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELEPHONE & DATA SYSTEMS INC /DE/ CENTRAL INDEX KEY: 0001051512 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 362669023 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-14157 FILM NUMBER: 584372 BUSINESS ADDRESS: STREET 1: 30 NORTH LASALLE STREET STREET 2: 8401 GREENWAY BLVD CITY: CHICAGO STATE: IL ZIP: 60602 BUSINESS PHONE: 3126301900 MAIL ADDRESS: STREET 1: 30 NORTH LASALLE STREET STREET 2: 8401 GREENWAY BLVD CITY: CHICAGO STATE: IL ZIP: 60602 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-14157 --------------------- TELEPHONE AND DATA SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-2669023 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602 (Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER: (312) 630-1900 Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Shares, $.01 par value American Stock Exchange 8.5% TDS-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust American Stock Exchange 8.04% TDS-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _X_ As of February 29, 2000, the aggregate market values of the registrant's Common Shares, Series A Common Shares and Preferred Shares held by non-affiliates were approximately $5.7 billion, $38.8 million and $28.3 million, respectively. The closing price of the Common Shares on February 29, 2000, was $105.50, as reported by the American Stock Exchange. Because no market exists for the Series A Common Shares and Preferred Shares, the registrant has assumed for purposes hereof that (i) each Series A Common Share has a market value equal to one Common Share because the Series A Common Shares were initially issued by the registrant in exchange for Common Shares on a one-for-one basis and are convertible on a share-for-share basis into Common Shares, (ii) each nonconvertible Preferred Share has a market value of $100 because each of such shares had a stated value of $100 when issued, and (iii) each convertible Preferred Share has a value of $105.50 times the number of Common Shares into which it was convertible on February 29, 2000. The number of shares outstanding of each of the registrant's classes of common stock, as of February 29, 2000, is 54,197,342 Common Shares, $.01 par value, and 6,958,391 Series A Common Shares, $.01 par value. DOCUMENTS INCORPORATED BY REFERENCE Those sections or portions of the registrant's 1999 Annual Report to Shareholders and of the registrant's Notice of Annual Meeting of Shareholders and Proxy Statement for its Annual Meeting of Shareholders to be held May 19, 2000, described in the cross reference sheet and table of contents attached hereto are incorporated by reference into Part II and III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET AND TABLE OF CONTENTS
PAGE NUMBER OR REFERENCE(1) --------------- Item 1. Business.................................................... 3 Item 2. Properties.................................................. 46 Item 3. Legal Proceedings........................................... 46 Item 4. Submission of Matters to a Vote of Security Holders......... 46 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 47(2) Item 6. Selected Financial Data..................................... 47(3) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 47(4) Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 47(4) Item 8. Financial Statements and Supplementary Data................. 47(5) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 47 Item 10. Directors and Executive Officers of the Registrant.......... 48(6) Item 11. Executive Compensation...................................... 48(7) Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 48(8) Item 13. Certain Relationships and Related Transactions.............. 48(9) Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 49
- ------------------------ (1) Parenthetical references are to information incorporated by reference from the registrant's Exhibit 13, which includes portions of its Annual Report to Shareholders for the year ended December 31, 1999 ("Annual Report") and from the registrant's Notice of Annual Meeting of Shareholders and Proxy Statement for its Annual Meeting of Shareholders to be held on May 19, 2000 ("Proxy Statement"). (2) Annual Report sections entitled "TDS Stock and Dividend Information" and "Market Price per Common Share by Quarter." (3) Annual Report section entitled "Selected Consolidated Financial Data." (4) Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition." (5) Annual Report sections entitled "Consolidated Statements of Operations," "Consolidated Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Common Stockholders' Equity," "Notes to Consolidated Financial Statements," "Consolidated Quarterly Income Information (Unaudited)" and "Report of Independent Public Accountants." (6) Proxy Statement sections entitled "Election of Directors" and "Executive Officers." (7) Proxy Statement section entitled "Executive Compensation," except for the information specified in Item 402(a)(8) of Regulation S-K under the Securities Exchange Act of 1934, as amended. (8) Proxy Statement section entitled "Security Ownership of Certain Beneficial Owners and Management." (9) Proxy Statement section entitled "Certain Relationships and Related Transactions." 2 TELEPHONE AND DATA SYSTEMS, INC. 30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602 TELEPHONE (312) 630-1900 [LOGO] - -------------------------------------------------------------------------------- PART I - -------------------------------------------------------------------------------- ITEM 1. BUSINESS Telephone and Data Systems, Inc. ("TDS"), is a diversified telecommunications service company with cellular telephone and telephone operations. At December 31, 1999, TDS served approximately 3.2 million customer units in 35 states, including 2,602,000 cellular telephones and 645,800 telephone access lines. For the year ended December 31, 1999, cellular operations provided 72% of TDS's consolidated revenues and telephone operations provided 28%. TDS's long-term business development strategy is to expand its existing operations through internal growth and acquisitions and to explore and develop other telecommunications businesses that management believes will utilize TDS expertise in customer-based telecommunications. On September 17, 1999, the Board of Directors of TDS approved a plan of merger between Aerial Communications Inc. and VoiceStream Wireless Corporation. See Discontinued Operations. TDS, conducts substantially all of its cellular operations through its 80.7%-owned subsidiary, United States Cellular Corporation. U.S. Cellular is traded on the American Stock Exchange under the symbol "USM". At December 31, 1999, U.S. Cellular provided cellular telephone service to 2,602,000 customers through 139 majority-owned and managed ("consolidated") cellular systems serving approximately 17% of the geography and approximately 9% of the population of the United States. Since 1985, when U.S. Cellular began providing cellular service in Knoxville, Tennessee, U.S. Cellular has expanded its cellular networks and customer service operations to cover 145 managed markets in 26 states as of December 31, 1999. In total, U.S. Cellular operated eight market clusters, of which four had a total population of more than two million, and each of which had a total population of more than one million. Overall, 91% of U.S. Cellular's 26.4 million population equivalents were in markets which were consolidated, 1% were in managed but not consolidated markets and 8% were in markets in which U.S. Cellular holds an investment interest. TDS conducts substantially all of its telephone operations through its wholly-owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom"). At December 31, 1999, TDS Telecom operated 104 Incumbent Local Exchange Carrier ("ILEC") telephone companies serving 571,700 access lines in 28 states. TDS Telecom is expanding by offering additional lines of telecommunications products and services to existing customers and through the selective acquisition of local exchange telephone companies serving rural and suburban areas. TDS Telecom has acquired 13 telephone companies and divested one telephone company since the beginning of 1995. These net acquisitions added 56,800 access lines during this five-year period, while internal growth added 122,400 lines. TDS Telecom also began offering services as a Competitive Local Exchange Carrier ("CLEC") in 1998 in certain markets in certain second and third-tier cities. At December 31, 1999, TDS Telecom's CLECs served 74,100 access lines. 3 TDS was incorporated in 1968 and changed its corporate domicile from Iowa to Delaware in 1998. TDS executive offices are located at 30 North LaSalle Street, Chicago, Illinois 60602. Its telephone number is 312-630-1900. Unless the context indicates otherwise: (i) references to "TDS" refer to Telephone and Data Systems, Inc., and its subsidiaries; (ii) references to "USM" or "U.S. Cellular" refer to United States Cellular Corporation and its subsidiaries; (iii) references to "TDS Telecom" refer to TDS Telecommunications Corporation and its subsidiaries; (iv) references to "AERL" or "Aerial" refer to Aerial Communications, Inc. and its subsidiaries; (v) references to "MSA" or to a particular city refer to the Metropolitan Statistical Area, as designated by the U.S. Office of Management and Budget and used by the Federal Communications Commission ("FCC") in designating metropolitan cellular market areas; (vi) references to "RSA" refer to the Rural Service Area, as used by the FCC in designating non-MSA cellular market areas; (vii) references to cellular "markets" or "systems" refer to MSAs, RSAs or both; (viii) references to "MTA" refer to Major Trading Areas, as used by the FCC in designating PCS markets; (ix) references to "population equivalents" mean the population of a market, based on 1999 Claritas estimates, multiplied by the percentage interests that TDS owns or has the right to acquire in an entity licensed, designated to receive a license or expected to receive a construction permit ("licensee") by the FCC to construct or operate a cellular or a personal communications service ("PCS") system in such market. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT This Annual Report on Form 10-K, including exhibits, contains statements that are not based on historical fact, including the words "believes," "anticipates," "intends," "expects," and similar words. These statements constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include: - general economic and business conditions, both nationally and in the regions in which TDS operates, - technology changes, - competition, - changes in business strategy or development plans, - changes in governmental regulations, - TDS's ability and the ability of its third-party suppliers to take corrective action in a timely manner with respect to the year 2000 issue, - availability of future financing, - changes in growth in cellular customers, penetration rates, and churn rates, and - completion and timing of the merger between Aerial and VoiceStream. TDS undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Readers should evaluate any statements in light of these important factors. DISCONTINUED OPERATIONS On September 17, 1999, the Board of Directors of TDS decided not to pursue a spin-off of Aerial Communications, Inc., an 82.1%-owned subsidiary of TDS, and approved a merger between Aerial and VoiceStream Wireless Corporation ("VoiceStream") pursuant to an Agreement and Plan of Reorganization dated September 17, 1999. As a result of the merger, Aerial shareholders will receive 4 0.455 VoiceStream common shares for each share of Aerial stock they own, subject to adjustment in certain circumstances. Aerial public shareholders will have a right to elect to receive $18 in cash in lieu of shares of VoiceStream. The parties anticipate that the merger will be tax-free to Aerial shareholders that elect to receive VoiceStream stock. This merger is subject to the approval of the Federal Communications Commission. The merger is expected to close in the second quarter of 2000. The merger agreement provides for TDS to be released from its guarantees of Aerial's long-term debt and vendor financing at the closing of the merger. TDS has also agreed to advance approximately $280 million to Aerial under the revolving credit agreement between TDS and a subsidiary of Aerial. At December 31, 1999, TDS had loaned a total of $37.8 million to Aerial. At the time of the merger, under certain circumstances, TDS is required to advance funds to a subsidiary of Aerial to bring the amount outstanding under the revolving credit agreement to $315 million. The $315 million outstanding will be repaid by VoiceStream one year from the date of the merger, or earlier at VoiceStream's option. Aerial is traded on the NASDAQ market under the symbol "AERL". Aerial provides PCS service in the Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus Major Trading Areas ("MTAs"). Such PCS markets include approximately 27.9 million population equivalents. Aerial has commenced service in all its markets and provided service to 422,900 PCS telephones as of December 31, 1999. TDS expects to recognize a net gain on the ultimate disposition of Aerial and, accordingly, has deferred recognition of Aerial's net operating losses subsequent to September 17, 1999 which will be offset against the expected gain upon closing of the merger. As of December 31, 1999, TDS has deferred Aerial net operating losses totaling $44.2 million. Pursuant to a Debt/Equity Replacement Agreement entered into between TDS and Aerial on September 17, 1999 in connection with the Aerial-VoiceStream plan of merger, on November 1, 1999, TDS converted $420 million of intercompany debt due from a subsidiary of Aerial into 19.1 million Aerial Common Shares at $22 per share. On September 17, 1999, the date of the TDS Debt/Equity Replacement Agreement, the closing price of Aerial Common Shares was $20 per share. Also on November 1, 1999, Sonera invested an additional $230 million into the equity of Aerial and one of its subsidiaries, also at an equivalent price of $22 per Aerial share. On September 21, 1999, Herbert Behrens, who purports to be an Aerial stockholder, filed a putative class action complaint on behalf of stockholders of Aerial in the Court of Chancery of the State of Delaware in New Castle County. The complaint names as defendants Aerial, TDS, certain directors of Aerial and TDS, and VoiceStream in connection with the transactions contemplated by the Agreement and Plan of Reorganization and the related agreements, particularly the Debt/Equity Replacement Agreement. The complaint alleges a breach of fiduciary duties by the defendants, including in connection with the exchange of $420 million of debt owed by Aerial to TDS for Aerial common stock at $22 per share. The complaint alleges that this action benefits TDS at the expense of Aerial's public stockholders and seeks to have the transactions contemplated by the Agreement and Plan of Reorganization enjoined or, if they are consummated, to have them rescinded and to recover unspecified damages, fees and expenses. The defendants believe that this lawsuit is without merit and intend to vigorously defend against this lawsuit. In connection with the merger agreement between Aerial and VoiceStream, Sonera, TDS and Aerial also reached an agreement to settle all their disputes relating to Sonera's earlier investment in the Aerial subsidiary, effective at the closing of the merger. This dispute is discussed below. On September 8, 1998, pursuant to a purchase agreement among TDS, Aerial, Aerial Operating Company, Inc., and Sonera Corporation a company organized under the laws of Finland and formerly known as Sonera Ltd., Sonera purchased approximately 2.4 million shares of common stock of Aerial Operating Company, representing a 19.423% equity interest in Aerial Operating Company, subject to adjustment under certain circumstances, for an aggregate purchase price of $200 million. Sonera has the right, subject to adjustment under certain circumstances, to exchange each share of Aerial Operating Company common stock which it owns for 6.72919 Common Shares of Aerial. Upon the 5 exchange of all of the Aerial Operating Company shares, Sonera would have owned an 18.452% equity interest in Aerial, reflecting a purchase price equivalent to $12.33 per Common Share (the "Equivalent Purchase Price"). Following the announcement by TDS in December 1998 that it intended to distribute to its shareholders all of the capital stock of Aerial that it owns, and that Aerial would seek additional financing from sources other than TDS in connection therewith, Sonera contacted TDS to express certain concerns. Sonera asserted, among other things, that Aerial and TDS misrepresented and failed to disclose certain material facts to Sonera, thereby inducing Sonera to pay an excessive price for the Aerial Operating Company common stock. Sonera requested the renegotiation of certain matters related to Sonera's investment in Aerial Operating Company, including an adjustment in the Equivalent Purchase Price, and raised the possibility of litigation in connection therewith. Under the Purchase Agreement, the number of Aerial Operating Company shares purchased by Sonera is subject to reduction if the average price of Aerial's Common Shares exceeds certain threshold prices during the first three years after Sonera's investment. During the second quarter and on July 7, 1999, the average price of Aerial's Common Shares exceeded all of the threshold prices set forth in the Purchase Agreement. Accordingly, Aerial requested Sonera to surrender for cancellation an aggregate of 634,216 shares of Aerial Operating Company common stock. Sonera refused to surrender any Aerial Operating Company shares and, in connection with its allegations, as discussed above, objected to the application of the share reduction provisions in the Purchase Agreement. In connection with an Agreement and Plan of Reorganization, Sonera, TDS, Aerial and Aerial Operating Company executed a Settlement Agreement and Release as of September 17, 1999. Under the Settlement Agreement and Release, Sonera surrendered for cancellation 317,108 Aerial Operating Company shares, representing one-half of the 634,216 disputed shares, on November 1, 1999, without releasing its claims with respect to such surrendered shares, in connection with the closing of transactions under a Debt/Equity Replacement Agreement. Upon satisfaction of all of the conditions to the closing of the transactions contemplated by the Agreement and Plan of Reorganization, the remaining 317,108 Aerial Operating Company shares will be surrendered for cancellation immediately prior to the closing of such transactions. At this closing, each of Sonera and Sonera U.S., on the one hand, and TDS, Aerial, Aerial Operating Company, VoiceStream and VoiceStream Holdings, on the other hand, will release each other from all claims relating to actions occurring through the date of the Settlement Agreement and Release, including all claims by Sonera to all of the disputed shares and, subject to certain exceptions, will extend such release to actions occurring through the date of such closing. Also at that closing, the Purchase Agreement and the other agreements entered into in connection with Sonera's original investment in Aerial Operating Company will be terminated. CELLULAR TELEPHONE OPERATIONS TDS's cellular operations are conducted through U.S. Cellular and its subsidiaries. U.S. Cellular is the eighth largest wireless company in the United States, based on the aggregate number of customers in its consolidated markets. U.S. Cellular's corporate development strategy is to operate controlling interests in cellular market licensees in areas adjacent to or in proximity to its other markets, thereby building clusters of operating markets. Customers benefit from larger service areas such as these, which provide longer uninterrupted service and the ability to make outgoing calls and receive incoming calls within the designated area without special roaming arrangements. In addition, U.S. Cellular anticipates that clustering will continue to provide it certain economies in its capital and operating costs. Over the past few years, U.S. Cellular has completed exchanges of controlling interests in its less strategic markets for controlling interests in markets which better complement its clusters. U.S. Cellular has also completed outright sales of other less strategic markets, and has purchased controlling interests in markets which enhance its clusters. 6 The following table summarizes the status of U.S. Cellular's interests in cellular markets at December 31, 1999. Owns Majority Interest and Manages (consolidated)........... 139 Owns Minority Interest and Manages.......................... 6 ---- Total Markets Managed by TDS................................ 145 Markets Managed by Others (1)............................... 35 ---- Total Markets............................................... 180 ====
- ------------------------------ (1) Represents markets in which U.S. Cellular owns a minority or other noncontrolling interest and which are managed by third parties; as of December 31, 1999, U.S. Cellular accounted for its interests in 29 of these markets using the equity method and accounted for the remaining six markets using the cost method. Cellular systems in U.S. Cellular's 139 majority-owned and managed markets served 2,602,000 customers at December 31, 1999, and contained 2,300 cell sites. The average penetration rate in U.S. Cellular's consolidated markets was 10.39% at December 31, 1999, and the churn rate in all consolidated markets averaged 2.1% per month for the twelve months ended December 31, 1999. THE CELLULAR TELEPHONE INDUSTRY Cellular telephone technology provides high-quality, high-capacity communications services to in-vehicle and hand-held portable cellular telephones. Cellular technology is a major improvement over earlier mobile telephone technologies. Cellular telephone systems are designed for maximum mobility of the customer. Access is provided through system interconnections to local, regional, national and world-wide telecommunications networks. Cellular telephone systems also offer a full range of ancillary services such as conference calling, call-waiting, call-forwarding, voice mail, Internet access, facsimile and data transmission. Cellular telephone systems divide each service area into smaller geographic areas or "cells." Each cell is served by radio transmitters and receivers operating on discrete radio frequencies licensed by the FCC. All of the cells in a system are connected to a computer-controlled Mobile Telephone Switching Office ("MTSO"). The MTSO is connected to the conventional "landline" telephone network and potentially other MTSOs. Each conversation on a cellular phone involves a transmission over a specific set of radio frequencies from the cellular phone to a transmitter/receiver at a cell site. The transmission is forwarded from the cell site to the MTSO and from there may be forwarded to the landline telephone network to complete the call. As the cellular telephone moves from one cell to another, the MTSO determines radio signal strength and transfers ("hands off") the call from one cell to the next. This hand-off is not noticeable to either party on the phone call. The FCC currently grants only two licenses to provide cellular telephone service in each market. However, competition for customers includes competing communications technologies such as conventional landline and mobile telephone, Specialized Mobile Radio ("SMR") systems, radio paging and PCS. PCS has become available in many areas of the United States, including the majority of U.S. Cellular's markets, and U.S. Cellular expects PCS operators to continue deployment of PCS in portions of all of U.S. Cellular's clusters through 2000. Additionally, technologies such as Enhanced Specialized Mobile Radio ("ESMR") are proving to be competitive with cellular service in certain of U.S. Cellular's markets. The services available to cellular customers and the sources of revenue available to cellular system operators are similar to those provided by conventional landline telephone companies. Customers may be charged a separate fee for system access, airtime, long-distance calls and ancillary services. Cellular system operators often provide service to customers of other operators' cellular systems while the customers are temporarily located within the operators' service areas. Customers using service away from their home system are called "roamers." Roaming is available because technical standards require that analog cellular telephones be compatible in all market areas in the United States. Additionally, because U.S. Cellular has deployed digital technologies in many of its service areas, its customers with digital or dual-mode (both analog and digital capabilities) wireless telephones can roam in other 7 companies' service areas which have a compatible digital technology in place. Likewise, in its service areas with digital technologies in place, U.S. Cellular can provide roaming service to other companies' customers who have compatible digital wireless telephones. This type of roaming is not limited to cellular customers and systems; PCS customers and systems have this roaming capability as well. In all cases, the system that provides the service to roamers will generate usage revenue. Many operators, including U.S. Cellular, charge premium rates for this roaming service. There have been a number of technical developments in the cellular industry since its inception. Currently, while most companies' MTSOs process information digitally, on certain cellular systems the radio transmission is done on an analog basis. Several years ago, certain digital transmission techniques were approved for implementation by the cellular industry. Time Division Multiple Access ("TDMA") technology was selected as one industry standard by the cellular industry and has been deployed by many wireless operators, including U.S. Cellular's operations in portions of several clusters. Another digital technology, Code Division Multiple Access ("CDMA"), is also being deployed by U.S. Cellular in portions of several clusters. Digital radio technology offers several advantages, including greater privacy, less transmission noise, greater system capacity and potentially lower incremental costs to accommodate additional system usage. The conversion from analog to digital radio technology is continuing on an industry-wide basis; however, this process is expected to take a number of years. PCS operators have deployed TDMA, CDMA and a third digital technology, Global System for Mobile Communication ("GSM"), in the markets where they have begun operations. The cellular telephone industry is characterized by high initial fixed costs. Accordingly, if and when revenues less variable costs exceed fixed costs, incremental revenues should yield an operating profit. The amount of profit, if any, under such circumstances is dependent on, among other things, prices and variable marketing costs which in turn are affected by the amount and extent of competition. Until technological limitations on total capacity are approached, additional cellular system capacity can normally be added in increments that closely match demand and at less than the proportionate cost of the initial capacity. CELLULAR OPERATIONS From its inception in 1983 until 1993, U.S. Cellular was principally in a start-up phase. Until 1993, U.S. Cellular's activities were concentrated significantly on the acquisition of interests in cellular licensees and on the construction and initial operation of cellular systems. The development of a cellular system is capital-intensive and requires substantial investment prior to and subsequent to initial operation. U.S. Cellular experienced operating losses and net losses from its inception until 1993. In years since 1993, U.S. Cellular has generated operations-driven net income and has significantly increased its operating cash flows. Management anticipates further growth in cellular units in service and revenues as U.S. Cellular continues to expand through internal growth. Marketing and system operations expenses associated with this expansion may reduce the rate of growth in operating cash flows and operating income during the period of additional growth. In addition, U.S. Cellular anticipates that the seasonality of revenue streams and operating expenses may cause U.S. Cellular's operating income to vary from quarter to quarter. While U.S. Cellular produced operating income and net income since 1993, changes in any of several factors may reduce U.S Cellular's growth in operating income and net income over the next few years. These factors include: - the growth rate in U.S. Cellular's customer base; - the usage and pricing of cellular services; - the churn rate; - the cost of providing cellular services, including the cost of attracting new customers; - continued competition from PCS and other technologies; and - continuing technological advances which may provide additional competitive alternatives to cellular service. 8 U.S. Cellular is building a substantial presence in selected geographic areas throughout the United States where it can efficiently integrate and manage cellular telephone systems. Its cellular interests include regional market clusters in the following areas: Midwest Regional Market Cluster - Western Wisconsin/Northern Illinois - Eastern Wisconsin - Missouri/Illinois/Indiana - Eastern Iowa - Western Iowa Mid-Atlantic Regional Market Cluster - Eastern North Carolina/South Carolina - Virginia/North Carolina - West Virginia/Maryland/Pennsylvania/Ohio Northwest Regional Market Cluster - Washington/Oregon/Idaho - Oregon/California Maine/New Hampshire/Vermont Market Cluster Florida/Georgia Market Cluster Texas/Oklahoma/Missouri/Kansas Regional Market Cluster - Oklahoma/Missouri/Kansas - Texas/Oklahoma Eastern Tennessee/Western North Carolina Market Cluster Southern Texas Market Cluster See "U.S. Cellular's Cellular Interests." U.S. Cellular has acquired its cellular interests through the wireline application process (16%), including settlements and exchanges with other applicants, and through acquisitions (84%), including acquisitions from TDS and third parties. CELLULAR SYSTEMS DEVELOPMENT ACQUISITIONS, DIVESTITURES AND EXCHANGES. U.S. Cellular assesses its cellular holdings on an ongoing basis in order to maximize the benefits derived from clustering its markets. Over the past few years, U.S. Cellular has completed exchanges of controlling interests in its less strategic markets for controlling interests in markets which better complement its clusters. U.S. Cellular has also completed outright sales of other less strategic markets, and has purchased controlling interests in markets which enhance its clusters. As a result, U.S. Cellular has not substantially increased its population equivalents during the past five years, but has shifted the balance of its holdings between investment and operating interests so that currently over 90% of U.S. Cellular's interests are in markets where it is the operator. Recently, the pace of acquisitions, exchanges and divestitures has slowed as industry-wide consolidation has reduced the number of markets available for acquisition. U.S. Cellular may continue to make opportunistic acquisitions or exchanges in markets that further strengthen its market clusters and in other attractive markets. U.S. Cellular also seeks to acquire minority interests in markets where it already owns the majority interest and/or operates the market. There can be no assurance that U.S. Cellular, or TDS for the benefit of U.S. Cellular, will be able to negotiate additional acquisitions or exchanges on terms acceptable to it or that regulatory approvals, where required, will be received. U.S. Cellular plans 9 to retain minority interests in certain cellular markets which it believes will earn a favorable return on investment. Other minority interests may be exchanged for interests in markets which enhance U.S. Cellular's market clusters or may be sold for cash or other consideration. U.S. Cellular also continues to evaluate the disposition of certain managed interests which are not essential to its corporate development strategy. COMPLETED ACQUISITIONS. During 1999, U.S. Cellular purchased a majority interest in one market and several minority interests in markets in which it currently owns a majority interest, representing approximately 245,000 population equivalents, for $31.5 million in cash. COMPLETED DIVESTITURES. During 1999, U.S. Cellular sold a majority interest in one market and several minority interests, representing approximately 612,000 population equivalents, for cash and receivables totaling $59.7 million. PENDING ACQUISITIONS AND DIVESTITURE. As of December 31, 1999, U.S. Cellular had agreements pending to acquire a majority interest in one market and a minority interest in another market in which it currently owns a majority interest, representing an aggregate of 160,000 population equivalents, in exchange for $24.0 million in cash and the issuance of approximately 28,000 U.S. Cellular Common Shares. Also at December 31, 1999, U.S. Cellular had an agreement pending to divest a minority interest in one market, representing 114,000 population equivalents, for $22.5 million in cash. U.S. Cellular expects all of the pending transactions to be completed in the first half of 2000. TDS maintains a shelf registration of Common Shares and U.S. Cellular maintains shelf registrations of Common Shares and Preferred Stock under the Securities Act of 1933 for issuance specifically in connection with acquisitions. U.S. Cellular is a majority-owned subsidiary of TDS. At December 31, 1999, TDS owned 80.7% of the combined total of the outstanding Common Shares and Series A Common Shares of U.S. Cellular and controlled 95.6% of the combined voting power of both classes of common stock. CELLULAR INTERESTS AND CLUSTERS U.S. Cellular operates clusters of adjacent cellular systems in nearly all of its markets, enabling its customers to benefit from larger service areas than otherwise possible. Where U.S. Cellular offers wide-area coverage, its customers enjoy uninterrupted service within the designated area. Customers may also make outgoing calls and receive incoming calls within this area without special roaming arrangements. In addition to benefits to customers, clustering also has provided to U.S. Cellular certain economies in its capital and operating costs. These economies are made possible through increased sharing of facilities, personnel and other costs and have resulted in a reduction of U.S. Cellular's per customer cost of service. The extent to which U.S. Cellular benefits from these revenue enhancements and economies of operation is dependent on market conditions, population size of each cluster and engineering considerations. U.S. Cellular may continue to make opportunistic acquisitions and exchanges which will complement its established market clusters. From time to time, U.S. Cellular may also consider exchanging or selling its interests in markets which do not fit well with its long-term strategies. U.S. Cellular owned interests in cellular telephone systems in 180 markets at December 31, 1999, representing 26,395,000 million population equivalents. Including the interest to be purchased and the 10 interest to be sold during 2000, U.S. Cellular owned or had the right to acquire 180 markets, representing 26,362,000 million population equivalents, at December 31, 1999. The following table summarizes the changes in U.S. Cellular's population equivalents in recent years.
DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (THOUSANDS OF POPULATION EQUIVALENTS)(1) Operational Markets: Majority-Owned and Managed...................... 24,079 23,825 23,051 20,625 20,325 Minority-Owned and Managed (2).................. 306 358 405 405 516 Majority-Owned Markets to be Managed, Net of Markets to be Divested: (2)(3).................. -- -- -- 221 274 ------ ------ ------ ------ ------ Total Markets Managed and to be Managed....... 24,385 24,183 23,456 21,251 21,115 Minority Interests in Markets Managed by Others... 1,977 2,166 2,163 4,614 4,115 ------ ------ ------ ------ ------ Total......................................... 26,362 26,349 25,619 25,865 25,230 ====== ====== ====== ====== ======
- ------------------------------ (1) Based on 1999 Claritas estimates for all years. (2) Includes markets where U.S. Cellular has the right to acquire an interest but does not currently own an interest. (3) Includes markets which are operational but which are currently managed by third parties. The following section details U.S. Cellular's cellular interests, including those it owned or had the right to acquire as of December 31, 1999. The table presented therein lists clusters of markets that U.S. Cellular manages. U.S. Cellular's market clusters show the areas in which U.S. Cellular is currently focusing its development efforts. These clusters have been devised with a long-term goal of allowing delivery of cellular service to areas of economic interest and along corridors of economic activity. The number of population equivalents represented by U.S. Cellular's cellular interests may have no direct relationship to the number of potential cellular customers or the revenues that may be realized from the operation of the related cellular systems. 11 U.S. CELLULAR'S CELLULAR INTERESTS The table below sets forth certain information with respect to the interests in cellular markets which U.S. Cellular owned or had the right to acquire pursuant to definitive agreements as of December 31, 1999.
TOTAL CURRENT AND ACQUIRABLE POPULATION CLUSTER/MAJOR SERVICE AREA 1999 POPULATION EQUIVALENTS -------------------------- --------------- ----------------- MIDWEST REGIONAL MARKET CLUSTER: Western Wisconsin/Northern Illinois....................... 2,627,000 2,583,000 Eastern Wisconsin......................................... 2,291,000 2,268,000 Missouri/Illinois/Indiana................................. 1,943,000 1,834,000 Eastern Iowa.............................................. 1,785,000 1,622,000 Western Iowa.............................................. 956,000 903,000 ---------- ---------- Total Midwest Regional Market Cluster................... 9,602,000 9,210,000 ---------- ---------- MID-ATLANTIC REGIONAL MARKET CLUSTER: Eastern North Carolina/South Carolina..................... 2,637,000 2,626,000 Virginia/North Carolina................................... 1,322,000 1,315,000 West Virginia/Maryland/Pennsylvania/Ohio.................. 1,383,000 1,255,000 ---------- ---------- Total Mid-Atlantic Regional Market Cluster.............. 5,342,000 5,196,000 ---------- ---------- NORTHWEST REGIONAL MARKET CLUSTER: Washington/Oregon/Idaho................................... 1,500,000 1,400,000 Oregon/California......................................... 1,053,000 1,053,000 ---------- ---------- Total Northwest Regional Market Cluster................. 2,553,000 2,453,000 ---------- ---------- MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER:................. 1,697,000 1,643,000 ---------- ---------- FLORIDA/GEORGIA MARKET CLUSTER:............................. 1,597,000 1,597,000 ---------- ---------- TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET CLUSTER: Oklahoma/Missouri/Kansas.................................. 1,451,000 896,000 Texas/Oklahoma............................................ 691,000 604,000 ---------- ---------- Total Texas/Oklahoma/Missouri/Kansas Regional Market Cluster:............................................... 2,142,000 1,500,000 ---------- ---------- EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET CLUSTER:.... 1,653,000 1,331,000 ---------- ---------- SOUTHERN TEXAS MARKET CLUSTER:.............................. 1,311,000 1,311,000 ---------- ---------- Other Operations:........................................... 144,000 144,000 ---------- ---------- Total Managed Markets....................................... 26,041,000 24,385,000 Markets Managed by Others................................... 1,977,000 ---------- Total Population Equivalents................................ 26,362,000 ==========
SYSTEM DESIGN AND CONSTRUCTION U.S. Cellular designs and constructs its systems in a manner it believes will permit it to provide high-quality service to analog and certain types of digital cellular telephones, based on market and engineering studies which relate to specific markets. Engineering studies are performed by U.S. Cellular personnel or independent engineering firms. U.S. Cellular's switching equipment is digital, which reduces noise and crosstalk and is capable of interconnecting in a manner which reduces costs of operation. While digital microwave interconnections are typically made between the MTSO and cell 12 sites, both analog and digital radio transmissions are made between cell sites and the cellular telephones themselves. Network reliability is given careful consideration and extensive redundancy is employed in virtually all aspects of U.S. Cellular's network design. Route diversity, ring topology and extensive use of emergency standby power are also utilized to enhance network reliability and minimize service disruption from any particular network failure. In accordance with its strategy of building and strengthening market clusters, U.S. Cellular has selected high capacity digital cellular switching systems that are capable of serving multiple markets through a single MTSO. U.S. Cellular's cellular systems are designed to facilitate the installation of equipment which will permit microwave interconnection between the MTSO and the cell site. U.S. Cellular has implemented such microwave interconnection in most of the cellular systems it manages. Otherwise, such systems will rely upon landline telephone connections to link cell sites with the MTSO. Although the installation of microwave network interconnection equipment requires a greater initial capital investment, a microwave network enables a system operator to avoid the current and future charges associated with leasing telephone lines from the landline telephone company, while generally improving system reliability. In addition, microwave facilities can be used to connect separate cellular systems to allow shared switching, which reduces the aggregate cost of the equipment necessary to operate multiple systems. Microwave facilities can also be used to carry long-distance calls, which reduces the costs of interconnecting to the landline network. U.S. Cellular has continued to expand its Wide Area Network ("WAN") to accommodate various business functions, including: - automatic call delivery - intersystem handoff - credit validation - fraud prevention - network management and - interconnectivity of all U.S. Cellular's MTSOs and cell sites. In addition, the WAN accommodates virtually all internal data communications between various U.S. Cellular office locations and a significant number of U.S. Cellular's retail locations to process customer activations. The WAN is deployed in U.S. Cellular's five regional customer service centers ("Communications Centers") for all customer service functions using U.S. Cellular's new billing and information system. Management believes that currently available technologies will allow sufficient capacity on U.S. Cellular's networks to meet anticipated demand over the next few years. COSTS OF SYSTEM CONSTRUCTION AND FINANCING Construction of cellular systems is capital-intensive, requiring substantial investment for land and improvements, buildings, towers, MTSOs, cell site equipment, microwave equipment, engineering and installation. U.S. Cellular, consistent with FCC control requirements, uses primarily its own personnel to engineer and oversee construction of each cellular system it owns and operates. The costs (exclusive of license costs) of the systems in which U.S. Cellular owns an interest have historically been financed through capital contributions or intercompany loans from U.S. Cellular to the entities owning the systems, and through certain vendor financing. In recent years, these funding requirements have been met with cash generated from operations, proceeds from debt offerings and proceeds from the sales of cellular interests. MARKETING U.S. Cellular's marketing plan is centered around rapid penetration of its market clusters, increasing customer awareness of cellular service and reducing churn. U.S. Cellular achieves these results through 13 the building of brand awareness and the implementation of loyalty programs which give customer service priority to U.S. Cellular's most valuable customers. The marketing plan stresses the value of U.S. Cellular's service offerings and incorporates combinations of rate plans and cellular telephone equipment which are designed to meet the needs of defined customer segments and their usage patterns. U.S. Cellular supports a multi-faceted distribution program, including direct sales, agents and retail service centers in the vast majority of its markets, and the Internet for those customers who wish to contact U.S. Cellular through that medium. U.S. Cellular-owned and managed locations are designed to market cellular service to the consumer segment in a familiar setting. In late 1999, U.S. Cellular expanded its e-commerce site to make additional accessories available online. U.S. Cellular anticipates that as customers become more comfortable with e-commerce, the Internet will become more of a robust marketing channel for both sales of rate plans as well as accessories. U.S. Cellular manages each cluster of markets with a local staff, including sales, engineering and in some cases installation personnel. U.S. Cellular operates five regional Communications Centers whose personnel are responsible for customer service and certain other functions. Direct sales consultants market cellular service to business customers throughout each cluster. Retail sales associates work out of U.S. Cellular's nearly 500 U.S. Cellular-owned retail stores and kiosks and market cellular service primarily to the consumer and small business segment. U.S. Cellular maintains an ongoing training program to improve the effectiveness of sales consultants and retail associates by focusing their efforts on obtaining customers and maximizing the sale of high-use packages. These packages enable customers to buy substantial amounts of minutes for fixed monthly rates. U.S. Cellular continues to expand its relationships with agents, dealers and non-U.S. Cellular retailers to obtain customers, and at year-end 1999 had contracts with more than 2,000 of these businesses. Agents and dealers are independent business people who obtain customers for U.S. Cellular on a commission basis. U.S. Cellular's agents are generally in the business of selling cellular telephones, cellular service packages and other related products. U.S. Cellular's dealers include car stereo companies, major appliance dealers, office supply dealers and mass merchants including national companies such as Best Buy and Circuit City. U.S. Cellular created a new class of agent during 1999, the Value Added Distributor agent channel. This channel's initial focus was on the sale of U.S. Cellular's prepaid service product, TalkTracker-Registered Trademark-, to selected market segments, and complements U.S. Cellular's own distribution channels. Additionally, in support of its overall Internet initiatives, U.S. Cellular has actively recruited agents who provide services exclusively through the Internet. Such agents include Sundial, Telstreet, StartSmart and Buyphone.com. U.S. Cellular uses a variety of direct mail, billboard, radio, television and newspaper advertising to stimulate interest by prospective customers in purchasing U.S. Cellular's cellular service and to establish familiarity with U.S. Cellular's name. In 1999, U.S. Cellular began operating under a unified brand name and logo, U.S. Cellular( SM), across all its markets. All markets were converted to the new brand name in the second quarter of 1999. The new logo is simpler and bolder than the old logo. U.S. Cellular retained its tag line "The way people talk around here( SM)," which is still used to promote the U.S. Cellular( SM) brand. U.S. Cellular continues to advertise its digital service offerings through both television and radio advertising, which contributed to a significant increase in the number of customers using U.S. Cellular's digital services during 1999. Advertising is directed at gaining customers, improving customers' awareness of the U.S. Cellular brand, increasing existing customers' usage of U.S. Cellular's services and increasing the public awareness and understanding of the cellular services offered by U.S. Cellular. U.S. Cellular attempts to select the advertising and promotion media that are most appealing to the targeted groups of potential customers in each local market. U.S. Cellular utilizes local advertising media and public relations activities and establishes community relations programs to enhance public awareness of U.S. Cellular. These programs are aimed at supporting the communities in which U.S. Cellular serves. The programs range from loaning phones to public service operations in emergencies to assisting victims of domestic abuse through U.S. Cellular's Stop Abuse From Existing(SM) programs. 14 The following table summarizes, by operating cluster, the total population, U.S. Cellular's customer units and penetration for U.S. Cellular's majority-owned and managed markets that were operational as of December 31, 1999.
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION ------------------ ---------- --------- ----------- Midwest Regional Market Cluster.......................... 9,209,000 1,140,000 12.38% Mid-Atlantic Regional Market Cluster..................... 5,091,000 415,000 8.15 Northwest Regional Market Cluster........................ 2,553,000 254,000 9.95 Maine/New Hampshire/Vermont Market Cluster............... 1,697,000 165,000 9.72 Florida/Georgia Market Cluster........................... 1,597,000 151,000 9.46 Texas/Oklahoma/Missouri/Kansas Regional Market Cluster... 2,142,000 226,000 10.55 Eastern Tennessee/Western North Carolina Market Cluster................................................ 1,300,000 152,000 11.69 Southern Texas Market Cluster............................ 1,311,000 77,000 5.87 Other Operations......................................... 144,000 22,000 15.28 ---------- --------- ----- 25,044,000 2,602,000 10.39% ========== ========= =====
CUSTOMERS AND SYSTEM USAGE Cellular customers come from a wide range of demographic segments. Business users typically include a large proportion of individuals who work outside of their offices such as people in the construction, real estate, wholesale and retail distribution businesses and professionals. Increasingly, U.S. Cellular is providing cellular service to consumers and to customers who use their cellular telephones for mixed business and personal use as well as for security purposes. A major portion of U.S. Cellular's recent customer growth is from these lower revenue segments. Although some of U.S. Cellular's customers still use in-vehicle cellular telephones, the vast majority of new customers are selecting portable cellular telephones. These units are more compact and fully featured as well as more attractively priced, and they appeal to newer segments of the customer population. U.S. Cellular's cellular systems are used most extensively during normal business hours between 7:00 AM and 6:00 PM. On average, the local retail customers in U.S. Cellular's consolidated markets used their cellular systems approximately 115 minutes per unit each month and generated retail revenue of approximately $33 per month during 1999, compared to 105 minutes and $33 per month in 1998. Revenue generated by roamers using U.S. Cellular's systems ("inbound roaming"), together with local retail, toll and other revenues, brought U.S. Cellular's total average monthly service revenue per customer unit in consolidated markets to $48 during 1999. Average monthly service revenue per customer unit decreased approximately 1% during 1999. This decrease was not as significant as in recent years, due to the proliferation of certain national pricing plans used by other wireless companies which significantly increased inbound roaming minutes of use on U.S. Cellular's systems during 1999. This effect was offset by decreases in average revenue per minute of use from both local retail customers and inbound roamers. Competitive pressures and U.S. Cellular's increasing use of pricing and other incentive programs to stimulate overall usage resulted in a decrease in average local retail revenue per minute of use in 1999. Inbound roaming revenue per minute also decreased during the year, partially due to the ongoing trend toward reduced per minute prices for roaming negotiated between U.S. Cellular and other cellular operators and also due to the additional minutes generated by customers with national pricing plans, which are at lower than average rates. U.S. Cellular anticipates that average monthly service revenue per customer unit will continue to decline in the future. However, this effect is more than offset by U.S. Cellular's increasing number of customers; therefore, U.S. Cellular expects total revenues to continue to grow for the next few years. U.S. Cellular's main sources of revenue are from its own customers and from inbound roaming customers. U.S. Cellular's roaming service allows a customer to place or receive a call in a cellular service area away from the customer's home service area. U.S. Cellular has entered into "roaming 15 agreements" with operators of other cellular systems covering virtually all systems in the United States, Canada, and Mexico. U.S. Cellular also has roaming agreements with several PCS operators. Roaming agreements offer customers the opportunity to roam in these systems. These reciprocal agreements automatically pre-register the customers of U.S. Cellular's systems in the other carriers' systems. Also, a customer of a participating system roaming (i.e. traveling) in a U.S. Cellular market where this arrangement is in effect is able to make and receive calls on U.S. Cellular's system. The charge for this service is typically at premium rates and is billed by U.S. Cellular to the customer's home system, which then bills the customer. U.S. Cellular has entered into agreements with other cellular carriers to transfer roaming usage at agreed-upon rates. In some instances, based on competitive factors, U.S. Cellular may charge a lower amount to its customers than the amount actually charged to U.S. Cellular by another cellular carrier for roaming. The following table summarizes certain information about customers and market penetration in U.S. Cellular's consolidated operations.
YEAR ENDED OR AT DECEMBER 31, -------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Majority-owned and managed markets: Cellular markets in operation (1)............... 139 138 134 131 137 Total population of markets in service (000s)... 25,044 24,683 24,034 21,712 22,309 Customer Units: (2) at beginning of period........................ 2,183,000 1,710,000 1,073,000 710,000 421,000 additions during period....................... 1,015,000 915,000 941,000 561,000 426,000 disconnects during period..................... 596,000 442,000 304,000 198,000 137,000 at end of period.............................. 2,602,000 2,183,000 1,710,000 1,073,000 710,000 Market penetration at end of period (3)......... 10.39% 8.84% 7.11% 4.94% 3.18% Consolidated revenues............................. $1,417,181 $1,162,467 $ 876,965 $ 680,068 $ 480,316 Depreciation expense.............................. 184,830 167,150 97,591 74,631 57,302 Amortization expense.............................. 45,142 39,629 34,788 34,208 32,156 Operating Income.................................. 255,842 176,075 129,543 87,366 42,755 Capital expenditures.............................. 277,450 320,417 318,748 248,123 210,878 Business segment assets........................... $3,331,590 $3,011,237 $2,508,916 $2,071,522 $1,876,262
- ------------------------------ (1) Represents the number of markets in which U.S. Cellular owned at least a 50% interest and which it managed. The revenues and expenses of these cellular markets are included in U.S. Cellular's consolidated revenues and expenses. (2) Represents the approximate number of revenue-generating cellular telephones served by the cellular markets referred to in footnote (1). The revenue generated by such cellular telephones is included in consolidated revenues. (3) Computed by dividing the number of customer units at the end of the period by the total population of markets in service as estimated by Claritas (1997-1999) or Donnelley Marketing Service (1995-1996) for the respective years. PRODUCTS AND SERVICES CELLULAR TELEPHONES AND INSTALLATION. There are a number of different types of cellular telephones, all of which are currently compatible with analog cellular systems nationwide. U.S. Cellular offers a full range of cellular telephones for use by its customers. Features offered in some of the cellular telephones include hands-free calling, repeat dialing, voice mail and others. In the systems where U.S. Cellular offers digital service, additional features such as caller ID and short messaging services are available on those cellular telephones. U.S. Cellular negotiates volume discounts from its cellular telephone suppliers. U.S. Cellular's discounts cellular telephones to meet competition or to stimulate sales by reducing the cost of becoming a cellular customer. In these instances, where permitted by law, customers are generally required to sign a service contract with U.S. Cellular. U.S. Cellular also cooperates with cellular equipment manufacturers in local advertising and promotion of cellular equipment. U.S. Cellular has established service and/or installation facilities in many of its local markets to ensure quality installation and service of the cellular telephones it sells. These facilities allow U.S. 16 Cellular to improve its service by promptly assisting customers who experience equipment problems. Additionally, U.S. Cellular maintains a repair facility in Tulsa, Oklahoma, which handles more complex service and repair issues. CELLULAR SERVICES. U.S. Cellular's customers are able to choose from a variety of packaged pricing plans which are designed to fit different calling patterns. The ability to help a customer find the right technology and the right pricing plan is central to U.S. Cellular's brand positioning. During 1999, U.S. Cellular focused its efforts on new products with the continued promotion of its digital service offering, called Digital PCS, and its prepaid offering, TalkTracker-Registered Trademark-. Both offerings continued their success during the year, as many higher revenue customers purchased U.S. Cellular's digital offering and new market segments such as individuals with credit difficulties were able to purchase cellular service through U.S. Cellular's prepaid offering. U.S. Cellular's customer bills typically show separate charges for custom-calling features, airtime in excess of the packaged amount, and toll calls. Custom-calling features provided by U.S. Cellular include wide-area call delivery, call forwarding, call waiting, three-way calling and no-answer transfer. U.S. Cellular also offers a voice message service in many of its markets. This service, which functions like a sophisticated answering machine, allows customers to receive messages from callers when they are not available to take calls. Additional services, such as short messaging services, are available in U.S. Cellular's markets where digital service is offered. REGULATION REGULATORY ENVIRONMENT. The operations of U.S. Cellular are subject to FCC and state regulation. The cellular telephone licenses held by U.S. Cellular are granted by the FCC for the use of radio frequencies and are an important component of the overall value of the assets of U.S. Cellular. The construction, operation and transfer of cellular systems in the United States are regulated to varying degrees by the FCC pursuant to the Communications Act of 1934. In 1996, Congress enacted the Telecommunications Act of 1996, which amended the Communications Act. The Telecommunications Act mandates significant changes in existing telecommunications rules and policies to promote competition, ensure the availability of telecommunications services to all parts of the nation and to streamline regulation of the telecommunications industry to remove regulatory burdens, as competition develops. The FCC has promulgated regulations governing construction and operation of cellular systems, licensing (including renewal of licenses) and technical standards for the provision of cellular telephone service under the Communications Act, and is implementing the legislative objectives of the Telecommunications Act, as discussed below. LICENSING. For cellular telephone licensing purposes, the FCC has divided the United States into separate geographic markets (MSAs and RSAs). In each market, the allocated cellular frequencies are divided into two equal blocks. During the application process, the FCC reserved one block of frequencies for non-wireline applicants and another block for wireline applicants. Subject to FCC approval, a cellular system may be sold to either a wireline or non-wireline entity, but no entity which controls a cellular system may own a significant interest in another cellular system in the same MSA or RSA. The completion of acquisitions involving the transfer of control of a cellular system requires prior FCC approval. Acquisitions of minority interests generally do not require FCC approval. Whenever FCC approval is required, any interested party may file a petition to dismiss or deny the application for approval of the proposed transfer. The FCC must be notified each time an additional cell is constructed which enlarges the service area of a given market. The FCC's rules also generally require persons or entities holding cellular construction permits or licenses to coordinate their proposed frequency usage with neighboring cellular licensees in order to avoid electrical interference between adjacent systems. The height and power of base stations in the cellular system are regulated by FCC rules, as are the types of signals emitted by these stations. In addition to regulation by the FCC, cellular systems are subject to certain Federal Aviation Administration ("FAA") regulations with respect to the siting and construction of cellular transmitter towers and antennas as well as local zoning requirements. 17 Beginning in 1996, the FCC has also imposed a requirement that all licensees register and obtain FCC registration numbers for all of their antenna towers which require prior FAA clearance. All new towers must be registered at the time of construction and existing towers were required to be registered by May 1998 on a staggered state-by-state basis. U.S. Cellular believes that it is in compliance with the FCC's tower registration requirements. Beginning in October 1997, cellular systems, which previously were "categorically excluded" from having to evaluate their facilities to ensure their compliance with federal "radio frequency" radiation requirements, were made subject to those requirements. As a result, all cellular towers of less than 10 meters in height, building mounted antennas and cellular telephones must comply with radio frequency radiation guidelines. After October 1997, all new cellular facilities must be in compliance when they are brought into service. As of September 1, 2000, all existing facilities must be brought into compliance. U.S. Cellular believes that the majority of its existing facilities already comply with the requirements and will seek to ensure that the remainder are brought into compliance as required. Initial cellular telephone licenses were granted for ten-year periods. The FCC has established standards for conducting comparative renewal proceedings between a cellular licensee seeking renewal of its license and challengers filing competing applications. The FCC has: (i) established criteria for comparing the renewal applicant to challengers, including the standards under which a renewal expectancy will be granted to the applicant seeking license renewal; (ii) established basic qualifications standards for challengers; and (iii) provided procedures for preventing possible abuses in the comparative renewal process. The FCC has concluded that it will award a renewal expectancy if the licensee has (i) provided "substantial" performance, which is defined as "sound, favorable and substantially above a level of mediocre service just minimally justifying renewal," and (ii) complied with FCC rules, policies and the Communications Act. If a renewal expectancy is awarded to an existing licensee, its license is renewed and competing applications are not considered. All of U.S. Cellular's licenses which it applied to have renewed between 1995 and 1999 were renewed. U.S. Cellular conducts and plans to conduct its operations in accordance with all relevant FCC rules and regulations and anticipates being able to qualify for a renewal expectancy in its upcoming renewal filings. Accordingly, U.S. Cellular believes that current regulations will have no significant effect on its operations and financial condition. However, changes in the regulation of cellular operators or their activities and of other mobile service providers could have a material adverse effect on U.S. Cellular's operations. The FCC has also provided that five years after the initial licenses are granted, unserved areas within markets previously granted to licensees may be applied for by both wireline and non-wireline entities and by third parties. Accordingly, many unserved area applications have been filed by U.S. Cellular and others and have generally been routinely granted. U.S. Cellular's strategy with respect to system construction in its markets has been to build cells covering areas within such markets that U.S. Cellular considers economically feasible to serve or might conceivably wish to serve and to do so within the five-year period following issuance of the license. In cases where applications for unserved areas are filed which are mutually exclusive and would result in overlapping service areas, the FCC decides between the competing applicants by an auction process. Pursuant to 1993 amendments to the Communications Act, cellular service is classified as a Commercial Mobile Radio Service, in that it is service offered to the public, for a fee, which is interconnected to the public switched telephone network. The FCC has determined that it will forbear from requiring such carriers to comply with a number of statutory provisions otherwise applicable to common carriers, such as the filing of tariffs. RECENT EVENTS. There are certain regulatory proceedings currently pending before the FCC which are of particular importance to the cellular industry. In one proceeding, the FCC has imposed new "enhanced 911" regulations on cellular carriers. Enhanced 911 capabilities will enable cellular systems to determine the precise location of persons making emergency calls. The new rules will require cellular carriers to work with local public safety officials to process 911 calls, including those made from mobile 18 telephones not registered with the cellular system. Since April 1998, cellular carriers have had to be able to identify the cell from which the call has been made. The rules will require cellular systems to improve their ability to locate wireless 911 callers during 2001 and 2002. The FCC has adopted a limited expansion of the obligation of cellular carriers to serve the roaming subscribers of broadband PCS providers, among others, even though the subscribers involved have no pre-existing service relationships with such cellular carriers. Under these policies, broadband PCS providers may offer their subscribers handsets which are capable of operating over broadband PCS and cellular networks so that when their subscribers are out of range of broadband PCS networks, they will be able to obtain access to cellular networks. The FCC expects that implementation of these roaming capabilities will promote competition between broadband PCS and cellular service providers. The FCC has adopted requirements which will make it possible for subscribers to retain, subject to certain geographic and other limitations, their existing telephone numbers when they switch from one service provider to another. This numbering portability will include switching between Local Exchange Carriers ("LECs") and other wireline providers, between wireless service providers and between LEC/ wireline and wireless providers. LECs in the 100 largest MSAs, had implementation deadlines by the end of 1998 at those switches which received specific requests for numbering portability. The FCC has extended the compliance date for cellular, broadband PCS, and certain other wireless providers until November 2002. In another proceeding, the FCC in 1996 adopted rules regarding the method by which cellular carriers and LECs shall compensate each other for interconnecting cellular and local exchange facilities. The FCC rules provided for symmetrical and reciprocal compensation between LECs and cellular carriers, and also prescribed interim interconnection proxy rates, which are much lower than the rates that were formerly paid by cellular carriers to LECs. Symmetrical and reciprocal compensation means they must pay each other at the same rate. Interconnection rate issues will be decided by the states. Cellular carriers are now paying and in the future can be expected to pay lower rates to LECs than they previously paid. This result is expected to be favorable to the wireless industry and somewhat unfavorable to LECs. The FCC is also proceeding to implement other parts of the Telecommunications Act. The Telecommunications Act provides that implementing its legislative objectives will be the task of the FCC, the state public utilities commissions and a Federal-state Joint Board. Much of this implementation is proceeding in numerous, concurrent proceedings with aggressive deadlines. U.S. Cellular cannot predict the full extent of, nature of and interrelationships among state and federal implementation and other responses to the Telecommunications Act. The primary purpose and effect of the new law is to open all telecommunications markets to competition. The Telecommunications Act makes most direct or indirect state and local barriers to competition unlawful. It directs the FCC to preempt all inconsistent state and local laws and regulations, after notice and comment proceedings. It also enables electric and other utilities to engage in telecommunications service through qualifying subsidiaries. Only narrow powers over competitive entry are left to state and local authorities. Each state retains the power to impose competitively neutral requirements that are consistent with the Telecommunications Act's universal service provisions and necessary for universal services, public safety and welfare, continued service quality and consumer rights. While a state may not impose requirements that effectively function as barriers to entry, it retains limited authority to regulate certain competitive practices in rural telephone company service areas. The Telecommunications Act establishes principles and a process for implementing a modified "universal service" policy. This policy seeks nationwide, affordable service and access to advanced telecommunications and information services. It calls for reasonably comparable urban and rural rates and services. The Telecommunications Act also requires universal service to schools, libraries and rural health facilities at discounted rates. Cellular carriers must provide such discounted rates to such organizations in accordance with federal regulations. The FCC has implemented the mandate of the Telecommunications Act to create a new universal service support mechanism "to ensure that all 19 Americans have access to telecommunications services." The Telecommunications Act requires all interstate telecommunications providers, including wireless service providers, to "make an equitable and non-discriminatory contribution" to support the cost of providing universal service, unless their contribution would be de minimis. At present, the provision of landline telephone service in high cost areas is subsidized by access charges and other payments by interexchange carriers to LECs. The obligation to make payments to support universal service has been expanded to include other telecommunications service providers, including cellular carriers. Such payments, based on a percentage of the total "billed revenue" of carriers for a given previous half year, began in the first quarter of 1998. Carriers are free to pass such charges on to their customers. Cellular carriers are also eligible to receive universal service support payments in certain circumstances under the new systems if they provide specified services in "high cost" areas. U.S. Cellular has sought designation as an "eligible telecommunications carrier" qualified to receive universal service support in certain states and has been designated as such a carrier in Washington State. It has also sought FCC clarification of the standards under which wireless eligible telecommunications carriers will be designated. Under a 1994 federal law, the Communications Assistance to Law Enforcement Act, all telecommunications carriers, including U.S. Cellular and other wireless licensees, must implement by June 30, 2000, certain equipment changes necessary to assist law enforcement authorities in achieving an enhanced ability to conduct electronic surveillance of those suspected of criminal activity. In August 1999, the FCC added certain additional capabilities necessary to meet the requirements of such act, which are to become applicable by September 2001. Also, issues remain as to when carriers may obtain reimbursement from the federal government for upgrades related to such requirements. U.S. Cellular will work diligently to comply with all applicable requirements of the Communications Assistance to Law Enforcement Act in cooperation with industry groups and standard setting bodies. The FCC has recently taken action in proceedings: (1) to ensure that the customers of wireless providers, among other carriers, will receive complete, accurate, and understandable bills; (2) to establish safeguards to protect against unauthorized access to customer information, though these rules have been overturned, at least temporarily, by court order; (3) to increase to 55 megahertz ("MHz") in rural areas its 45 MHz "cap" on the amount of spectrum which entities under common ownership and control may hold in a single wireless market and to relax its related cellular cross ownership restrictions; and (4) to require improved access to telecommunications facilities by persons with disabilities. The FCC also has pending proceedings: (1) to implement a wireless billing option under which wireline customers who call wireless customers could be charged for wireless "airtime" as opposed to the wireless customer receiving the call, as is the case at present ("calling party pays"); (2) to implement requirements for wireless providers to set interstate interexchange rates in each state at levels no higher than the rates charged to subscribers in any other state; and (3) to set national policy for the allocation by state public utilities commissions of telephone numbers to wireline and wireless carriers. U.S. Cellular will monitor such proceedings and comply with new federal requirements as they become applicable. The FCC has also allocated a total of 140 MHz to broadband PCS (a portion of radio spectrum from 1850 MHz to 1990 MHz), 20 MHz to unlicensed operations and 120 MHz to licensed operations, consisting of two 30 MHz blocks in each of the 51 Major Trading Areas ("MTAs") and one 30 MHz block and three 10 MHz blocks in each of 493 Basic Trading Areas ("BTAs"). Cellular operators and those entities under common ownership with them are permitted to participate in the ownership of PCS licenses, except for those PCS licenses reserved for small businesses, and licenses for PCS service areas in which the cellular operator owns a 20% or greater interest in a cellular licensee, the service area of which covers 10% or more of the population of the PCS service area. In the latter case, the cellular license holder is limited to 20 MHz of PCS channels in urban areas. In rural areas, such cellular operators may also now have 30 MHz of PCS channels. PCS technology is similar in some respects to cellular technology. Where it has become commercially available, this technology is capable of offering increased capacity for wireless two-way and one-way voice, data and multimedia communications services and has resulted in increased competition with U.S. Cellular's operations in the markets where PCS systems have begun operations. The 20 ability of these PCS licensees to complement or compete with existing cellular licensees will be affected by future FCC rule-makings. These and other future technological and regulatory developments in the wireless telecommunications industry and the enhancement of current technologies will likely create new products and services that are competitive with the services currently offered by U.S. Cellular. U.S. Cellular could be adversely affected by such technological and regulatory developments. In January, 2000, the FCC took an action which may have an impact on both cellular and PCS licensees. Pursuant to a congressional directive, the FCC adopted service rules for licensing the commercial use of 30 MHz of spectrum in the 746-764 MHz and 776-794 MHz spectrum bands. That spectrum is to be auctioned, beginning in June 2000. The licenses are divided into six regional service areas, with 20 and 10 MHz blocks, and are designed to allow for a wide range of wireless services. There will be no eligibility restrictions on participation in the auctions for this spectrum. Cellular and PCS carriers and other entities will be eligible to bid in the auction. Use of the spectrum by licensees selected in the auction may be affected by the presence of incumbent broadcast licensees on some of the auctioned frequencies through at least December 31, 2006. STATE AND LOCAL REGULATION. U.S. Cellular is also subject to state and local regulation in some instances. In 1981, the FCC preempted the states from exercising jurisdiction in the areas of licensing, technical standards and market structure. In 1993, Congress preempted states from regulating the entry of cellular systems into service and the rates charged by cellular systems to customers. The siting and construction of the cellular facilities, including transmitter towers, antennas and equipment shelters are still subject to state or local zoning and land use regulations. However, in 1996, Congress amended the Communications Act to provide that states could not discriminate against wireless carriers in tower zoning proceedings and had to decide on zoning requests with reasonable speed. In addition, states may still regulate other terms and conditions of cellular service. The FCC is required to forbear from applying any statutory or regulatory provision that is not necessary to keep telecommunications rates and terms reasonable or to protect consumers. A state may not apply a statutory or regulatory provision that the FCC decides to forbear from applying. In addition, the FCC must review its telecommunications regulations every two years and change any that are no longer necessary. Further, the FCC is empowered under certain circumstances to preempt state regulatory authorities if a state is obstructing the Communications Act's basic purposes. U.S. Cellular and its subsidiaries have been and intend to remain active participants in proceedings before the FCC and state regulatory authorities. Proceedings with respect to the foregoing policy issues before the FCC and state regulatory authorities could have a significant impact on the competitive market structure among wireless providers and the relationships between wireless providers and other carriers. U.S. Cellular is unable to predict the scope, pace or financial impact of policy changes which could be adopted in these proceedings. COMPETITION U.S. Cellular's principal competitor for cellular telephone service in each market is the licensee of the second cellular system in that market. Since each competitor operates its cellular system on a 25 MHz frequency block licensed by the FCC using comparable technology and facilities, competition for customers between the two systems in each market is principally on the basis of quality of service, price, size of area covered, services offered, and responsiveness of customer service. The competing entities in many of the markets in which U.S. Cellular has an interest have financial resources which are substantially greater than those of U.S. Cellular and its partners in such markets. The FCC's rules require all operational cellular systems to provide, on a nondiscriminatory basis, cellular service to resellers which purchase blocks of mobile telephone numbers from an operational system and then resell them to the public. In addition to competition from the other cellular licensee in each market, there is also competition from PCS providers and SMR/ESMR system providers, both of which are able to connect with the landline telephone network. PCS providers have initiated service in many markets across the United States, including markets where U.S. Cellular has operations. PCS providers offer digital, wireless 21 communications services to their customers. U.S. Cellular expects PCS operators to continue deployment of PCS in portions of all of U.S. Cellular's clusters throughout 2000. ESMR, an enhanced SMR system, has cells and frequency reuse like other wireless services, thereby eliminating any technological limitation. In recent years, ESMR providers have initiated service in several of U.S. Cellular's markets. Although less directly a substitute for cellular service, wireless data services and paging services may be adequate for those who do not need full two-way voice service. Similar technological advances or regulatory changes in the future may make available other alternatives to cellular service, thereby creating additional sources of competition. Continuing technological advances in the communications field make it difficult to predict the extent of additional future competition for cellular systems. For example, the FCC has allocated radio channels to mobile satellite systems in which transmissions from mobile units to satellites would augment or replace transmissions to cell sites, and several consortia to provide such service have been formed. Such systems are designed primarily to serve the communications needs of remote locations and mobile satellite systems could provide viable competition for cellular systems in such areas. It is also possible that the FCC may in the future assign additional frequencies to cellular telephone service to provide for more than two cellular telephone systems per market. 22 TELEPHONE OPERATIONS OVERVIEW TDS's telephone operations are conducted through TDS Telecom and its subsidiaries. TDS Telecom is a full-service local exchange carrier providing high-quality telecommunication services, including local and long-distance telephone service and Internet access, to rural and suburban communities through TDS Telecom's 104 telephone company subsidiaries and to small and midsized towns and metropolitan areas through TDS Telecom's two CLEC subsidiaries. Each of the 104 telephone companies, ranging in size from approximately 500 to 64,000 access lines, is an ILEC. An ILEC is an incumbent local telephone company that traditionally had the exclusive right and responsibility to provide local transmission and switching services in its designated service territory. TDS Telecom served approximately 571,700 access lines through its ILEC subsidiaries at December 31, 1999, in 28 states. The table below sets forth, as of December 31, 1999, the nine largest states of ILEC operations of TDS Telecom based on the number of access lines and the total number of access lines operated by all of the telephone subsidiaries of TDS Telecom.
NUMBER OF ILEC ACCESS LINES AT STATE DECEMBER 31, 1999 % OF TOTAL - ----- ------------------------------ ---------- Tennessee............................................. 98,106 17.2% Wisconsin............................................. 94,466 16.5 Georgia............................................... 45,262 7.9 Minnesota............................................. 33,076 5.8 Indiana............................................... 30,435 5.3 Alabama............................................... 27,332 4.8 Michigan.............................................. 25,359 4.4 Maine................................................. 24,980 4.4 New York.............................................. 23,602 4.1 ------- ----- Total for 9 Largest States........................ 402,618 70.4 Other States.......................................... 169,082 29.6 ------- ----- Total ILEC...................................... 571,700 100.0% ======= =====
TDS Telecom provides consumers and businesses with landline local telephone service through its switching and intra-city network. Long-distance or toll service is provided through connections with long-distance carriers, primarily AT&T and the Regional Bell Operating Companies ("RBOCs"), which purchase network access from TDS Telecom. In 1998, TDS Telecom began providing telecommunications services as a CLEC in Madison, Appleton, Green Bay, Menasha and Neenah, Wisconsin under the TDS METROCOM brand name and in Minnesota markets including Brainerd, Duluth and St. Cloud under the USLink brand name. CLEC is a term which depicts companies that enter the operating areas of ILECs to offer competing local exchange service and other telephone services. In 1999, TDS METROCOM began providing service in Oshkosh, Wisconsin. TDS Telecom served approximately 74,100 customers through its CLEC subsidiaries at December 31, 1999. Future growth in ILEC telephone operations is expected to be derived from providing service to new or presently underserved establishments, from business expansion in the areas served by TDS Telecom and others, from upgrading existing customers to higher grades of service and increasing penetration of services, from increased usage of the network through both local and long-distance calling, from providing additional services made possible by advances in technology and from the acquisition of additional telephone companies. Future growth in CLEC telephone operations is expected to be derived from expansion into new markets and continued penetration in markets currently served. 23 TDS Telecom is committed to offering its customers a full complement of telecommunications services, and is bundling those services in customer friendly packages in order to be a single source for their telecommunications needs. TDS Telecom intends to provide its customers with an ever-growing range of communications products and services covering their local, long distance, data, video and wireless needs. The following table summarizes certain information regarding TDS Telecom's telephone operations:
YEAR ENDED OR AT DECEMBER 31, -------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) ILEC Access lines(1).......... 571,700 547,500 515,500 484,500 425,900 % Residential............... 77.9% 78.1% 78.3% 79.9% 80.6% % Business (nonresidential)........... 22.1% 21.9% 21.7% 20.1% 19.4% CLEC Access lines(1).......... 74,100 34,100 -- -- -- Total Revenues................ $ 545,917 $ 488,104 $ 437,624 $ 395,059 $ 354,841 Operating cash flow........... 237,901 205,814 198,164 190,995 175,594 Depreciation and amortization expense...................... $ 123,350 $ 111,402 $ 98,021 $ 88,346 $ 77,354 Operating income.............. 114,551 94,412 100,143 102,649 98,240 Construction expenditures..... 122,181 143,126 151,460 144,440 104,372 Business segment assets....... $1,472,556 $1,352,554 $1,244,174 $1,213,884 $1,074,439
- ------------------------------ (1) An "access line" is a single or multi-party circuit between the customer's establishment and the central switching office. TDS Telecom is a wholly-owned business unit of TDS, founded in 1968. TDS Telecom's corporate headquarters are located in Madison, Wisconsin. BUSINESS STRATEGY TDS Telecom has historically produced revenue growth in its ILEC markets by providing its customers with state-of-the-art telecommunications solutions, maintaining a high quality of on-going service and selectively acquiring local telephone companies. Management believes that TDS Telecom has a number of advantages as an ILEC, including a modern network substantially upgraded to provide a variety of advanced calling services ("ACS"), a strong local presence and established brand name, economies of scale not available to smaller independent operators and attractive, growing markets. However, the competitive environment in the telecommunications industry has changed significantly as a result of technological advances, increasing customer requirements and regulatory changes, including the Telecommunications Act of 1996. In response to this changing competitive environment, TDS Telecom's business plan is designed to leverage TDS Telecom's strength as an ILEC into a full-service telecommunications company. The business plan provides for TDS Telecom to meet these challenges in three areas: - by growing and protecting TDS Telecom's core ILEC business; - by leveraging its strengths into attractive new markets; and - by creating a robust line of data products and services, and selling them in existing and new markets. GROW AND PROTECT CORE ILEC BUSINESS Management of TDS Telecom believes that the key to growing and protecting its existing ILEC markets is to continue to build customer loyalty by providing superior customer service, offering a suite of standardized products and services, including bundled service offerings, and rapidly developing new products and services. Management of TDS Telecom believes that its community-based business offices offering full face-to-face customer service are a fundamental competitive advantage. That advantage was further enhanced in 1999 when TDS Telecom completed its virtual business office initiative, 24 which links multiple business offices electronically, permitting TDS Telecom to maintain its local presence while expanding hours and achieving certain efficiencies of a consolidated call center. With respect to products and services, TDS Telecom markets itself to consumers as a single telecommunications provider offering bundled packages of advanced telecommunications services including local, long distance, Internet and data services. These service packages are all offered under the TDS Telecom brand name in order to benefit from the brand equity in this name. In addition, management of TDS Telecom believes it can achieve cost economies by refining its acquisition strategy to focus on certain acquisitions which will increase the geographic clustering of TDS Telecom's ILEC markets. See "ILEC Telephone Markets". LEVERAGE STRENGTHS INTO CLEC MARKETS TDS Telecom has begun its controlled entry into certain targeted midsized communities, geographically proximate to existing TDS Telecom facilities and service areas, for facilities-based entry as a CLEC. Management of TDS Telecom believes that the smaller size of these markets reduces the likelihood of facing significant competition and it can offer a significantly improved service level over that of the incumbent local exchange carrier. Because it can utilize the infrastructure (e.g. billing systems, network control center, operating systems, financial and control accounting, technology planning, etc.) developed for the TDS Telecom ILEC business, management believes that TDS Telecom can become profitable in markets too small for start-ups and become profitable faster than start-ups in the larger of its targeted markets. As in its ILEC markets, TDS Telecom intends to be the single source for customers' telecommunications needs in its CLEC markets. The geographic focus of TDS Telecom's CLEC strategy is designed to leverage TDS Telecom's existing infrastructure to facilitate early entry into new CLEC markets and to complement TDS Telecom's ILEC clustering strategy. Consistent with this strategy, TDS Telecom initiated service as a CLEC in Madison, Wisconsin, and in Brainerd, Duluth and St. Cloud, Minnesota, in January 1998 and initiated service as a CLEC in Appleton, Green Bay, Menasha and Neenah, Wisconsin, in June 1998. In 1999, TDS Telecom initiated service in Oshkosh, Wisconsin. In Minnesota, TDS Telecom has adopted a slightly different strategy by entering as a CLEC through its long-distance subsidiary, USLink. USLink is able to build on its relationship developed as a long distance reseller and now offers local and Internet access services to its long distance customers in a number of locations in Minnesota. USLink began converting customers in Brainerd, Duluth and St. Cloud to its facilities in late 1999, as part of its long-term strategy. USLink will complete a substantial portion of this conversion in 2000. TDS Telecom plans to expand its CLEC operations to additional markets with a controlled entry strategy. See "CLEC Telephone Markets". PURSUE EMERGING DATA MARKETS Data communications is one of the fastest growing segments of the telecommunications services industry. In light of the growth of Internet use and rapid introduction of new telecommunications technology, TDS Telecom intends to offer a suite of data products in all of its markets, thereby positioning itself as a full-service data networking service provider. TDS Telecom currently provides Internet access service to its ILEC and CLEC customers. Most of TDS Telecom's data products are in the early stages of development. See "Data Initiatives". ILEC TELEPHONE MARKETS TDS Telecom's goal is to be a leading provider of electronically deliverable products in its ILEC markets. According to published sources, at December 31, 1999 TDS Telecom was the 8th largest non-Bell local exchange telephone company in the United States, based on the number of telephone access lines served. At December 31, 1999, the telephone subsidiaries of TDS Telecom served approximately 571,700 access lines in 28 states. TDS Telecom currently operates over 460 central office and remote switching centers in its telephone operating areas. All of TDS Telecom's access lines are served by digital switching technology, which, in conjunction with other technologies, allows TDS Telecom to offer additional premium services to its customers, including call forwarding, conference calling, caller identification, selective call ringing and call waiting. 25 As one of the major independent telephone companies in the United States, TDS Telecom's ILECs provide both local telephone service and access to the long distance network for customers in their respective service areas. The ILECs also provide directory advertising through a contract with another company, and billing and collection services to interexchange carriers ("IXCs"). IXCs are telephone companies that provide long-distance telephone service between points in different local exchange areas, states or geographically defined Local and Access Transport Areas ("LATAs"). TDS Telecom provides centralized administrative and support services to field operations from its corporate offices in Madison, Wisconsin. RETAIL MARKETS TDS Telecom's ILEC presence includes a Retail Markets Group and Wholesale Markets Group. The Retail Markets Group is the customer-facing organization for all retail sales with residential and commercial customers. The Retail Markets Group includes 109 sales and service offices located in 28 states. The retail customer base is a mix of rural and suburban customers, with significant concentrations in the Upper Midwest and in the Southeast. Approximately 78% of TDS Telecom's retail access lines serve residential customers and approximately 22% serve business customers. Most business customers could be described as small business or small office/home office type customers. The Retail Markets Group has three primary goals to support its grow and protect strategy: - build customer loyalty; - grow revenues; and - control costs. Management of TDS Telecom believes it can achieve these goals by offering a continually updated flow of new products and services through value-added packages and bundles, by building brand equity in the TDS Telecom brand name, and by providing superior customer service to its retail customers. VALUE ADDED PRODUCT BUNDLES AND PACKAGES. Management of TDS Telecom believes that its consumer and business customers have a strong preference to purchase all of their telecommunications services from a single provider. TDS Telecom believes that by offering a full complement of telecommunication services and bundling those services in customer-friendly packages it can build customer loyalty and reduce customer churn. TDS Telecom added several new bundles and services in 1999 by combining existing services of its network or partnering with other vendors. These products include: - Privacy Pack (five ACS services or switch-based number translation services offered to customers as a package), - Caller ID Starter Pack (Caller ID and Call Waiting), - TDSNET (Internet service)/Voice Mail (switch-base answering machine service) and - National Directory Assistance (directory assistance that covers the entire nation versus a single area code). TDS Telecom will continue to pursue relationships with strategic partners to further develop the long distance, video and wireless components of its product mix. BRAND EQUITY. TDS Telecom continued the branding process started in 1996. This process adopted the TDS Telecom name as a unified brand name across its markets to build its brand image. TDS Telecom has continued its customer awareness campaign to build awareness of the TDS Telecom name. TDS Telecom continues to build name awareness through existing customer-facing vehicles such as bill statements, and vehicle and company signage. Centralized media purchasing has enabled higher reach and frequency at a lower cost. In 1999, TDS Telecom continued to focus on building a positive share of mind with current and prospective customers. This was done by increasing the volume of public 26 relations messages and through linkage of company image with sales and marketing messages. Management of TDS Telecom believes that branding will increase the loyalty of its customers and also reduce expenses through more cost-effective marketing. CUSTOMER SERVICE. TDS Telecom makes a unique customer service offer to its retail customers. TDS Telecom is a large national company with a local sales and service office in each of its markets. This combination provides TDS Telecom's retail customers with the economies of scale and product offers generally associated with large companies. It also provides the high levels of personal customer service generally associated with small companies, through community-based professional service representatives and field representatives who both live and work in the communities served. TDS Telecom's strength in two key areas--product/price and customer service--provides a fundamental competitive advantage for TDS Telecom. TDS Telecom completed the Virtual Business Office ("VBO") initiative in 1999. This initiative enables multiple TDS Telecom local sales and service offices to function as a single office. Management of TDS Telecom believes that VBO facilitates enhanced customer service at a lower cost. Cost savings are expected to come through standardization of training and procedures and improved voice and customer service application technology. Enhanced customer service will come through expanded hours of operation, improved product, service and sales training for all customer sales and service representatives, and through improved customer access to company personnel on the first call. Initial customer surveys show that customer satisfaction with transactions in the VBO environment is equal to or better than satisfaction with transactions in the prior environment. WHOLESALE MARKETS The Wholesale Markets Group focuses on TDS Telecom's wholesale customers and has traditionally provided a majority of TDS Telecom's revenues. TDS Telecom receives much of its ILEC revenue from the sale of traditional wholesale services, such as local network access and billing and collections services, to the IXCs. As a result, TDS Telecom continues to provide a high level of service to traditional IXC wholesale customers such as AT&T, MCI, Sprint and the RBOCs. ACCESS REVENUES. TDS Telecom's operating telephone subsidiaries receive access revenue as compensation for carrying interstate and intrastate long-distance traffic on its local networks. The interstate and intrastate access rates charged include the cost of providing service plus a fair rate of return. Access revenues account for approximately 55% of the revenue generated by TDS Telecom's ILEC subsidiaries. TDS Telecom participates in the National Exchange Carrier Association ("NECA") interstate common line and traffic sensitive tariffs for all but one of its ILEC subsidiaries. These operating companies participate in the access revenue pools administered by NECA, which collect and distribute revenue from interstate access services. The FCC created NECA and it is subject to FCC rules and oversight. The FCC regulates interstate rates for dominant carriers and other matters relating to interstate telephone service. On June 4, 1998, the FCC released a Notice of Proposed Rulemaking on access reform for local exchange carriers subject to rate of return regulation. In the Notice, the FCC proposed changes similar to those which were ordered for price cap LECs in 1997. The proposed changes could negatively affect rural LECs' ability to recover costs from the interstate jurisdiction. In addition to the FCC's initiatives to reform access, there have been industry initiatives to develop an overall plan for access reform, universal service, the form of regulation and separations. These initiatives seek to reduce access rates, eliminate implicit subsidies, and maintain universal service in a way acceptable to small, rural LECs as markets become more competitive. The FCC also released a Notice of Proposed Rule making on jurisdictional separations reform on October 7, 1997. In the Notice, the FCC reviewed the current procedures for separating LECs' service costs between state and federal jurisdictions. Many of the proposals in the Notice seek to limit costs assigned to the interstate jurisdiction and seek to assign greater costs to the intrastate jurisdiction. To the extent that the costs are not made up in the federal and state universal service mechanisms, TDS Telecom may seek rate increases to offset any reductions in interstate revenues. The FCC has not yet issued a final order on either Notice. 27 TDS Telecom is also monitoring the effects of increasing volumes of Internet traffic on the operating telephone subsidiaries' ability to appropriately recover the network-related costs associated with this traffic. Unless changes to the access charge methodology and/or to the separations process are made, increasing costs will continue to be shifted to the intrastate jurisdiction for recovery and TDS Telecom may need to seek rate increases to recover these costs. The ILEC trade associations are advocating a freeze in the traffic factors that would otherwise continue are shifting increasing levels of Internet costs into the intrastate jurisdiction. Where applicable and subject to state regulatory approval, TDS Telecom's ILEC subsidiaries utilize intrastate access tariffs and participate in intrastate revenue pools. Many intrastate toll revenue pooling arrangements, a source of substantial revenues to TDS Telecom's ILECs, have been replaced with access-charge-based arrangements. In these cases, access charges are typically set to generate revenue flows similar to those realized in the pooling process. To the extent that state-ordered access charge revisions reduce revenues, TDS Telecom may seek adjustments in other rates. Some states are utilizing state high cost funds to offset access charge reductions. FEDERAL FINANCING TDS Telecom's primary sources of long-term financing for additions to telephone plant and equipment have been the Rural Utilities Service ("RUS"), the Rural Telephone Bank ("RTB") and the Federal Financing Bank ("FFB"), agencies of the United States of America. The RUS has made primarily 35-year loans to telephone companies since 1949, at interest rates of 2% and 5%, for the purpose of improving telephone service in rural areas. Currently, the RUS is authorized to issue hardship loans at a 5% interest rate and other loans at an interest rate approximating the government's rate for instruments of comparable maturity. The RTB, established in 1971, makes loans at interest rates based on its average cost of money (5.54% for its fiscal year ended September 30, 1999), and in some cases makes loans concurrently with RUS loans. In addition, the RUS guarantees loans made to telephone companies by the FFB at the federal cost of money. All such loans have a maturity date based on the life of the assets being financed. Substantially all of TDS Telecom's telephone plant is pledged under, or is otherwise subject to, mortgages securing obligations of the operating telephone companies to the RUS, RTB and FFB. The amount of dividends on common stock that may be paid by the operating telephone companies is limited by certain financial requirements set forth in the mortgages. In any calendar year, companies with greater than 40% net worth to total assets can distribute the entire amount above 40%. The majority of TDS Telecom's telephone subsidiaries exceed this percentage. Approximately $470.1 million may be paid as dividends from the operating subsidiaries to TDS Telecom. At December 31, 1999, TDS Telecom's operating telephone companies had unadvanced loan commitments under the RUS, RTB and FFB loan programs aggregating approximately $124.3 million, at a weighted average annual interest rate of 6.01%, to finance specific construction activities in 2000 and future years. These loan commitments are generally issued for five-year periods and may be extended under certain circumstances. TDS Telecom's operating telephone companies intend to make further applications for additional loans from the RUS, RTB and FFB as their needs arise. There is no assurance that these applications will be accepted or what the terms or interest rates of any future loan commitments will be. FEDERAL SUPPORT REVENUES To promote universal service, the FCC developed a number of federal support mechanisms to keep telephone rates affordable for both high-cost rural areas and low-income customers. Many of TDS Telecom's ILEC subsidiaries provide telephone service in rural areas and all of them offer service to a range of customers including low-income customers. The FCC continues to work on reforming universal service. The Telecommunications Act codified universal service; set forth clear principles for ensuring affordable access to modern telephone service 28 nationwide; established discounts for schools, libraries and rural health care facilities; and established a federal-state joint board to make recommendations to the FCC regarding implementation of the universal service provisions of the Telecommunications Act. On May 8, 1997, the FCC released its universal service order. The FCC adopted the use of forward-looking proxy cost models to determine costs rather than relying on actual costs. Non-rural companies will begin using the FCC's Hybrid Cost Proxy Model in 2000 to determine their costs of providing universal service. Rural LECs will continue to receive support based on their actual costs using the existing mechanisms, as opposed to proxy models, through at least December 31, 2000. The Rural Task Force (which is a committee appointed by the FCC including representatives of the rural ILEC industry, the public and other telecommunications companies) is currently working on its recommendation to the Federal-State Joint Board on the appropriate mechanism for rural carriers. Rural LECs will not transition to another method of receiving support until it can be shown that the method will be sufficient to meet the universal service needs of customers in the areas they serve. The Rural Task Force's recommendation is not due to the Joint Board and the FCC until September 2000. All telecommunications carriers are required to contribute to the universal service fund based on their interstate and international revenues. Carriers may recover their contributions through their access charges; however, they are not required to do so. Since TDS Telecom's ILECs are members of the NECA pools, they will continue to recoup their contributions through access charges rather than through end-user charges. Historically, telephone company acquisition and investment decisions assumed the ability to recover costs and a reasonable rate of return through local service, access, and support revenues. As universal service and access are being reformed, these revenues streams are becoming less certain. Potential declining access rates and revisions to universal service support may lead to higher local rates and/or declining earnings. Significant changes in the universal service funding system could affect TDS's and TDS Telecom's acquisition and investment strategy. TELEPHONE ACQUISITIONS TDS and TDS Telecom continually review attractive opportunities to acquire operating telephone companies. Since January 1, 1995, TDS has acquired 14 telephone companies serving a total of 57,900 net access lines for an aggregate consideration totaling $161.5 million, all of which were transferred to TDS Telecom. The consideration paid by TDS consisted of $22.3 million in cash and notes, 30,000 TDS Preferred Shares and 3.0 million TDS Common Shares. TDS sold one telephone company serving 1,100 access lines in 1995. Telephone holding companies and others actively compete for the acquisition of telephone companies and such acquisitions are subject to the consent or approval of regulatory agencies in most states and, in some cases, to federal waivers that may affect the form of regulation or amount of interstate cost recovery of acquired telephone exchanges. While management believes that it will be successful in making additional acquisitions, there can be no assurance that TDS or TDS Telecom will be able to negotiate additional acquisitions on terms acceptable to them or that regulatory approvals, where required, will be received. TDS Telecom provides the telephone subsidiaries with centralized purchasing and general management and other services. These services afford the subsidiaries expertise in finance, accounting and treasury services; marketing; customer service; traffic; network management; engineering and construction; customer billing; rate administration; credit and collection; and the development of administrative and procedural practices. CLEC TELEPHONE MARKETS The Telecommunications Act facilitates entry of TDS Telecom into new markets by requiring non-exempted ILECs (e.g., RBOCs and GTE) to provide reasonable and non-discriminatory interconnection services and access to unbundled network elements to any CLEC that seeks to enter the markets in which the ILEC already offers services. TDS Telecom, through TDS METROCOM and USLink, 29 wholly owned subsidiaries of TDS Telecom, has targeted certain midsized, geographically clustered communities, for facilities-based entry as a CLEC. Management of TDS Telecom believes that the size of many of the target markets will sustain a limited number of facilities-based competitors in addition to the ILEC. While additional competitors may enter such markets as resellers, TDS Telecom believes only facility-based CLECs will be significantly profitable over the long term because facilities will provide a long-run cost advantage, discourage further competitors from entry and enable an alternative wholesale strategy for growth. To this end, TDS Telecom plans to build switching and other network facilities in its targeted CLEC markets. TDS Telecom plans to follow a "clustering" approach to building its CLECs which will allow it to seek regional long distance traffic, share service and repair resources, and realize marketing efficiencies. As in its ILEC markets, TDS Telecom intends to become an Integrated Communications Provider ("ICP") in its chosen CLEC markets. It will provide local, long distance, Internet access and other services through its own facilities and via resale. TDS Telecom intends to resell mobile services in many markets. TDS Telecom's first CLEC, TDS METROCOM, became operational in Madison, Wisconsin, in January 1998. TDS METROCOM is a facilities-based, full-service alternative to the Ameritech (now SBC) telephone company, providing both voice and data services to commercial and consumer accounts, as well as wholesale services to IXCs and other carriers. TDS METROCOM now also operates as a CLEC in Appleton, Green Bay, Menasha, Neenah and Oshkosh, Wisconsin. In early 2000, TDS METROCOM expects to begin facility-based services in the western suburbs of Milwaukee and Fond Du Lac, Wisconsin. USLink began offering local service (in addition to its long distance and Internet products) on a resale basis in 1998 in Minnesota, with a focus on the Brainerd, St. Cloud and Duluth markets. In 1999, USLink deployed local switching platforms in three markets in Minnesota--Brainerd, St. Cloud and Duluth to enhance the operating margins. TDS Telecom's CLEC strategy is currently focused on markets in Wisconsin and Minnesota and adjoining geographical areas. TDS Telecom expects to continue to grow the competitive local exchange business with a controlled entry strategy. The CLEC strategy will place primary emphasis on the small and medium-sized commercial and wholesale customers. Consumer markets are typically pursued soon after the CLEC enters the commercial market. Wholesale customers purchase transmission capacity and access services from CLECs. These services will be available to wholesale customers shortly after network completion. TDS Telecom believes that these customers are generally more sophisticated and are more likely to switch providers to obtain network reliability, redundancy and more flexible pricing. Medium-sized commercial prospects are characterized by above-average access line to employee ratios, heavier utilization of data services, and a focus on using telecommunications for business improvement rather than on cost reduction concerns. Commercial prospects are generally growth-oriented and may be underserved by the ILEC or major IXCs. TDS Telecom's CLECs will pursue a personal selling approach for their primary target markets. This approach builds on customer preference for integrated communication services and the customer's perception that the quality of the product includes personalized service. While the CLECs are positioning themselves as high-quality providers, they expect price competition from the ILECs as they attempt to retain and regain their customers. The CLECs will seek to maintain an efficient cost structure to ensure that they can match price-based initiatives from competitors. The ILEC is likely to be constrained in the short term by the existing regulatory environment; as a result, TDS Telecom's CLECs expect to be more flexible in responding to customer needs. To effectively compete in this new environment, TDS Telecom's CLECs will enhance their efforts at product development to provide high-quality, cutting-edge services to their customers. TDS Telecom believes the targeted CLEC markets present a significant opportunity to market data services, as the major carriers serving these locations have typically underinvested in these markets despite the growing demand. Switched data communications represents one of the fastest growing segments of the telecommunications services market. Computer proliferation, connectivity via local and wide area networks, the Internet and the emergence of multimedia applications are all driving demand. As a result, the United States network infrastructure is strained at the local level. TDS Telecom's CLEC initiative will add local capacity in its selected markets designed to help accommodate this growth. 30 DATA INITIATIVES TDS Telecom is also seeking to recognize additional revenue opportunities in related areas of the telecommunications industry. In 1999 TDS Telecom continued to expand its investments into data communications to offer a suite of data products in its CLEC and in many of its ILEC markets. TDSNET, TDS Telecom's Internet service provider, expanded its operation in 1999 adding 16 additional markets. During 1999, TDS Telecom completed the integration of its Internet and developing data services operations into products and services offered by its ILEC and CLEC business units. Alignment of TDS's growing Internet product line into its core business units, coupled with sales and marketing strategies focused on in-territory and nearby markets, has allowed TDS Telecom to continue its Internet sales growth while benefiting from operational and financial synergies. At December 31, 1999, TDS Telecom provided Internet services to approximately 73,000 customers through its ILEC and CLEC subsidiaries. In furtherance of TDS Telecom's strategy to position itself as a full-service, networking service provider, it plans to make high-speed Digital Subscriber Loop ("DSL") based services available in the near term to customers in several of its ILEC markets. TDS Telecom believes DSL technology will form the foundation for new, high-speed data services and applications and has conducted trials of DSL modems manufactured by several vendors. TDS Telecom's first commercial offering of DSL began in Wisconsin in 1998 in TDS METROCOM and DSL was introduced in the ILEC Tennessee market in the fall of 1999. This technology is employed to offer high-speed Internet access as well as high-speed LAN connectivity. TDS Telecom's data business offerings include web-hosting services, co-location services and customized web content development for various sized customer market segments. TDS Telecom is offering enterprise network management center services to large businesses and government through expanded use of its own network management facilities, and its knowledgeable personnel. Such services consist of centralized network monitoring as well as network management. In 1997, the State of Wisconsin awarded TDS Telecom the "BadgerNet" enterprise network management center multi-year contract. The BadgerNet enterprise network management center has been designed to provide a focal point for the operational management of state agency and university networks, services and equipment and began operations in 1998. TDS Telecom is currently developing an enterprise network management center product offering. TDS Telecom believes that it has the experience, partnerships and technology to actively manage networks for third parties, and has the capacity to provide enterprise network management center services to additional third parties. Although TDS Telecom currently operates these data businesses, they are in early stages of development. There can be no assurance that TDS Telecom will substantially expand these businesses. SALES AND MARKETING--ILEC TDS Telecom seeks to leverage its networks through sales and marketing activities targeted at two separate customer groups: retail and wholesale. Retail customers are composed primarily of residential customers, businesses, government and institutional telecommunications users. Wholesale customers consist of IXCs and information service providers such as commercial data processing service providers and Internet service providers. RETAIL MARKETS COMMERCIAL MARKETS. Businesses account for approximately 22% of TDS Telecom's ILEC access lines. TDS Telecom focuses its marketing on information-intensive industries such as financial services, health services, realty, hotels and motels, education and government. TDS Telecom uses its direct sales force, targeted mailings, and telemarketing to sell products and services to the commercial markets, which are segmented into tiers based on size and strategic importance. Different sales and distribution channels are employed for each segment. Account executives focus on the most profitable customers by staying in contact with them on a regular basis. TDS Telecom employs an aggressive compensation plan for its account executives targeted at revenue and customer satisfaction results. CONSUMER MARKETS. TDS Telecom's promotional and sales strategy consists of two major initiatives: building brand equity by creating awareness of the TDS Telecom brand name; and using direct 31 marketing to sell specific products and product groupings. Approximately 78% of TDS Telecom's total ILEC access lines are residential. Approximately 71% of these residential customers live in rural areas, while the other 29% are located in suburban settings. The nature of TDS Telecom's markets has historically made direct marketing more effective than mass media such as radio and television. In addressing its consumer markets, TDS Telecom has made extensive and aggressive use of direct mail. It has been more selective, though still active, in the use of telemarketing as a means of generating awareness, qualified leads, and actual sales. Newspaper advertising is used as well. Uniform branding has made the use of mass media more attractive, and TDS Telecom has increasingly incorporated these elements into its marketing media mix. In nearly all of its ILEC markets, TDS Telecom offers the complete family of custom calling services including call waiting, call forwarding, three-way calling, and speed dialing. In 1999, TDS Telecom sold 10,959 residential second lines, an increase of 29% over 1998. TDS Telecom's advanced calling services family of products is centered around Caller ID service. In 1999, the ACS family of services was available to 96% of the lines in service compared to 89% in 1998. Penetration of Caller ID increased from 19% to 24% of lines equipped, and aggregate penetration of ACS increased from 35% to 41% of lines equipped. WHOLESALE MARKETS Access charges, billing and collection services and other primarily traditional wholesale offerings generated $286 million, or approximately 58%, of TDS Telecom's revenue for the year ended December 31, 1999. Account teams in Madison, Wisconsin, and Knoxville, Tennessee currently service wholesale customers. These teams manage and coordinate the purchasing of access services by the major IXCs and RBOCs on a national basis. TDS Telecom also provides new wholesale offerings to non-traditional customers. TDS Telecom has targeted wireline and wireless telecommunications service providers and select vertical markets. COMPETITION ILEC MARKETS The Telecommunications Act has helped to introduce a new wave of competition in the telecommunications industry. The Telecommunications Act embraced competition in telecommunications as a national policy and also started the process of deregulation. The Telecommunications Act requires ILECs to provide reasonable and non-discriminatory interconnection services and access to unbundled network elements to any CLEC that seeks to enter the markets in which the ILEC already offers services. The Telecommunications Act also allows CLECs to co-locate network equipment on the ILEC's premises and prevents ILECs and CLECs from unduly restricting each other from use of facilities or information that would allow other organizations to effectively compete with them. The FCC has recently added further interconnection requirements to spur competitive broadband development. All 104 TDS Telecom ILEC companies are exempt from many of the provisions of the Telecommunications Act. Specifically, they are exempt from the requirements imposed on the ILECs until they receive a bona fide request for interconnection and the state commission lifts the exemption. This, coupled with the economics of competing in lower population density markets, may delay certain forms of competition in TDS Telecom ILEC service areas while additional regulatory issues are resolved. However, some TDS Telecom ILECs already face interconnection requests, filed by potential competitors, and TDS Telecom believes there will eventually be open entry into nearly every aspect of the telephone industry, including local service, interstate and intrastate toll, switched and special access services and customer premises equipment. TDS Telecom expects competition in the telephone business to be dynamic and intense as a result of the entrance of new competitors and the development of new technologies, products and services. Increased competition is expected from competitive access providers, IXCs, out-of-territory RBOCs and independent telephone companies, niche entrepreneurs, cable and utility companies, and wireless and satellite providers. To face this increasing competition, TDS Telecom's strategy is to build customer loyalty by providing superior customer service, offering a suite of standardized products and services bundled in response to customer preferences, and rapidly developing new data products and services. 32 In the long run, TDS Telecom believes that the wireless companies pose the most significant threat to the local exchange industry. Wireless providers are also seeking universal service support in various rural markets. Although traditional analog cellular radio service currently cannot match the features or the clarity of communications provided via wireline networks, and as a result of high error rates and speed limitations is not suitable for data transmission, advances in digital cellular and PCS technology may permit wireless companies to match the functionality and clarity of wireline communication and still allow customers the mobility of traditional wireless service. As the emerging PCS companies compete directly with established cellular radio companies, flat-rate pricing alternatives may drive wireless rates towards or below wireline rates. In order to minimize the impact of wireless competition, TDS Telecom is pursuing wholesale service agreements with wireless companies to provide services to them and expects to provide wireless services through resale in many of its markets. CLEC MARKETS In Wisconsin and Minnesota and in each geographical area in which TDS Telecom expands as a CLEC, TDS Telecom faces, and expects to continue to face, significant competition from the ILECs which currently dominate their local telecommunications markets. TDS Telecom will compete with the ILECs on the basis of price, reliability, state-of-the-art technology, product offerings, route diversity, ease of ordering and customer service. However, the ILECs have long-standing relationships with their customers, may have the potential to subsidize competitive services from monopoly service revenues, and benefit from some favorable state and federal regulations. Although the ILECs generally are subject to greater pricing and regulatory constraints than CLECs, ILECs are achieving increased pricing flexibility for their services as a result of, among other things, the Telecommunications Act. Existing competition for private line, special access and local exchange services is based primarily on quality, capacity and reliability of network facilities, customer service, response to customer needs, service features and price, and is not based on any proprietary technology. As a result of the technology used in its networks, TDS Telecom may have cost and service quality advantages over some currently available ILEC networks. In addition, TDS Telecom believes that, in general, it will provide more attention and responsiveness to its customers than will its ILEC competitors. TDS Telecom may face competition from other CLECs and other potential competitors in the cities in which TDS Telecom offers and plans to offer its services. Many of TDS Telecom's existing and potential competitors have financial, personnel and other resources significantly greater than those of TDS Telecom. However, TDS Telecom believes that its strategy of targeting midsized communities, and its capital, technical and management resources will enable it to achieve its strategic objectives. In addition to the ILECs and other CLECs, potential competitors capable of offering private line, special access and local exchange services include long distance carriers, cable television companies, electric utilities, microwave carriers, wireless telephone system operators, and private networks built by large end users. Previous impediments to certain utility companies entering telecommunications markets under the Public Utility Holding Company Act of 1935 were removed by the Telecommunications Act. CONSTRUCTION AND DEVELOPMENT PROGRAM--ILEC In 1999, TDS Telecom continued its program of enhancing and expanding its service providing network. TDS Telecom intends to meet competition by providing its customers with high-quality telecommunications services and building its network to take full advantage of advanced telecommunications technologies such as: - Signaling System 7 ("SS7"), a high speed data network with dedicated access points that provides for various call set up, call routing and enhanced calling features, - Fiber optic fed Digital Serving Areas ("DSAs"), a defined geographic area within an exchange that is served by a digital loop carrier system. The digital loop carrier system extends to that geographic area the line side hardware of the central switch. 33 - Integrated Services Digital Network ("ISDN"), a digital switched service that provides end-to-end digital transmission and signaling, and - Advanced Calling Services. The following table shows that TDS Telecom continues to make these advanced features available to a large majority of its ILEC customers:
AS OF DECEMBER 31, 1999 ------------------------------------------------- # OF ILEC WORKING LINES % OF ILEC WORKING LINES ----------------------- ----------------------- Signaling System 7............................... 556,973 98% Advanced Calling Services........................ 556,973 98% Integrated Services Digital Network.............. 450,711 79%
As TDS Telecom upgrades and expands its network, it is also standardizing equipment and processes to increase efficiency and has centralized the monitoring and management of its network to reduce costs and improve service reliability. TDS Telecom formed strategic alliances with Lucent Technologies and Siemens Telecom Networks to modernize and standardize TDS Telecom's ILEC switching platform with the Lucent 5ESS-2000 and Siemens EWSD switches. This standardized switching platform assisted TDS Telecom in implementing its 24-hour-a-day/7-day-per-week ILEC and CLEC network management center. The network management center continuously monitors the network in an effort to proactively identify and correct network faults prior to any customer impact. The network management center is proactively monitoring 100% of TDS Telecom's ILEC network. TDS Telecom's total 2000 capital budget is $125.0 million compared to actual capital expenditures of $122.2 million in 1999 and $143.1 million in 1998. The telephone capital additions budget for 2000 includes approximately $30.2 million for CLEC markets, and $39.3 million for outside plant facilities and $31.3 million for switching facilities in the ILEC markets. Financing for the 2000 capital additions will be primarily provided by internally generated funds and supplemented by federal long-term financing. REGULATION TDS Telecom subsidiaries are primarily ILECs, the traditional regulated local telephone companies in their communities. TDS Telecom's ILEC subsidiaries are regulated by state regulatory agencies and TDS Telecom seeks to maintain positive relationships with these regulators. Rates, including local rates, intrastate toll rates and intrastate access charges, are subject to state commission approval in most states. The state regulators also establish and oversee any state universal service funds. TDS Telecom intends to continue to pursue changes in rate structures and regulation that will provide affordable rates and reasonable earnings. TDS Telecom is currently evaluating whether to elect alternative forms of regulation in each of its states. Alternative regulation describes regulatory frameworks which allow local exchange carriers to benefit from revenue growth and expense control in exchange for rate ceilings and other restrictions. In some states, alternative regulation, together with controls on expense growth, has the potential to boost regulated earnings. The TDS Telecom subsidiaries that provide services in competition with other ILECs, or long distance services in competition with other long distance providers are subject to minimal regulation with respect to such services. For the TDS Telecom ILECs, state regulators can approve service areas, service standards, and accounting methods. In some states, construction plans, borrowing, depreciation rates, affiliated charge transactions and certain other financial transactions are also subject to regulatory approval. States traditionally regulated entry into local markets by designating a single carrier to be the universal service provider. However, the Telecommunications Act has almost completely pre-empted state authority over market entry. Each state retains the power to impose competitively neutral requirements that are consistent with the Telecommunications Act's universal service provision and necessary for universal services, public safety, and welfare, continued service quality and consumer rights. While a state may not impose requirements that effectively function as barriers to entry, and the FCC must pre-empt challenged state requirements if they impose such barriers to entry, a state retains limited authority to regulate certain competitive practices in rural telephone company service areas. Proceedings to pre-empt laws and policies in several states are pending before the FCC, and the FCC has preempted several state laws as unduly restricting competitive entry or unduly giving preferences to incumbents. 34 The Telecommunications Act establishes a general duty for all telecommunications carriers, including wireless providers, to interconnect with other carriers. Congress prescribed a more specific list of interconnection requirements for all local exchange carriers ("LECs") including resale, number portability, dialing parity, access to rights-of-way and reciprocal compensation. Unless exempted or granted suspension or modification, ILECs have additional obligations: (a) to negotiate in good faith terms of interconnection; (b) to comply with more detailed interconnection terms, including non-discrimination and unbundling their network and service components so competitors may use only those elements they choose for providing their services; (c) to offer their retail services at wholesale rates to facilitate resale by their competitors; and (d) to allow other carriers to place equipment necessary for interconnection or access on their premises. The FCC also requires ILEC's rates for interconnection and network components to be based on "forward-looking economic costs." Challenges to the new cost methodology, pending in a federal court of appeals, attack the requirement because it does not let ILECs recover their full historical or actual costs as measured under the FCC's prior cost measurement approach. As defined in the Telecommunications Act, all of TDS Telecom's ILEC subsidiaries qualify as rural telephone companies. Therefore, they are exempt from the ILEC interconnection requirements until they receive a bona fide request for interconnection and the state commission lifts the exemption. That process is underway in some TDS Telecom ILEC markets. Under an FCC interpretation of the Telecommunications Act, under challenge in the same federal appellate court case, rural telephone companies bear the burden of proof to show that elimination of the rural exemption would be likely to cause undue economic burden beyond the economic burdens typically associated with efficient competitive entry or to meet other tests in the law for remaining exempt. The FCC has also adopted extensive rules for state commissions to follow in mediating and arbitrating interconnection negotiations between incumbent LECs and carriers requesting interconnection, services or network elements. The Telecommunications Act establishes deadlines, standards for state commission approval of interconnection agreements and recourse to the FCC if a state commission fails to act. The FCC is still considering rules and policies implementing the provisions of the Telecommunications Act. Many of the FCC determinations made to implement the Telecommunications Act and to facilitate competition in local service and other telephone services involve mandatory investment in and upgrades to TDS Telecom LEC networks, and impose greater costs and obligations on ILECs than on their competitors. These investments and upgrades include requirements to implement local number portability so subscribers may change to competitors' services without changing their telephone numbers, network signaling information that must be provided to certain other carriers and pay phone providers, and other changes that require additional investments and expenses. TDS Telecom is seeking to comply with these requirements or to obtain the necessary suspensions or modifications where appropriate, while at the same time also pursuing policies that provide a fair opportunity to recover its costs. For example, the ILEC industry is seeking FCC reconsideration of an order setting rates for providing directory listing information about ILEC customers to competing telephone directory publishers because the rates, set to recover the costs of the largest ILECs, are inadequate for companies such as the TDS Telecom ILECs. A new law also requires LECs to provide access to certain communications for law enforcement purposes. The full cost of complying and the adequacy of the government compensation are not yet known, but the LEC industry is pursuing regulatory policies that cover any shortfall in available government compensation. The FCC continues to explore how to comply with the requirement in the Telecommunications Act for federal and state authorities to encourage nationwide advanced broadband infrastructure development. Future FCC decisions could require extensive additional investment. For example, in November 1999, the FCC released an order mandating line sharing. In its order, the FCC amended its unbundling rules to require ILECs to provide unbundled access to a new network element--the high frequency portion of the local loop. As noted, TDS Telecom ILECs are currently exempt from the interconnection and unbundling provisions of the Telecommunications Act. Until a TDS Telecom ILEC has received a bona fide request and the state commission has terminated the rural exemption, that ILEC will not be required to provide line sharing. When a currently exempt ILEC is required to provide line sharing, additional costs may be incurred to condition loops to provide the service. As another example, 35 any requirement for nationwide access to advanced network capabilities at this time would entail large investments. If such regulatory requirements did not carry sufficient added support or cost recovery based on real market demand, TDS Telecom would need to seek rate increases or other relief. TDS Telecom seeks to maintain and enhance existing revenue streams despite heightened earnings review activity by state regulators and the advent of local exchange competition sparked by the Telecommunications Act. TDS Telecom is preparing for competition even though its operating subsidiaries remain governed by state regulators. For example, TDS Telecom is seeking the necessary pricing flexibility to adjust its rate structures to a more competitive model. TDS Telecom also continues to participate in state and federal regulatory and legislative processes to urge that any telecommunications reform measures treat rural areas fairly and continue to provide sufficient contributions to high cost rural service areas to keep TDS Telecom ILECs' rates affordable and allow for the continued development of rural infrastructure. The ongoing changes in public policy due to numerous FCC and court proceedings and the introduction of competition may affect the earnings of the operating subsidiaries, and TDS Telecom is not able to predict the impact of these changes. While the majority of TDS Telecom's ILEC subsidiaries continue to operate in a rate-of-return environment, a number of state commissions are negotiating, or have agreed to, alternative regulation plans with LECs. Price regulation, the most common form of alternative regulation, focuses on the price of telecommunication services. TDS Telecom's ILEC subsidiaries in Alabama, Arkansas, Michigan and Pennsylvania are currently operating in a price-regulated environment, whereby the commissions in those states no longer review earnings. For several years, the regional Bell operating companies and some of the nation's larger LECs have operated under an FCC "price cap" plan, modified in 1997, where earnings can be increased only through productivity improvements. In 1999, TDS Telecom's telephone subsidiaries did not elect either price caps or an alternative FCC plan, which was designed for smaller LECs. Instead, the operating subsidiaries plan to continue under traditional rate-of-return regulation for interstate purposes, unless those regulatory requirements are changed. Approximately one-third of TDS Telecom's telephone subsidiaries serve high-cost areas and a number of TDS Telecom ILECs receive federal universal service support under the current transitional federal high cost support program. Important averaging mechanisms associated with the NECA pooling process would be lost if TDS Telecom elected either of the alternatives to traditional rate-of-return regulation. TDS Telecom is also participating in ongoing proceedings to make universal service sustainable as competition takes hold in rural markets. TDS Telecom and rural ILEC associations seek to demonstrate that proposals to measure rural telephone companies' costs for universal service support calculations using a forward-looking proxy model based on the costs of a hypothetical maximally-efficient carrier, fail to comport with the universal service mandate of the Telecommunications Act. Significant reductions in high cost support for TDS Telecom's high cost ILECs, due to changes in support mechanisms or the shifting of support per line that is "portable" to competitors that qualify for support, may affect their ability to modernize and recover their full actual costs. The proceeding to represcribe the authorized rate of return for interstate services provided by ILECs remains pending at the FCC. Currently, this rate is set at 11.25%. Reduction of the interstate rate of return would have detrimental effects on ILECs and could impact the ability of ILECs to continue to invest in infrastructure. TDS Telecom, along with the rural industry associations, believes that it is inappropriate for the FCC to represcribe the rate of return at this time, and that represcription should not occur until after the FCC resolves other pending issues including universal service, access reform, and separations (the allocation of costs to state and interstate jurisdictions) reform. If the FCC proceeds with the represcription, TDS Telecom may potentially be faced with a lower allowed interstate rate of return, a reduction in universal service funds, and potentially higher local rates. Both access reform and universal service reform issues remain to be resolved by the FCC in further proceedings. A rural industry association effort, led in part by TDS Telecom, has developed a comprehensive plan to address universal service, access reform, rate of return and separations reform for rural and rate of return LECs. Access to affordable long-distance service in rural areas was achieved because the FCC ordered AT&T to provide nationwide average rates. As a result of increasing competition, the FCC lifted all regulations relating to AT&T's interstate services in 1996. However, the Telecommunications Act preserves interstate toll rate averaging and imposes a nationwide policy that interstate and intrastate 36 long-distance rates of all long-distance carriers should not be higher in rural areas than in urban areas they serve. In 1999, AT&T and several regional Bell operating companies began limiting and/or discontinuing their long distance services in TDS Telecom serving areas. TDS Telecom will continue to monitor and participate in regulatory activities at both the federal and state levels to ensure continued affordable long-distance and local rates for even its most remote exchanges. Unresolved issues affecting TDS Telecom ILECs' access charge, jurisdictional cost separations and federal universal service support payments are described in "Wholesale Markets" and "Federal Support Revenues," above. The FCC is investigating objections by interexchange carriers that they should not be required to use CLECs' terminating access services when they consider the charges excessive and is considering whether and how to prevent excessive charges by CLECs although the person to whom a call is terminated, not the interexchange carrier, controls the choice of what terminating access carrier the interexchange carrier must use. The FCC's ruling that Internet access is an interstate service, and not a local service when an Internet access call is delivered to an information provider, also may result in decreased intrastate revenues for CLECs providing access to information providers when current grandfathered contract terms expire. BROADBAND PCS OPERATIONS VOICESTREAM MERGER On September 17, 1999, the Board of Directors of TDS decided not to pursue a spin-off of Aerial Communications, Inc., an 82.1%-owned subsidiary of TDS, and approved a merger between Aerial and VoiceStream Wireless Corporation ("VoiceStream") pursuant to an Agreement and Plan of Reorganization dated September 17, 1999. As a result of the merger, Aerial shareholders will receive 0.455 VoiceStream common shares for each share of Aerial stock they own, subject to adjustment in certain circumstances. Aerial public shareholders will have a right to elect to receive $18 in cash in lieu of shares of VoiceStream. The parties anticipate that the merger will be tax-free to Aerial shareholders that elect to receive VoiceStream stock. This merger is subject to the approval of the Federal Communications Commission. The merger is expected to close in the second quarter of 2000. See "Discontinued Operations." As a result of the board's approval of the plan, the consolidated financial statements and supplemental data of TDS have been adjusted to reflect the results of operations and net assets of Aerial as discontinued operations in accordance with generally accepted accounting principles. Financial statements for prior periods have been reclassified to conform to current year presentation. TDS expects to recognize a net gain on the ultimate disposition of Aerial and, accordingly, has deferred recognition of Aerial's net operating losses of $44.2 million from September 18, 1999 through December 31, 1999. COMPANY Aerial is a provider of Personal Communications Services in the Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus Major Trading Areas (collectively, the "PCS Markets"). The PCS Markets include approximately 27.9 million population equivalents. Aerial has constructed networks for its PCS Markets using Global System for Mobile Communication ("GSM") technology. Aerial served 422,900 PCS telephones at December 31, 1999. At December 31,1999, Aerial had expanded its system coverage to total more than 80% of the six Major Trading Areas ("MTAs") total population. PCS is the term used to describe the wireless telecommunications services that are offered by those companies that acquired licenses for radio spectrum (frequency range 1850-1990 MHz) in the FCC auctions and are the newest entrants in the wireless telecommunications market. PCS competes directly with existing cellular telephone, paging and specialized mobile radio services. PCS providers were the first in most markets to offer mass market all-digital mobile networks. In addition, Aerial believes PCS providers may be among the first to be able to offer mass market wireless local loop applications, in competition with switched and direct access local telecommunications services. 37 Aerial's strategic goal is to take full advantage of the potential of wireless telecommunications. Aerial sees an opportunity for significant growth in the wireless telecommunications market through the shift of existing wireless usage patterns from applications focused on business use, special occasions and emergencies to much broader applications for everyday use. Aerial is structured to meet the increasingly competitive challenges of the wireless telecommunications marketplace, and has a marketing-oriented approach focused on serving its customers and their needs. Since 1983, the demand for wireless telecommunications services has grown dramatically as cellular, paging and other emerging wireless personal communications services have become widely available and increasingly affordable. As of December 31, 1999, there were an estimated 86 million domestic wireless telephone subscribers (representing both cellular and PCS customers), which represented U.S. market penetration of approximately 32%. During 1996 and early 1997, Aerial contracted for network equipment, billing systems, support software and the equipment and services necessary to launch service. Additionally during this period, Aerial completed the design for its PCS networks, acquired and built out the switching centers serving each market, leased and built out a National Operations Center, leased or purchased the cell sites required to launch service and commenced zoning and building the sites. The Columbus MTA launched service on March 27, 1997. Aerial's five remaining MTAs launched service during the second quarter of 1997. Across all six markets, Aerial launched with approximately 600 cell sites in service. Aerial had 1,278 cell sites in service by the end of 1999. The coverage of Aerial's PCS networks includes the major metropolitan areas within the PCS Markets, as well as portions of the major highway corridors extending out from those areas. In November 1996, TDS entered into a Member Control Agreement ("Agreement") forming a joint venture with Rural Cellular Corporation ("RCC"), called the Wireless Alliance, LLC ("WALLC"), to build out certain rural areas covering approximately 925,000 population equivalents in the Minneapolis MTA. Aerial has contributed 20 MHz of its Minneapolis MTA license covering certain territories as defined in the Agreement in return for a 30% equity interest in the joint venture. RCC built the network and is responsible for the ongoing operations. The WALLC launched service in 1998. The joint venture purchases services such as network switching from Aerial. The network uses GSM technology. WIRELESS TELECOMMUNICATIONS INDUSTRY OVERVIEW. Wireless service is currently available using analog or digital technology. Traditionally wireless services transmitted voice and data signals over analog-based networks by varying the amplitude or frequency of one continuous electronic signal transmitted over a single radio channel. Analog technology currently has several limitations, including inconsistent service quality, lack of privacy, limited capacity and less reliability in transferring data without errors. Aerial has chosen GSM, which utilizes a digital technology, for use in the PCS Markets. Digital systems convert voice or data signals into a stream of digits that is compressed before transmission, enabling a single radio channel to carry multiple simultaneous signal transmissions. This additional capacity, along with improvements in digital protocols, allows digital-based wireless technologies to offer new and enhanced services, such as greater call privacy and more robust data transmission features, such as "mobile office" applications (including facsimile, electronic mail and wireless connections to computer/data networks, including the Internet). PCS spectrum differs from existing cellular and SMR spectrum in three basic ways: frequency, spectrum and geographic division. PCS networks will operate in a higher frequency range (1850-1990 MHz) compared to the cellular and SMR frequency range (800-900 MHz). PCS is comprised of 30 or 10 MHz spectrum versus 25 MHz spectrum for cellular networks. As a result of the improved capacity of the infrastructure and large allocation of spectrum in the A, B and C PCS frequency Blocks, PCS will have more capacity for new wireless services such as data and video transmission. Finally, the geographic areas for PCS licenses are divided differently than for cellular licenses. PCS is segmented among 51 MTAs and 493 Basic Trading Areas ("BTAs") as opposed to cellular's 306 Metropolitan Statistical Areas ("MSA") and 428 Rural Service Areas ("RSA"). An MTA license generally covers a much larger geographic area than a BTA, MSA or RSA license. 38 OPERATION OF WIRELESS NETWORKS. Wireless service areas are divided into smaller geographic areas called "cells", each of which contains an antenna and a base transceiver station ("BTS") consisting of a low-power transmitter, a receiver and signaling equipment. The cells are typically configured on a grid in a honeycomb-like pattern, although terrain factors (including natural and man-made obstructions) and signal coverage patterns may result in irregularly shaped cells and overlaps or gaps in coverage. The BTS in each cell is connected by microwave, fiber optic cable or telephone wires to a switching office ("mobile switching center" or "MSC"). The MSC controls the operation of the wireless phone network for its entire service area, performing inter-BTS hand-offs, managing call delivery to phones, allocating calls among the cells within the network and connecting calls to local landline telephone systems or to long-distance telephone carriers. Wireless service providers have interconnection agreements with various local exchange carriers and interexchange carriers, thereby integrating the wireless phone network with landline telecommunications systems. Because two-way wireless networks are fully interconnected with landline telephone networks and long-distance networks, customers can receive and originate both local and long-distance calls from their wireless phones. The signal strength of a transmission between a phone and a BTS antenna declines as the phone moves away from the BTS antenna. The MSC and the BTSs monitor the signal strength of calls in process. When the signal strength of a call declines to a predetermined level, the MSC may "hand off" the call to another BTS that can establish a stronger signal with the phone. If a phone leaves the service area of the wireless service provider, the call is disconnected unless an appropriate technical interface is established to hand off the call to an adjacent service provider's system. Operators of wireless networks frequently agree to provide service to customers from other compatible networks who are temporarily located in or traveling through the operator's service area. Such customers are called "roamers." Agreements among network operators allocate revenues received from roamers. With automatic roaming, wireless customers are preregistered in certain networks outside their home service area and receive service automatically while they are roaming. Other roaming features permit calls to a customer to follow the customer into different networks, so that the customer will continue to receive calls in a different network just as if the customer were within his or her service area. Wireless customers generally are charged separately for monthly access, air time, long-distance calls and custom-calling features (although custom-calling features may be included in monthly access charges in certain pricing plans). Wireless network operators pay fees to local exchange and long-distance telephone companies for access to their networks and toll charges based on standard or negotiated rates. When wireless operators provide service to roamers from other networks, they generally charge roamer air-time usage rates, which usually are higher than standard air-time usage rates for their own customers, and additionally may charge daily access fees. Special, discounted rate roaming arrangements, often between neighboring operators who wish to stimulate usage in their respective territories, provide for reduced roaming fees and no daily access fees. TECHNOLOGY With GSM technology, Aerial offers easy-to-use, interactive menu-driven phones, and advanced features such as caller identification and a smart card, as well as more complex features such as text messaging, which allows the GSM handset to function as a two-way messaging device. GSM is not compatible with other PCS or cellular technologies. However, compatibility can be achieved through the use of phones that support multiple technologies. Aerial launched its dual-mode service in April 1999 that enables roaming between GSM and the existing analog cellular systems through the use of dual-mode phones. In addition, Aerial has established roaming arrangements with over 75 international operators in more than 40 countries. This enables Aerial customers, using their own phone numbers, to place calls anywhere within the country they are visiting as well as return calls to the U.S. To date, seventeen North American PCS companies are providing commercial GSM service. GSM systems are currently in commercial operation in approximately 4,000 North American cities with 39 approximately 6 million customers. Aerial's customers are able to roam substantially throughout the United States, either on other GSM-based PCS networks or by using dual-mode phones that can also be used on existing cellular networks. Aerial is a member of the North American GSM Alliance LLC ("GSM Alliance"), an all-digital wireless PCS network of U.S. and Canadian carriers. The GSM Alliance was established to create a national network and develop seamless wireless communications for customers, whether at home, away or abroad. The GSM Alliance's collaborative efforts focus on serving the wireless customer efficiently by addressing the areas of roaming, customer care, national distribution and data communications. Aerial is also a limited partner of the GSM Capital Limited Partnership. The partnership was formed to make investments in companies mainly engaged in the wireless communications industry using the GSM platform, that are in a development or expansion stage, or whose securities trade in an organized market. Aerial is also a part of GSM North America, which is the North American interest group for the GSM Association. Formed in 1995, GSM North America brings together service providers and equipment manufacturers to identify and resolve issues related to making GSM the premier PCS digital technology. SOURCES OF EQUIPMENT Aerial does not manufacture any of the GSM network equipment, phones or accessories ("equipment") used or anticipated to be used in its operations. The equipment Aerial uses or anticipates to use is available from multiple sources, and Aerial anticipates such equipment will continue to be available to Aerial in the foreseeable future, consistent with normal manufacturing and delivery lead times. As GSM uses an open system architecture, and due to the fact that GSM has well-developed features, software systems and equipment that are available "off the shelf", Aerial is able to design its GSM networks and systems without being dependent upon any single manufacturing source. Nokia Telecommunications Inc. has been Aerial's sole supplier of digital radio channel and switching infrastructure equipment to date. Aerial's current phone vendors are Nokia Mobile Phones, Inc., Ericsson Inc., Motorola Inc., and Mitsubishi Wireless Communications, Inc. PRODUCTS AND SERVICES Aerial offers coverage in those areas of the PCS Markets where most of the population lives and works. Continuing construction of its PCS networks will provide coverage which, in combination with roaming services as described above, is competitive with that of current cellular operators. Aerial provides roaming capabilities through agreements with other GSM and cellular operators. Aerial's two primary sources of revenues are similar to those available to other cellular system providers. Service revenue primarily consists of charges for access, airtime and value-added services provided to Aerial's retail customers who use the network operated by Aerial, and charges for long-distance calls made on Aerial's systems. Service revenue also consists of charges to customers of other wireless carriers who use Aerial's PCS network when roaming (outcollect roaming revenue). Equipment sales revenue consists of the sale of phones and related accessories to retailers, independent agents and end user customers. At December 31, 1999, Aerial had 422,900 customers. Service revenues and equipment sales revenues totaled $195.1 million and $30.4 million, respectively, for the year ended December 31, 1999. Aerial provides the following services and features: THE SMART CARD. GSM technology employs a Smart Card which contains a microchip containing detailed information about a customer's service profile. The Smart Card allows Aerial to initiate services or change a customer's service package from a remote location. The Smart Card also allows customers to roam onto other participating GSM-based networks by using their cards in phones compatible with the local network. 40 FEATURE-RICH PHONES. As part of its basic service package, Aerial provides easy-to-use, interactive menu-driven phones that enable customers to utilize the features available in a GSM network. These handsets primarily use words and easy-to-use menus rather than numeric codes to operate handset functions such as call-forwarding, call-waiting and text messaging. SHORT TEXT MESSAGING. GSM technology allows for the capability to send and receive short text messages, similar to two-way radio paging services. This service allows Aerial to offer a quicker and less expensive form of wireless communication when a full conversation is not necessary. ENHANCED SECURITY. Aerial's service provides greater security from eavesdropping and cloning than analog wireless service. Greater conversation security is provided by the encryption code of the digital GSM signal. Greater fraud protection is provided because GSM phones require the use of a Smart Card with a sophisticated authentication scheme, the replication of which is virtually impossible. MARKETING AND DISTRIBUTION Aerial's marketing objective is to create demand for its PCS service by clearly differentiating its service offerings. Aerial believes the strength of its marketing efforts is a key contributor to its success. Aerial's mass marketing efforts emphasize the value of its services and its "fairness" to customers and are supported by heavily promoting the Aerial brand name. This is supported by a substantial advertising program. Aerial offers its services and products through traditional cellular sales channels as well as through new, lower cost channels which increase the quality of the typical sale. Aerial utilizes traditional sales channels which include mass merchandisers and retail outlets, company retail stores, sales agents and a direct sales force. National distributors include Best Buy, Circuit City, Office Depot, and Staples. Aerial currently also distributes its services and products through over 100 company retail locations (mall stores, strip mall stores and kiosks). COMPETITION The wireless telecommunications industry is experiencing significant technological change, as evidenced by the increasing pace of digital upgrades to existing analog cellular networks, evolving industry standards, ongoing improvements in the capacity and quality of digital technology, shorter development cycles for new products and enhancements, and changes in end-user requirements and preferences. Accordingly, Aerial expects competition in the wireless telecommunications business to be dynamic and intense as a result of the entrance of new competitors and the development of new technologies, products and services. Aerial competes directly with up to five other PCS providers in each of its PCS Markets. The other successful bidders in the FCC's broadband Block A and Block B PCS auction in each of the six PCS Markets were PCS PrimeCo (Houston and Tampa-St. Petersburg-Orlando), Sprint PCS (Minneapolis, Pittsburgh and Kansas City) and AT&T Wireless Services, Inc. (Columbus). The existing cellular providers in the PCS Markets, most of which have an infrastructure in place and have been operational for a number of years, have in most cases, upgraded their networks to provide comparable services in competition with Aerial. Principal cellular providers in the PCS Markets are AT&T Wireless Services, Inc., BellSouth Mobility, Inc., GTE Mobile Communications Corporation, AirTouch Communications, Inc., SBC Wireless, Bell Atlantic-NYNEX Mobile and Ameritech Cellular. Additionally, Aerial competes with SMR provider Nextel Communications, Inc. in each of its six PCS Markets. Aerial also competes with other communications technologies that now exist, such as paging and global satellite networks. In the future, cellular service and PCS will also compete more directly with traditional landline telephone service providers and with cable operators who expand into the offering of traditional communications services over their cable systems. All of such competition is intense. There can be no assurance that Aerial will be able to compete successfully in this environment or that new technologies and products that are more commercially effective than Aerial's technologies and products will not be developed. In addition, many of Aerial's competitors have substantially greater financial, technical, marketing, sales and distribution resources 41 than those of Aerial and have significantly greater experience than Aerial in testing new or improved telecommunications products and services and obtaining regulatory approvals. Some competitors are expected to market other services, such as cable television access, with their wireless telecommunications service offerings. Several of Aerial's competitors are operating, or planning to operate, through joint ventures and affiliation arrangements, wireless telecommunications networks that cover most of the United States. Aerial anticipates that market prices for two-way wireless services generally will continue to decline in the future based on increased competition. Aerial will compete to attract and retain customers principally on the basis of services and enhancements, its customer service, the size and location of its service areas and pricing. Aerial's ability to compete successfully will also depend, in part, on its ability to anticipate and respond to various competitive factors affecting the industry, including new services that may be introduced, changes in consumer preferences, demographic trends, economic conditions and discount pricing strategies by competitors, which could adversely affect Aerial's operating margins. REGULATION REGULATORY ENVIRONMENT. The FCC regulates the licensing, construction, operation and acquisition of wireless telecommunications systems in the United States pursuant to the Communications Act of 1934, as amended, and the rules, regulations and policies promulgated by the FCC thereunder. Under the Communications Act, the FCC is authorized to allocate, grant and deny licenses for PCS frequencies, establish regulations governing the interconnection of Commercial Mobile Radio Service networks with wireline and other wireless carriers, grant or deny license renewals and applications for transfer of control or assignment of Commercial Mobile Radio Service licenses, and impose fines and forfeitures for any violations of FCC regulations. In addition, the Telecommunications Act, which amended the Communications Act, mandates significant changes in existing telecommunications rules and policies to promote competition, ensure the availability of telecommunications services to all parts of the nation and to streamline regulation of the telecommunications industry to remove regulatory burdens, as competition develops, and makes regulation less necessary. The FCC promulgated and continues to promulgate regulations governing construction and operation of wireless carriers, licensing (including renewal of licenses) and technical standards for the provision of PCS services under the Communications Act, and is implementing the legislative objectives of the Telecommunications Act, as discussed below. PCS LICENSING. The FCC established PCS service areas in the United States and its possessions and territories based upon Rand McNally's market definition of 51 MTAs comprised of 493 smaller BTAs. Each MTA consists of at least two BTAs. The FCC has allocated 120 MHz of radio spectrum in the 2 GHz band for licensed broadband PCS services. The FCC divided the 120 MHz of spectrum into six individual blocks, each of which is allocated to serve either MTAs or BTAs. The spectrum allocation includes two 30 MHz blocks ("A" and "B" Blocks) licensed for each of the 51 MTAs, one 30 MHz block ("C" Block) licensed for each of the 493 BTAs, and three 10 MHz blocks ("D," "E" and "F" Blocks) licensed for each of the 493 BTAs. A PCS license has been awarded for each MTA and substantially all of the BTAs in every block, for a total of more than 1,500 licenses. This means that in any PCS service area as many as six licensees could be operating separate PCS networks. Under the FCC's rules, a broadband PCS licensee may own combinations of licenses with total aggregate spectrum coverage of up to 45 MHz in a single geographic area, except for rural areas where the limit is 55 MHz. The FCC adopted comprehensive rules that outlined the bidding process, described the bidding application and payment process, established penalties for certain bid withdrawals, default or disqualification and established regulatory safeguards. The grants of licenses to Aerial are conditioned upon timely compliance with the FCC's build-out requirements, I.E., coverage of one-third of the population of a PCS market within five years of initial license grant and coverage of two-thirds of that population within ten years. Aerial has exceeded the buildout requirements for both the five year and ten year stages for each of its MTAs. 42 The FCC also imposes a requirement that all licensees register and obtain FCC registration numbers for all of their antenna towers which require prior FAA clearance. All broadband PCS transmitting facilities of Aerial also must comply with federal "radio frequency" radiation requirements. Aerial has complied with and continues to comply with the antenna registration and radio frequency radiation requirements. The FCC enhanced 911 regulations require broadband PCS operators to be capable of transmitting 911 calls from individuals with speech or hearing disabilities through the use of "text telephone devices." Text telephone devices currently, however, are not compatible with digital wireless systems such as Aerial's. Consequently, on December 4, 1998, Aerial filed a petition with the FCC requesting a waiver of the applicability of the text telephone devices connectivity requirement to Aerial's digital system. On December 30, 1998, the FCC granted Aerial, along with over 100 other wireless operators, a temporary waiver of the regulation. Equipment manufacturers are developing hardware and software that will make text telephone devices compatible with the digital wireless technologies used by Aerial and other wireless service providers. Aerial is working with manufacturers and other members of the wireless industry in developing solutions for users of text telephone devices. The enhanced 911 regulations also require broadband PCS operators to determine the approximate location of persons making emergency calls. On February 5, 1999, Aerial filed a petition requesting a waiver to clarify that handset based location technology will meet the FCC's enhanced 911 location requirements. A waiver will enable Aerial to be compliant with the location requirements by introducing new handsets that have the capability of being located rather than installing very expensive upgraded equipment throughout Aerial's entire network. Aerial's waiver request and dozens of other wireless operators' waiver requests were dismissed as moot by the FCC's Third Report and Order in light of rules changes which require PCS systems to improve their ability to locate wireless 911 callers during 2001 and 2002. On December 6, 1999, Aerial filed a Petition for Reconsideration of the FCC's Third Report and Order. The Petition for Reconsideration is pending at the FCC. The FCC licenses granted to Aerial are issued for a ten-year period expiring June 23, 2005 and may be renewed. In the event challengers file competing applications in response to any of Aerial's renewal filings, the FCC has rules and policies providing that the application of the licensee seeking renewal will be granted and the application of the challenger will not be considered in the event that the broadband PCS licensee involved has (i) provided "substantial" service, which is defined as "sound, favorable and substantially above a level of mediocre service just minimally justifying renewal" and (ii) substantially complied with FCC rules, policies and the Communications Act. Although Aerial is unaware of any circumstances which would prevent the approval of any future renewal applications, there can be no assurance that Aerial's licenses will be renewed by the FCC in the future. Moreover, although revocation and involuntary modification of licenses are extraordinary regulatory measures, the FCC has the authority to restrict the operation of licensed facilities or revoke or modify licenses. The FCC has proceedings in process which could lead to the re-auction of PCS licenses previously granted to auction winners who filed for bankruptcy and could open up other frequency bands for wireless telecommunications and PCS-like services. Such proceedings could result in additional wireless competition. In addition, there are citizenship requirements, assignment requirements and other federal regulations and requirements which may affect the business of Aerial. RECENT EVENTS. There are certain regulatory proceedings currently pending before the FCC which are of particular importance to the broadband PCS industry. The FCC has adopted a limited expansion of the obligation of cellular carriers to serve the subscribers of broadband PCS providers, among others, even though neither the subscribers or the PCS providers involved have a pre-existing service relationship with such cellular carrier. Under these new policies, broadband PCS providers may offer their subscribers phones which are capable of operating over broadband PCS and cellular networks so that when their subscribers are out of range of broadband PCS networks, they will be able to obtain non-automatic access to cellular networks. The FCC expects that implementation of these roaming capabilities will promote competition between 43 broadband PCS and cellular service providers. The FCC is considering whether cellular, broadband PCS and certain specialized mobile radio providers instead should be required to provide "automatic" roaming service to other providers (i.e., carrier-to-carrier roaming service). The FCC has adopted requirements which will make it possible for subscribers to retain, subject to certain geographic and other limitations, their existing telephone numbers when they switch from one service provider to another. This numbering portability will include switching between LEC and other wireline providers, between wireless service providers and between LEC/wireline and wireless providers. LECs, in the 100 largest MSAs, had implementation deadlines by the end of 1998 at those switches which received specific requests for numbering portability. The FCC has extended the compliance date for cellular, broadband PCS, and certain other wireless providers to November 2002. Also, in August 1999, the FCC added certain additional capabilities necessary to meet requirements under the Communications Assistance for Law Enforcement Act, which are to become applicable by September 2001. Also, issues remain as to when carriers may obtain reimbursement from the federal government for upgrades related to such requirements. Aerial will work diligently to comply with all such related requirements in cooperation with industry groups and standard setting bodies. The FCC has recently taken action in proceedings: - To ensure that the customers of wireless providers, among other carriers, will receive complete, accurate, and understandable bills. - To establish safeguards to protect against unauthorized access to customer information (though these rules have been overturned, at least temporarily, by court order). - To increase to 55 megahertz ("MHz") in rural areas its 45 MHz "cap" on the amount of spectrum which entities under common ownership and control may hold in a single wireless market and to relax its related cellular cross ownership restriction. - To require improved access to telecommunications facilities by persons with disabilities. The FCC also has pending proceedings: - To implement a wireless billing option under which wireline customers who call wireless customers could be charged for the wireless "airtime" as opposed to the wireless customer receiving the call, as is the case at present ("calling party pays"). - To implement requirements for wireless providers to set interstate interexchange rates in each state at levels no higher than the rates charged to subscribers in any other state. - To set national policy for the allocation by state public utilities commissions of telephone numbers to wireline and wireless carriers. Aerial intends to monitor such proceedings and comply with new federal requirements as they become applicable. In January 2000, the FCC took an action which may have an impact on both cellular and PCS licensees. Pursuant to a congressional directive, the FCC adopted service rules for licensing the commercial use of 30 MHz of spectrum in the 746-764 MHz and 776-794 MHz spectrum bands. The spectrum is to be auctioned, beginning in June 2000, for six regional service areas, in 20 and 10 MHz blocks, to provide a wide range of wireless services. There will be no eligibility restrictions on participation in the auctions for this spectrum. Cellular and PCS carriers and other entities will be eligible to bid in the auction. Use of the spectrum by licensees selected in the auction may be affected by the presence of incumbent broadcast licensees on some of the auctioned frequencies through at least December 31, 2006. The FCC is also continuing to implement the Telecommunications Act. The Telecommunications Act provides that implementing its legislative objectives will be the task of the FCC, the state public utilities commissions and a Federal-State Joint Board. Much of this implementation has and continues to be 44 proceeding in numerous, concurrent proceedings with aggressive deadlines. Aerial cannot predict the full extent and nature of developments of the Telecommunications Act, which will depend, in part, upon interrelationships among state and federal regulators. The primary purpose and effect of the Telecommunications Act is to open all telecommunications markets to competition, including local telephone service. The Telecommunications Act makes most direct or indirect state and local barriers to competition unlawful. It directs the FCC to preempt all inconsistent state and local laws and regulations, after notice and comment proceedings. It also enables electric and other utilities to engage in telecommunications service through qualifying subsidiaries. Only narrow powers over competitive entry are left to state and local authorities. Each state retains the power to impose competitively neutral requirements that are consistent with the Telecommunications Act's universal service provision and necessary for universal services, public safety and welfare, continued service quality and consumer rights. The Telecommunications Act establishes principles and a process for implementing a modified "universal service" policy. This policy seeks nationwide, affordable service and access to advanced telecommunications and information services. It calls for reasonably comparable urban and rural rates and services. The Telecommunications Act also requires universal service to schools, libraries and rural health facilities at discounted rates. In a series of orders adopted in 1997, the FCC established universal service support mechanisms which require telecommunications providers, including all wireless carriers, to contribute. Aerial has made the required universal service worksheet filings and makes the required periodic payments. Since enactment, the FCC has adopted orders implementing the local competition provisions of the Telecommunications Act. The FCC found that broadband PCS and certain other wireless providers that are entitled to reciprocal compensation, may not be charged for LEC-originated traffic or for code opening/per-number fees, and may obtain LEC interconnection subject to the terms of the Telecommunications Act. Appeals were taken to the United States Supreme Court from these FCC orders by numerous parties alleging that the FCC has exceeded its statutory mandate, among other matters. On January 25, 1999, the U.S. Supreme Court upheld the FCC's general jurisdiction to implement the local competition provisions of the Telecommunications Act. STATE AND LOCAL REGULATION. The scope of state and local regulatory authority covers such matters as the terms and conditions of interconnection between LECs and wireless carriers with respect to intrastate services, customer billing information and practices, billing disputes, other consumer protection matters, facilities construction issues and transfers of control, among other matters. In these areas, particularly the terms and conditions of interconnection between LECs and wireless providers, the FCC and state regulatory authorities share regulatory responsibilities with respect to interstate and intrastate issues, respectively. The FCC has pending numerous petitions for preemption of state and local regulations which allege such regulations prohibit or impair the provision of interstate or intrastate telecommunications services. It has also requested public comment on a petition requesting preemption of moratoria imposed by state and local governments on siting of telecommunications facilities, the imposition of state taxes on the gross receipts of Commercial Mobile Radio Service providers and other proposed state taxes based on the asset value of Commercial Mobile Radio Service licenses awarded by the FCC. The FCC has been actively involved in educating state and local regulatory and zoning authorities as to the prohibitions in the Telecommunications Act against the creation of unreasonable and discriminatory zoning, taxation or other barriers to new wireless providers. The FCC is required to forbear from applying any statutory or regulatory provision that is not necessary to keep telecommunications rates and terms reasonable or to protect consumers. A state may not apply a statutory or regulatory provision that the FCC decides to forbear from applying. In addition, the FCC must review its telecommunications regulations every two years and change any that are no longer necessary. Aerial and its subsidiaries have been and intend to remain active participants in proceedings before the FCC and before state regulatory and zoning authorities. Proceedings with respect to the foregoing 45 policy issues before the FCC and state regulatory authorities could have significant impacts on the competitive market structure among wireless providers and the relationships between wireless providers and other carriers. Aerial is unable to predict the scope, pace, or financial impact of policy changes which could be adopted in these proceedings. EMPLOYEES TDS enjoys satisfactory employee relations. As of December 31, 1999, 10,150 persons were employed by TDS (2,000 of whom were employed at Aerial), 162 of whom are represented by unions. - -------------------------------------------------------------------------------- ITEM 2. PROPERTIES The property of TDS consists principally of switching and cell site equipment related to cellular telephone operations; telephone lines, central office equipment, telephone instruments and related equipment, and land and buildings related to telephone operations. As of December 31, 1999, TDS's property, plant and equipment, net of accumulated depreciation, totaled approximately $2.1 billion, $1.2 billion at U.S. Cellular and $0.9 billion at TDS Telecom. The plant and equipment of TDS is maintained in good operating condition and is suitable and adequate for TDS's business operations. The properties of the operating telephone subsidiaries are subject to the lien of the mortgages securing the funded debt of such companies. TDS leases many of its offices and transmitter sites used in its cellular business and owns substantially all of its central office buildings, local administrative buildings, warehouses, and storage facilities used in its telephone operations. All of TDS's cell and transmitter sites and telephone lines are located either on private or public property. Locations on private land are by virtue of easements or other arrangements. - -------------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS TDS is involved in a number of legal proceedings before the FCC and various state and federal courts. Management does not believe that any such proceeding should have a material adverse impact on the financial position or results of operations of TDS. See Item 1. Business--"Discontinued Operations." - -------------------------------------------------------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of 1999. 46 - -------------------------------------------------------------------------------- PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference from Exhibit 13, Annual Report sections entitled "TDS Stock and Dividend Information" and "Market Price per Common Share by Quarter." - -------------------------------------------------------------------------------- ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference from Exhibit 13, Annual Report section entitled "Selected Consolidated Financial Data," except for ratios of earnings to fixed charges, which are incorporated herein by reference from Exhibit 12 to this Annual Report on Form 10-K. - -------------------------------------------------------------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from Exhibit 13, Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition." - -------------------------------------------------------------------------------- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated by reference from Exhibit 13, Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition" under the caption "Market Risk." - -------------------------------------------------------------------------------- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference from Exhibit 13, Annual Report sections entitled "Consolidated Statements of Operations," "Consolidated Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Common Stockholders' Equity," "Notes to Consolidated Financial Statements," "Consolidated Quarterly Income Information (Unaudited)," and "Report of Independent Public Accountants." - -------------------------------------------------------------------------------- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 47 - -------------------------------------------------------------------------------- PART III - -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from Proxy Statement sections entitled "Election of Directors" and "Executive Officers." - -------------------------------------------------------------------------------- ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from Proxy Statement section entitled "Executive Compensation" except for the information specified in Item 402(a)(8) of Regulation S-K under the Securities Exchange Act of 1934, as amended. - -------------------------------------------------------------------------------- ITEM 12. BENEFICIAL OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from Proxy Statement sections entitled "Security Ownership of Management" and "Principal Shareholders." - -------------------------------------------------------------------------------- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from Proxy Statement section entitled "Certain Relationships and Related Transactions." 48 - -------------------------------------------------------------------------------- PART IV - -------------------------------------------------------------------------------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as a part of this report: (a) (1) Financial Statements Consolidated Statements of Operations....................... Annual Report* Consolidated Statements of Cash Flows....................... Annual Report* Consolidated Balance Sheets................................. Annual Report* Consolidated Statements of Common Stockholders' Equity...... Annual Report* Notes to Consolidated Financial Statements.................. Annual Report* Consolidated Quarterly Income Information (Unaudited)....... Annual Report* Report of Independent Public Accountants.................... Annual Report*
- ------------------------ * Incorporated by reference from Exhibit 13. (2) Schedules
LOCATION --------- Report of Independent Public Accountants on Financial Statement Schedules........... page S-1 I. Condensed Financial Information of Registrant-Balance Sheets as of December 31, 1999 and 1998 and Statements of Operations and Statements of Cash Flows for each of the Three Years in the Period Ended December 31, 1999........... page S-2 II. Valuation and Qualifying Accounts for each of the Three Years in the Period Ended December 31, 1999................. page S-7
All other schedules have been omitted because they are not applicable or not required because the required information is shown in the financial statements or notes thereto. (3) Exhibits The exhibits set forth in the accompanying Index to Exhibits are filed as a part of this Report. The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this Report. 49
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- 10.1 Salary Continuation Agreement for LeRoy T. Carlson dated May 20, 1977, as amended May 22, 1981 and May 25, 1984 is hereby incorporated by reference to TDS's Registration Statement on Form S-2, No. 2-92307. 10.2(a) Supplemental Benefit Agreement for LeRoy T. Carlson dated March 21, 1980, as amended March 20, 1981 is hereby incorporated by reference to an exhibit to TDS's Registration Statement on Form S-7, No. 2-74615. 10.2(b) Memorandum of Amendment to Supplemental Benefit Agreement dated May 28, 1991 is hereby incorporated by reference to Exhibit 10.2(b) to TDS's Annual Report Form 10-K for the year ended December 31, 1991. 10.3 Description of Terms of Letter Agreement with Sandra L. Helton dated August 7, 1998 is hereby incorporated by reference to Exhibit 10.3 to TDS's Annual Report on Form 10-K for the year ended December 31, 1998. 10.4(a) 1988 Stock Option and Stock Appreciation Rights Plan of TDS is hereby incorporated by reference to Exhibit A to TDS's definitive Notice of Annual Meeting and Proxy Statement dated March 31, 1988. 10.4(b) Amendment #1 to 1988 Stock Option and Stock Appreciation Rights Plan of TDS is hereby incorporated by reference to Exhibit 10.7(b) to TDS's Annual Report on Form 10-K for the year ended December 31, 1993. 10.4(c) Amendment #2 to 1988 Stock Option and Stock Appreciation Rights Plan of TDS is hereby incorporated by reference to Exhibit 10.7(c) to TDS's Annual Report on Form 10-K for the year ended December 31, 1993. 10.5 Telephone and Data Systems, Inc. 1994 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit 99.1 to TDS's Registration Statement on Form S-8 (Registration No. 33-57257). 10.6(a) Telephone and Data Systems, Inc. 1998 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit D to TDS's Proxy Statement/Prospectus dated March 24, 1998, which was part of TDS's Registration Statement on Form S-4 (Registration No. 333-42535). 10.6(b) Amendment No. 1 to Telephone and Data Systems, Inc. 1998 Long Term Incentive Plan, filed herewith. 10.7 Amended and Restated Supplemental Executive Retirement Plan of TDS is hereby incorporated by reference to Exhibit 10.7 to TDS's Annual Report on Form 10-K for the year ended December 31, 1998. 10.11 Supplemental Benefit Agreement between United States Cellular Corporation and H. Donald Nelson is hereby incorporated by reference to an exhibit to United States Cellular Corporation's Registration Statement on Form S-1 (Registration No. 33-16975). 10.12 Deferred Compensation Agreement for H. Donald Nelson dated July 15, 1996, is hereby incorporated by reference to Exhibit 10.1 to TDS's Quarterly Report in Form 10-Q for the quarterly period ended September 30, 1996. 10.13 Stock Option and Stock Appreciation Rights Plan, is hereby incorporated by reference to Exhibit B to United States Cellular Corporation's definitive Notice of Annual Meeting and Proxy Statement dated April 15, 1991, as filed with the Commission on April 16, 1991. 10.14 Summary of 1999 Bonus Program for the Senior Corporate Staff on United States Cellular Corporation is hereby incorporated by reference to Exhibit 10.11 to United States Cellular Corporation's Annual Report on Form 10-K for the year ended December 31, 1999.
50
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- 10.15 United States Cellular Corporation 1994 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit 99.1 to United States Cellular Corporation's Registration Statement on Form S-8 (Registration No. 33-57255). 10.16 United States Cellular Corporation 1996 Senior Executive Stock Bonus and Restricted Stock Award Plan is hereby incorporated by reference to Exhibit 99.1 to United States Cellular Corporation's Registration Statement on Form S-8 (Registration No. 333-19405). 10.17 United States Cellular Corporation Special Retention Restricted Stock Award Plan is hereby incorporated by reference to Exhibit 99.1 to United States Cellular Corporation's Registration Statement on Form S-8 (Registration No. 333-23861). 10.18 United States Cellular Corporation 1998 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit 99.4 to United States Cellular Corporation's Registration Statement on Form S-8 (Registration No. 333-57063). 10.19 Form of 1997 Special Retention Restricted Stock Awards is hereby incorporated by reference to Exhibit 99.2 to United States Cellular Corporation's Registration Statement on Form S-8 (Registration No. 333-57063). 10.20 TDS Compensation Plan for Non-Employee Directors is hereby incorporated by reference to Exhibit 99.1 of TDS's Registration Statement on Form S-8 (Registration No. 333-23947). 10.21 Executive Deferred Compensation Agreement for James Barr III dated January 1, 1998, is hereby incorporated by reference to Exhibit 10.15 to TDS's Annual Report on Form 10-K for the year ended December 31, 1997. 10.22 Form of TDS Telecommunications Corporation Phantom Stock Option Incentive Agreement between TDS Telecommunications Corporation and James Barr III is hereby incorporated by reference to Exhibit 10.16 to TDS's Annual Report on Form 10-K for the year ended December 31, 1997.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1999. None 51 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Stockholders and Board of Directors of Telephone and Data Systems, Inc.: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in Telephone and Data Systems, Inc. and Subsidiaries Annual Report incorporated by reference in this Form 10-K, and have issued our report thereon dated January 26, 2000. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The financial statement schedules listed in Item 14(a)(2) are the responsibility of TDS's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These financial statement schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois January 26, 2000 S-1 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT TELEPHONE AND DATA SYSTEMS, INC. (PARENT) BALANCE SHEETS ASSETS
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (DOLLARS IN THOUSANDS) CURRENT ASSETS Cash and cash equivalents................................. $ 32,910 $ 264 Temporary investments..................................... 166 -- Notes receivable from affiliates.......................... 80,341 91,354 Accounts receivable Due from subsidiaries................................... 7,409 21,379 Other................................................... 7,445 3,838 Prepaid income taxes...................................... 26,114 5,064 Other current assets...................................... 5,622 2,621 ---------- ---------- 160,007 124,520 ---------- ---------- INVESTMENT IN SUBSIDIARIES.................................. 2,933,405 2,588,893 ---------- ---------- OTHER INVESTMENTS Notes receivable from affiliates.......................... -- 6,050 Marketable equity securities.............................. 136,742 -- Minority interests and other investments.................. 33,152 27,724 ---------- ---------- 169,894 33,774 ---------- ---------- PROPERTY AND EQUIPMENT Property and equipment, net of accumulated depreciation... 15,425 19,778 ---------- ---------- OTHER ASSETS AND DEFERRED CHARGES Net deferred income taxes................................. 155,944 165,752 Debt issuance expenses.................................... 12,685 13,350 Development and acquisition expenses...................... 143 426 Other..................................................... 388 483 ---------- ---------- 169,160 180,011 ---------- ---------- NET ASSETS OF DISCONTINUED OPERATIONS....................... 246,801 471,990 ---------- ---------- $3,694,692 $3,418,966 ========== ==========
The Notes to Consolidated Financial Statements, included in the Annual Report, are an integral part of these statements. S-2 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT TELEPHONE AND DATA SYSTEMS, INC. (PARENT) BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (DOLLARS IN THOUSANDS) CURRENT LIABILITIES Current portion of long-term debt......................... $ 258 $ 248 Notes payable............................................. -- 170,889 Notes payable to affiliates............................... 373,744 179,606 Accounts payable Due to subsidiaries--Income Taxes....................... 25,043 12,854 Due to subsidiaries--Other.............................. 4,544 3,037 Other................................................... 14,924 7,637 Accrued interest.......................................... 15,895 16,527 Other..................................................... 4,445 5,346 ---------- ---------- 438,853 396,144 ---------- ---------- DEFERRED LIABILITIES AND CREDITS Postretirement benefits obligation other than pensions.... 844 779 Other..................................................... 12,714 7,717 ---------- ---------- 13,558 8,496 ---------- ---------- LONG-TERM DEBT, excluding current portion (Note A).......... 440,895 441,153 LONG-TERM DEBT, due to affiliates (Note B).................. 309,280 309,280 ---------- ---------- 750,175 750,433 ---------- ---------- PREFERRED SHARES............................................ 9,005 25,985 ---------- ---------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $.01 per share, respectively; authorized 100,000,000 shares; issued and outstanding 55,411,746 and 54,988,498 shares, respectively........... 554 550 Series A Common Shares, par value $.01 per share, respectively; authorized 25,000,000 shares; issued and outstanding 6,958,691 and 6,949,904 shares, respectively............................................. 70 69 Capital in excess of par value............................ 1,897,402 1,882,710 Accumulated other comprehensive income from subsidiaries............................................. 179,071 75,609 Treasury Shares, at cost, 1,237,207 and 761,220 shares, respectively............................................. (102,975) (29,439) Retained earnings......................................... 508,979 308,409 ---------- ---------- 2,483,101 2,237,908 ---------- ---------- $3,694,692 $3,418,966 ========== ==========
The Notes to Consolidated Financial Statements, included in the Annual Report, are an integral part of these statements. S-3 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT TELEPHONE AND DATA SYSTEMS, INC. (PARENT) STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (DOLLARS IN THOUSANDS) Operating service revenues................................ $ 66,600 $ 69,768 $ 67,349 Cost of sales and operating expenses...................... 75,103 76,238 72,249 --------- --------- --------- Net operations.......................................... (8,503) (6,470) (4,900) --------- --------- --------- Other income Interest income received from affiliates................ 23,343 19,344 14,321 Gain on sale of investments............................. -- 7,164 10,307 Other, net.............................................. (2,658) (10,182) (4,612) --------- --------- --------- 20,685 16,326 20,016 --------- --------- --------- Income before interest and income taxes................... 12,182 9,856 15,116 Interest expense.......................................... 84,965 78,002 49,422 Income tax credit......................................... (66,796) (79,394) (39,423) --------- --------- --------- Corporate operations...................................... (5,987) 11,248 5,117 Equity in net income of subsidiaries and other investments............................................. 320,138 190,151 94,628 --------- --------- --------- Net income from continuing operations..................... 314,151 201,399 99,745 --------- --------- --------- Discontinued operations, net of tax....................... (84,190) (136,991) (109,294) --------- --------- --------- Net income (loss)......................................... $ 229,961 $ 64,408 $ (9,549) ========= ========= =========
The Notes to Consolidated Financial Statements, included in the Annual Report, are an integral part of these statements. Note A: The annual requirements for principal payments on long-term debt are $258,000, $270,000, $283,000, $32.1 million, and $7.5 million for the years 2000 through 2004, respectively. Note B: In 1998, TDS Capital II, a subsidiary trust ("Capital II") of TDS, issued 6,000,000 of its 8.04% Company-Obligated Mandatorily Redeemable Preferred Securities (the "1998 Preferred Securities") at $25 per Preferred Security. Net proceeds totaled $144.9 million and were used to reduce short-term debt. The sole asset of TDS Capital II is $154.6 million principal amount of TDS's 8.04% Subordinated Debentures due March 31, 2038. In 1997, TDS Capital I, a subsidiary trust ("Capital I") of TDS, issued 6,000,000 of its 8.5% Company-Obligated Mandatorily Redeemable Preferred Securities (the "1997 Preferred Securities") at $25 per Preferred Security. Net proceeds totaled $144.8 million and were used to reduce short-term debt. The sole asset of TDS Capital I is $154.6 million principal amount of TDS's 8.5% Subordinated Debentures due December 31, 2037. The obligations of TDS Capital I and II under the 1998 Preferred Securities and 1997 Preferred Securities (the "Preferred Securities") issued by TDS Capital I and II are fully and unconditionally guaranteed by TDS. However, TDS's obligations are subordinate and junior in right of payment to certain other indebtedness of TDS. TDS has the right to defer payments of interest on the Subordinated Debentures by extending the interest payment period, at any time, for up to 20 consecutive quarters. If interest payments on the Subordinated Debentures are so deferred, distributions on the Preferred Securities will also be deferred. During any deferral, distributions will continue to accrue with interest thereon. In addition, during any such deferral, TDS may not declare or pay any dividend or other distribution on, or redeem or purchase, any of its common stock. S-4 The 8.04% and 8.5% Subordinated Debentures are redeemable by TDS, in whole or in part, from time to time, on or after March 31, 2003, and November 18, 2002, respectively, or, in whole but not in part, at any time in the event of certain income tax circumstances. If the Subordinated Debentures are redeemed, TDS Capital I and II must redeem Preferred Securities on a pro rata basis having an aggregate liquidation amount equal to the aggregate principal amount of the Subordinated Debentures so redeemed. In the event of the dissolution, winding up or termination of TDS Capital I and II, the holders of Preferred Securities will be entitled to receive, for each Preferred Security, a liquidation amount of $25 plus accrued and unpaid distributions thereon to the date of payment, unless, in connection with the dissolution, winding up or termination, Subordinated Debentures are distributed to the holders of the Preferred Securities. Note C: On September 17, 1999, the Board of Directors of Telephone and Data Systems, Inc. decided not to pursue a spin-off of Aerial Communications, Inc. ("Aerial"), an 82.1%-owned subsidiary of TDS, and approved a plan of merger between Aerial and VoiceStream Wireless Corporation ("VoiceStream"). As a result of the merger, Aerial shareholders will receive 0.455 VoiceStream common shares for each share of Aerial stock they own, subject to adjustment in certain circumstances. Aerial public shareholders will have a right to elect to receive $18 in cash in lieu of shares of VoiceStream. The parties anticipate that the merger will be tax-free to Aerial shareholders that elect to receive VoiceStream stock. This merger is subject to the approval of the Federal Communications Commission. The merger is expected to close in the second quarter of 2000. As a result of the board's approval of the plan, the consolidated financial statements and supplemental data of TDS have been adjusted to reflect the results of operations and net assets of Aerial as discontinued operations in accordance with generally accepted accounting principles. Financial statements for prior periods have been reclassified to conform to current year presentation. TDS expects to recognize a net gain on the ultimate disposition of Aerial and, accordingly, has deferred recognition of Aerial's net operating losses of $44.2 million from September 18, 1999 through December 31, 1999. S-5 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT TELEPHONE AND DATA SYSTEMS, INC. (PARENT) STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income from continuing operations..................... $ 314,151 $ 201,399 $ 99,745 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization........................... 9,859 10,365 9,508 Gain on sale of investments............................. -- (7,164) (10,307) Deferred taxes.......................................... (43,839) (126,354) (53,068) Equity in net income of subsidiaries and other investments............................................ (320,138) (190,151) (94,628) Other noncash expense................................... 31 (394) (211) Change in accounts receivable........................... (6,949) 27,352 (15,992) Change in accounts payable.............................. 11,643 6,810 3,612 Change in accrued taxes................................. (4,106) 9,310 2,151 Change in other assets and liabilities.................. 3,401 6,058 677 --------- --------- --------- (35,947) (62,769) (58,513) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings................................. -- 343,127 144,788 Repayment of long-term debt............................... (248) (239) (735) Change in notes payable................................... (170,889) (354,996) 368,658 Change in notes payable to affiliates..................... 194,138 183,216 (47,990) Change in notes receivable from affiliates................ (4,096) (130,152) (87,021) Change in advances to affiliates.......................... -- -- 1,616 Common stock issued....................................... 7,991 3,391 5,225 Redemption of preferred shares............................ (531) (367) (359) Dividends from subsidiaries............................... 7,973 38,391 22,022 Dividends paid............................................ (29,390) (28,488) (27,192) Repurchase of Common Shares............................... (69,014) -- (69,942) Purchase of subsidiary common stock....................... -- (9,107) (9,801) --------- --------- --------- (64,066) 44,776 299,269 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions Value of assets acquired................................ (2,450) (14,425) (47,851) Common Shares issued.................................... -- 10,028 42,685 Preferred Shares issued................................. -- -- 3,000 --------- --------- --------- Net cash paid for acquisitions........................ (2,450) (4,397) (2,166) Capital expenditures...................................... (6,703) 6,662 (20,957) Payment to subsidiary under contract agreement............ -- (28,696) -- Proceeds from sale of investments......................... -- 5,382 20,886 Investments in subsidiaries............................... 179 262 (2,301) Other investments......................................... (60) 184 2,851 Change in temporary investments........................... (166) 132 22 --------- --------- --------- (9,200) (20,471) (1,665) --------- --------- --------- CASH FLOWS FROM DISCONTINUED OPERATIONS..................... 141,859 38,457 (238,961) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 32,646 (7) 130 CASH AND CASH EQUIVALENTS Beginning of period....................................... 264 271 141 --------- --------- --------- End of period............................................. $ 32,910 $ 264 $ 271 ========= ========= =========
The Notes to Consolidated Financial Statements, included in the Annual Report, are an integral part of these statements. S-6 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ----------- ------------ ---------- ---------- ---------- ---------- COLUMN A COLUMN B COLUMN C-1 COLUMN C-2 COLUMN D COLUMN E (DOLLARS IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, 1999 Deducted from deferred state tax asset: For unrealized net operating losses............................ $(27,779) $ 2,778 $ (78) $ -- $(25,079) Deducted from accounts receivable: For doubtful accounts............ (6,732) (26,938) -- 23,145 (10,525) FOR THE YEAR ENDED DECEMBER 31, 1998 Deducted from deferred state tax asset: For unrealized net operating losses............................ (15,602) (1,023) (11,154) -- (27,779) Deducted from accounts receivable: For doubtful accounts............ (7,850) (21,254) -- 22,372 (6,732) FOR THE YEAR ENDED DECEMBER 31, 1997 Deducted from deferred state tax asset: For unrealized net operating losses............................ (13,367) 877 (3,112) -- (15,602) Deducted from accounts receivable: For doubtful accounts............ $ (6,090) $(31,855) $ -- $30,095 $ (7,850)
S-7 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TELEPHONE AND DATA SYSTEMS, INC. By: /s/ LEROY T. CARLSON ----------------------------------------- LeRoy T. Carlson CHAIRMAN By: /s/ LEROY T. CARLSON, JR. ----------------------------------------- LeRoy T. Carlson, Jr. PRESIDENT, (CHIEF EXECUTIVE OFFICER) By: /s/ SANDRA L. HELTON ----------------------------------------- Sandra L. Helton EXECUTIVE VICE PRESIDENT--FINANCE (CHIEF FINANCIAL OFFICER) By: /s/ D. MICHAEL JACK ----------------------------------------- D. Michael Jack VICE PRESIDENT AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
Dated March 29, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ LEROY T. CARLSON ------------------------------------------- Director March 29, 2000 LeRoy T. Carlson /s/ LEROY T. CARLSON, JR. ------------------------------------------- Director March 29, 2000 LeRoy T. Carlson, Jr. /s/ SANDRA L. HELTON ------------------------------------------- Director March 29, 2000 Sandra L. Helton /s/ JAMES BARR III ------------------------------------------- Director March 29, 2000 James Barr III /s/ WALTER C.D. CARLSON ------------------------------------------- Director March 29, 2000 Walter C.D. Carlson /s/ LETITIA G.C. CARLSON ------------------------------------------- Director March 29, 2000 Letitia G.C. Carlson
SIGNATURE TITLE DATE --------- ----- ---- /s/ HERBERT S. WANDER ------------------------------------------- Director March 29, 2000 Herbert S. Wander /s/ DONALD C. NEBERGALL ------------------------------------------- Director March 29, 2000 Donald C. Nebergall /s/ GEORGE W. OFF ------------------------------------------- Director March 29, 2000 George W. Off /s/ MARTIN L. SOLOMON ------------------------------------------- Director March 29, 2000 Martin L. Solomon /s/ KEVIN A. MUNDT ------------------------------------------- Director March 29, 2000 Kevin A. Mundt /s/ MURRAY L. SWANSON ------------------------------------------- Director March 29, 2000 Murray L. Swanson
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF DOCUMENT - --------------------- ----------------------- 3.1 Restated Certificate of Incorporation, as amended, are hereby incorporated by reference to Exhibit 3.1 to TDS's Report on Form 8-A/A filed on July 10, 1998. 3.2 Restated By-laws, as amended, filed herewith. 4.1 Restated Certificate of Incorporation, as amended, are hereby incorporated by reference to Exhibit 3.1 to TDS's Report on Form 8-A/A filed on July 10, 1998. 4.2 Restated By-laws, as amended, filed herewith as Exhibit 3.2. 4.3(a) The Indenture between TDS and Harris Trust and Savings Bank, Trustee, dated February 1, 1991, under which TDS's Medium-Term Notes are issuable, is hereby incorporated by reference to TDS's Current Report on Form 8-K filed on February 19, 1991. 4.3(b) Form of First Supplemental Indenture with Harris Trust and Savings Bank is hereby incorporated by reference to Exhibit 4.1(b) of Post Effective Amendment No. 1 to Form S-3 (Registration No. 33-68456). 4.4(a) Revolving Credit Agreement, dated as of June 7, 1996, among TDS and the First National Bank of Boston, as agent and LaSalle National Bank and Toronto Dominion (Texas), Inc. as co-agents, is hereby incorporated by reference to the registrant's Form 8-K dated July 1, 1996. 4.4(b) Amendment No. 1 to Revolving Credit Agreement, filed herewith. 4.4(c) Assignment and Assumption Agreement with respect to Revolving Credit Agreement, filed herewith. 4.5 The Trust Indenture dated as of November 4, 1996 between Aerial Communications, Inc. as issuer, TDS as guarantor, and The First National Bank of Chicago, as trustee for Aerial's Series A Zero Coupon Notes, is hereby incorporated by reference to Exhibit 4.1 to Aerial's Current Report on Form 8-K filed on November 29, 1996. 4.6 The Trust Indenture, dated as of February 5, 1998, between Aerial Communications, Inc. as issuer, TDS as guarantor, and The First National Bank of Chicago, as trustee for Aerial's Series B Zero Coupon Notes, is hereby incorporated by reference to Exhibit 4.1 to Aerial's Current Report on Form 8-K filed on April 29, 1998. 4.7(a) The Amended and Restated Declaration of Trust, dated November 18, 1997, by and among TDS, as Sponsor, the Trust, The First National Bank of Chicago, as Property Trustee, First Chicago Delaware, Inc., as Delaware Trustee and the Regular Trustees named therein, is hereby incorporated by reference to Exhibit 4.1 to TDS's Current Report on Form 8-K filed on December 2, 1997, dated November 18, 1997. 4.7(b) The Amended and Restated Declaration of Trust, dated February 10, 1998, by and among TDS, as Sponsor, the Trust, The First National Bank of Chicago, as Property Trustee, First Chicago Delaware, Inc., as Delaware Trustee and the Regular Trustees named therein, is hereby incorporated by reference to Exhibit 4.1 to TDS's Current Report on Form 8-K filed on April 28, 1998, dated February 10, 1998. 4.7(c) Form of First Supplemental Indenture to Amended and Restated Declaration of Trust relating to assumption of TDS Delaware is hereby incorporated by reference to Exhibit 4.7 of Post Effective Amendment No. 1 to Form S-3 (Registration No. 333-38355). 4.8(a) The Subordinated Indenture, dated October 15, 1997, by and between TDS and the First National Bank of Chicago, as Trustee under which the Trust Originated Preferred Securities are issuable, is hereby incorporated by reference to Exhibit 4.3 to TDS's Current Report on Form 8-K filed on December 2, 1997, dated November 18, 1997.
E-1
EXHIBIT NO. DESCRIPTION OF DOCUMENT - --------------------- ----------------------- 4.8(b) The Supplemental Indenture dated November 18, 1997, by and between TDS and the First National Bank of Chicago, as Trustee under which the Trust Originated Preferred Securities are issuable, is hereby incorporated by reference to Exhibit 4.4 to TDS's Current Report on Form 8-K filed on December 2, 1997, dated November 18, 1997. 4.8(c) The Second Supplemental Indenture, dated as of February 10, 1998, by and among TDS and The First National Bank of Chicago, as Debt Trustees, is hereby incorporated by reference to Exhibit 4.3 to TDS's Current Report on Form 8-K filed on April 28, 1998, dated February 10, 1998. 4.8(d) Form of Third Supplemental Indenture to Subordinated Indenture relating to assumption by TDS Delaware is hereby incorporated by reference to Exhibit 4.9 of Post Effective Amendment No. 1 to Form S-3 (Registration No. 333-38355). 4.9(a) The Preferred Securities Guarantee Agreement, dated as of November 18, 1997, by and among TDS and The First National Bank of Chicago, as Guarantee Trustee for the benefit of the holders of Trust Preferred Securities of the Trust, is hereby incorporated by reference to Exhibit 4.2 to TDS's Current Report on Form 8-K filed on December 2, 1997, dated November 18, 1997. 4.9(b) The Preferred Securities Guarantee Agreement, dated as of February 10, 1998, by and among TDS and The First National Bank of Chicago, as Guarantee Trustee for the benefit of the holders of Trust Preferred Securities of the Trust, is hereby incorporated by reference to Exhibit 4.2 to TDS's Current Report on Form 8-K filed on April 28, 1998, dated February 10, 1998. 4.9(c) Form of First Supplemental Indenture to Preferred Securities Guarantee Agreement relating to assumption by TDS Delaware is hereby incorporated by reference to Exhibit 4.8 of Post Effective Amendment No. 1 to Form S-3 (Registration No. 333-38355). 9.1(a) Voting Trust Agreement, dated as of June 30, 1989, is hereby incorporated by reference to an exhibit to Post-Effective Amendment No. 3 to TDS's Registration Statement on Form S-1, No. 33-12943. 9.1(b) Amendment dated as of May 9, 1991 to the Voting Trust Agreement dated as of June 30, 1989, is hereby incorporated by reference to Exhibit 9.2 to TDS's Annual Report on Form 10-K for the year ended December 31, 1991. 9.1(c) Amendment dated as of November 20, 1992, to the Voting Trust Agreement dated as of June 30, 1989, as amended, is hereby incorporated by reference to Exhibit 9.1(c) to TDS's Annual Report on Form 10-K for the year ended December 31, 1992. 9.1(d) Amendment dated as of May 22, 1998, to the Voting Trust Agreement dated as of June 30, 1989, as amended, is hereby incorporated by reference to Exhibit 99.3 to TDS's Current Report on Form 8-K filed on June 5, 1998. 10.1 Salary Continuation Agreement for LeRoy T. Carlson dated May 20, 1977, as amended May 22, 1981 and May 25, 1984 is hereby incorporated by reference to TDS's Registration Statement on Form S-2, No. 2-92307. 10.2(a) Supplemental Benefit Agreement for LeRoy T. Carlson dated March 21, 1980, as amended March 20, 1981, is hereby incorporated by reference to an exhibit to TDS's Registration Statement on Form S-7, No. 2-74615. 10.2(b) Memorandum of Amendment to Supplemental Benefit Agreement dated as of May 28, 1991, is hereby incorporated by reference to Exhibit 10.2(b) to TDS's Annual Report on Form 10-K for the year ended December 31, 1991. 10.3 Description of Terms of Letter Agreement with Sandra L. Helton dated August 7, 1998 is hereby incorporated by reference to Exhibit 10.3 to TDS's Annual Report on Form 10-K for the year ended December 31, 1998.
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EXHIBIT NO. DESCRIPTION OF DOCUMENT - --------------------- ----------------------- 10.4(a) 1988 Stock Option and Stock Appreciation Rights Plan of TDS, is hereby incorporated by reference to Exhibit A to TDS's definitive Notice of Annual Meeting and Proxy Statement dated March 31, 1988. 10.4(b) Amendment #1 to 1988 Stock Option and Stock Appreciation Rights Plan of TDS, is hereby incorporated by reference to Exhibit 10.7(b) to TDS's Annual Report on Form 10-K for the year ended December 31, 1993. 10.4(c) Amendment #2 to 1988 Stock Option and Stock Appreciation Rights Plan of TDS, is hereby incorporated by reference to Exhibit 10.7(c) to TDS's Annual Report on Form 10-K for the year ended December 31, 1993. 10.5 Telephone and Data Systems, Inc. 1994 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit 99.1 to TDS's Registration Statement on Form S-8 (Registration No. 33-57257). 10.6(a) Telephone and Data Systems, Inc. 1998 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit D to TDS's Proxy Statement/Prospectus dated March 24, 1998 which was part of TDS's Registration Statement on Form S-4 (Registration No. 333-42535). 10.6(b) Amendment No. 1 to Telephone and Data Systems, Inc. 1998 Long-term Incentive Plan, filed herewith. 10.7 Amended and Restated Supplemental Executive Retirement Plan is hereby incorporated by reference to Exhibit 10.7 to TDS's Annual Report on Form 10-K for the year ended December 31, 1998. 10.8 Securities Loan Agreement, dated June 13, 1995, between TDS and Merrill Lynch & Co. is hereby incorporated by reference to Exhibit 99.1 to the Form 8-K dated June 16, 1995 of United States Cellular Corporation. 10.9 Registration Rights Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation is hereby incorporated by reference to Exhibit 99.2 to the Form 8-K dated June 16, 1995 of United States Cellular Corporation. 10.10 Common Share Delivery Arrangement Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation is hereby incorporated by reference to Exhibit 99.3 to the Form 8-K dated June 16, 1995 of United States Cellular Corporation. 10.11 Supplemental Benefit Agreement between United States Cellular Corporation and H. Donald Nelson is hereby incorporated by reference to an exhibit to United States Cellular Corporation's Registration Statement on Form S-1 (Registration No. 33-16975). 10.12 Deferred Compensation Agreement for H. Donald Nelson dated July 15, 1996, is hereby incorporated by reference to Exhibit 10.1 to TDS's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. 10.13 Stock Option and Stock Appreciation Rights Plan, is hereby incorporated by reference to Exhibit B to United States Cellular Corporation's definitive Notice of Annual Meeting and Proxy Statement dated April 15, 1991, as filed with the Commission on April 16, 1991. 10.14 Summary of 1999 Bonus Program for the Senior Corporate Staff on United States Cellular Corporation is hereby incorporated by reference to Exhibit 10.11 to United States Cellular Corporation's Annual Report on Form 10-K for the year ended December 31, 1999. 10.15 United States Cellular Corporation 1994 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit 99.1 to United States Cellular Corporation's Registration Statement on Form S-8 (Registration No. 33-57255).
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EXHIBIT NO. DESCRIPTION OF DOCUMENT - --------------------- ----------------------- 10.16 United States Cellular Corporation 1996 Senior Executive Stock Bonus and Restricted Stock Award Plan is hereby incorporated by reference to Exhibit 99.1 to United States Cellular Corporation's Registration Statement on Form S-8 (Registration No. 333-19405). 10.17 United States Cellular Corporation Special Retention Restricted Stock Award Plan is hereby incorporated by reference to Exhibit 99.1 to United States Cellular Corporation's Registration Statement on Form S-8 (Registration No. 333-23861). 10.18 United States Cellular Corporation 1998 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit 99.4 to United States Cellular Corporation's Registration Statement on Form S-8 (Registration No. 333-57063). 10.19 Form of 1997 Special Retention Restricted Stock Awards is hereby incorporated by reference to Exhibit 99.2 to United States Cellular Corporation's Registration Statement on Form S-8 (Registration No. 333-57063). 10.20 TDS Compensation Plan for Non-Employee Directors is hereby incorporated by reference to Exhibit 99.1 of TDS's Registration Statement on Form S-8 (Registration No. 333-23947). 10.21 Executive Deferred Compensation Agreement for James Barr III dated January 1, 1998 is hereby incorporated by reference to Exhibit 10.15 to TDS's Annual Report on Form 10-K for the year ended December 31, 1997. 10.22 Form of TDS Telecommunications Corporation Phantom Stock Option Incentive Agreement between TDS Telecommunications Corporation and James Barr III is hereby incorporated by reference to Exhibit 10.16 to TDS's Annual Report on Form 10-K for the year ended December 31, 1997. 10.23 Credit Agreement dated June 30, 1998, by and between Nokia Telecommunications Inc. and Aerial Communications, Inc., is hereby incorporated by reference to Exhibit 99.1 of Aerial Communications, Inc.'s Form 8-K dated June 30, 1998 and filed on November 9, 1998. 10.24 Investment Agreement by and between Aerial Communications, Inc., TDS, Aerial Operating Company, Inc. and Sonera Ltd. is hereby incorporated by reference to Exhibit 99.2 of the Aerial Form 8-K dated September 8, 1998 and filed on September 17, 1998. 10.25 Registration Rights Agreement by and between Aerial Communications, Inc. and Sonera Ltd. is hereby incorporated by reference to Exhibit 99.3 of the Aerial Form 8-K dated September 8, 1998 and filed on September 17, 1998. 10.26 Joint Venture Agreement by and between Aerial Communications, Inc., Aerial Operating Company, Inc. and Sonera Corporation U.S., is hereby incorporated by reference to Exhibit 99.4 of the Aerial Form 8-K dated September 8, 1998 and filed on September 17, 1998. 10.27 Supplemental Agreement by and between Aerial Communications, Inc., Aerial Operating Company, Inc. and Sonera Ltd., is hereby incorporated by reference to Exhibit 99.5 of the Aerial Form 8-K dated September 8, 1998 and filed on September 17, 1998. 10.28 Agreement and Plan of Reorganization dated September 17, 1999 among VoiceStream Wireless Corporation, VoiceStream Wireless Holding Corporation, VoiceStream Subsidiary III Corporation, Aerial Communications, Inc., and TDS is hereby incorporated by reference to Exhibit 99.2 of TDS's Form 8-K dated September 17, 1999 and filed on September 28,1999. 10.29 Stockholder Agreement dated September 17, 1999 by and between Telephone and Data Systems, Inc. and stockholder of Aerial Communications, Inc., and VoiceStream Wireless Corporation, and VoiceStream Wireless Holding Corporation is hereby incorporated by reference to Exhibit 99.3 of TDS's Form 8-K dated September 17, 1999 and filed on September 28,1999.
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EXHIBIT NO. DESCRIPTION OF DOCUMENT - --------------------- ----------------------- 10.30 Indemnity Agreement dated September 17, 1999 among VoiceStream Wireless Corporation, VoiceStream Wireless Holding Corporation, Aerial Communications, Inc., Aerial Operating Company, Inc., and TDS is hereby incorporated by reference to Exhibit 99.4 of TDS's Form 8-K dated September 17, 1999 and filed on September 28,1999. 10.31 Debt/Equity Replacement Agreement dated as of September 17, 1999 made by and among TDS, Aerial Communications, Inc., Aerial Operating Company, Inc., VoiceStream Wireless Corporation and VoiceStream Wireless Holding Corporation is hereby incorporated by reference to Exhibit 99.5 of TDS's Form 8-K dated September 17, 1999 and filed on September 28,1999. 10.32 Parent Stockholder Agreement dated as of September 17, 1999 by and among Aerial Communications, Inc., TDS, VoiceStream Wireless Corporation, VoiceStream Wireless Holding Corporation and certain individuals and entities set forth therein, is hereby incorporated by reference to Exhibit 99.6 of TDS's Form 8-K dated September 17, 1999 and filed on September 28,1999. 10.33 Settlement Agreement and Release dated as of September 17, 1999 by and among Sonera Ltd., Sonera Corporation U.S., TDS, Aerial Communications, Inc., and Aerial Operating Company, Inc. is hereby incorporated by reference to Exhibit 99.7 of TDS's Form 8-K dated September 17, 1999 and filed on September 28,1999. 11 Statement regarding computation of per share earnings (included in Footnote 4 to financial statements in Exhibit 13). 12 Statements regarding computation of ratios. 13 Incorporated portions of 1999 Annual Report to Security Holders. 21 List of Subsidiaries of TDS. 23 Consent of independent public accountants. 27.1 Financial Data Schedule for the year ended December 31, 1999 27.2 Financial Data Schedule for the three months ended March 31, 1999 and the six months ended June 30, 1999, as restated. 27.3 Financial Data Schedule for the three months ended March 31, 1998, the six months ended June 30, 1998, the nine months ended September 30, 1998 and the year ended December 31, 1998, as restated. 27.4 Financial Data Schedule for the year ended December 31, 1997, as restated.
E-5 [LOGO] TELEPHONE AND DATA SYSTEMS, INC. 30 North LaSalle Street Chicago, Illinois 60602 312/630-1900 EX-3.2 2 EXHIBIT 3.2 EXHIBIT 3.2 BYLAWS* OF TELEPHONE AND DATA SYSTEMS, INC. (a Delaware corporation) ARTICLE I STOCKHOLDERS SECTION 1.1. ANNUAL MEETING. The annual meeting of stockholders for the election of directors and the transaction of such other business as may properly come before such meeting shall be held on the first Wednesday of May of each year, or on such other date, and at such time and place, within or without the State of Delaware, as shall be determined by resolution of the Board of Directors. If the day fixed for the annual meeting is a legal holiday, such meeting shall be held on the next succeeding business day. If the election of directors shall not be held on the day designated herein for the annual meeting of stockholders, or at any adjournment thereof, the Board of Directors shall cause such election to be held at a meeting of stockholders to be called as soon thereafter as is convenient. SECTION 1.2. SPECIAL MEETINGS. Special meetings of stockholders may be called by the Board of Directors, by the Chairman or President and shall be called by the President or the Secretary at the request in writing, stating the purpose or purposes thereof, of holders of at least fifty percent of the voting power of the capital stock of the Corporation issued and outstanding and entitled to vote thereat. Special meetings of stockholders may be held at such time and place, within or without the State of Delaware, as shall be determined by resolution of the Board of Directors or as may be specified in the call of any such special meeting. If not otherwise designated, the place of any special meeting shall be the principal office of the Corporation in the State of Illinois. SECTION 1.3. NOTICE OF MEETINGS AND ADJOURNED MEETINGS. Written notice of every meeting of stockholders, stating the place, date, time and purposes thereof, shall, except when otherwise required by the Restated Certificate of Incorporation of the Corporation, as it may be amended from time to time (the "Restated Certificate of Incorporation"), or the laws of the State of Delaware, be given at least 10 but not more than 60 days prior to such meeting to each stockholder of record entitled to vote thereat, in the manner set forth in Section 9.1 of these Bylaws, by - -------- *As amended November 3, 1999 or at the direction of the President or the Secretary or the persons calling such meeting. Any meeting at which a quorum of stockholders is present, in person or by proxy, may be adjourned from time to time without notice, other than by announcement at such meeting, until its business shall be completed. At such adjourned meeting, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, written notice of the adjourned meeting shall be given to each stockholder of record entitled to vote thereat as above provided. SECTION 1.4. QUORUM. Except as otherwise provided by the laws of the State of Delaware or the Restated Certificate of Incorporation, a majority of the voting power of shares of capital stock of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of stockholders, notwithstanding the subsequent withdrawal of enough stockholders to leave less than a quorum. If at any meeting a quorum shall not be present, the chairman of such meeting shall, if approved by the affirmative vote of a majority of the voting power of shares of capital stock of the Corporation so represented, adjourn such meeting to another time and/or place without notice other than announcement at such meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, written notice of the adjourned meeting shall be given to each stockholder of record entitled to vote thereat as above provided. At such adjourned meeting, if a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting, notwithstanding the subsequent withdrawal of enough stockholders to leave less than a quorum. SECTION 1.5. VOTING. (a) Unless otherwise provided by law, the stockholders entitled to vote at any meeting of stockholders and the number of votes to which such stockholders are entitled shall be determined as provided in the Restated Certificate of Incorporation. Unless otherwise provided by law or in the Restated Certificate of Incorporation, directors shall be elected by a plurality of the votes cast in the election of directors. Each other question shall, unless otherwise provided by law, the Restated Certificate of Incorporation or these By-laws, be decided by the vote of the holders of stock having a majority of the votes which could be cast by the holders of all stock entitled to vote on such question which are present in person or by proxy at the meeting. (b) Where a separate vote by a class or group is required by the laws of the State of Delaware, the Restated Certificate of Incorporation or by these Bylaws, a majority of the voting power of the outstanding shares of each such class or group present in person or represented by proxy, shall constitute a -2- quorum entitled to take action with respect to the vote on that matter and the affirmative vote of a majority of the voting power of the outstanding shares of each class or group present in person or represented by proxy at the meeting shall be the act of each such class or group. SECTION 1.6. PROXIES. (a) At every meeting of stockholders, each stockholder having the right to vote thereat shall be entitled to vote in person or by proxy. Such proxy shall be filed with the Secretary before or at the time of the meeting. No proxy shall be valid after eleven months from its date, unless such proxy provides for a longer period. (b) A stockholder may authorize another person or persons to act for such stockholder as proxy (i) by executing a writing authorizing such person or persons to act as such, which execution may be accomplished by such stockholder or such stockholder's authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means, including, but not limited to, facsimile signature, or (ii) by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission (a "Transmission") to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such Transmission; PROVIDED, HOWEVER, that any such Transmission must either set forth or be submitted with information from which it can be determined that such Transmission was authorized by such stockholder. The inspector or inspectors appointed pursuant to Section 1.10 of these Bylaws shall examine Transmissions to determine if they are valid. If it is determined that a Transmission is valid, the person or persons making that determination shall specify the information upon which such person or persons relied. Any copy, facsimile telecommunication or other reliable reproduction of such a writing or such a Transmission may be substituted or used in lieu of the original writing or Transmission for any and all purposes for which the original writing or Transmission could be used; PROVIDED, HOWEVER, that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or Transmission. SECTION 1.7. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing such record date shall be adopted by the Board of Directors, and which record date shall not be more -3- than 60 nor less than 10 days before the date of such meeting. If no such record date shall have been fixed by the Board of Directors, such record date shall be at the close of business on the day next preceding the day on which such notice is given or, if such notice is waived, at the close of business on the day next preceding the day on which such meeting shall be held. A determination of stockholders of record entitled to notice of or to vote at any meeting of stockholders shall apply to any adjournment of such meeting; PROVIDED, HOWEVER, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing such record date shall be adopted by the Board of Directors, and which record date shall not be more than 10 days after the date upon which such resolution shall be adopted. If no such record date shall have been fixed by the Board of Directors, such record date shall be, if no prior action by the Board of Directors shall be required by the laws of the State of Delaware, the first date on which a signed written consent setting forth the action taken or proposed to be taken shall be delivered to the Corporation at its registered office in the State of Delaware, at its principal place of business or to the Secretary. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no such record date shall have been fixed by the Board of Directors and prior action by the Board of Directors shall be required by the laws of the State of Delaware, such record date shall be at the close of business on the day on which the Board of Directors shall adopt the resolution taking such prior action. (c) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or any allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of any capital stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing such record date shall be adopted by the Board of Directors, and which record date shall not be more than 60 days prior to such payment, allotment or other action. If no such record date shall have been fixed, such record date shall be at the close of business on the day on which the Board of Directors shall adopt the resolution relating to such payment, allotment or other action. SECTION 1.8. STOCKHOLDER LIST. The Secretary or any other officer who has charge of the stock ledger of the Corporation shall prepare, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting, arranged in alphabetical order, and showing the -4- address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to such meeting, during ordinary business hours, for a period of at least 10 days prior to such meeting, either at a place within the city where such meeting is to be held, which place shall be specified in the notice of such meeting, or, if not so specified, at the place where such meeting is to be held. The list shall also be produced and kept at the time and place of such meeting during the whole time thereof, and may be inspected by any stockholder who is present. Such stock ledger shall be the only evidence as to who are the stockholders entitled to examine such stock ledger, such list or the books of the Corporation or to vote in person or by proxy at any meeting of stockholders. SECTION 1.9. VOTING OF SHARES BY CERTAIN HOLDERS. Shares of capital stock of the Corporation standing in the name of another corporation, domestic or foreign, and entitled to vote may be voted by such officer, agent or proxy as the bylaws of such other corporation may prescribe or, in the absence of such provision, as the Board of Directors of such other corporation may determine. Shares of capital stock of the Corporation standing in the name of a deceased person, a minor, an incompetent or a corporation declared bankrupt and entitled to vote may be voted by an administrator, executor, guardian, conservator or trustee, as the case may be, either in person or by proxy, without transfer of such shares into the name of the official so voting. A stockholder whose shares of capital stock of the Corporation are pledged shall be entitled to vote such shares unless on the transfer books of the Corporation the pledgor has expressly empowered the pledgee to vote such shares, in which case only the pledgee, or such pledgee's proxy, may represent such shares and vote thereon. Shares of capital stock of the Corporation belonging to the Corporation, or to another corporation if a majority of the shares entitled to vote in the election of directors of such other corporation shall be held by the Corporation, shall not be voted at any meeting of stockholders and shall not be counted in determining the total number of outstanding shares for the purpose of determining whether a quorum is present. Nothing in this Section 1.9 shall be construed to limit the right of the Corporation to vote shares of capital stock of the Corporation held by it in a fiduciary capacity. SECTION 1.10. VOTING PROCEDURES AND INSPECTORS OF ELECTIONS. (a) The Board of Directors shall, in advance of any meeting of stockholders, appoint one or more inspectors -5- (individually an "Inspector," and collectively the "Inspectors") to act at such meeting and make a written report thereof. The Board of Directors may designate one or more persons as alternate Inspectors to replace any Inspector who shall fail to act. If no Inspector or alternate shall be able to act at such meeting, the person presiding at such meeting shall appoint one or more other persons to act as Inspectors thereat. Each Inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of Inspector with strict impartiality and according to the best of his or her ability. (b) The Inspectors shall (i) ascertain the number of shares of capital stock of the Corporation outstanding and the voting power of each, (ii) determine the shares of capital stock of the Corporation represented at such meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the Inspectors and (v) certify their determination of the number of such shares represented at such meeting and their count of all votes and ballots. The Inspectors may appoint or retain other persons or entities to assist them in the performance of their duties. (c) The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at such meeting shall be announced at such meeting. No ballots, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the Inspectors after the closing of the polls unless the Court of Chancery of the State of Delaware upon application by any stockholder shall determine otherwise. (d) In determining the validity and counting of proxies and ballots, the Inspectors shall be limited to an examination of the proxies, any envelopes submitted with such proxies, any information provided in accordance with the second paragraph of Section 1.6 of these Bylaws, ballots and the regular books and records of the Corporation, except that the Inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by a stockholder of record to cast or more votes than such stockholder holds of record. If the Inspectors consider other reliable information for the limited purpose permitted herein, the Inspectors, at the time they make their certification pursuant to paragraph (b) of this Section 1.10, shall specify the precise information considered by them, including the person or persons from whom they obtained such information, when the information was obtained, the means by which such information was obtained and the basis for the Inspectors' belief that such information is accurate and reliable. -6- SECTION 1.11. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Any action required to be taken or which may be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote if a consent or consents in writing, setting forth the action so taken, shall be signed by persons entitled to vote capital stock of the Corporation representing not less than 90% of the voting power of the shares that would be necessary to authorize or take such action at a meeting at which all shares of capital stock of the Corporation entitled to vote thereon were present and voted. Every written consent shall bear the date of signature of each stockholder (or his, her or its proxy) who shall sign such consent. Prompt notice of the taking of corporate action without a meeting of stockholders by less than unanimous written consent shall be given to those stockholders who shall not have consented in writing. All such written consents shall be delivered to the Corporation at its registered office in the State of Delaware, at its principal place of business or to the Secretary. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. No written consent shall be effective to authorize or take the corporate action referred to therein unless, within 60 days of the earliest dated written consent delivered in the manner required by this Section 1.11 to the Corporation, written consents signed by a sufficient number of persons to authorize or take such action shall be delivered to the Corporation at its registered office in the State of Delaware, at its principal place of business or to the Secretary as aforesaid. All such written consents shall be filed with the minutes of proceedings of the stockholders and actions authorized or taken under such written consents shall have the same force and effect as those adopted by vote of the stockholders at any annual or special meeting thereof. SECTION 1.12. INTRODUCTION OF BUSINESS AT A MEETING OF STOCKHOLDERS. At an annual or special meeting of stockholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before an annual or special meeting of stockholders. To be properly brought before an annual or special meeting of stockholders, business must be (a) in the case of a special meeting, specified in the notice of the special meeting (or any supplement thereto) given by the Corporation, or (b) in the case of an annual meeting, properly brought before the meeting by or at the direction of the Board of Directors, or otherwise properly brought before the annual meeting by a stockholder. For business to be properly brought before an annual meeting of stockholders by a stockholder, the stockholder must have given timely notice thereof in writing to the President or Secretary of the Corporation. To be timely, a stockholder's notice must be received at the principal executive offices of the Corporation not earlier than 120 calendar days nor later than 90 calendar days in advance of the anniversary date of the date of the Corporation's proxy statement to stockholders in connection with the most recent preceding annual meeting of stockholders, except -7- that if the date of the current year's annual meeting has been changed by more than 30 calendar days from the anniversary date of the most recent preceding annual meeting, a stockholder proposal shall be received by the Corporation not later than the close of business on the tenth day following the date of public notice of the date of the current year's annual meeting; PROVIDED, HOWEVER, that, notwithstanding the foregoing, for purposes of the annual meeting of stockholders to be held in 1998, a stockholder's notice shall be timely if received by the Corporation not later than the close of business on the tenth day following the effective date of these Restated Bylaws. A stockholder's notice shall set forth as to each matter the stockholder proposes to bring before an annual meeting of stockholders (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business and any other stockholders known by such stockholder to be supporting such proposal, (c) the class and number of shares of the Corporation which are beneficially owned by such stockholder on the date of such stockholder's notice and by any other stockholders known by such stockholder to be supporting such proposal on the date of such stockholder's notice and (d) any material interest of the stockholder in such proposal. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at a meeting of stockholders except in accordance with the procedures set forth in this Section 1.12. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that the business was not properly brought before the meeting in accordance with the procedures prescribed by the Bylaws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be considered. SECTION 1.13. NOMINATION OF DIRECTORS. Only persons nominated in accordance with the procedures set forth in this section shall be eligible for election as directors. Nominations of persons for election to the Board may be made at a meeting of stockholders (a) by or at the direction of the Board of Directors, or (b) by any stockholder of the Corporation entitled to vote for the election of directors at such meeting who complies with the notice procedures set forth in this Section 1.13. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the President or Secretary of the Corporation. To be timely, a stockholder's notice must be received at the principal executive offices of the Corporation not earlier than 120 calendar days nor later than 90 calendar days in advance of the anniversary date of the date of the Corporation's proxy statement to stockholders in connection with the preceding year's annual meeting of stockholders, except that if the date of the current year's -8- annual meeting has been changed by more than 30 calendar days from the anniversary date of the most recent preceding annual meeting, a nomination shall be received by the Corporation not later than the close of business on the tenth day following the date of public notice of the date of the current year's annual meeting. A stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person on the date of such stockholder's notice and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and any other stockholders known by such stockholder to be supporting such nominee and (ii) the class and number of shares of the Corporation which are beneficially owned by such stockholder on the date of such stockholder's notice and by any other stockholders known by such stockholder to be supporting such nominee on the date of such stockholder's notice. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this section. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. This Section 1.13 shall not apply to the election of a director to a directorship which may be filled by the Board of Directors under the Delaware General Corporation Law. ARTICLE II DIRECTORS SECTION 2.1. GENERAL POWERS. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. SECTION 2.2. STAGGERED BOARD. The Board of Directors shall consist of twelve members, to be divided into three classes -9- and the number of directors of each class shall be as equal as possible. The term of office of the second class shall expire at the annual meeting of the stockholders in 1998; the third class shall expire at the annual meeting of the stockholders in 1999 and the first class shall expire at the annual meeting of the stockholders in 2000. At each annual election, commencing at the next annual meeting of stockholders, the successors to the class of directors whose term expires in that year shall be elected to hold office for the term of three years to succeed those whose term expires so that the term of office of one class of directors shall expire in each year. Each director elected or appointed shall serve until his successor shall be elected and qualify, or until his earlier death, resignation, removal or disqualification. SECTION 2.3. RESIGNATION OR REMOVAL. Any director may resign by giving written notice to the Board of Directors or the President. Any such resignation shall take effect at the time of receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Directors may be removed from office, either with or without cause, only as provided in the Restated Certificate of Incorporation or the laws of the State of Delaware. SECTION 2.4. VACANCIES. (a) Except as otherwise required by the Restated Certificate of Incorporation or the laws of the State of Delaware or these Bylaws, any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors provided in Section 2.2 of these Bylaws, may be filled for the remainder of the unexpired term by the affirmative vote of a majority of the directors then in office, although less than a quorum, by a sole remaining director or by the stockholders. (b) Except as otherwise required by the Restated Certificate of Incorporation, when one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office for the remainder of the unexpired term of such office. SECTION 2.5. PLACE OF MEETINGS. Meetings of the Board of Directors may be held at such places, within or without the State of Delaware, as the Board of Directors may from time to time determine or as may be specified in the call of any such meeting. SECTION 2.6. REGULAR MEETINGS. A regular annual meeting of the Board of Directors shall be held, without call or notice, immediately after and at the same place as the annual -10- meeting of stockholders, or at such other time and place as may be fixed by resolution of the Board of Directors or specified by the Secretary at the direction of the Chairman, for the purpose of organizing the Board of Directors, electing officers and transacting any other business that may properly come before such meeting. If the stockholders shall elect the directors by written consent of stockholders as permitted by Section 1.11 of these Bylaws, a special meeting of the Board of Directors shall be called as soon as practicable after such election for the purposes described in the preceding sentence. Additional regular meetings of the Board of Directors may be held without call or notice at such times as shall be fixed by resolution of the Board of Directors or specified by the Secretary at the direction of the Chairman. SECTION 2.7. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman, the President or by a majority of the directors then in office. Notice of each special meeting shall be mailed by the Secretary to each director at least three days before such meeting, or be given by the Secretary personally or by telegraph or telecopy or by electronic mail at least four hours before such meeting, in the manner set forth in Section 9.1 of these Bylaws. Such notice shall set forth the date, time and place of such meeting but need not, unless otherwise required by the laws of the State of Delaware, state the purpose of such meeting. SECTION 2.8. QUORUM AND VOTING. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors. The act of the majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, unless otherwise provided by the laws of the State of Delaware, the Restated Certificate of Incorporation or these Bylaws. A majority of the directors present at any meeting at which a quorum shall be present may adjourn such meeting to any other date, time or place without further notice other than announcement at such meeting. If at any meeting a quorum shall not be present, a majority of the directors present may adjourn such meeting to any other date, time or place upon notice to all directors pursuant to Section 2.7. SECTION 2.9. TELEPHONIC MEETINGS. Members of the Board of Directors or of any committee designated by the Board of Directors may participate in a meeting of the Board of Directors or such committee through conference telephone or similar communications equipment by means of which all persons participating in such meeting can hear each other, and participation in any meeting conducted pursuant to this Section 2.9 shall constitute presence in person at such meeting. SECTION 2.10. COMPENSATION. Unless otherwise restricted by the laws of the State of Delaware or the Restated Certificate of -11- Incorporation, the Board of Directors shall have the authority to fix the compensation of directors. The directors shall be paid their reasonable expenses, if any, of attendance at each meeting of the Board of Directors or a committee thereof and may be paid a fixed sum for attendance at each such meeting and an annual retainer or salary for services as a director or committee member. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 2.11. PRESUMPTION OF ASSENT. Unless otherwise provided by the laws of the State of Delaware, a director who is present at a meeting of the Board of Directors or a committee thereof at which action is taken on any corporate matter shall be presumed to have assented to the action taken unless his or her dissent shall be entered in the minutes of such meeting or unless he or she shall file his or her written dissent to such action with the person acting as secretary of such meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary immediately after the adjournment of such meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 2.12. ACTION WITHOUT MEETING. Unless otherwise restricted by the laws of the State of Delaware, the Restated Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or any committee thereof, may be taken without a meeting if a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or such committee. SECTION 2.13. PRESIDING OFFICER. The presiding officer at any meeting of the Board of Directors shall be the Chairman or, in his or her absence, the President, or in his or her absence, any other director elected chairman by vote of a majority of the directors present at such meeting. SECTION 2.14. EXECUTIVE COMMITTEE. The Board of Directors may, in its discretion, by resolution passed by a majority of the entire Board of Directors, designate an Executive Committee consisting of such number of directors as the Board of Directors shall determine. The Executive Committee shall have and may exercise all of the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation with respect to any matter which may require action prior to, or which in the opinion of the Executive Committee may be inconvenient, inappropriate or undesirable to be postponed until, the next meeting of the Board of Directors; PROVIDED, HOWEVER, that the Executive Committee shall not have the power or authority of the Board of Directors in reference to (a) approving or adopting, or recommending to the stockholders any action or matter expressly -12- required by Delaware law to be submitted to the stockholders for approval or (b) adopting, amending or repealing these Bylaws. SECTION 2.15. OTHER COMMITTEES. The Board of Directors may from time to time, in its discretion, by resolution passed by a majority of the entire Board of Directors, designate other committees of the Board of Directors consisting of such number of directors as the Board of Directors shall determine, which shall have and may exercise such lawfully delegable powers and duties of the Board of Directors as shall be conferred or authorized by such resolution. The Board of Directors shall have the power to change at any time the members of any such committee, to fill vacancies and to dissolve any such committee. SECTION 2.16. ALTERNATES. The Board of Directors may from time to time designate from among the directors alternates to serve on any committee of the Board of Directors to replace any absent or disqualified member at any meeting of such committee. Whenever a quorum cannot be secured for any meeting of any committee from among the regular members thereof and designated alternates, the member or members, including alternates, of such committee present at such meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another director to act at such meeting in place of any absent or disqualified member. SECTION 2.17. QUORUM AND MANNER OF ACTING OF COMMITTEES. A majority of the members of any committee of the Board of Directors shall constitute a quorum for the transaction of business at any meeting of such committee, and the act of a majority of the members present at any meeting at which a quorum is present shall be the act of such committee. SECTION 2.18. COMMITTEE CHAIRMAN, BOOKS AND RECORDS, ETC. The chairman of each committee of the Board of Directors shall be selected from among the members of such committee by the Board of Directors. Each committee shall keep a record of its acts and proceedings, and all actions of each committee shall be reported to the Board of Directors at its next meeting. Each committee shall fix its own rules of procedure not inconsistent with these Bylaws or the resolution of the Board of Directors designating such committee and shall meet at such times and places and upon such call or notice as shall be provided by such rules. SECTION 2.19. RELIANCE UPON RECORDS. Every director, and every member of any committee of the Board of Directors, shall, in the performance of his or her duties, be fully protected in relying in good faith upon the records of the Corporation and upon -13- such information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or committees of the Board of Directors, or by any other person as to matters the director or member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation, including, but not limited to, such records, information, opinions, reports or statements as to the value and amount of the assets, liabilities and/or net profits of the Corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid, or with which the Corporation's capital stock might properly be purchased or redeemed. SECTION 2.20. INTERESTED DIRECTORS. The presence of a director, who is directly or indirectly a party in a contract or transaction with the Corporation, or between the Corporation and any other corporation, partnership, association or other organization in which such director is a director or officer or has a financial interest, may be counted in determining whether a quorum is present at any meeting of the Board of Directors or a committee thereof at which such contract or transaction is discussed or authorized, and such director may participate in such meeting to the extent permitted by applicable law, including Section 144 of the General Corporation Law of the State of Delaware. ARTICLE III OFFICERS SECTION 3.1. NUMBER AND DESIGNATION. The officers of the Corporation shall be a Chairman, a President, one or more Vice Presidents, a General Counsel, a Secretary, a Treasurer and a Controller, and such Assistant Secretaries, Assistant Treasurers or other officers or agents as may be elected or appointed by the Board of Directors. Any two or more offices may be held by the same person unless the Restated Certificate of Incorporation or these Bylaws provide otherwise. SECTION 3.2. ELECTION AND TERM OF OFFICE. The officers of the Corporation shall be elected by the Board of Directors at the first meeting of the Board of Directors held after the election of directors. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Vacancies may be filled or new offices created and filled at any meeting of the Board of Directors. Each officer shall hold office until his or her successor shall have been duly elected and shall have qualified or until his or her earlier death, resignation, removal or disqualification. -14- SECTION 3.3. REMOVAL AND RESIGNATION. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer or agent may resign at any time by giving written notice to the Board of Directors, to the Chairman or to the Secretary. Any such resignation shall take effect at the time of receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. SECTION 3.4. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or otherwise may be filled by the Board of Directors for the unexpired portion of the term. SECTION 3.5. CHAIRMAN. The Chairman shall be the principal officer of the Corporation. The Chairman may execute, alone or with the Secretary or any other officer of the Corporation authorized by the Board of Directors, any deeds, mortgages, bonds, contracts or other instruments which the Board of Directors or a committee thereof has authorized to be executed, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or a committee thereof or by these Bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed, and in general he or she shall perform all duties incident to the office of Chairman and such other duties as from time to time may be prescribed by the Board of Directors or a committee thereof. When present, he or she shall preside at all meetings of the stockholders and of the Board of Directors. SECTION 3.6. PRESIDENT. The President shall be the chief executive officer of the Corporation and shall in general supervise and control all of the business and affairs of the Corporation. In the absence of the Chairman or in the event of his or her inability or refusal to act as Chairman, the President shall perform the duties of the Chairman and, when so acting, shall have all the powers of, and be subject to all the restrictions placed upon the Chairman. He or she may execute, alone or with the Secretary or any other officer of the Corporation authorized by the Board of Directors, any deeds, mortgages, bonds, contracts or other instruments which the Board of Directors or a committee thereof has authorized to be executed, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or a committee thereof or by these Bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed, and in general he or she shall perform all duties incident to the office of President and such other duties as from time to time may be prescribed by the Chairman, the Board of Directors or a committee thereof. -15- SECTION 3.7. THE VICE PRESIDENTS. In the absence of the President or in the event of his or her inability or refusal to act, the Chairman, or in the event of his or her inability or refusal to act, the Vice President (or in the event there shall be more than one Vice President, the Vice President determined or elected by the Board of Directors at the time) shall perform the duties of the President and, when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Board of Directors may also designate certain Vice Presidents as being in charge of designated divisions, plants or functions of the Corporation's business and add appropriate descriptions to their titles. In addition, any Vice President shall perform such duties as from time to time may be assigned to him or her by the Chairman, the President or the Board of Directors. SECTION 3.8. GENERAL COUNSEL. The General Counsel shall be the principal legal officer of the Corporation and shall be responsible for and have charge of all legal matters affecting the Corporation, its subsidiaries, and those affiliated entities which it controls. The General Counsel shall perform or supervise the performance of all duties incident to such legal matters, together with such other duties as from time to time may be assigned to him by the Chairman, the President or the Board of Directors. The duties and powers of the General Counsel shall extend to all subsidiaries of the Corporation and, insofar as the Chairman or President may deem appropriate and practicable, to all affiliated entities. SECTION 3.9. THE SECRETARY. The Secretary shall (a) keep the minutes of proceedings of the stockholders, the Board of Directors and any committee of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation; (d) affix the seal of the Corporation or a facsimile thereof, or cause it to be affixed, and, when so affixed, attest the seal by his or her signature, to all Certificates for shares of capital stock of the Corporation prior to the issue thereof and to all other documents the execution of which on behalf of the Corporation under its seal is duly authorized by the Board of Directors or otherwise in accordance with the provisions of these Bylaws; (e) keep a register of the post office address of each stockholder, director or committee member, which shall be furnished to the Secretary by such stockholder, director or member; (f) have general charge of the stock transfer books of the Corporation; and (g) in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him or her by the Chairman, the President or the Board of Directors. SECTION 3.10. THE TREASURER. The Treasurer shall have charge and custody of and be responsible for all funds and -16- securities of the Corporation, receive and give receipts for moneys due and payable to the Corporation from any source whatsoever, deposit all such moneys in the name of the Corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of Article IV of these Bylaws, disburse the funds of the Corporation as ordered by the Board of Directors, the Chairman or the President or as otherwise required in the conduct of the business of the Corporation and render to the Chairman, President or the Board of Directors, upon request, an accounting of all his or her transactions as Treasurer and a report on the financial condition of the Corporation. The Treasurer shall in general perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him or her by the Chairman, President or the Board of Directors. If required by the Board of Directors, the Treasurer shall give a bond (which shall be renewed regularly), in such sum and with such surety or sureties as the Board of Directors shall determine, for the faithful discharge of his or her duties and for the restoration to the Corporation, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under his or her control belonging to the Corporation. SECTION 3.11. CONTROLLER. The Controller shall be the chief accounting officer of the Corporation. The duties of the Controller shall be to maintain adequate records of all assets, liabilities and transactions of the Corporation; to see that adequate audits are currently and regularly performed; and, in conjunction with other officers and department heads, to initiate and enforce measures and procedures whereby the business of the Corporation shall be conducted with the maximum safety, efficiency and economy. The Controller shall establish and administer an adequate plan for the control of operations, including systems and procedures required to properly maintain internal controls on all financial transactions of the Corporation. The Controller shall perform all duties as from time to time may be assigned to him or her by the chief financial officer or the Board of Directors. The duties and powers of the Controller shall extend to all subsidiaries of the Corporation and, insofar as the chief financial officer may deem appropriate and practicable, to all affiliated entities. SECTION 3.12. ASSISTANT TREASURERS AND SECRETARIES. In the absence of the Secretary or the Treasurer, as the case may be, or in the event of his or her inability or refusal to act, the Assistant Secretaries and the Assistant Treasurers, respectively, in the order determined by the Board of Directors (or if there shall have been no such determination, then in the order of their election), shall perform the duties and exercise the powers of the Secretary or the Treasurer, as the case may be. In addition, the Assistant Secretaries and the Assistant Treasurers shall, in general, perform such duties as may be assigned to them by the -17- Chairman, the President, the Secretary, the Treasurer or the Board of Directors. Each Assistant Treasurer shall, if required by the Board of Directors, give a bond (which shall be renewed regularly), in such sum and with such surety or sureties as the Board of Directors shall determine, for the faithful discharge of his or her duties. SECTION 3.13. SALARIES. The salaries of the officers and agents of the Corporation shall be fixed from time to time by the Board of Directors or by such committee or officer as it shall designate for such purpose. No officer shall be prevented from receiving such salary by reason of the fact that he or she is also a director of the Corporation. ARTICLE IV CONTRACTS, LOANS, CHECKS, AND DEPOSITS SECTION 4.1. CONTRACTS. The Board of Directors may authorize any officer or officers, or agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. SECTION 4.2. LOANS. No loans shall be contracted on behalf of the Corporation and no evidences of indebtedness shall be issued in the name of the Corporation unless authorized by or pursuant to a resolution adopted by the Board of Directors. Such authority may be general or confined to specific instances. SECTION 4.3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for payment of money issued in the name of the Corporation shall be signed by such officers, employees or agents of the Corporation as shall from time to time be designated by the Board of Directors, the Chairman, the President or the Treasurer. SECTION 4.4. DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as shall be designated from time to time by the Board of Directors, the Chairman, the President or the Treasurer; and such officers may designate any type of depository arrangement (including, but not limited to, depository arrangements resulting in net debits against the Corporation) as may from time to time be offered or made available. -18- ARTICLE V CERTIFICATES OF STOCK AND THEIR TRANSFER SECTION 5.1. CERTIFICATES OF STOCK. Shares of capital stock of the Corporation shall be represented by Certificates which shall be in such form as may be determined by the Board of Directors, shall be numbered and shall be entered on the books of the Corporation as they are issued. Such Certificates shall indicate the holder's name and the number of shares evidenced thereby and shall be signed by the Chairman, the President or a Vice President and by the Secretary or an Assistant Secretary. If any stock Certificate shall be manually signed (a) by a transfer agent or an assistant transfer agent or (b) by a transfer clerk acting on behalf of the Corporation and a registrar, the signature of any officer of the Corporation may be facsimile. In case any such officer whose facsimile signature has been used on any such stock Certificate shall cease to be such officer, whether because of death, resignation, removal or otherwise, before such stock Certificate shall have been delivered by the Corporation, such stock Certificate may nevertheless be delivered by the Corporation as though the person whose facsimile signature has been used thereon had not ceased to be such officer. SECTION 5.2. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of Directors in individual cases, or by general resolution or by delegation to the transfer agent for the Corporation, may direct that a new stock Certificate or Certificates for shares of capital stock of the Corporation be issued in place of any stock Certificate or Certificates theretofore issued by the Corporation claimed to have been lost, stolen or destroyed, upon the filing of an affidavit to that effect by the person claiming such loss, theft or destruction. When authorizing such an issuance of a new stock Certificate or Certificates, the Board of Directors may, in its discretion and as a condition precedent to such issuance, require the owner of such lost, stolen or destroyed stock Certificate or Certificates to advertise the same in such manner as the Corporation shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the stock Certificate or Certificates claimed to have been lost, stolen or destroyed. SECTION 5.3. TRANSFERS OF STOCK. Upon surrender to the Corporation or the transfer agent of the Corporation of a stock Certificate for shares of capital stock of the Corporation duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer or, if the relevant stock Certificate for shares of capital stock of the Corporation is claimed to have been lost, stolen or destroyed, upon compliance with the provisions of Section 5.2 of these Bylaws, and upon payment of applicable taxes with respect to such transfer, and in compliance with any restrictions on transfer applicable to such stock Certificate or the shares represented thereby of which the Corporation shall have notice and subject to such rules and regulations as the Board of Directors may from time to time deem advisable concerning the transfer and registration of stock -19- Certificates for shares of capital stock of the Corporation, the Corporation shall issue a new stock Certificate or Certificates for such shares to the person entitled thereto, cancel the old stock Certificate and record the transaction upon its books. Transfers of shares shall be made only on the books of the Corporation by the registered holder thereof or by such holder's attorney or successor duly authorized as evidenced by documents filed with the Secretary or transfer agent of the Corporation. Whenever any transfer of shares of capital stock of the Corporation shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of transfer if, when the stock Certificate or Certificates representing such shares are presented to the Corporation for transfer, both the transferor and transferee request the Corporation to do so. SECTION 5.4. STOCKHOLDERS OF RECORD. The Corporation shall be entitled to treat the holder of record of any share of capital stock of the Corporation as the holder thereof and shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware. ARTICLE VI GENERAL PROVISIONS SECTION 6.1. FISCAL YEAR. The fiscal year of the Corporation shall be the same as the calendar year. SECTION 6.2. SEAL. The corporate seal of the Corporation shall have inscribed thereon the name of the Corporation and the words "CORPORATE SEAL" and "DELAWARE"; and it shall otherwise be in the form approved by the Board of Directors. Such seal may be used by causing it, or a facsimile thereof, to be impressed or affixed or otherwise reproduced. ARTICLE VII OFFICES SECTION 7.1. REGISTERED OFFICE. The registered office of the Corporation in the State of Delaware shall be located at 1209 Orange Street in the City of Wilmington, County of New Castle, and the name of its registered agent is Corporation Trust Company. SECTION 7.2. OTHER OFFICES. The Corporation may have offices at such other places, both within or without the State of -20- Delaware, as shall be determined from time to time by the Board of Directors or as the business of the Corporation may require. ARTICLE VIII INDEMNIFICATION SECTION 8.1. GENERAL. (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that he or she is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that such person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he or she is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application -21- that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs (a) and (b) of this Section 8.1, or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith. (d) Any indemnification under paragraphs (a) and (b) of this Section 8.1 (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in paragraphs (a) and (b) of this Section 8.1. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, (ii) if such a quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion or (iii) by the stockholders. (e) Subject to compliance with the other terms and conditions of this Section 8.1, expenses (including attorneys' fees) incurred by a director or officer in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation pursuant to this Section 8.1. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon compliance with the terms and conditions set forth in this Section 8.1 or such other terms and conditions as the Board of Directors deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. (g) For purposes of this Article VIII, any reference to the "Corporation" shall include, in addition to the resulting or surviving corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger -22- which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued. (h) For purposes of this Article VIII, any reference to "other enterprise" shall include employee benefit plans; any reference to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and any reference to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article VIII. (i) The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. (j) Notwithstanding any other provisions of this Section 8.1, the Corporation shall not make any payments pursuant to this Section 8.1 unless the Corporation shall have first received adequate documentation demonstrating that such amounts for which payment is requested were actually and reasonably incurred for the purposes permitted to be reimbursed pursuant to this Section 8.1. Such documentation may include time records, fee and disbursement records (including hourly rates), description of the work performed, periodic litigation status reports, the legal basis for the indemnification claim, and other information reasonably requested by the Corporation. If a written claim has been made for payment or reimbursement of expenses, the Corporation may require periodic status reports from the claimant or the counsel handling the defense of such proceeding as to the status of such proceeding, the matters presented in the proceeding for which indemnification is sought, the names of any expert witnesses to be retained, the projected costs for such proceeding and any other information which is customary to obtain in order to determine whether such expenses were actually and reasonably incurred for the purposes permitted to be reimbursed pursuant to this Section 8.1. In the event that the -23- party requesting indemnification or advancement of expenses has incurred costs in multiple proceedings, or shared legal counsel with other claimants, or circumstances exist where some costs are permitted or required to be reimbursed and some are not, the party submitting the request for payment shall allocate such costs and explain in sufficient detail a reasonable basis for the allocation of costs. If the party requesting payment fails to make an allocation when necessary, or to provide an adequate explanation for any such allocation, the Corporation shall determine a reasonable basis for allocation based on the written information furnished to it. If any information relating to the allocation of expenses or any other matter is not properly supplied, the Corporation shall not be required to make payment until such information is fully supplied. If a claim under this Section 8.1 is not paid in full by the Corporation within ninety days after a written claim meeting the requirements of this Section 8.1 has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, plus any interest required by law to be paid. Such suit may only be filed in the Circuit Court of Cook County, Illinois, the federal district court for the Northern District of Illinois, the Superior Court of Delaware, New Castle County, or the federal district court for Delaware. It shall be a defense to any such action that the claimant has not met the requirements of this Section 8.1, including the provisions of this paragraph (j), or the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to pay the claimant for the amount claimed. (k) Notwithstanding any other provisions of this Section 8.1, nothing herein shall require the Corporation to make an advance of expenses at any time. In the event that any written claim for advancement of expenses is submitted to the Corporation, this Section 8.1 shall apply to such written claim for advancement of expenses except to the extent expressly required by the General Corporation Law of the State of Delaware or applicable law. Any undertaking shall comply with the requirements of paragraph (l) of this Section 8.1. (l) If any undertaking is permitted to be delivered by a person pursuant to this Section 8.1 or the General Corporation Law of the State of Delaware, the Corporation shall prescribe the form of undertaking. The Corporation shall be a party to the instrument evidencing the undertaking. In the event that there is doubt as to the collectibility of any amounts to be advanced to a claimant which may be required to be repaid, or for other good and sufficient reason, the Corporation may require adequate security for the undertaking. (m) Except to the extent expressly required by the General Corporation law of the State of Delaware or applicable law or except as otherwise approved by the Board of Directors, the Corporation does not intend to provide indemnification or -24- advancement of expenses to any person who (i) has not acted in good faith or has acted in a manner opposed to the best interests of the Corporation; (ii) has initiated any action, suit or proceeding against the Corporation which was not authorized by the Board of Directors of the Corporation; (iii) has breached any agreement with the Corporation in any material respect; (iv) has tortiously induced any director, officer, employee, agent, customer or supplier of the Corporation or other person or entity to breach his, her or its contractual obligations to the Corporation; (v) has tortiously interfered with the Corporation's customers or business relationships; (vi) has committed, threatened or conspired to commit any acts of dishonesty, embezzlement, misappropriation of funds, theft of trade secrets, fraud, breach of fiduciary duty or other crime or tort against the Corporation; or (vii) has engaged in any other unlawful or tortious conduct against the Corporation or its interests. To the extent permitted by the General Corporation Law of the State of Delaware and applicable law, these rules of interpretation shall be applied in construing all provisions of this Section 8.1. (n) Notwithstanding anything to the contrary in this Section 8.1, the Corporation may provide indemnification to a person consistent with the requirements of Section 145(a) and Section 145(b) of the General Corporation Law of the State of Delaware and this Section 8.1, and the Corporation shall provide indemnification to the extent required by Section 145(c) of the General Corporation Law of the State of Delaware. The provisions of this Section 8.1 are severable, and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions and any partially enforceable provisions, to the extent so enforceable, shall nevertheless be binding and enforceable. SECTION 8.2. INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of Section 145 of the General Corporation Law of the State of Delaware. ARTICLE IX NOTICES SECTION 9.1. MANNER OF NOTICE. Except as otherwise provided by law, whenever under the provisions of the laws of the -25- State of Delaware, the Restated Certificate of Incorporation or these Bylaws notice is required to be given to any stockholder, director or member of any committee of the Board of Directors, such notice may be given by personal delivery or by depositing it, in a sealed envelope, in the United States mails, air mail or first class, postage prepaid, addressed, or by delivering it to a telegraph company, charges prepaid, for transmission, or by transmitting it via telecopier or by electronic mail via the Internet or similar system, to such stockholder, director or member either at the address of such stockholder, director or member as it appears on the books of the Corporation or, in the case of such a director or member, at his or her business address; and such notice shall be deemed to be given at the time when it is thus personally delivered, deposited, delivered or transmitted, as the case may be. Such requirement for notice shall also be deemed satisfied, except in the case of stockholder meetings with respect to which written notice is required by law, if actual notice is received orally or by other writing by the person entitled thereto as far in advance of the event with respect to which notice is being given as the minimum notice period required by the laws of the State of Delaware or these Bylaws. Whenever notice is required to be given under any provision of the laws of the State of Delaware, the Restated Certificate of Incorporation or these Bylaws to any stockholder to whom (a) notice of two consecutive annual meetings of stockholders, and all notices of meetings of stockholders or of the taking of action by stockholders by written consent without a meeting to such stockholder during the period between such two consecutive annual meetings, or (b) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities of the Corporation during a 12-month period, have been mailed addressed to such stockholder at the address of such stockholder as shown on the records of the Corporation and have been returned undeliverable, the giving of such notice to such stockholder shall not be required. Any action or meeting which shall be taken or held without notice to such stockholder shall have the same force and effect as if such notice had been duly given. If any such stockholder shall deliver to the Corporation a written notice setting forth the then current address of such stockholder, the requirement that notice be given to such stockholder shall be reinstated. SECTION 9.2. WAIVER OF NOTICE. Whenever any notice is required to be given under any provision of the laws of the State of Delaware, the Restated Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to such notice. Attendance by a person at a meeting shall constitute a waiver of notice of such meeting, except when such person attends such meeting for the express purpose of objecting, at the beginning of such meeting, to the transaction of any business because such meeting has not been -26- lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of stockholders, the Board of Directors or a committee of the Board of Directors need be specified in any written waiver of notice unless so required by the laws of the State of Delaware, the Restated Certificate of Incorporation or these Bylaws. ARTICLE X DIVIDENDS The Board of Directors may from time to time declare, and the Corporation may pay, dividends, in cash, in property or in shares of capital stock of the Corporation, on its outstanding shares of capital stock in the manner and upon the terms and conditions provided by law and by the Restated Certificate of Incorporation. ARTICLE XI AMENDMENTS Except to the extent otherwise provided in the Restated Certificate of Incorporation or these Bylaws, these Bylaws shall be subject to alteration, amendment or repeal, and new Bylaws may be adopted (a) by the affirmative vote of the holders of not less than a majority of the voting power of all outstanding shares of capital stock of the Corporation entitled to vote for matters other than the election of directors or (b) by the affirmative vote of not less than a majority of the entire Board of Directors at any meeting of the Board of Directors at which there is a quorum present and voting; PROVIDED, HOWEVER, that the right to call a special meeting by holders of at least fifty percent of the voting power of the capital stock of the Corporation issued and outstanding and entitled to vote at a special meeting, as provided in Section 1.2 of these Bylaws, shall not be altered, amended or repealed with respect to any group of shareholders entitled to call a special meeting, without the approval by the affirmative vote of the holders of not less than a majority of the voting power of the shares of capital stock which are held by such shareholders and which are entitled to vote in such group at such special meeting. -27- EX-4.4(B) 3 EXHIBIT 4.4(B) Exhibit 4.4(b) AMENDMENT NO. 1 Dated as of June 2, 1997 to that certain REVOLVING CREDIT AGREEMENT This AMENDMENT NO. 1 (the "AMENDMENT"), is made as of June 2, 1997, by and among TELEPHONE AND DATA SYSTEMS, INC. (THE "BORROWER"), an Iowa corporation having its principal place of business at 30 N. LaSalle Street, Chicago, Illinois 60602, the financial institutions listed on SCHEDULE 1.1(a) to the Credit Agreement (as defined below) (the "BANKS"), BANKBOSTON, N.A., f/k/a THE FIRST NATIONAL BANK OF BOSTON, as agent for the Banks (the "AGENT") and as Arranger and LASALLE NATIONAL BANK and TORONTO DOMINION (TEXAS), INC., as Co-Agents. WHEREAS, the Borrower, the Banks, the Agent and the Co-Agents are parties to that certain Revolving Credit Agreement dated as of June 7, 1996 (the "CREDIT AGREEMENT"), pursuant to which the Banks, upon certain terms and conditions, have made and agree to make loans to the Borrower; and WHEREAS, the Borrower has requested and the Banks have agreed, on the terms and subject to the conditions set forth herein, to amend the Credit Agreement to (a) modify the Maturity Date and the provisions regarding the extension of the Maturity Date therein, and (b) modify SCHEDULE 1.2 thereof; NOW, THEREFORE, the parties hereto hereby agree as follows: Section 1. DEFINED TERMS. Capitalized terms which are used herein without definition and which are defined in the Credit Agreement shall have the same meanings herein as in the Credit Agreement. Section 2. AMENDMENT OF CREDIT AGREEMENT. (a) SCHEDULE 1.1(a) to the Credit Agreement is hereby amended by substituting therefor the SCHEDULE 1.1(a) annexed hereto. (b) SCHEDULE 1.2 to the Credit Agreement is hereby amended by substituting therefor the SCHEDULE 1.2 annexed hereto. (c) The definition of Maturity Date is hereby amended by deleting the date "June 7, 2001" therein and substituting therefor the date "June 7, 2002". (d) Section 2.9 is hereby amended by (a) deleting the phrase "the first anniversary of the Closing Date" in the first sentence thereof and substituting therefor the date "June 7, 1998" and (b) deleting the date "June 7, 2002" in the first sentence thereof and substituting therefor the date "June 7, 2003". Section 3. EFFECTIVENESS. The effectiveness of this Amendment shall be subject to the satisfaction of the following conditions. (a) DELIVERY. The Borrower and each of the Banks shall have executed and delivered to the Agent this Amendment. (b) PROCEEDINGS AND DOCUMENTS. All proceedings in connection with the transactions contemplated by this Amendment and all documents incident thereto shall be reasonably satisfactory in substance and form to the Banks and the Agent, and the Agent shall have received all information and such counterpart originals or certified or other copies of such documents as the Agent may reasonably request. (c) NO DEFAULT OR EVENT OF DEFAULT. No Default or Event of Default shall exist under the Credit Agreement. Section 4. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Banks and the Agent as follows: (a) REPRESENTATIONS AND WARRANTIES IN CREDIT AGREEMENT. The representations and warranties of the Borrower contained in the Credit Agreement, (i) were true and correct in all material respects when made, and (ii) except to the extent such representations and warranties by their terms are made solely as of a prior date, continue to be true and correct in all material respects on the date hereof. (b) AUTHORITY, ETC. The execution and delivery by the Borrower of this Amendment and the performance by the Borrower of all of its agreements and obligations under the Credit Agreement as amended by this Amendment (i) are within the corporate proceedings by the Borrower, (ii) have 2 been duly authorized by all necessary corporate proceedings by the Borrower, (iii) do not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which the Borrower is subject or any judgment, order, writ, injunction, license or permit applicable to the Borrower, and (iv) do not conflict with any provision of the corporate charter or by-laws of, or any agreement or other instrument binding upon, the Borrower. (c) ENFORCEABILITY OF OBLIGATIONS. This Amendment, and the Credit Agreement as amended hereby, constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. (d) ABSENCE OF DEFAULTS. Immediately prior to and after giving effect to this Amendment, no Default or Event of Default exists under the Credit Agreement. Section 5. NO WAIVER. Except as otherwise expressly provided for in this Amendment, nothing in this Amendment shall extend to or affect in any way any of the Borrower's obligations or any of the rights and remedies of the Banks or the Agent in respect of the Credit Agreement arising on account of the occurrence of any Event of Default, all of which are expressly preserved. Section 6. MISCELLANEOUS PROVISIONS. (a) Except at otherwise expressly provided by this Amendment, all of the terms, conditions and provisions of the Credit Agreement shall remain the same. It is declared and agreed by each of the parties hereto that the Credit Agreement, as amended hereby, shall continue in full force and effect, and that this Amendment and the Credit Agreement shall be read and construed as one instrument. (b) THIS AMENDMENT IS INTENDED TO TAKE EFFECT AS AN AGREEMENT UNDER SEAL AND SHALL BE CONSTRUED ACCORDING TO AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. (c) This Amendment may be executed in any number of counterparts, but all such counterparts shall together constitute but one instrument. In making proof of this Amendment it shall not be necessary to produce or account 3 for more than one counterpart signed by each party hereto by and against which enforcement hereof is sought. (d) The Borrower hereby agrees to pay to the Agent, on demand by the Agent, all reasonable out-of-pocket costs and expenses incurred or sustained in connection with the preparation of this amendment (including reasonable legal fees). IN WITNESS WHEREOF, the parties hereto have executed this Amendment as an agreement under seal of the date first written above. TELEPHONE AND DATA SYSTEMS, INC. By: /s/ RONALD D. WEBSTER ---------------------------------- Name: Ronald D. Webster Title: Vice President and Treasurer BANKBOSTON, N.A., f/k/a THE FIRST NATIONAL BANK OF BOSTON, individually and as Agent By: /s/ JULIE V. JALELIAN ---------------------------------- Name: Julie V. Jalelian Title: Vice President and Treasurer LASALLE NATIONAL BANK, individually and as Co-Agent By: /s/ ANN H. ELLINGSEN ---------------------------------- Title: Vice President TORONTO DOMINION (TEXAS), INC., individually and as Co-Agent By: /s/ NEVA NESBITT ---------------------------------- Title: Vice President The signatures of the Banks are omitted. Schedule 1.1(a) and 1.2 are not filed herewith. The registrant agrees to file a copy of Schedule 1.1(a) and 1.2 upon request of the Commission. 4 EX-4.4(C) 4 EXHIBIT 4.4(C) Exhibit 4.4(c) ASSIGNMENT AND ASSUMPTION AGREEMENT This ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of May 11, 1998 (the "Agreement"), is entered into between Telephone and Data Systems, Inc., an Iowa corporation ("TDS Iowa") and Telephone and Data Systems, Inc., a Delaware corporation ("TDS Delaware"). W I T N E S S E T H: WHEREAS, TDS Iowa, BankBoston N.A. (formerly known as The First National Bank of Boston), as Agent and Arranger, LaSalle National Bank and Toronto Dominion (Texas), Inc., as Co-Agents, and the financial institutions named therein (individually, a "Bank" and collectively, the "Banks") are parties to a Revolving Credit Agreement, dated as of June 7, 1996, as amended on June 2, 1997 (the "Credit Agreement"), relating to the borrowing, repaying and reborrowing from time to time by TDS Iowa of loans up to a maximum aggregate principal amount outstanding at any one time equal to the aggregate amount of the Banks' commitments (the "Loans"); and WHEREAS, capitalized terms herein, not otherwise defined, shall have the same meanings given them in the Credit Agreement; and WHEREAS, Section 6.3(b) of the Credit Agreement provides that an agreement may be entered into by TDS Iowa, to evidence the succession of another corporation to the capacity of Borrower under the Credit Agreement and the assumption by such successor corporation of the covenants, conditions and obligations of TDS Iowa; and WHEREAS, TDS Iowa and TDS Delaware are entering into this Agreement to recognize the merger (the "Merger") of TDS Iowa with and into TDS Delaware, with TDS Delaware as the surviving corporation; and WHEREAS, the Merger will be consummated for the sole purpose of reincorporating TDS Iowa from Iowa to Delaware, and will not result in any change in its name, business, management, assets or liabilities; and WHEREAS, all things necessary to make this Agreement a valid agreement of TDS Iowa and TDS Delaware have been done. NOW, THEREFORE, in consideration of the premises and the mutual covenants of the parties hereto, the parties hereto agree as follows: Section 1. SUCCESSION OF TDS IOWA BY TDS DELAWARE Subject to the effectiveness of the Merger: (a) TDS Delaware, as successor to TDS Iowa, hereby expressly assumes the due and punctual payment of the principal of and interest on all of the Loans and the due and punctual performance and observance of all of the covenants, conditions and other obligations of the Credit Agreement and the Notes to be performed or observed by TDS Iowa as Borrower; and (b) TDS Delaware shall succeed to, and be substituted for, and may exercise every right and power of, TDS Iowa under the Credit Agreement with the same effect as if TDS Delaware had been originally named as the Borrower therein. Section 2. REPRESENTATIONS AND WARRANTIES. TDS Iowa and TDS Delaware hereby jointly and severally represent and warrant to the Banks and the Agent that, as of the date hereof and immediately prior to and after giving effect to the Merger: (a) Representations and Warranties in Credit Agreement. The representations and warranties of the Borrower contained in the Credit Agreement, (i) were true and correct in all material respects when made, and (ii) except to the extent such representations and warranties by their terms are made solely as of a prior date or by their terms relate specifically to the Borrower's status as an Iowa corporation, continue to be true and correct in all material respects. (b) Authority, Etc. The execution and delivery by each of TDS Iowa and TDS Delaware of this Assignment and Assumption Agreement, and the performance by TDS Delaware, as the Borrower under the Credit Agreement after giving effect to the Merger, of all of its agreements and obligations under the Credit Agreement (i) are within the corporate authority of TDS Iowa and TDS Delaware, respectively, (ii) have been duly authorized by all necessary corporate proceedings by TDS Iowa and TDS Delaware, respectively, (iii) do not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which either TDS Iowa or TDS Delaware is subject, or any judgment, order, writ, injunction, license or permit applicable to TDS Iowa or TDS Delaware, and (iv) do not conflict with any provision of the corporate charter or by-laws of, or any agreement or other instrument binding upon, TDS Iowa or TDS Delaware. (c) Enforceability of Obligations. The Credit - 2 - Agreement constitutes the legal, valid and binding obligation of TDS Iowa as of the date hereof and immediately prior to the Merger, and of TDS Delaware immediately after giving effect to the Merger, in each case enforceable in accordance with its terms against TDS Iowa or TDS Delaware, in their respective capacities as the Borrower under the Credit Agreement, subject to the qualifications as to enforceability set forth in Section 4.1(c) of the Credit Agreement. (d) Absence of Defaults. No Default or Event of Default exists under the Credit Agreement. Section 3. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT (a) On and after the date of this Agreement, each reference in the Credit Agreement to "hereunder," "hereof," or "herein" shall mean and be a reference to the Credit Agreement as supplemented by this Agreement. (b) The Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed. (c) All capitalized terms used but not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. (d) This Agreement shall be effective at the time the Merger is effective, subject to no Default or Event of Default existing under the Credit Agreement at such time. Section 4. GOVERNING LAW This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the jurisdiction which govern the Credit Agreement and its construction. Section 5. COUNTERPARTS AND METHOD OF EXECUTION This Agreement may be executed in several counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all parties have not signed the same counterpart. Section 6. SECTION TITLES Section titles are for descriptive purposes only and shall not control or alter the meaning of this Agreement as set forth in the text. - 3 - IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and their respective seals to be affixed hereunto and duly attested all as of the day and year first above written. TELEPHONE AND DATA SYSTEMS, INC., an Iowa Corporation [Corporate Seal] By: /s/ LEROY T. CARLSON, JR. ---------------------------------- LeRoy T. Carlson, Jr. President Attest: /s/ MICHAEL G. HRON - ----------------------------- Michael G. Hron Secretary TELEPHONE AND DATA SYSTEMS, INC., a Delaware Corporation [Corporate Seal] By: /s/ LEROY T. CARLSON, JR. ---------------------------------- LeRoy T. Carlson, Jr. President Attest: /s/ MICHAEL G. HRON - ----------------------------- Michael G. Hron Secretary Accepted and Acknowledged: BANKBOSTON, N.A., as Agent for the Banks referred to herein By: /s/ JULIE V. JALELIAN ------------------------ Name: Julie V. Jalelian Title: Director - 4 - EX-10.6(B) 5 EXHIBIT 10.6(B) EXHIBIT 10.6(b) FIRST AMENDMENT TO THE TELEPHONE AND DATA SYSTEMS, INC. 1998 LONG-TERM INCENTIVE PLAN WHEREAS, Telephone and Data Systems, Inc. (the "Corporation") has adopted the Telephone and Data Systems, Inc. 1998 Long-Term Incentive Plan (the "Plan") for the benefit of certain key executives and management personnel; WHEREAS, pursuant to Section 8.2 of the Plan, the Board may amend the Plan as it deems advisable; WHEREAS, the Board desires to amend the Plan in certain respects. NOW, THEREFORE, BE IT RESOLVED, pursuant to the power of amendment contained in Section 8.2 of the Plan, the Plan is hereby amended in the following respects, effective December 1, 1999: 1. Section 4.1(d) of the Plan is hereby amended to read as follows: An option may be exercised (i) by giving written notice to the Vice President-Human Resources of the Company specifying the number of whole shares of Stock to be purchased and by accompanying such notice with payment therefor (in full, unless another arrangement for such payment which is satisfactory to the Company has been made) either (A) in cash, (B) in Mature Shares having a Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, (C) in cash by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (D) a combination of (A) and (B), in each case to the extent set forth in the Agreement relating to the option, and (ii) by executing such documents and taking any other actions as the Company may reasonably request. The Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(D) of the preceding sentence. If the payment of the purchase price is to be made pursuant to clause (B) of the first sentence of this Section 4.1(d), then any fraction of a share of Stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the optionee. No share of Stock shall be delivered until the full purchase price therefor has been paid. 2. The first sentence of Section 7.2 of the Plan is hereby amended to delete therefrom the phrase "to be made in accordance with the Agreement evidencing such award". 3. Section 8.9(b)(3) is hereby amended to delete the phrase "approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all the assets of the Company (a "Corporate Transaction")" and to insert in its place the phrase "consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all the assets of the Company (a "Corporate Transaction")". IN WITNESS WHEREOF, the undersigned has executed this amendment as of this 10th day of March, 2000. TELEPHONE AND DATA SYSTEMS, INC. BY: /s/ Leroy T. Carlson, Jr. ------------------------- LEROY T. CARLSON, JR. PRESIDENT SIGNATURE PAGE TO FIRST AMENDMENT TO TELEPHONE AND DATA SYSTEMS, INC. 1998 LONG-TERM INCENTIVE PLAN * * * * * 2 EX-12 6 EXHIBIT 12 Exhibit 12 TELEPHONE AND DATA SYSTEMS, INC. RATIOS OF EARNINGS TO FIXED CHARGES (Dollars In Thousands)
12 Months Ended 12/30/99 ----------------- EARNINGS: Income from Continuing Operations before income taxes $542,327 Add (Deduct): Minority Share of Losses (46) Earnings on Equity Method (18,397) Distributions from Minority Subsidiaries 26,061 Amortization of Non-Telephone Capitalized Interest 2 Minority interest in majority-owned subsidiaries that have fixed charges 58,130 ----------------- 608,077 Add fixed charges: Consolidated interest expense 124,794 Interest Portion (1/3) of Consolidated Rent Expense 15,275 ----------------- $748,146 FIXED CHARGES: Consolidated interest expense/TOPRS $124,794 Interest Portion (1/3) of Consolidated Rent Expense 15,275 ----------------- $140,069 RATIO OF EARNINGS TO FIXED CHARGES 5.34 ================= Tax-Effected Redeemable Preferred Dividends $ 114 Fixed Charges 140,069 ----------------- Fixed Charges and Redeemable Preferred Dividends $140,183 RATIO OF EARNINGS TO FIXED CHARGES AND REDEEMABLE PREFERRED DIVIDENDS 5.34 ================= Tax-Effected Preferred Dividends $ 1,865 Fixed Charges 140,069 ----------------- Fixed Charges and Preferred Dividends $141,934 RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS 5.27 =================
EX-13 7 EXHIBIT 13 Exhibit 13 Selected Consolidated Financial Data
YEAR ENDED OR AT DECEMBER 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating Revenues $ 1,963,098 $ 1,650,571 $ 1,314,589 $ 1,075,127 $ 835,157 Operating Income from Ongoing Operations 370,393 270,487 229,686 190,015 140,995 Gain on Sale of Cellular and Other Investments 345,938 262,698 41,438 136,152 86,625 Net Income Available to Common from Continuing Operations 313,004 199,748 97,853 136,647 95,974 From Operations 121,515 65,186 81,939 73,330 55,324 From Gains $ 191,489 $ 134,562 $ 15,914 $ 63,317 $ 40,650 Weighted Average Shares Outstanding 61,436 60,982 60,211 60,464 57,456 Basic Earnings per Share from Continuing Operations $ 5.09 $ 3.28 $ 1.63 $ 2.26 $ 1.67 Diluted Earnings per Share from Continuing Operations $ 5.02 $ 3.22 $ 1.59 $ 2.22 $ 1.63 Pretax Profit on Revenues 27.6% 21.0% 14.2% 24.4% 21.4% Effective Income Tax Rate 42.1% 41.9% 46.7% 47.1% 44.9% Dividends per Common and Series A Common Share $ .46 $ .44 $ .42 $ .40 $ .38 Cash and Cash Equivalents and Temporary Investments $ 115,993 $ 55,445 $ 70,357 $ 118,113 $ 80,586 Working Capital 138,336 (192,179) (448,958) (46,939) (159,594) Property, Plant and Equipment, net 2,095,889 2,020,092 1,892,556 1,515,906 1,268,198 Total Assets 5,375,828 5,042,604 4,561,957 3,874,267 3,471,436 Notes Payable -- 170,889 527,587 160,537 184,320 Long-term Debt (including current portion) 1,294,844 1,291,032 1,082,594 915,108 894,584 Common Stockholders' Equity 2,483,101 2,237,908 1,968,119 2,032,941 1,684,365 Capital Expenditures $ 399,631 $ 463,543 $ 488,833 $ 425,081 $ 341,777 Current Ratio 1.4 .7 .4 .9 .6 Common Equity per Share $ 39.80 $ 36.12 $ 32.06 $ 33.23 $ 29.01 Return on Equity 13.3% 9.5% 4.9% 7.4% 6.1% - ------------------------------------------------------------------------------------------------------------------------------------
1 Telephone and Data Systems, Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition TELEPHONE AND DATA SYSTEMS, INC. ("TDS" OR THE "COMPANY") IS A DIVERSIFIED TELECOMMUNICATIONS COMPANY WHICH PROVIDED HIGH-QUALITY TELECOMMUNICATIONS SERVICES TO APPROXIMATELY 3.2 MILLION CELLULAR TELEPHONE AND TELEPHONE CUSTOMERS IN 35 STATES AT DECEMBER 31, 1999. THE COMPANY CONDUCTS SUBSTANTIALLY ALL OF ITS CELLULAR TELEPHONE OPERATIONS THROUGH ITS 80.7%-OWNED SUBSIDIARY, UNITED STATES CELLULAR CORPORATION ("U.S. CELLULAR") AND ITS TELEPHONE OPERATIONS THROUGH ITS WHOLLY-OWNED SUBSIDIARY, TDS TELECOMMUNICATIONS CORPORATION ("TDS TELECOM"). Merger of Aerial Communications, Inc. On September 17, 1999, the Board of Directors of TDS decided not to pursue a spin-off of Aerial Communications, Inc. ("Aerial"), its 82.1%-owned personal communications services company, and approved a plan of merger between Aerial and VoiceStream Wireless Corporation ("VoiceStream"). As a result of the board's approval of the plan, the consolidated financial statements and supplemental data of TDS have been adjusted to reflect the results of operations and net assets of Aerial as discontinued operations in accordance with generally accepted accounting principles. Financial statements for prior periods have been reclassified to conform to current year presentation. See "Discontinued Operations." Results of Operations OPERATING REVENUES increased 19% ($312.5 million) during 1999 and 26% ($336.0 million) during 1998 reflecting primarily the 17% and 24% growth in customer units, respectively. U.S. Cellular revenues increased $254.7 million in 1999 and $285.5 million in 1998 on 19% and 28% increases in customer units and 31% and 12% increases in inbound roaming revenues, respectively. The 1998 revenue increase also reflects the effects of the October 1997 transaction where U.S. Cellular added 195,000 customers as a result of exchanging certain markets with another provider. TDS Telecom revenues increased $57.8 million in 1999 and $50.5 million in 1998 as a result of recovery of increased costs of providing long-distance services, internal access line growth, increased network usage and growth in the competitive local exchange operations. OPERATING EXPENSES rose 15% ($212.6 million) in 1999 and 27% ($295.2 million) in 1998. U.S. Cellular operating expenses increased $174.9 million during 1999 and $239.0 million during 1998 due to the expansion of the customer base as well as the cost of providing service to the growing customer base. TDS Telecom operating expenses increased $37.7 million during 1999 and $56.2 million during 1998 due to growth in telephone operations and the expansion into the competitive local exchange business in 1998. OPERATING INCOME increased 43% ($111.3 million) in 1999 and 33% ($64.7 million) in 1998, reflecting strong cellular telephone operations growth. U.S. Cellular's operating income increased 45% ($79.8 million) in 1999 and 36% ($46.5 million) in 1998, reflecting the increase in customers and revenues, as well as margin expansion. U.S. Cellular's operating margin, as a percent of service revenues, improved to 18.7% in 1999 from 15.7% in 1998 and 15.2% in 1997. TDS Telecom's operating income increased 21% ($20.1 million) in 1999 and decreased 6% ($5.7 million) in 1998. The increase in TDS Telecom's 1999 operating income primarily reflects improved operations of the local telephone business. The decrease in TDS Telecom's 1998 operating income primarily reflects a $9.2 million operating loss resulting from the expansion into the competitive local exchange business in the beginning of 1998. TDS Telecom's operating margin was 21.0% in 1999 compared to 19.3% in 1998 and 22.9% in 1997. 2
YEAR ENDED DECEMBER 31, 1999 1998 1997 - ------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Operating Income U.S. Cellular $255,842 $176,075 $ 129,543 TDS Telecom 114,551 94,412 100,143 --------------------------------------------------- Operating Income from Ongoing Operations 370,393 270,487 229,686 American Paging Operating (Loss) -- (11,406) (35,307) --------------------------------------------------- $370,393 $259,081 $ 194,379 ===================================================
TDS contributed substantially all of the assets and certain, limited liabilities of American Paging, Inc. ("American Paging") to a previously unrelated limited liability corporation for a 30% interest in that corporation effective March 31, 1998. American Paging's revenues were netted against its expenses for the periods presented with the resulting operating loss reported as American Paging Operating (Loss). American Paging's operating revenues totaled $17.8 million and $94.4 million and operating expenses totaled $29.2 million and $129.7 million for the three month period ended March 31, 1998 and the year ended December 31, 1997, respectively. Beginning April 1, 1998, TDS followed the equity method of accounting for this investment and reported these results as a component of Investment income. INVESTMENT AND OTHER INCOME (EXPENSE) totaled $296.7 million in 1999, $219.3 million in 1998 and $86.3 million in 1997. Investment and other income (expense) includes interest and dividend income, gain on sale of cellular and other investments, investment income, other income and (expense), and minority share of income. GAIN ON SALE OF CELLULAR AND OTHER INVESTMENTS totaled $345.9 million in 1999, $262.7 million in 1998 and $41.4 million in 1997. The Company recognized a $327.1 million gain in 1999 as a result of the AirTouch Communications, Inc. ("AirTouch") merger with Vodafone Group plc. TDS recognized a gain on the difference between the historical basis in its investment in AirTouch common shares and the value of Vodafone AirTouch plc American Depository Receipts and cash received from the merger. The Company recognized a $198.6 million gain in 1998 as a result of the sale of certain minority cellular interests to AirTouch. The sale of other non-strategic minority cellular interests and other investments generated gains totaling $18.8 million in 1999, $64.1 million in 1998 and $41.4 million in 1997. INVESTMENT INCOME, the Company's share of income in unconsolidated entities in which the Company has a minority interest, totaled $31.3 million in 1999, $40.8 million in 1998 and $83.7 million in 1997. The Company follows the equity method of accounting, which recognizes TDS's proportionate share of the income and losses accruing to it under the terms of its partnership or shareholder agreements, where the Company's ownership interest equals or exceeds 20% for corporations and 3% for partnerships. Investment income decreased in 1999 and 1998 as a result of paging equity losses subsequent to April 1, 1998, decreased operating results of certain minority cellular interests, fewer unconsolidated cellular entities as a result of the sale of certain cellular minority interests in 1998 and the transfer of certain cellular minority interests in October of 1997. In 1999, TDS also recorded $7.8 million as its share of a one-time gain reported by an equity-method investment. As of December 31, 1999, the carrying value of the paging investment was approximately $85 million. During 1999, the public market capitalization of companies in the paging industry generally declined as the market price of the companies' stock declined. The Company has evaluated the carrying value of the paging investment and will continue to review the value considering the operations of the investment and the general paging industry. OTHER EXPENSE, NET totaled $11.2 million in 1999, $35.4 million in 1998 and $8.7 million in 1997. Other expense, net in 1998 primarily includes additional expenses relating to corporate restructuring ($10.6 million), a LAN wiring business and the cost to exit that business ($11.9 million), and costs to exit the paging business ($8.7 million). MINORITY SHARE OF INCOME includes primarily the minority public shareholders' share of U.S. Cellular's net income and the minority shareholders' or partners' share of certain U.S. Cellular subsidiaries' net income or loss. Minority share of income increased as U.S. Cellular's net income increased in 1999, 1998, and 1997.
YEAR ENDED DECEMBER 31, 1999 1998 1997 - ------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Minority Share of Income U.S. Cellular Minority Public Shareholders' $(57,411) $(41,083) $(21,264) Subsidiaries' Minority Interests (7,148) (6,039) (12,298) -------------------------------------------------- (64,559) (47,122) (33,562) Other Subsidiaries (558) (339) (1,160) -------------------------------------------------- $(65,117) $(47,461) $(34,722) ==================================================
INTEREST EXPENSE decreased 8% ($8.4 million) in 1999 and increased 18% ($16.4 million) in 1998. Interest expense decreased in 1999 due primarily to reduced average short-term debt balances. Interest expense increased in 1998 due primarily to larger, higher-cost long-term debt balances as long-term debt was sold to replace short-term debt balances. 3 MINORITY INTEREST IN INCOME OF SUBSIDIARY TRUST (Trust Preferred Securities Distributions) totaled $24.8 million in 1999, $23.5 million in 1998 and $1.5 million in 1997. In February 1998, a subsidiary trust issued $150,000,000 of 8.04% Trust Originated Preferred Securities, and in November 1997, another subsidiary trust issued $150,000,000 of 8.5% Trust Originated Preferred Securities. The proceeds were used to reduce short-term debt balances. INCOME TAX EXPENSE was $228.2 million in 1999, $145.1 million in 1998, and $87.4 million in 1997. The period to period change reflects primarily the changes in pretax income. NET INCOME FROM CONTINUING OPERATIONS totaled $314.2 million in 1999, $201.4 million in 1998 and $99.7 million in 1997. DILUTED EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS totaled $5.02 in 1999, $3.22 in 1998 and $1.59 in 1997. Net income from continuing operations was significantly affected by gains from the sale of cellular interests and other investments in 1999 and 1998. Net income and diluted earnings per share from continuing operations and gains are shown in the following table.
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Income From Continuing Operations Operations $122,662 $ 66,837 $ 83,831 Gains 191,489 134,562 15,914 ----------------------------------------------------- $314,151 $201,399 $ 99,745 ===================================================== Diluted Earnings Per Share From Continuing Operations Operations $ 1.96 $ 1.05 $1.33 Gains 3.06 2.17 .26 ----------------------------------------------------- $ 5.02 $ 3.22 $1.59 ================================================================================
DISCONTINUED OPERATIONS, NET OF TAX totaled losses of $84.2 million in 1999, $137.0 million in 1998 and $109.3 million in 1997. Discontinued operations, net of tax reflects the 1999 results of operations of Aerial prior to September 17, 1999, and for the years 1998 and 1997. On September 17, 1999, the Board of Directors approved a plan of merger between Aerial and VoiceStream. Since TDS expects to recognize a net gain on the ultimate disposition of Aerial, TDS has deferred recognition of Aerial's net operating losses of $44.2 million from September 18, 1999 through December 31, 1999. Cellular Telephone Operations The Company provides cellular telephone service through United States Cellular Corporation ("U.S. Cellular"), an 80.7%-owned subsidiary. U.S. Cellular owns, manages and invests in cellular markets throughout the United States. Rapid growth in the customer base and increased inbound roaming activity are the primary reasons for the growth in U.S. Cellular's results of operations in 1999 and 1998. The number of customer units increased 19% to 2,602,000 at December 31, 1999, and increased 28% to 2,183,000 at December 31, 1998. U.S. Cellular added 404,000 net new customer units from its marketing efforts and 15,000 customer units from acquisitions in 1999 compared to 454,000 net new customer units from its marketing efforts and 19,000 customer units from acquisitions in 1998. 4
YEAR ENDED OR AT DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER CUSTOMER AMOUNTS) Operating Revenues Local retail $ 930,001 $ 772,803 $ 568,578 Inbound roaming 318,659 242,605 217,499 Long-distance and Other 117,752 108,046 66,914 ---------------------------------------------------- Service Revenues 1,366,412 1,123,454 852,991 Equipment sales 50,769 39,013 23,974 ---------------------------------------------------- 1,417,181 1,162,467 876,965 ---------------------------------------------------- Operating Expenses System operations 208,822 193,625 153,137 Marketing and selling 272,729 228,844 178,984 Cost of equipment sold 124,058 94,378 82,302 General and administrative 325,758 262,766 200,620 Depreciation and amortization 229,972 206,779 132,379 ---------------------------------------------------- 1,161,339 986,392 747,422 ---------------------------------------------------- Operating Income $ 255,842 $ 176,075 $ 129,543 ================================================================================ Consolidated Markets: Markets 139 138 134 Market penetration 10.39% 8.84% 7.11% Cell sites in service 2,300 2,065 1,748 Average monthly service revenue per customer unit $ 48.11 $ 48.61 $ 54.18 Churn rate per month 2.1% 1.9% 1.9% Marketing cost per gross customer addition $ 346 $ 317 $ 318 Employees 4,810 4,790 4,620 ================================================================================
OPERATING REVENUES increased 22% ($254.7 million) in 1999 and 33% ($285.5 million) in 1998. The revenue increases were driven by the 19% and 28% growth in customer units, and the 31% and 12% growth in inbound roaming revenues in 1999 and 1998, respectively. Increased promotional activity and improved consumer awareness of wireless communications were key factors contributing to customer growth. Lower revenue per customer, due to competitive pricing pressures, incentive plans and consumer market penetration, has partially offset the revenue growth resulting from the increase in the customer base. The 1998 revenue increase and growth rate and average monthly service revenue per customer unit reflect the effects of the October 1997 transaction where U.S. Cellular added 195,000 customers as a result of exchanging certain markets with another provider. Average monthly service revenue per customer was $48.11 in 1999, $48.61 in 1998 and $54.18 in 1997. Management anticipates that average monthly service revenue per customer will continue to decrease as local retail and inbound roaming revenue per minute of use decline. LOCAL RETAIL REVENUES (charges to U.S. Cellular's customers for local system usage) increased 20% ($157.2 million) in 1999 and 36% ($204.2 million) in 1998 due primarily to the growth in customers. Average monthly local retail revenue per customer was $32.74 in 1999, $33.44 in 1998 and $36.11 in 1997. Local minutes of use averaged 115 per month in 1999, 105 per month in 1998 and 103 per month in 1997. Average revenue per minute was $.29 in 1999, $.32 in 1998 and $.35 in 1997. Competitive pressures and use of pricing and other incentive programs to stimulate overall usage resulted in the decrease in average monthly local retail revenue per minute of use. The decrease in average monthly retail revenue per customer primarily reflects the increasing level of competition for wireless services and the continued penetration of the consumer market. 5 INBOUND ROAMING REVENUES (charges to other cellular service providers whose customers use U.S. Cellular's cellular systems when roaming) increased 31% ($76.1 million) in 1999 and 12% ($25.1 million) in 1998. Increases in minutes of use have more than offset lower negotiated roaming rates, resulting in increased roaming revenues in 1999. The increase in minutes of use and the decrease in revenue per minute of use were significantly affected by certain pricing programs introduced by other wireless companies beginning in the second half of 1998. Wireless customers who sign up for these programs are given price incentives to roam in other markets, including U.S. Cellular's markets, thus driving an increase in U.S. Cellular's inbound roaming minutes. The increase in inbound roaming minutes of use is expected to be slower in 2000 as the effect of these pricing programs becomes present in all periods of comparison. Average monthly inbound roaming revenue per U.S. Cellular customer was $11.22 in 1999, $10.50 in 1998 and $13.81 in 1997. The increase in average monthly inbound roaming revenue per U.S. Cellular customer in 1999 was attributable to a larger increase in roaming revenue compared to the U.S. Cellular customer base; the reverse was true in 1998, resulting in a decline in average monthly inbound roaming revenue per U.S. Cellular customer. LONG-DISTANCE AND OTHER SERVICE REVENUES increased 9% ($9.7 million) in 1999 and 61% ($41.1 million) in 1998 primarily due to increased long-distance revenue from the growth in the volume of long-distance calls billed by U.S. Cellular. Growth in long-distance revenue was slowed by price reductions primarily related to long-distance charges on roaming minutes of use. These reductions, similar to the price reductions on roaming airtime charges, are a continuation of the industry trend toward reduced per-minute prices. The price reductions also reduced the growth in the outbound roaming expense component of system operations expense by approximately the same amount, resulting in no material effect on U.S. Cellular's operating cash flow or operating income. Average monthly long-distance and other revenue per customer was $4.15 in 1999, $4.68 in 1998 and $4.25 in 1997. OPERATING EXPENSES increased 18% ($174.9 million) in 1999 and 32% ($239.0 million) in 1998. Operating expenses as a percent of service revenue were 85.0% in 1999, 87.8% in 1998 and 87.6% in 1997. The overall increase in operating expenses is primarily due to the increased costs of expanding the customer base ($73.6 million in 1999 and $61.9 million in 1998), general and administrative expenses ($63.0 million in 1999 and $62.1 million in 1998), costs of providing service to the expanding customer base ($15.2 million in 1999 and $40.5 million in 1998), and additional depreciation and amortization on the increased investment in cell sites and equipment ($23.2 million in 1999 and $74.4 million in 1998). The increase in expenses in 1998 also reflects the October 1997 exchange where U.S. Cellular added 195,000 customers. Costs to expand the customer base consists of marketing and selling expenses and the cost of equipment sold. These expenses less equipment sales revenue represent the cost to add a new customer. The cost to add a new cellular customer was $346 in 1999, $317 in 1998 and $318 in 1997. Gross customer activations (excluding acquisitions) rose 12% in 1999 to 1,000,000 and 20% in 1998 to 896,000 from 746,000 in 1997. The increase in cost per gross customer activation in 1999 was primarily driven by increased commissions and additional advertising expenses incurred to promote U.S. Cellular and to distinguish U.S. Cellular's service offerings from those of competitors. Another contributing factor was the increase in equipment sales losses primarily driven by the sale of more dual-mode phones, which on average generate greater equipment losses than the sale of analog phones. The increase in sales of dual-mode phones is related to U.S. Cellular's ongoing conversion of its systems to digital coverage, enabling U.S. Cellular to offer its customers more features, better clarity, and increased roaming capabilities. General and administrative expenses (costs of local business offices and corporate expenses) as a percent of service revenues were 23.8% in 1999, 23.4% in 1998 and 23.5% in 1997. The overall increases in administrative expenses include the effects of an increase in expenses required to serve the growing customer base and other expenses incurred related to the growth in U.S. Cellular's business. Employee related expenses increased primarily due to an increase in deferred compensation expense related to stock options in 1999 and an increase in the number of customer service and administrative employees in 1998. Costs of providing service (system operations expenses) as a percent of service revenues were 15.3% in 1999, 17.2% in 1998 and 18.0% in 1997. System operations expenses include customer usage expenses (charges from other service providers for landline connection, toll and roaming costs incurred by customers' use of systems other than their local systems), and maintenance, utility and cell site expenses. 6 Customer usage expenses were 9.8% of service revenues in 1999, 11.6% in 1998 and 11.7% in 1997. In 1999, customer usage expense increased primarily due to the $13.6 million increase in costs related to both increased local and inbound minutes of use and increased roaming usage. This increase was offset by a $10.7 million decrease in net outbound roaming expense reflecting growth in roaming minutes used by U.S. Cellular's customers, which was more than offset by lower costs per roaming minute of use. These lower costs are related to lower roaming prices in the industry. In 1998, customer usage expense increased primarily due to a $28.8 million increase in net roaming expense. This increase was driven by the substantial increase in outbound roaming charges incurred when U.S. Cellular's customers use other operators' service areas which were included in the customer's "home" territory. These calls were billed at the customer's local rate, but U.S. Cellular was charged a roaming rate by the other operators which was usually higher than that local rate. Maintenance, utility and cell site expenses were 5.5% of service revenues in 1999, 5.7% in 1998 and 6.3% in 1997. The number of cell sites operated increased to 2,300 in 1999 from 2,065 in 1998 and 1,748 in 1997. Depreciation and amortization expense as a percent of service revenues was 16.8% in 1999, 18.4% in 1998 and 15.5% in 1997. Depreciation expense increased 11% ($17.7 million) in 1999 and 71% ($69.6 million) in 1998, reflecting increases in average fixed asset balances of 14% and 27%, respectively. Increased fixed asset balances in both years resulted from the addition of new cell sites built to improve coverage and capacity, from upgrades to provide digital service, and from the acquisition of markets in late 1997. The increase in 1998 also reflects reduction in useful lives of certain assets beginning in 1998 which increased depreciation expense by $23.2 million. Annual amortization expense is expected to increase by approximately $17 million as the development costs related to U.S. Cellular's new billing and information system, totaling $118 million, are amortized over a seven-year period beginning in the fourth quarter of 1999. OPERATING INCOME increased 45% ($79.8 million) to $255.8 million in 1999 from $176.1 million in 1998 and $129.5 million in 1997. The improvement was primarily driven by the substantial growth in customers and revenue. Operating margin, as a percent of service revenue, improved to 18.7% in 1999 from 15.7% in 1998 and 15.2% in 1997. Management expects service revenues to continue to grow during 2000. However, management anticipates that service revenues will grow at a slower rate than the customer base. In addition, management expects average monthly revenue per customer will decrease in 2000 as local retail and inbound roaming revenue per minute of use decline and as U.S. Cellular further penetrates the consumer market. Management believes U.S. Cellular's operating results reflect seasonality in both service revenues, which tend to increase more slowly in the first and fourth quarters, and operating expenses, which tend to be higher in the fourth quarter due to increased marketing activities and customer growth. This seasonality may cause operating income to vary from quarter to quarter. Competitors licensed to provide PCS services have initiated service in certain U.S. Cellular markets in the past three and one half years. U.S. Cellular expects PCS operators to continue deployment of PCS in portions of all its market clusters through 2000. U.S. Cellular has increased its advertising to promote the U.S. Cellular brand and distinguish its service from other wireless communications providers. U.S. Cellular's management continues to monitor other wireless communications providers' strategies to determine how this additional competition is affecting U.S. Cellular's results. Management anticipates that customer growth will be lower in the future, primarily as a result of the increase in the number of competitors in its markets. 7 Telephone Operations The Company operates its landline telephone business through TDS Telecommunications Corporation ("TDS Telecom"), a wholly-owned subsidiary. Prior to the Telecommunications Act of 1996, local telephone companies, referred to as incumbent local exchange companies ("ILEC"), had the exclusive right and responsibility for providing local telephone service in their designated service territories. TDS Telecom's local telephone companies served 571,700 access lines at the end of 1999 compared to 547,500 at the end of 1998 and 515,500 at the end of 1997. As a result of the Telecommunications Act of 1996, companies referred to as competitive local exchange carriers ("CLEC") have been allowed to compete with the local telephone companies in providing local exchange service. In early 1998, TDS Telecom began to compete with local telephone companies in certain markets in Wisconsin not previously served by TDS Telecom. TDS Telecom also entered into certain markets in Minnesota through a subsidiary that was primarily a long-distance provider prior to competing with local telephone companies in 1998. TDS Telecom's competitive local exchange companies served 74,100 access lines at the end of 1999 compared to 34,100 access lines at the end of 1998. TDS Telecom plans to slowly expand its competitive local exchange operations into certain midsized cities which are geographically proximate to existing TDS Telecom markets.
YEAR ENDED OR AT DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER ACCESS LINE AMOUNTS) Local Telephone Operations Operating Revenues Local service $152,290 $136,656 $ 122,826 Network access and long-distance 269,188 256,272 235,725 Miscellaneous 71,052 68,432 57,759 ---------------------------------------------------- 492,530 461,360 416,310 ---------------------------------------------------- Operating Expenses Operating expenses 250,994 249,312 219,451 Depreciation and amortization 117,443 108,173 96,488 ---------------------------------------------------- 368,437 357,485 315,939 ---------------------------------------------------- Local Telephone Operating Income $124,093 $103,875 $ 100,371 ---------------------------------------------------- Competitive Local Exchange Operations Operating Revenues Local service $22,279 $ 6,484 $ -- Network access and long-distance 25,850 17,308 17,021 Miscellaneous 7,044 5,951 5,986 ---------------------------------------------------- 55,173 29,743 23,007 ---------------------------------------------------- Operating Expenses Operating expenses 58,808 35,977 21,702 Depreciation and amortization 5,907 3,229 1,533 ---------------------------------------------------- 64,715 39,206 23,235 ---------------------------------------------------- Competitive Local Exchange Operating (Loss) $(9,542) $(9,463) $ (228) ---------------------------------------------------- Intercompany revenues (1,786) (2,999) (1,693) Intercompany expenses (1,786) (2,999) (1,693) ---------------------------------------------------- Operating Income $114,551 $94,412 $100,143 ================================================================================ Access lines (ILEC) 571,700 547,500 515,500 Access lines (CLEC) 74,100 34,100 -- Growth in ILEC access lines: Internal growth 23,700 25,500 27,800 Acquisitions 500 6,500 3,200 Average monthly revenue per ILEC access line $ 73.00 $ 71.85 $69.43 Employees 2,590 2,480 2,390 ================================================================================
8 OPERATING REVENUES totaled $545.9 million in 1999, up 12% ($57.8 million) from 1998 which totaled $488.1 million and was up 12% ($50.5 million) from 1997. The increase was due to the growth in local telephone operations and the expansion into competitive local exchange activities. LOCAL TELEPHONE OPERATING REVENUES increased 7% ($31.2 million) to $492.5 million in 1999 and 11% ($45.0 million) to $461.4 million in 1998. Acquisitions increased local telephone operating revenues by $9.0 million in 1998. Average monthly revenue per local telephone access line was $73.00 in 1999, $71.85 in 1998 and $69.43 in 1997, reflecting primarily growth in local service revenues. Local telephone operating revenues are expected to continue their pattern of moderate growth. LOCAL SERVICE REVENUES (provision of local telephone exchange service within the franchise serving area of TDS Telecom's local telephone companies) increased 11% ($15.6 million) in 1999 and 11% ($13.8 million) in 1998. Average monthly local service revenue per customer was $22.57 in 1999, $21.28 in 1998 and $20.49 in 1997. Access line growth, excluding acquisitions, of 4.3% in 1999 and 4.9% in 1998 resulted in increases in revenues of $7.4 million and $6.0 million, respectively. The sale of custom-calling and advanced features increased revenues by $5.6 million in 1999 and $4.4 million in 1998. NETWORK ACCESS AND LONG-DISTANCE REVENUES (compensation for carrying interstate and intrastate long-distance traffic on TDS Telecom's local telephone networks) increased 5% ($12.9 million) in 1999 and 9% ($20.5 million) in 1998. Average monthly network access and long-distance revenue per customer was $39.90 in 1999, $39.91 in 1998 and $39.31 in 1997. Revenue generated from access minute growth due to increased network usage increased $9.1 million in 1999 and $8.2 million in 1998. Recovery of increased costs of providing long-distance services resulted in increases in revenue of $7.0 million in 1999 and $5.9 million in 1998. Acquisitions and additional cost recovery as a result of ice storm damage in the Northeast increased revenues in 1998 by $4.2 million and $2.2 million, respectively. MISCELLANEOUS REVENUES (charges for (i) leasing, selling, installing and maintaining customer premise equipment, (ii) providing billing and collection services, (iii) providing Internet services and (iv) selling of digital broadcast satellite receivers) increased 4% ($2.6 million) in 1999 and 18% ($10.7 million) in 1998. Average monthly miscellaneous revenue per customer was $10.53 in 1999, $10.66 in 1998 and $9.63 in 1997. Revenues from providing Internet service increased by $3.9 million in 1999 and $3.6 million in 1998. Increased sales of customer premise equipment, including digital broadcast satellites, increased revenues by $5.8 million in 1998. COMPETITIVE LOCAL EXCHANGE OPERATING REVENUES (revenue from the provision of local and long-distance telephone service and revenue from a long-distance provider) increased 85% ($25.4 million) to $55.2 million in 1999 and 29% ($6.7 million) to $29.7 million in 1998. The increase in local service revenues in 1999 was primarily due to the 117% increase in access lines. The increase in 1998 was significantly less as TDS Telecom began providing competitive local exchange services early in the year. Long-distance revenues increased primarily as a result of the increase in access lines. Long-distance revenues include the revenues from an existing long-distance business prior to becoming a competitive local exchange company in 1998. OPERATING EXPENSES totaled $431.4 million in 1999, up 10% ($37.7 million) from 1998 and totaled $393.7 million in 1998, up 17% ($56.2 million) from 1997. 9 Local telephone operating expenses increased 3% ($11.0 million) in 1999 and 13% ($41.5 million) in 1998. Local telephone operating expenses as a percent of local telephone revenues were 74.8% in 1999, 77.5% in 1998 and 75.9% in 1997. Local telephone operating expenses are expected to increase due to inflation and new revenue-producing programs, and to continue to decline slightly as a percent of operating revenues. The 1999 increase in local telephone operating expenses primarily related to the cost of providing Internet service and wage and benefit increases as TDS Telecom emphasized cost controls during the year. The 1998 increase in local telephone operating expenses primarily resulted from increases in information systems and support, acquisitions, cost of goods sold for customer premise equipment, support payments to the Federal high cost pool, and emergency storm damage in the Northeast. Depreciation and amortization expenses increased 9% ($9.3 million) in 1999 and 12% ($11.7 million) in 1998 as a result of increased investment in plant and equipment. Competitive local exchange operating expenses increased 65% ($25.5 million) in 1999 and 69% ($16.0 million) in 1998 due primarily to the costs incurred to grow the customer base and provide competitive local exchange services. Depreciation and amortization expense increased 83% ($2.7 million) in 1999 and 111% ($1.7 million) in 1998 as TDS Telecom added plant and equipment to expand competitive local exchange operations. OPERATING INCOME increased 21% ($20.1 million) in 1999 and decreased 6% ($5.7 million) in 1998. Operating income from local telephone operations increased 19% ($20.2 million) to $124.1 million in 1999 and 3% ($3.5 million) to $103.9 million in 1998 from $100.4 million in 1997. The local telephone operating margin was 25.2% in 1999, 22.5% in 1998 and 24.1% in 1997. The increase in operating margin in 1999 was caused by the growth in revenue along with the emphasis on controlling costs. The reduction in operating margin in 1998 was caused by slightly higher operating costs, improvements to the telephone network, expenditures to develop programs aimed at improving customer satisfaction, and resale of lower-margin services. TDS Telecom's overall operating margin was 21.0% in 1999 compared to 19.3% in 1998 and 22.9% in 1997. Operating loss from competitive local exchange operations was $9.5 million in 1999 and 1998, and $200,000 in 1997. The competitive local exchange operating losses in 1999 and 1998 reflect the expenses associated with the expansion into the competitive local exchange business. TDS Telecom expects to continue to grow the competitive local exchange business with a controlled entry strategy. TDS Telecom is subject to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation." TDS Telecom periodically reviews the criteria for applying these provisions to determine whether continuing application of SFAS No. 71 is appropriate. TDS Telecom believes that such criteria are still being met and therefore has no current plans to change its method of accounting. In analyzing the effects of discontinuing the application of SFAS No. 71, management has determined that the useful lives of plant assets used for regulatory and financial reporting purposes are consistent with generally accepted accounting principles, and therefore, any adjustments to telecommunications plant would be immaterial, as would be any write-off of regulatory assets and liabilities. Inflation Management believes that inflation affects TDS's business to no greater extent than the general economy. 10 Accounting for Derivative Instruments and Hedging Activities Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Management believes that this statement will not have a material effect on results of operations and financial position of the Company. Revenue Recognition Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition" is effective beginning in the first quarter of 2000. SAB No. 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. Management believes that this bulletin will not have a material effect on results of operations and financial position of the Company. FINANCIAL RESOURCES TDS and its subsidiaries operate relatively capital- and marketing-intensive businesses. Increasing internal cash flow and cash received from the sale of cellular interests and other investments have reduced the overall need for external financing. However, in recent years, TDS has obtained substantial funds from external sources to finance Aerial's operations and construction activities and for general corporate purposes. On September 17, 1999, the Board of Directors of TDS approved a plan of merger between Aerial and VoiceStream. See "Discontinued Operations." CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES. TDS is generating substantial internal funds from the operations of U.S. Cellular and TDS Telecom. Cash flows from operating activities totaled $479.8 million in 1999, $466.3 million in 1998 and $309.2 million in 1997. Net income from continuing operations excluding all noncash items increased 40% ($157.2 million) to $554.9 million in 1999 and 31% ($93.8 million) to $397.7 million in 1998. The increase primarily reflects the 24% ($138.6 million) and 28% ($128.3 million) growth in aggregate operating cash flow (operating income plus depreciation and amortization). Changes in assets and liabilities from operations required $75.0 million in 1999 and provided $68.6 million in 1998 and $5.3 million in 1997. The primary reason for the change in assets and liabilities is due to the reduction of accounts payable in 1999.
Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Net Income from continuing operations $314,151 $201,399 $ 99,745 Noncash items included in Net Income from continuing operations 240,707 196,273 204,169 ----------------------------------------------------- Net Income from continuing operations excluding all noncash items 554,858 397,672 303,914 Changes in assets and liabilities from operations (75,026) 68,596 5,271 ----------------------------------------------------- $479,832 $466,268 $ 309,185 ================================================================================
CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES. TDS makes substantial investments each year to acquire, construct, operate and maintain modern high-quality communications networks and facilities as a basis for creating long-term value for shareowners. In recent years, rapid changes in technology and new opportunities have required substantial investments in revenue enhancing and cost reducing upgrades of the Company's networks. Cash flows used for investing activities totaled $285.4 million in 1999, $414.3 million in 1998 and $482.3 million in 1997 primarily for capital expenditures and acquisitions offset somewhat by proceeds from the sales of non-strategic assets. Cash expenditures for capital additions totaled $399.6 million in 1999, $463.5 million in 1998 and $488.8 million in 1997. Cash used for acquisitions, excluding cash acquired, totaled $31.3 million in 1999, $120.5 million in 1998 and $138.5 million in 1997. The sale of non-strategic cellular assets and other investments and cash received from the merger of AirTouch and Vodafone provided $120.0 million in 1999, $131.0 million in 1998 and $84.2 million in 1997. Other cash flows from investing activities include distributions from unconsolidated investments which provided $26.1 million in 1999, $28.9 million in 1998 and $56.4 million in 1997, and changes in temporary investments and marketable non-equity securities which provided $9.5 million in 1999, $34.7 million in 1998 and $36.5 million in 1997. 11 Capital Expenditures The primary purpose of TDS's construction and expansion strategy is to provide for significant customer growth, to upgrade service, and to take advantage of service-enhancing and cost-reducing technological developments. The following table summarizes the Company's investments in its communications networks and related facilities during the past three years.
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) U.S. Cellular Cell sites and equipment $167,651 $184,032 $238,797 Switching equipment and other 81,071 90,343 39,002 Systems development 28,728 46,042 40,949 ---------------------------------------------------- 277,450 320,417 318,748 ---------------------------------------------------- TDS Telecom Local telephone operations Central office 31,049 38,117 49,049 Outside plant 41,043 43,353 53,184 Other 27,062 38,229 36,163 Competitive local exchange 23,027 23,427 13,064 ---------------------------------------------------- 122,181 143,126 151,460 ---------------------------------------------------- American Paging -- -- 18,625 ---------------------------------------------------- $399,631 $463,543 $488,833 ================================================================================
U.S. Cellular's capital additions include expenditures to build 225 cell sites in 1999, 281 in 1998 and 331 in 1997 and to improve business systems, primarily its customer information system. In 1999 and 1998, significant amounts were expended to change out analog radio equipment for digital radio equipment. TDS Telecom's capital additions include expenditures for switch modernization and outside plant facilities to maintain and enhance the quality of service and offer new revenue opportunities. TDS Telecom has also invested in switching and other network facilities for its competitive local exchange business in the past three years. Acquisitions and Exchanges TDS reviews attractive opportunities to acquire additional telecommunications companies which add value to the organization. TDS and U.S. Cellular continue to assess the makeup of cellular holdings in order to maximize the benefits derived from clustering U.S. Cellular's markets. Cash expenditures (excluding cash acquired) for acquisitions totaled $31.3 million in 1999, $120.5 million in 1998 and $138.5 million in 1997. Aggregate consideration for acquisitions (consisting of cash, TDS Common Shares, TDS Preferred Shares, and U.S. Cellular Common Shares) totaled $31.4 million, $133.9 million and $184.2 million, respectively. The Company's acquisitions include primarily the purchase of controlling interests in cellular telephone and telephone entities, and minority interests which increased the ownership of majority-owned markets. These acquisitions and exchanges added 245,000 population equivalents, 15,000 customer units and 500 access lines in 1999, 1,308,000 population equivalents, 19,000 customer units and 6,500 access lines in 1998, and 1,348,000 population equivalents, 195,000 customer units and 3,200 access lines in 1997. CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES. Cash flows from continuing financing activities required $272.5 million in 1999 and $63.8 million in 1998, and provided $545.9 million in 1997. Cash flows from financing activities primarily reflect changes in short-term debt balances during the last three years, proceeds from sales of long-term debt and equity securities in 1998 and 1997, and stock repurchases in 1999 and 1997. 12 Changes in short-term debt balances required $170.9 million in 1999 and $356.7 million in 1998, and provided $368.9 million in 1997. TDS has used short-term debt for acquisitions and for general corporate purposes and to finance Aerial's construction, development and operations. TDS has taken advantage of attractive opportunities to reduce short-term debt with proceeds from the sale of long-term debt and equity securities, including sales of debt and equity securities by subsidiaries. In addition, increasing internally generated funds as well as proceeds from the sale of non-strategic cellular and other investments from time to time have also been used to reduce short-term debt. During 1999, TDS reduced notes payable balances by $170.9 million, primarily through internally generated cash and improved cash management. In addition, in November 1999, Aerial and one of its subsidiaries received capital contributions of $230 million from Sonera Corporation ("Sonera"). Aerial used the proceeds to repay indebtedness to TDS and placed any remaining cash in the TDS cash management program. TDS has cash management arrangements with its subsidiaries under which the subsidiaries may from time to time deposit excess cash with TDS for investment under TDS's cash management program. TDS reduced notes payable balances by $356.7 million in 1998, primarily through refinancing short-term debt by the sale of long-term debt and equity securities. In 1998, the Company received net proceeds of $144.9 million on the sale of 8.04% Trust Originated Preferred Securities and $198.2 million on the sale of eight-year, 7% notes. In September 1998, Aerial received an equity investment of $200 million from Sonera, which was used to repay amounts owed to TDS. Notes payable balances increased by $368.9 million in 1997, reflecting primarily financing for Aerial's construction and operating needs. In 1997, TDS received net proceeds of $144.8 million on the sale of 8.5% Trust Originated Preferred Securities, and U.S. Cellular received $247.0 million on the sale of 10-year, 7.25% notes. U.S. Cellular used the proceeds to repay existing balances on its vendor financing arrangements, to finance the cash requirements for acquisitions, and for general corporate purposes. TDS Telecom has also used long-term debt to finance its construction activities. TDS Telecom's telephone subsidiaries borrowed $5.0 million in 1999, $4.1 million in 1998 and $15.0 million in 1997 under the Rural Utility Service and the Rural Telephone Bank long-term federal government loan programs to finance their telephone construction programs. Other cash flows for financing activities include the repurchase of common shares and dividend payments. TDS paid $69.0 million in 1999 and $69.9 million in 1997 to repurchase TDS Common Shares. An additional $11.5 million was paid in January 2000 to settle purchases of TDS Common Shares that occurred at the end of December 1999. Aggregate dividends paid on Common and Preferred Shares, excluding dividends reinvested, totaled $29.4 million in 1999, $28.5 million in 1998 and $27.2 million in 1997. CASH FLOWS FROM DISCONTINUED OPERATIONS. Cash flows from discontinued operations provided $143.9 million in 1999 and $10.9 million in 1998, and required $349.1 million in 1997. The cash provided in 1999 and 1998 primarily reflects the $230 million and $200 million investments, respectively, in Aerial and one of its subsidiaries by Sonera. The cash provided by these investments was used to reduce intercompany debt incurred to fund the construction and operating activities of Aerial. The cash required in 1997 primarily reflects the costs of construction and the costs to begin operations. 13 Liquidity The Company anticipates that the aggregate resources required in 2000 will include approximately $455 million for capital additions and, under certain circumstances, up to $280 million to finance Aerial's operations and to provide Aerial with liquidity at the time of the merger with VoiceStream. TDS and its subsidiaries had cash and temporary investments totaling $116.0 million at December 31, 1999. TDS also had $587 million of bank lines of credit for general corporate purposes at December 31, 1999, all of which was unused. These line of credit agreements provide for borrowings at negotiated rates up to the prime rate. U.S. Cellular's capital additions budget totals approximately $330 million, primarily to add additional cell sites to expand and enhance coverage, including adding digital service capabilities to its systems. U.S. Cellular plans to finance its construction expenditures primarily with internally generated cash. U.S. Cellular's operating cash flow (operating income plus depreciation and amortization) totaled $485.8 million in 1999, up 27% ($103.0 million) from 1998. In addition, at December 31, 1999, U.S. Cellular had $500 million of bank lines of credit for general corporate purposes, all of which was unused. U.S. Cellular's LYONs are convertible, at the option of the holders, at any time prior to maturity, redemption or purchase, into U.S. Cellular Common Shares at a conversion rate of 9.475 U.S. Cellular Common Shares per LYON. Upon conversion, U.S. Cellular has the option to deliver to holders either U.S. Cellular Common Shares or cash equal to the market value of the U.S. Cellular Common Shares into which the LYONs are convertible. Under the terms of the LYONs, on June 15, 2000, each holder of LYONs has the option to require U.S. Cellular to purchase the LYONs for a purchase price of $411.99 for each LYON (the "Put Value"). Each LYON has a face value of $1,000 at maturity. U.S. Cellular may elect to pay this purchase price either in (a) cash, (b) U.S. Cellular Common Shares, (c) shares of publicly traded common equity securities of TDS or (d) any combination thereof. Based on current market prices for U.S. Cellular Common Shares, the conversion value of the LYONs is greater than the Put Value. Accordingly, U.S. Cellular's management believes it is unlikely that holders of LYONs will exercise their put rights on June 15, 2000. However, there can be no assurance that the conversion value of the LYONs will exceed the Put Value on or shortly prior to that date. If the conversion value declines so that it is near or below the Put Value, it is possible that some or all holders of LYONs may exercise their option to require U.S. Cellular to purchase the LYONs. In such event, U.S. Cellular will determine, based upon market conditions and other factors, which option it will exercise to satisfy such requirement. In addition, U.S. Cellular may, at any time on or after June 15, 2000, redeem LYONs for cash at a price equal to the issue price plus accrued original issue discount through the date of redemption. However, holders of the LYONs may exercise their conversion rights prior to the date of redemption. TDS Telecom's capital additions budget totals approximately $125 million. TDS Telecom expects the local telephone companies to spend approximately $95 million to provide for normal growth, and to upgrade plant and equipment to provide enhanced services, and the competitive local exchange companies to spend approximately $30 million to build switching and other network facilities to expand current markets and enter new markets. TDS Telecom plans to finance its construction expenditures using internally generated cash supplemented by long-term financing from federal government programs. Operating cash flow totaled $237.9 million in 1999, up 16% ($32.1 million) from 1998. At December 31, 1999, TDS Telecom's telephone subsidiaries had $124.3 million in unadvanced loan funds from federal government programs to finance the telephone construction program. These loan commitments have a weighted average annual interest rate of 6.01%. 14 TDS has agreed to advance approximately $280 million to Aerial under the revolving credit agreement between TDS and a subsidiary of Aerial. At December 31, 1999, TDS had loaned a total of $37.8 million to Aerial. At the time of the merger, under certain circumstances, TDS is required to advance funds to a subsidiary of Aerial to bring the amount outstanding under the revolving credit agreement to $315 million. The $315 million outstanding will be repaid by VoiceStream one year from the date of the merger, or earlier at VoiceStream's option. Management believes that internal cash flows and funds available from cash and cash equivalents, lines of credit, and longer-term financing commitments provide sufficient financial flexibility. TDS and its subsidiaries have access to public and private capital markets to help meet its long-term financing needs. TDS and its subsidiaries anticipate accessing public and private capital markets to issue debt and equity securities only when and if capital requirements, financial market conditions and other factors warrant. Discontinued Operations On September 17, 1999, the Board of Directors of TDS decided not to pursue a spin-off of Aerial Communications, Inc. ("Aerial"), an 82.1%-owned subsidiary of TDS, and approved a plan of merger between Aerial and VoiceStream Wireless Corporation. As a result of the merger, Aerial shareholders will receive 0.455 VoiceStream common shares for each share of Aerial stock they own, subject to adjustment in certain circumstances. Aerial public shareholders will have a right to elect to receive $18 in cash in lieu of shares of VoiceStream. The parties anticipate that the merger will be tax-free to Aerial shareholders that elect to receive VoiceStream stock. This merger is subject to the approval of the Federal Communications Commission. The merger is expected to close in the second quarter of 2000. On November 1, 1999, TDS converted $420 million of intercompany debt due from a subsidiary of Aerial into 19.1 million Aerial Common Shares at $22 per share. On September 17, 1999, the date of the TDS Debt Replacement Agreement, the closing price of Aerial Common Shares was $20 per share. Any remaining intercompany debt due from Aerial, at the closing of the merger, will be due one year after the closing of the merger, or earlier under certain circumstances. The merger agreement also provides for TDS to be released from its guarantees of Aerial's long-term debt and vendor financing at the closing of the merger. Also on November 1, 1999, Sonera invested an additional $230 million into the equity of Aerial and one of its subsidiaries, also at an equivalent price of $22 per Aerial share. Immediately prior to the merger, Sonera will exchange its interest in the subsidiary of Aerial for Aerial common stock. Sonera, TDS and Aerial also reached an agreement to settle all of their disputes relating to Sonera's earlier investment in the Aerial subsidiary, effective at the closing of the merger. TDS expects to recognize a net gain on the ultimate disposition of Aerial and, accordingly, has deferred recognition of Aerial's net operating losses of $44.2 million from September 18, 1999 through December 31, 1999. Market Risk The Company is subject to market rate risks due to fluctuations in interest rates and equity markets. The majority of the Company's debt is in the form of long-term, fixed-rate notes, convertible debt, debentures and trust securities with original maturities ranging up to 40 years. Accordingly, fluctuations in interest rates can lead to significant fluctuations in the fair value of such instruments. TDS has not entered into financial derivatives to reduce its exposure to interest rate risks. The annual requirements for principal payments on long-term debt are approximately $15.0 million, $15.6 million, $16.0 million, $48.1 million and $23.9 million for the years 2000 through 2004 and $1.623 billion in years after 2004. The average interest rates of this debt are 7.32%, 7.32%, 7.32%, 8.44% and 7.81% for the years 2000 through 2004 and 6.86% thereafter. The total aggregate principal payments, including the fully accreted value of the U.S. Cellular LYONs at maturity, at December 31, 1999 and 1998 was $1.742 billion and $1.749 billion, respectively, the estimated fair value was $1.647 billion and $1.333 billion, respectively, and the average interest rate on the debt was 6.93% and 7.27%, respectively. The fair value was estimated using market price for the U.S. Cellular LYONs and discounted cash flow analysis for the remaining debt. The trust securities instruments totaling $300 million, with an average interest rate of 8.27%, are due in 2037 and 2038. The fair value of the trust securities was $246.8 million and $297.8 million based upon the market price at December 31, 1999 and 1998, respectively. 15 TDS maintains a portfolio of available for sale marketable equity securities. The market value of these investments amounted to $843.3 million at December 31, 1999 and $382.7 million at December 31, 1998. A hypothetical 10% decrease in the share prices of these investments would result in an $84.3 million and $38.3 million decline in the market value of the investments in 1999 and 1998, respectively. Year 2000 Issue The Year 2000 Issue existed because certain computer systems and applications abbreviate dates using only two digits rather than four digits, e.g., "98" rather than "1998". Unless corrected, this shortcut could have caused problems when the century date "2000" occurred. On that date, some computer operating systems and applications and embedded technology may have recognized the date as January 1, 1900 instead of January 1, 2000. The Company's management established Year 2000 project teams in 1998 to address Year 2000 issues. The project teams identified those mission critical hardware, systems and applications that were not Year 2000 ready. These mission critical hardware, systems and applications were then renovated, validated and implemented prior to December 31, 1999. No significant problems were encountered in January, 2000. The total costs associated with the Year 2000 Issue were $31.1 million. The Company expects to incur minimal expenditures for final project wrap-up activities. While the Company believes its mission critical hardware, systems and applications are Year 2000 ready, it will continue to monitor information systems, facilities, equipment and relationships with third parties. Contingency plans have been developed to address any interruptions in essential services. Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION AND OTHER SECTIONS OF THIS ANNUAL REPORT CONTAIN STATEMENTS THAT ARE NOT BASED ON HISTORICAL FACT, INCLUDING THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "EXPECTS," AND SIMILAR WORDS. THESE STATEMENTS CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, EVENTS OR DEVELOPMENTS TO BE SIGNIFICANTLY DIFFERENT FROM ANY FUTURE RESULTS, EVENTS OR DEVELOPMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE: - - GENERAL ECONOMIC AND BUSINESS CONDITIONS, BOTH NATIONALLY AND IN THE REGIONS IN WHICH TDS OPERATES, - - TECHNOLOGY CHANGES, - - COMPETITION, - - CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS, - - CHANGES IN GOVERNMENTAL REGULATION, - - TDS'S ABILITY AND THE ABILITY OF THIRD-PARTY SUPPLIERS TO TAKE CORRECTIVE ACTION IN A TIMELY MANNER WITH RESPECT TO THE YEAR 2000 ISSUE, - - AVAILABILITY OF FUTURE FINANCING, - - CHANGES IN GROWTH IN CELLULAR CUSTOMERS, PENETRATION RATES AND CHURN RATES, AND - - COMPLETION AND TIMING OF THE MERGER BETWEEN AERIAL AND VOICESTREAM. TDS UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF THESE IMPORTANT FACTORS. 16 Consolidated Statements of Operations
YEAR ENDED DECEMBER 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating Revenues U.S. Cellular $ 1,417,181 $ 1,162,467 $ 876,965 TDS Telecom 545,917 488,104 437,624 --------------------------------------------------- 1,963,098 1,650,571 1,314,589 --------------------------------------------------- Operating Expenses U.S. Cellular 1,161,339 986,392 747,422 TDS Telecom 431,366 393,692 337,481 --------------------------------------------------- 1,592,705 1,380,084 1,084,903 --------------------------------------------------- Operating Income from Ongoing Operations 370,393 270,487 229,686 American Paging Operating (Loss) -- (11,406) (35,307) --------------------------------------------------- Operating Income 370,393 259,081 194,379 --------------------------------------------------- Investment and Other Income (Expense) Interest and dividend income 8,708 10,070 11,526 Investment income 31,324 40,774 83,668 Amortization of costs related to minority investments (12,927) (11,395) (6,857) Gain on sale of cellular and other investments 345,938 262,698 41,438 Other (expense), net (11,198) (35,435) (8,749) Minority share of income (65,117) (47,461) (34,722) --------------------------------------------------- 296,728 219,251 86,304 --------------------------------------------------- Income Before Interest and Income Taxes 667,121 478,332 280,683 Interest expense 99,984 108,371 92,010 Minority interest in income of subsidiary trust 24,810 23,504 1,523 --------------------------------------------------- Income From Continuing Operations Before Income Taxes 542,327 346,457 187,150 Income tax expense 228,176 145,058 87,405 --------------------------------------------------- Net Income From Continuing Operations 314,151 201,399 99,745 --------------------------------------------------- Discontinued Operations, net of tax Discontinued operations (142,250) (212,752) (168,140) Tax effect of discontinued operations (58,060) (75,761) (58,846) --------------------------------------------------- (84,190) (136,991) (109,294) --------------------------------------------------- Net Income (Loss) 229,961 64,408 (9,549) Preferred Dividend Requirement (1,147) (1,651) (1,892) --------------------------------------------------- Net Income (Loss) Available to Common $ 228,814 $ 62,757 $ (11,441) ==================================================================================================================================== Weighted Average Shares Outstanding (000s) 61,436 60,982 60,211 Basic Earnings per Share Continuing Operations $ 5.09 $ 3.28 $ 1.63 Discontinued Operations (1.37) (2.25) (1.82) --------------------------------------------------- $ 3.72 $ 1.03 $ (0.19) ==================================================================================================================================== Diluted Earnings per Share Continuing Operations $ 5.02 $ 3.22 $ 1.59 Discontinued Operations (1.35) (2.21) (1.80) --------------------------------------------------- $ 3.67 $ 1.01 $ (.21) --------------------------------------------------- Dividends per Share $ .46 $ .44 $ .42 ====================================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 17 Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES Net income from continuing operations $ 314,151 $ 201,399 $ 99,745 Add (Deduct) adjustments to reconcile net income from continuing operations to net cash provided by operating activities Depreciation and amortization 353,322 326,077 262,440 Deferred income taxes and investment tax credit, net 152,222 75,928 1,972 Investment income (31,324) (40,774) (83,668) Minority share of income 65,117 47,461 34,722 Gain on sale of cellular and other investments (345,938) (262,698) (41,438) Noncash interest expense 18,297 20,189 15,948 Other noncash expense 29,011 30,090 14,193 Changes in assets and liabilities from operations Change in accounts receivable (50,417) (37,840) (18,236) Change in materials and supplies (13,436) (3,897) 122 Change in accounts payable (22,421) 75,940 1,892 Change in accrued taxes (17,051) 19,017 6,096 Change in other assets and liabilities 28,299 15,376 15,397 ---------------------------------------------------- 479,832 466,268 309,185 ---------------------------------------------------- CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES Capital expenditures (399,631) (463,543) (488,833) Acquisitions, net of cash acquired (31,323) (120,455) (138,527) Proceeds from investment sales 120,000 130,957 84,230 Distributions from unconsolidated entities 26,061 28,912 56,413 Change in temporary investments and marketable non-equity securities 9,484 34,740 36,470 Investments in and advances to investment entities and license costs 5,497 (185) (10,535) Other investing activities (15,438) (24,692) (21,560) ---------------------------------------------------- (285,350) (414,266) (482,342) ---------------------------------------------------- CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES Issuance of long-term debt 9,902 202,277 260,099 Repayments of long-term debt (22,131) (16,454) (121,958) Change in notes payable (170,889) (356,698) 368,858 Trust preferred securities -- 144,880 144,788 Dividends paid (29,391) (28,490) (27,193) Repurchase of Common Shares (69,014) -- (69,942) Other financing activities 9,001 (9,284) (8,762) ---------------------------------------------------- (272,522) (63,769) 545,890 ---------------------------------------------------- Cash Flows from Discontinued Operations 143,911 10,910 (349,086) ---------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 65,871 (857) 23,647 Cash and Cash Equivalents Beginning of period 45,139 45,996 22,349 ---------------------------------------------------- End of period $ 111,010 $ 45,139 $ 45,996 ====================================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 18 Consolidated Balance Sheets -- Assets
DECEMBER 31, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Current Assets Cash and cash equivalents $ 111,010 $ 45,139 Temporary investments 4,983 10,306 Accounts receivable Due from customers, less allowance of $10,525 and $6,732, respectively 175,623 139,706 Other, principally connecting companies 141,402 117,127 Materials and supplies, at average cost 39,880 25,243 Other current assets 35,110 19,222 --------------------------------------------------- 508,008 356,743 --------------------------------------------------- Investments Intangible Assets Cellular license costs, net of amortization 1,156,175 1,200,653 Franchise and other costs in excess of the underlying book value of subsidiaries, net of amortization 177,677 181,517 Marketable equity securities 843,280 382,706 Investments in unconsolidated entities 272,601 301,921 Other investments 28,837 33,870 --------------------------------------------------- 2,478,570 2,100,667 --------------------------------------------------- Property, Plant and Equipment, net U.S. Cellular 1,206,467 1,138,585 TDS Telecom 889,422 881,507 --------------------------------------------------- 2,095,889 2,020,092 --------------------------------------------------- Other Assets and Deferred Charges 56,216 66,297 --------------------------------------------------- Net Assets of Discontinued Operations 237,145 498,805 --------------------------------------------------- $5,375,828 $ 5,042,604 ===================================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 19 Consolidated Balance Sheets -- Liabilities and Stockholders' Equity
DECEMBER 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Current Liabilities Current portion of long-term debt $ 14,967 $ 15,946 Notes payable -- 170,889 Accounts payable 206,937 232,320 Advance billings and customer deposits 43,965 33,283 Accrued interest 23,492 24,133 Accrued taxes 19,773 23,434 Accrued compensation 35,939 24,415 Other current liabilities 24,599 24,502 --------------------------------------------------- 369,672 548,922 --------------------------------------------------- Deferred Liabilities and Credits Net deferred income tax liability 382,468 191,748 Postretirement benefits obligation other than pensions 8,611 9,463 Other 33,436 22,666 --------------------------------------------------- 424,515 223,877 --------------------------------------------------- Long-term Debt, excluding current portion 1,279,877 1,275,086 --------------------------------------------------- Minority Interest in subsidiaries 509,658 430,826 --------------------------------------------------- Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Company Subordinated Debentures (a) 300,000 300,000 --------------------------------------------------- Preferred Shares 9,005 25,985 --------------------------------------------------- Common Stockholders' Equity Common Shares, par value $.01 per share; authorized 100,000,000 shares; issued and outstanding 55,411,746 and 54,988,498 shares, respectively 554 550 Series A Common Shares, par value $.01 per share; authorized 25,000,000 shares; issued and outstanding 6,958,691 and 6,949,904 shares, respectively 70 69 Capital in excess of par value 1,897,402 1,882,710 Treasury Shares, at cost, 1,237,207 and 761,220 shares, respectively (102,975) (29,439) Accumulated other comprehensive income 179,071 75,609 Retained earnings 508,979 308,409 --------------------------------------------------- 2,483,101 2,237,908 --------------------------------------------------- $5,375,828 $ 5,042,604 ====================================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. (a) AS DESCRIBED IN NOTE 14, THE SOLE ASSET OF TDS CAPITAL I IS $154.6 MILLION PRINCIPAL AMOUNT OF 8.5% SUBORDINATED DEBENTURES DUE 2037 FROM TDS, AND THE SOLE ASSET OF TDS CAPITAL II IS $154.6 MILLION PRINCIPAL AMOUNT OF 8.04% SUBORDINATED DEBENTURES DUE 2038 FROM TDS. 20 Consolidated Statements of Common Stockholders' Equity
Accumulated Series A Capital in Compre- Other Com- Common Common Excess of Treasury hensive prehensive Retained Shares Shares Par Value Shares Income Income Earnings - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) BALANCE, DECEMBER 31, 1996 $ 54,237 $ 6,917 $1,662,041 $ -- $ 513 $ 309,233 Comprehensive Income Net (Loss) -- -- -- -- $ (9,549) -- (9,549) Net unrealized gains on securities -- -- -- -- 170 170 -- ----------- Comprehensive (Loss) $ (9,379) =========== Dividends Common and Series A Common Shares -- -- -- -- -- (25,300) Preferred Shares -- -- -- -- -- (1,893) Acquisitions 16 -- 3,585 39,084 -- -- Repurchase Common Shares -- -- -- (69,942) -- -- Dividend reinvestment, incentive and compensation plans 122 19 4,707 176 -- -- Conversion of Preferred Shares 68 -- 1,419 -- -- -- Other -- -- (7,504) -- -- -- ------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 54,443 6,936 1,664,248 (30,682) 683 272,491 Comprehensive Income Net Income -- -- -- -- $ 64,408 -- 64,408 Net unrealized gains on securities -- -- -- -- 74,926 74,926 -- ---------- Comprehensive Income $ 139,334 ========== Dividends Common and Series A Common Shares -- -- -- -- -- (26,850) Preferred Shares -- -- -- -- -- (1,640) Recapitalization (53,899) (6,867) 60,766 -- -- -- Acquisitions 2 -- 10,025 -- -- -- Dividend reinvestment, incentive and compensation plans 1 -- 2,029 1,243 -- -- Conversion of Preferred Shares 3 -- 6,284 -- -- -- Gain on sale of subsidiary stock -- -- 148,357 -- -- -- Other -- -- (8,999) -- -- -- ------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 550 69 1,882,710 (29,439) 75,609 308,409 Comprehensive Income Net Income -- -- -- -- $ 229,961 -- 229,961 Net unrealized gains on securities -- -- -- -- 103,462 103,462 -- ----------- Comprehensive Income $ 333,423 =========== Dividends Common and Series A Common Shares -- -- -- -- -- (28,290) Preferred Shares -- -- -- -- -- (1,101) Repurchase Common Shares -- -- -- (80,457) -- -- Dividend reinvestment, incentive and compensation plans 1 1 177 6,921 -- -- Conversion of Preferred Shares 3 -- 17,273 -- -- -- Other -- -- (2,758) -- -- -- -------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 $ 554 $ 70 $1,897,402 $ (102,975) $ 179,071 $ 508,979 ====================================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 21 Notes to Consolidated Financial Statements Note 1 Discontinued Operations On September 17, 1999, the Board of Directors of Telephone and Data Systems, Inc. ("TDS") decided not to pursue a spin-off of Aerial Communications, Inc. ("Aerial"), an 82.1%-owned subsidiary of TDS, and approved a plan of merger between Aerial and VoiceStream Wireless Corporation ("VoiceStream"). As a result of the merger, Aerial shareholders will receive 0.455 VoiceStream common shares for each share of Aerial stock they own, subject to adjustment in certain circumstances. Aerial public shareholders will have a right to elect to receive $18 in cash in lieu of shares of VoiceStream. The parties anticipate that the merger will be tax-free to Aerial shareholders that elect to receive VoiceStream stock. This merger is subject to the approval of the Federal Communications Commission. The merger is expected to close in the second quarter of 2000. On November 1, 1999, TDS converted $420 million of intercompany debt due from a subsidiary of Aerial into 19.1 million Aerial Common Shares at $22 per share. On September 17, 1999, the date of the TDS Debt Replacement Agreement, the closing price of Aerial Common Shares was $20 per share. TDS has agreed to advance approximately $280 million to Aerial under the revolving credit agreement between TDS and a subsidiary of Aerial. At December 31, 1999, TDS had loaned a total of $37.8 million to Aerial. At the time of the merger, under certain circumstances, TDS is required to advance funds to a subsidiary of Aerial to bring the amount outstanding under the revolving credit agreement to $315 million. The $315 million outstanding will be repaid by VoiceStream one year from the date of the merger, or earlier at VoiceStream's option. The merger agreement also provides for TDS to be released from its guarantees of Aerial's long-term debt and vendor financing at the closing of the merger. Also on November 1, 1999, Sonera Corporation ("Sonera"), a Finnish telecommunications company, invested an additional $230 million into the equity of Aerial and one of its subsidiaries, also at an equivalent price of $22 per Aerial share. Immediately prior to the merger, Sonera will exchange its interest in the subsidiary of Aerial for Aerial common stock. Sonera, TDS and Aerial also reached an agreement to settle all of their disputes relating to Sonera's earlier investment in the Aerial subsidiary, effective at the closing of the merger. As a result of the board's approval of the plan, the consolidated financial statements and supplemental data of TDS have been adjusted to reflect the results of operations and net assets of Aerial as discontinued operations in accordance with generally accepted accounting principles. Financial statements for prior periods have been reclassified to conform to current year presentation. TDS expects to recognize a net gain on the ultimate disposition of Aerial and, accordingly, has deferred recognition of Aerial's net operating losses of $44.2 million from September 18, 1999 through December 31, 1999. Net assets of discontinued operations are as follows:
December 31, 1999 1998 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Current Assets Cash and temporary investments $ 5,261 $ 4,978 Accounts receivable 32,223 27,776 Inventory 8,336 11,378 Other current assets 5,565 4,564 Investments Broadband PCS license costs, net 303,913 311,915 Other investments 3,263 1,443 Property, plant and equipment 619,913 621,281 Other assets and deferred charges 204 411 Current Liabilities Current portion vendor credit agreement (103,765) -- Accounts payable (35,230) (56,097) Accrued taxes (7,419) (7,015) Accrued compensation (9,732) (5,169) Other accrued expenses (4,676) (6,177) Deferred income tax liability (147,696) (123,110) Long-term debt (250,846) (278,010) Minority interest in subsidiaries (226,348) (9,363) Losses deferred after measurement date 44,179 -- - -------------------------------------------------------------------------------- $237,145 $498,805 ================================================================================
22 Notes to Consolidated Financial Statements Summarized income statement information relating to discontinued operations, excluding any corporate charges and intercompany interest expense, is as follows:
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Revenues $225,501 $155,154 $ 55,952 Expenses 435,509 435,139 252,503 ------------------------------------------------------ Operating (Loss) (210,008) (279,985) (196,551) Minority share of loss 21,369 75,974 43,038 Other income (expense) (6,504) 9,248 (16,799) Interest expense (22,119) (17,989) 2,172 ------------------------------------------------------ (Loss) Before Income Taxes (217,262) (212,752) (168,140) Income tax (benefit) (88,893) (75,761) (58,846) ------------------------------------------------------ Net (Loss) (128,369) (136,991) (109,294) Losses deferred after measurement date 44,179 -- -- ------------------------------------------------------ Net (Loss) from Discontinued Operations $(84,190) $(136,991) $(109,294) ================================================================================
Summarized cash flow statement information relating to discontinued operations is as follows:
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Cash flows from operating activities $ (62,633) $(110,106) $(102,678) Cash flows from investing activities (32,351) (80,054) (278,378) Cash flows from financing activities 239,213 201,001 1,698 - -------------------------------------------------------------------------------- Cash provided (used) by discontinued operations 144,229 10,841 (379,358) (Increase) decrease in cash included in Net Assets of Discontinued Operations (318) 69 30,272 - -------------------------------------------------------------------------------- Cash flows from discontinued operations $ 143,911 $ 10,910 $(349,086) ================================================================================
Note 2 Summary of Significant Accounting Policies Nature of Operations TDS is a diversified telecommunications company which provided high-quality telecommunications services to approximately 3.2 million cellular telephone and telephone customers in 35 states at December 31, 1999. The Company conducts substantially all of its cellular telephone operations through its 80.7%-owned subsidiary, United States Cellular Corporation ("U.S. Cellular") and its telephone operations through its wholly-owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom"). In September 1999, TDS approved a plan of merger between Aerial and VoiceStream. See Note 1 -- Discontinued Operations. Effective March 31, 1998, TDS contributed substantially all of the assets and certain, limited liabilities of American Paging, Inc. to a previously unrelated limited liability corporation for a 30% interest in that corporation. American Paging's revenues are netted against its expenses in the Consolidated Statements of Operations with the resulting operating loss reported as American Paging Operating (Loss). American Paging's revenues totaled $17.8 million and operating expenses totaled $29.2 million for the three month period ended March 31, 1998, and revenues totaled $94.4 million and operating expenses totaled $129.7 million for the year ended December 31, 1997. Beginning April 1, 1998, TDS followed the equity method of accounting for this investment and reported these results as a component of Investment income. See Note 20 -- Business Segment Information for summary financial information on each business segment. 23 Notes to Consolidated Financial Statements Principles of Consolidation The accounting policies of TDS conform to generally accepted accounting principles. The consolidated financial statements include the accounts of TDS, its majority-owned subsidiaries since acquisition and the cellular partnerships in which TDS has a majority general partnership interest. All material intercompany items have been eliminated. TDS includes as investments in subsidiaries the value of the consideration given and all direct and incremental costs relating to acquisitions accounted for as purchases. All costs relating to unsuccessful negotiations for acquisitions are expensed. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts reported in prior years have been reclassified to conform to current period presentation. Cash and Cash Equivalents and Temporary Investments Cash and cash equivalents include cash and those short-term, highly-liquid investments with original maturities of three months or less. Those investments with original maturities of more than three months to 12 months are classified as Temporary investments. Temporary investments are stated at cost. The carrying amounts of Cash and cash equivalents and Temporary investments approximate fair value due to the short-term nature of these investments. Outstanding checks in excess of cash balances totaled $37.6 million and $28.7 million at December 31, 1999 and 1998, respectively, and are classified as Accounts payable in the Consolidated Balance Sheets. Sufficient funds were available to fund these outstanding checks when presented for payment. TDS has cash management arrangements with its subsidiaries under which the subsidiaries may from time to time deposit excess cash with TDS for investment under TDS's cash management program. Revenue Recognition Revenues from cellular operations primarily consist of charges to customers for monthly access, airtime, data usage, vertical services, roaming charges, long-distance charges and equipment sales. Revenues are recognized as services are rendered. Unbilled revenues, resulting from service provided from the billing cycle date to the end of each month and from other cellular carriers' customers using U.S. Cellular's cellular systems for the last half of each month, are estimated and recorded. Equipment sales are recognized upon delivery to the customer. TDS's telephone subsidiaries participate in revenue pools with other telephone companies for interstate revenue and for certain intrastate revenue. Such pools are funded by toll revenue and/or access charges within state jurisdiction and by access charges in the interstate market. Revenues earned through the various pooling processes are initially recorded based on TDS Telecom's estimates. Advertising Costs The Company expenses advertising costs as incurred. Advertising expense totaled $69.0 million, $58.0 million and $44.3 million in 1999, 1998 and 1997, respectively. Recent Accounting Pronouncements Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities by requiring that entities recognize all derivatives as either assets or liabilities at fair market value on the balance sheet. Management believes that this statement will not have a material effect on results of operations and financial position of the Company. Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition" is effective beginning in the first quarter of 2000. SAB No. 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. Management believes that this bulletin will not have a material effect on results of operations and financial position of the Company. 24 Notes to Consolidated Financial Statements Note 3 Income Taxes TDS files a consolidated federal income tax return. Income tax provisions charged to net income from continuing operations are summarized as follows:
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Current: Federal $ 61,261 $ 57,717 $ 72,039 State 14,693 14,413 13,394 Deferred: Federal 130,692 64,282 1,595 State 21,530 12,496 896 Amortization of deferred investment tax credits -- (850) (519) -------------------------------------------------- Total income tax expense for continuing operations $ 228,176 $ 145,058 $ 87,405 ================================================================================
Investment tax credits resulting from investments in telephone plant and equipment were deferred and were amortized over the service lives of the related property. A reconciliation of TDS's effective income tax rate for continuing operations and the statutory federal income tax rate is as follows:
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 4.3 4.9 4.8 Amortization of license acquisition costs and costs in excess of book value .8 1.1 2.8 Amortization of deferred investment tax credits -- (.2) (.3) Effects of corporations not included in consolidated federal tax return .4 .5 .8 Sale of cellular interests -- .7 3.0 Resolution of prior period tax issues 1.6 -- -- Other differences, net -- (.1) .6 -------------------------------------------------- Effective income tax rate for continuing operations 42.1% 41.9% 46.7% ================================================================================
Income tax provisions charged to net income are summarized as follows:
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Current: Federal $ 3,312 $9,872 $4,532 State 6,060 10,076 6,790 Deferred: Federal 137,528 36,827 13,302 State 23,216 13,372 4,454 Amortization of deferred investment tax credits -- (850) (519) ------------------------------------------------------ Total income tax expense $170,116 $69,297 $28,559 ================================================================================
Deferred income taxes are provided for the temporary differences between the amount of the Company's assets and liabilities for financial reporting purposes and their tax bases. The Company's current net deferred tax assets totaled $2.8 million and $1.2 million as of December 31, 1999 and 1998, respectively. The net current deferred tax asset primarily represents the deferred tax effects of the allowance for customer receivables. The temporary differences that gave rise to the noncurrent deferred tax assets and liabilities are as follows:
DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Deferred Tax Asset: Net operating loss carryforwards $ 132,131 $ 116,608 Minority share of income 56,488 30,532 Partnership investments 36,335 19,557 Alternative minimum tax credit carryforward 33,745 27,230 Taxes on acquisitions 32,782 27,066 Postretirement benefits 3,400 3,673 Other 7,232 78 ---------------------- 302,113 224,744 Less valuation allowance (25,079) (27,779) ---------------------- Total Deferred Tax Asset 277,034 196,965 Deferred Tax Liability: Marketable equity securities 313,772 133,333 Property, plant and equipment 190,294 136,611 Licenses 79,821 39,408 Equity investments 75,615 78,179 Other -- 1,182 ---------------------- Total Deferred Tax Liability 659,502 388,713 Net Deferred Income Tax Liability $ 382,468 $ 191,748 ============================================================
25 Notes to Consolidated Financial Statements TDS had $302.1 million of federal net operating loss carryforward (generating a $99.7 million deferred tax asset) at December 31, 1999, expiring between 2012 and 2014 which is available to offset future consolidated taxable income. In addition, TDS had $517.6 million of state net operating loss carryforward (generating a $32.4 million deferred tax asset) at December 31, 1999, expiring between 2000 and 2014 which is available to offset future taxable income primarily of the individual subsidiaries which generated the loss. A valuation allowance was established for the state operating loss carryforwards since it is more likely than not that a portion will expire before such carryforwards can be utilized. At December 31, 1999, TDS had $33.7 million of federal alternative minimum tax credit carryforward available to offset regular income tax payable in future years. The financial reporting basis of the marketable equity securities was greater than the tax basis at the date of acquisition, generating $183.2 million of deferred taxes. Additionally, the value of the marketable equity securities has appreciated since acquisition, generating $130.6 million of deferred taxes. Included in Cellular license cost, Franchise and other cost and Investment in unconsolidated entities is goodwill related to various acquisitions structured to be tax-free of $232 million, $123 million, and $20 million, respectively, at December 31, 1999 and $240 million, $124 million, and $23 million, respectively, at December 31, 1998. No deferred taxes have been provided on this goodwill. Note 4 Earnings Per Share The amounts used in computing Earnings per Share from Continuing Operations and the effect on income and the weighted average number of Common and Series A Common Shares of dilutive potential common stock are as follows:
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS AND SHARES IN THOUSANDS) Net Income from Continuing Operations $314,151 $201,399 $ 99,745 Preferred Dividend Requirement (1,147) (1,651) (1,892) ----------------------------------------------------- Net Income from Continuing Operations Available to Common used in Basic Earnings per Share 313,004 199,748 97,853 Reduction in preferred dividends if Preferred Shares converted into Common Shares 1,031 1,513 585 Minority income adjustment (938) (1,806) (1,765) ----------------------------------------------------- Net Income from Continuing Operations Available to Common used in Diluted Earnings per Share $313,097 $199,455 $ 96,673 ================================================================================ Weighted Average Number of Common Shares used in Basic Earnings per Share 61,436 60,982 60,211 Effect of Dilutive Securities: Common Shares outstanding if Preferred Shares converted 550 820 481 Stock options and stock appreciation rights 377 122 130 Common Shares issuable 13 13 15 - -------------------------------------------------------------------------------- Weighted Average Number of Common Shares used in Diluted Earnings per Share 62,376 61,937 60,837 ================================================================================
Preferred Shares convertible into 436,000 Common Shares in 1997 were not included in computing Diluted Earnings per Share because their effects were antidilutive. The minority income adjustment reflects the additional minority share of U.S. Cellular's income computed as if all of U.S. Cellular's issuable securities were outstanding. 26 Notes to Consolidated Financial Statements Note 5 Intangible Assets Cellular license costs consist of costs incurred in acquiring Federal Communications Commission licenses to provide cellular service. These costs include amounts paid to license applicants and owners of interests in cellular entities awarded licenses and all direct and incremental costs relating to acquiring the licenses. These costs are capitalized and amortized through charges to expense over 40 years upon commencement of operations. Amortization amounted to $33.8 million, $32.7 million and $27.2 million in 1999, 1998 and 1997, respectively. Accumulated amortization of cellular license costs was $188.1 million and $153.9 million at December 31, 1999 and 1998, respectively. Franchise and other costs include the costs in excess of the underlying book value of acquired telephone companies. Costs aggregating $216.8 million and $215.3 million at December 31, 1999 and 1998, respectively, relating to acquisitions since November 1, 1970, are being amortized on a straight-line basis over a 40-year period. Amortization amounted to $5.3 million, $5.3 million and $5.2 million in 1999, 1998 and 1997, respectively. Accumulated amortization of excess cost was $45.6 million and $40.2 million at December 31, 1999 and 1998, respectively. Costs in excess of the underlying book value relating to acquisitions initiated before November 1, 1970, aggregating $6.5 million, are not being amortized. Note 6 Marketable Equity Securities Marketable equity securities are classified as available-for-sale, are stated at fair market value and consist of the following:
DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Vodafone AirTouch plc Value $ 640,824 $ -- ADRs 12,945,920 -- AirTouch Communications, Inc. Value $ -- $ 375,108 Common Shares -- 5,178,368 Illuminet Holdings, Inc. Value $ 136,742 -- Common Shares 2,486,224 -- Rural Cellular Corporation Value $ 65,105 $ 7,598 Common Shares 719,396 719,396 Other $ 609 $ -- ================================================================================
In 1999, the Company received 12.9 million (adjusted for a five-for-one stock split) Vodafone AirTouch plc American Depository Receipts ("ADRs") and $46.6 million in cash in exchange for its 5.2 million AirTouch common shares as a result of the AirTouch Communications, Inc. merger with Vodafone Group plc. The Company received the AirTouch common shares in 1998 as a result of the sale of certain minority cellular interests to AirTouch. In October 1999, Illuminet Holdings, Inc. ("Illuminet") completed its initial public offering. At December 31, 1999, TDS's investment in Illuminet is included in Marketable Equity Securities and stated at fair market value. Information regarding the Company's marketable equity securities is summarized below.
DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Available-for-sale Equity Securities Aggregate Fair Value $843,280 $382,706 Original Cost 517,870 234,238 ------------------- Gross Unrealized Holding Gains 325,410 148,468 Tax Effect 130,616 59,661 ------------------- Unrealized Holding Gains, net of tax 194,794 88,807 Minority Share of Unrealized Holding Gains 15,723 13,198 ------------------- Net Unrealized Holding Gains $179,071 $ 75,609 ==========================================================
The Company's net unrealized holding gains are included as an increase to Accumulated other comprehensive income. Realized gains and losses are determined on the basis of specific identification. During 1999, cash proceeds from the exchange of available-for-sale securities totaled $46.6 million and gross realized gains totaled $327.1 million. During 1998, proceeds from the sale of available-for-sale securities totaled $613,000 and gross realized gains totaled $300,000. During 1997, proceeds from the sale of available-for-sale securities totaled $1.5 million and gross realized gains totaled $154,000. 27 Notes to Consolidated Financial Statements Note 7 Investment in Unconsolidated Entities Investments in unconsolidated entities consists of investments in which the Company holds a minority interest. The Company follows the equity method of accounting, which recognizes TDS's proportionate share of the income and losses accruing to it under the terms of its partnership or shareholder agreements, where the Company's ownership interest equals or exceeds 20% for corporations and 3% for partnerships ($262.4 million and $286.1 million at December 31, 1999 and 1998, respectively). Income and losses from these entities are reflected in the Consolidated Statements of Operations on a pretax basis as Investment income. Investment income totaled $31.3 million, $40.8 million and $83.7 million in 1999, 1998 and 1997, respectively. At December 31, 1999, the cumulative share of income from minority investments accounted for under the equity method was $217.5 million, of which $64.6 million was undistributed. The cost method of accounting is followed for certain minority interests where the Company's ownership interest is less than 20% for corporations and 3% for partnerships ($10.2 million and $15.8 million at December 31, 1999 and 1998, respectively). Investments in unconsolidated entities include cellular license costs and costs in excess of the underlying book value of certain non-cellular minority investments. These costs are being amortized from 10 to 40 years. Amortization amounted to $12.6 million, $9.7 million and $3.0 million in 1999, 1998 and 1997, respectively. The Company's more significant investments in unconsolidated entities consist of the following:
PERCENTAGE OWNERSHIP DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- Cellular investments Los Angeles SMSA Limited Partnership 5.5% 5.5% Raleigh-Durham MSA Limited Partnership 8.0% 8.0% Midwest Wireless Communication, LLC 14.7% 14.7% North Carolina RSA 1 Partnership 50.0% 50.0% Oklahoma City SMSA Limited Partnership 14.6% 14.6% Other investments TSR Wireless Holdings, LLC 30.0% 30.0% Volcano Communications Company 45.0% 45.0% ================================================================================
As of December 31, 1999, the carrying value of the investment in TSR Wireless Holdings, LLC was approximately $85 million. During 1999, the public market capitalization of companies in the paging industry generally declined as the market price of the companies' stock declined. The Company has evaluated the carrying value of the investment in TSR Wireless and will continue to review the value considering the operations of TSR Wireless and the general paging industry. The following summarizes the unaudited combined assets, liabilities and equity, and the unaudited combined results of operations of the entities for which TDS's investments are accounted for by the equity method.
DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- (UNAUDITED, DOLLARS IN MILLIONS) Assets Current assets $ 338 $ 299 Due from affiliates 3 7 Property and other 1,106 1,140 ---------------------------------------- $1,447 $1,446 ================================================================================ Liabilities and Equity Current liabilities $ 278 $ 268 Due to affiliates 16 26 Deferred credits 7 3 Long-term debt 210 143 Partners' capital and stockholders' equity 936 1,006 ---------------------------------------- $1,447 $1,446 ================================================================================
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (UNAUDITED, DOLLARS IN MILLIONS) Results of Operations Revenues $ 1,794 $ 1,624 $ 1,732 Costs and expenses 1,492 1,141 1,242 ----------------------------------------------------- Operating Income 302 483 490 ----------------------------------------------------- Other income (expense) 29 7 5 Interest expense (15) (10) (9) Income taxes (19) (4) (6) ----------------------------------------------------- Net income $ 297 $ 476 $ 480 ================================================================================
28 Notes to Consolidated Financial Statements Note 8 Property, Plant and Equipment U.S. Cellular U.S. Cellular property, plant and equipment is stated at the original cost of construction including capitalized costs of certain taxes and payroll-related expenses and consists of:
DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Cell site-related equipment $ 939,797 $ 790,292 Land, buildings and leasehold improvements 280,306 237,361 Switching-related equipment 153,984 116,198 Office furniture and equipment 104,901 127,397 System development 153,041 134,225 Other operating equipment 67,021 59,152 Work in process 33,269 70,197 ---------------------- 1,732,319 1,534,822 Accumulated depreciation 525,852 396,237 ---------------------- $1,206,467 $1,138,585 ===========================================================================
Renewals and betterments of units of property are recorded as additions to cellular plant in service. The original cost of depreciable property (and related accumulated depreciation) retired is removed from plant in service and, together with removal cost less any salvage realized, is charged to depreciation expense. Repairs and renewals of minor units of property are charged to system operations expense. TDS Telecom TDS Telecom property, plant and equipment is stated at the original cost of construction including the capitalized costs of certain taxes, payroll-related expenses, and an allowance for funds used during construction and consists of:
DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Cable and wire $ 812,752 $ 772,749 Central office equipment 498,730 460,323 Office furniture and equipment 166,013 145,851 Land and buildings 68,193 68,274 Other equipment 65,282 67,338 Work in process 29,920 28,696 -------------------------------------------- 1,640,890 1,543,231 Accumulated depreciation 751,468 661,724 -------------------------------------------- $ 889,422 $ 881,507 ================================================================================
Renewals and betterments of units of property are recorded as additions to telephone plant in service. The original cost of depreciable property (and related accumulated depreciation) retired is removed from plant in service and, together with removal cost less any salvage realized, is charged to accumulated depreciation. No gain or loss is recognized on ordinary retirements of depreciable telephone property. Repairs and renewals of minor units of property are charged to plant operations expense. The Company's telephone operations follow accounting for regulated enterprises prescribed by SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." Management periodically reviews the criteria for applying these provisions to determine whether continuing application of SFAS No. 71 is appropriate. Management believes that such criteria are still being met and therefore has no current plans to change its method of accounting. In analyzing the effects of discontinuing the application of SFAS No. 71, management has determined that the useful lives of plant assets used for regulatory and financial reporting purposes are consistent with generally accepted accounting principles and therefore, any adjustments to telecommunications plant would be immaterial, as would be any write-off of regulatory assets and liabilities. Depreciation Depreciation is provided using the straight-line method over the estimated useful lives of the assets. The provision for depreciation as a percentage of depreciable property was as follows:
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- U.S. Cellular 12.4% 13.0% 10.3% TDS Telecom 7.8% 7.5% 7.4% - --------------------------------------------------------------------------------
Cellular depreciation as a percentage of depreciable property increased in 1998 due to the reduction in useful lives of certain assets in 1998, increasing the provision for depreciation. 29 Notes to Consolidated Financial Statements Note 9 Supplemental Cash Flow Disclosures Following are supplemental cash flow disclosures for interest and income taxes paid and certain noncash transactions.
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Interest paid $81,629 $81,612 $69,568 Income taxes paid 19,976 9,936 17,362 Common Shares issued for conversion of Preferred Shares 16,465 6,114 1,031 Additions to property, plant and equipment financed through accounts payable and accrued expenses $22,984 $28,895 $11,280 - --------------------------------------------------------------------------------
TDS has acquired certain cellular licenses and operating companies, operating telephone companies and certain other assets since January 1, 1997. In conjunction with these acquisitions, the following assets were acquired and liabilities assumed, and Common Shares and Preferred Shares issued:
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Property, plant and equipment $ 4,248 $ 26,560 $ 120,365 Cellular licenses 22,568 97,228 146,957 Decrease in investment in unconsolidated entities (546) (2,317) (89,205) Franchise and other costs 1,006 5,983 2,452 Long-term debt (987) (4,450) (4,857) Deferred credits (226) (3,905) 1,104 Other assets and liabilities, excluding cash and cash equivalents 5,260 10,835 7,396 Common Shares issued and issuable -- (9,479) (42,685) Preferred Shares issued -- -- (3,000) ------------------------------------------------- Decrease in cash due to acquisitions $ 31,323 $ 120,455 $ 138,527 ================================================================================
Note 10 Acquisitions and Sales During 1999 and 1998, TDS and its subsidiaries completed the following business combinations: 30
Consideration ------------------------- TDS and U.S. Cellular Cash Common Stock - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Acquisitions During 1999 Cellular interests (245,000 population equivalents) $ 29,841 $ -- Telephone interests (500 access lines) 1,482 -- Acquisitions During 1998 Cellular interests (1,308,000 population equivalents) $119,957 $ 4,750 Telephone interests (6,500 access lines) 498 8,725 - --------------------------------------------------------------------------------
Sales of Cellular and Other Investments During 1999, the Company recognized a $327.1 million gain as a result of the AirTouch Communications Inc. merger with Vodafone Group plc. The Company recognized a gain on the difference between the historical basis of its investment in AirTouch common shares and the value of the Vodafone AirTouch plc ADRs and cash received from the merger. During 1998, the Company recognized a $198.6 million gain on the sale of certain minority cellular interests to AirTouch for 5.2 million AirTouch shares and cash. The sale of other non-strategic minority cellular interests and other investments generated gains in 1999, 1998 and 1997 totaling $18.8 million, $64.1 million and $41.4 million, respectively. These transactions generated net cash proceeds of $120.0 million, $131.0 million and $84.2 million in 1999, 1998 and 1997, respectively. Note 11 Notes Payable TDS has used short-term debt for acquisitions and for general corporate purposes and to finance Aerial's construction, development and operations. Proceeds from the sale of long-term debt and equity securities from time to time, including the sale of debt and equity securities by subsidiaries, have been used to 31 Notes to Consolidated Financial Statements reduce such short-term debt. Proceeds from the sale of non-strategic cellular and other investments from time to time have also been used to reduce short-term debt. TDS had $587 million of committed bank lines of credit for general corporate purposes at December 31, 1999, all of which was unused. These lines of credit consist of a $500 million TDS revolving credit facility and $87 million in direct bank lines of credit. TDS has a six-year $500 million revolving credit facility with a group of banks. The terms of the credit facility provide for borrowings with interest at the London InterBank Offered Rate ("LIBOR") plus 22.5 basis points. Interest and principal are due the last day of the borrowing period, as selected by the borrower, of either seven days or one, two, three or six months. The credit facility expires in June 2002. TDS also had $87 million in direct bank lines of credit at December 31, 1999. The terms of the direct bank lines of credit provide for borrowings at negotiated rates up to the prime rate. U.S. Cellular has a seven-year $500 million revolving credit facility with a group of banks at December 31, 1999, all of which was unused. The terms of the credit facility provide for borrowings with interest at the LIBOR plus 26.5 basis points. Interest and principal are due the last day of the borrowing period, as selected by the borrower, of either seven days or one, two, three or six months. The credit facility expires in August 2004. The carrying amount of short-term debt approximates fair value due to the short-term nature of these instruments. Information concerning notes payable is shown in the table below:
DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Balance at end of year $ -- $170,889 $527,587 Weighted average interest rate at end of year -- 6.0% 6.3% Maximum amount outstanding during the year $214,968 $572,405 $587,683 Average amount outstanding during the year (1) $148,818 $360,375 $407,965 Weighted average interest rate during the year (1) 5.8% 5.7% 6.1% - --------------------------------------------------------------------------------
(1)THE AVERAGE WAS COMPUTED BASED ON MONTH-END BALANCES. Note 12 Long-term Debt Long-term debt is as follows:
DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Telephone and Data Systems, Inc. (Parent) Medium-term notes, averaging 9.0% 8.0% to 9.6% due 2003-2007 $ 87,500 $ 87,500 8.0% to 10.0% due 2021-2025 151,700 151,700 ---------------------------------- 239,200 239,200 7.0% notes, maturing in 2006 200,000 200,000 Purchase contracts, 9.0% and 14.0%, due through 2003 1,953 2,201 ---------------------------------- Total Parent 441,153 441,401 ---------------------------------- Subsidiaries U.S. Cellular 6.0% zero coupon convertible redeemable debentures, maturing in 2015 739,215 744,975 Unamortized discount (442,893) (463,488) ---------------------------------- 296,322 281,487 7.25% notes, maturing in 2007 250,000 250,000 TDS Telecom RUS, RTB and FFB Mortgage Notes, various rates averaging 5.5% in 1999 and 1998, due through 2031 301,251 308,494 Other long-term notes, various rates averaging 7.1% in 1999 and 7.2% in 1998, due through 2006 1,939 5,676 Other Long-term notes, 7.3% to 8.0%, due through 2009 4,179 3,974 ---------------------------------- Total Subsidiaries 853,691 849,631 ---------------------------------- Total long-term debt 1,294,844 1,291,032 Less: Current portion of long-term debt 14,967 15,946 ---------------------------------- Total long-term debt, excluding current portion $ 1,279,877 $ 1,275,086 ================================================================================
32 Notes to Consolidated Financial Statements The Medium-Term Notes ("MTNs") carry original maturities of 12 to 30 years, maturing at various times from 2003 to 2025. Interest is payable semi-annually. The MTNs may be redeemed by the Company at par value with initial redemption dates from 1999 to 2006. The Company sold $200 million principal amount of 7% unsecured notes in 1998 with proceeds to the Company of $198.4 million. The notes are due August 2006 and interest is payable semi-annually. The notes are redeemable at any time at the option of the Company, at a redemption price equal to the greater of (a) 100% of the principal amount of such notes, plus accrued but unpaid interest, or (b) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the Treasury Rate plus .25%. The 6% yield to maturity zero coupon convertible redeemable unsecured notes are due in 2015 and there is no periodic payment of interest. Each note is convertible at the option of the holder at any time at a conversion rate of 9.475 U.S. Cellular Common Shares per $1,000 of notes. Upon conversion, U.S. Cellular may elect to deliver its Common Shares or cash equal to the market value of the Common Shares. Beginning June 15, 2000, U.S. Cellular may redeem the notes for cash at the issue price plus accrued original issue discount through the date of redemption. Holders have the right to exercise their conversion option prior to the redemption date. On June 15, 2000, the holders may require U.S. Cellular to purchase the notes at the issue price plus accrued original issue discount through that date. U.S. Cellular will have the option of purchasing such notes with cash, U.S. Cellular Common Shares, TDS common equity securities, or any combination thereof. U.S. Cellular sold $250 million principal amount of 7.25% unsecured senior notes in 1997 with proceeds of $247.0 million. The notes are due 2007 and interest is payable semi-annually. U.S. Cellular may redeem the notes beginning 2004 at principal amount plus accrued interest. The RUS, RTB and FFB Mortgage Notes issued under certain loan agreements with the Rural Utilities Service ("RUS"), Rural Telephone Bank ("RTB") and Federal Financing Bank ("FFB"), agencies of the United States of America, are to be repaid in equal monthly or quarterly installments covering principal and interest beginning six months to three years after dates of issue and expiring through 2031. Substantially all telephone plant is pledged under RUS and RTB mortgage notes and various other obligations of the telephone subsidiaries. The annual requirements for principal payments on long-term debt are approximately $15.0 million, $15.6 million, $16.0 million, $48.1 million and $23.9 million for the years 2000 through 2004, respectively. The carrying value and estimated fair value of the Company's Long-term Debt were $1,294.8 million and $1,647.0 million at December 31, 1999 and $1,291.0 million and $1,333.0 million at December 31, 1998, respectively. The fair value of the Company's long-term debt was estimated using market price for the 6% zero coupon convertible debentures and discounted cash flow analysis for the remaining debt. Note 13 Minority Interest in Subsidiaries The following table summarizes the minority shareholders' and partners' interests in the equity of consolidated subsidiaries.
DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) U.S. Cellular Public shareholders $439,483 $362,224 Subsidiaries' partners and shareholders 40,971 43,609 ----------------------------- 480,454 405,833 TDS Telecom telephone subsidiaries 28,773 24,701 Other 431 292 ----------------------------- $509,658 $430,826 ================================================================================
33 Notes to Consolidated Financial Statements Note 14 Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Company Subordinated Debentures In 1998, TDS Capital II, a subsidiary trust ("Capital II") of TDS, issued 6,000,000 of its 8.04% Company-Obligated Mandatorily Redeemable Preferred Securities (the "1998 Preferred Securities") at $25 per Preferred Security. Net proceeds totaled $144.9 million and were used to reduce short-term debt. The sole asset of TDS Capital II is $154.6 million principal amount of TDS's 8.04% Subordinated Debentures due March 31, 2038. In 1997, TDS Capital I, a subsidiary trust ("Capital I") of TDS, issued 6,000,000 of its 8.5% Company-Obligated Mandatorily Redeemable Preferred Securities (the "1997 Preferred Securities") at $25 per Preferred Security. Net proceeds totaled $144.8 million and were used to reduce short-term debt. The sole asset of TDS Capital I is $154.6 million principal amount of TDS's 8.5% Subordinated Debentures due December 31, 2037. Payments due on the obligations of TDS Capital I and II under 1998 Preferred Securities and 1997 Preferred Securities (the "Preferred Securities") issued by TDS Capital I and II are fully and unconditionally guaranteed by TDS to the extent each trust has funds available therefor. However, TDS's obligations are subordinate and junior in right of payment to certain other indebtedness of TDS. TDS has the right to defer payments of interest on the Subordinated Debentures by extending the interest payment period, at any time, for up to 20 consecutive quarters. If interest payments on the Subordinated Debentures are so deferred, distributions on the Preferred Securities will also be deferred. During any deferral, distributions will continue to accrue with interest thereon. In addition, during any such deferral, TDS may not declare or pay any dividend or other distribution on, or redeem or purchase, any of its common stock. The 8.04% and 8.5% Subordinated Debentures are redeemable by TDS, in whole or in part, from time to time, on or after March 31, 2003, and November 18, 2002, respectively, or, in whole but not in part, at any time in the event of certain income tax circumstances. If the Subordinated Debentures are redeemed, TDS Capital I and II must redeem Preferred Securities on a pro rata basis having an aggregate liquidation amount equal to the aggregate principal amount of the Subordinated Debentures so redeemed. In the event of the dissolution, winding up or termination of TDS Capital I and II, the holders of Preferred Securities will be entitled to receive, for each Preferred Security, a liquidation amount of $25 plus accrued and unpaid distributions thereon to the date of payment, unless, in connection with the dissolution, winding up or termination, Subordinated Debentures are distributed to the holders of the Preferred Securities. The carrying value and estimated fair value of the Company's Preferred Securities were $300.0 million and $246.8 million at December 31, 1999 and $300.0 million and $297.8 million at December 31, 1998, respectively. The fair value of the Company's Preferred Securities was estimated based upon the market prices at December 31, 1999 and 1998, respectively. 34 Notes to Consolidated Financial Statements Note 15 Preferred Shares At December 31, 1999, 90,045 Preferred Shares were authorized, issued and outstanding. The holders of outstanding Preferred Shares are entitled to one vote per share. The average dividend rate is $6.12 per share. At December 31, 1999, 9,218 Preferred Shares are redeemable at the option of TDS and 80,056 Preferred Shares are redeemable at the option of the holder at $100 per share, plus accrued and unpaid dividends. At December 31, 1999, 76,060 Preferred Shares are convertible into 277,817 TDS Common Shares. In connection with the reincorporation of TDS into Delaware in 1998, each issued Iowa Preferred Share, no par value, stated value of $100 per share, was converted into a Delaware Preferred Share, $.01 par value. All Preferred Shares have a liquidation value of $100 per share plus accrued and unpaid dividends. Preferred Shares are stated on the balance sheet at $100 per share. The following is a schedule of Preferred Shares activity.
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Balance, beginning of year $ 25,985 $ 32,466 $ 30,858 Add: Acquisition -- -- 3,000 Stock Dividends -- -- -- Less: Conversion of preferred (16,465) (6,114) (1,031) Redemption of preferred (515) (367) (361) -------------------------------- Balance, end of year $ 9,005 $ 25,985 $ 32,466 ================================================================================
The carrying value and estimated fair value of the Company's Preferred Shares were $9.0 million and $5.3 million at December 31, 1999 and $26.0 million and $17.8 million at December 31, 1998, respectively. The fair value of the Company's Preferred Shares was estimated using discounted cash flow analysis. Note 16 Common Stockholders' Equity Common Stock The holders of Common Shares are entitled to one vote per share. The following table summarizes the number of Common and Series A Common Shares outstanding:
Series A Common Common Treasury Shares Shares Shares - -------------------------------------------------------------------------------- (SHARES IN THOUSANDS) Balance December 31, 1996 54,237 6,917 -- Repurchase Common Shares -- -- (1,798) Acquisitions of cellular and telephone interests 16 -- 999 Dividend reinvestment, incentive and compensation plans 122 19 4 Conversion of Preferred Shares 68 -- -- ------------------------------------- Balance December 31, 1997 54,443 6,936 (795) Acquisitions of cellular and telephone interests 228 -- -- Dividend reinvestment, incentive and compensation plans 39 14 34 Conversion of Preferred Shares 278 -- -- ------------------------------------- Balance December 31, 1998 54,988 6,950 (761) Repurchase Common Shares -- -- (664) Dividend reinvestment, incentive and compensation plans 8 9 188 Conversion of Preferred Shares 416 -- ------------------------------------- Balance December 31, 1999 55,412 6,959 (1,237) ================================================================================
35 Notes to Consolidated Financial Statements In connection with the reincorporation of TDS into Delaware in 1998, each issued Iowa Common and Series A Common Share, $1 par value, was converted into a Delaware Common and Series A Common Share, $.01 par value. The December 31, 1998 amounts for Common Shares, Series A Common Shares and Capital in Excess of Par Value have been adjusted to reflect the change in par value. Convertible Preferred Shares TDS issued 408,573 Common Shares in 1999, 274,634 in 1998 and 56,365 in 1997 for TDS Preferred Shares converted. TDS also issued 6,514 Common Shares in 1999, 3,780 in 1998 and 11,345 in 1997 for subsidiary preferred stock converted. Series A Common Shares The holders of Series A Common Shares are entitled to ten votes per share. Series A Common Shares are convertible, on a share-for-share basis, into Common Shares. TDS has reserved 6,958,691 Common Shares for possible issuance upon such conversion. Common Share Repurchase Program In December 1996, the Company authorized the repurchase of up to 3.0 million TDS Common Shares over a period of three years. The Company may use repurchased shares to fund acquisitions and for other corporate purposes. The Company repurchased 664,410 Common Shares in 1999 for $80.5 million and 1,798,100 Common Shares in 1997 for $69.9 million. No Common Shares were repurchased in 1998. The Company reissued 187,900 Common Shares in 1999, 33,400 in 1998 and 4,700 in 1997 for incentive and compensation plans and 998,800 Common Shares in 1997 for acquisitions. Accumulated Other Comprehensive Income Effective January 1, 1998, the Company implemented the provisions of SFAS No. 130, "Reporting Comprehensive Income." Under SFAS No. 130, the Company is required to report all changes in equity during a period, except those resulting from investments and distributions by owners, in a financial statement for the period in which they are recognized. The Company has chosen to disclose Comprehensive Income, which encompasses Net Income and Net Unrealized Gains on Securities, in the Consolidated Statements of Common Stockholders' Equity. Prior years have been restated to conform to the requirements of SFAS No. 130. The income tax effects allocated to and the cumulative balance of unrealized gains on securities are as follows:
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Balance, beginning of year $75,609 $ 683 $513 ------------------------------------------------------ Add: Unrealized gains on securities 504,055 147,620 473 Income tax effect 201,801 59,316 210 ------------------------------------------------------ 302,254 88,304 263 Minority share of unrealized gains 32,179 13,198 -- ------------------------------------------------------ Net unrealized gains 270,075 75,106 263 ------------------------------------------------------ Deduct: Recognized gains on sales of securities 327,113 300 154 Income tax expense 130,845 120 61 ------------------------------------------------------ 196,268 180 93 Minority share of recognized gains 29,655 -- -- ------------------------------------------------------ Net recognized gains included in Net Income 166,613 180 93 ------------------------------------------------------ Net change in unrealized gains included in Comprehensive Income 103,462 74,926 170 ------------------------------------------------------ Balance, end of year $179,071 $75,609 $683 ======================================================================================
Note 17 Dividend Reinvestment, Incentive and Compensation Plans The following table summarizes Common and Series A Common Shares issued, including reissued Treasury Shares, for the employee stock ownership plans and dividend reinvestment plans described below.
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Common Shares Tax-deferred savings plan 25,287 13,270 32,354 Dividend reinvestment plan 8,161 14,883 25,273 Stock-based compensation plans 162,651 44,662 69,109 ------------------------------------------- 196,099 72,815 126,736 ================================================================================ Series A Common Shares Dividend reinvestment plan 8,787 13,627 19,731 ================================================================================
36 Notes to Consolidated Financial Statements Tax-Deferred Savings Plan TDS had reserved 133,408 Common Shares for issuance under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing plan pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code. Participating employees have the option of investing their contributions in TDS Common Shares, U.S. Cellular Common Shares or five nonaffiliated funds. Dividend Reinvestment Plans TDS had reserved 437,698 Common Shares for issuance under the Automatic Dividend Reinvestment and Stock Purchase Plan and 150,109 Series A Common Shares for issuance under the Series A Common Share Automatic Dividend Reinvestment Plan. These plans enable holders of TDS's Common Shares and Preferred Shares to reinvest cash dividends in Common Shares and holders of Series A Common Shares to reinvest cash dividends in Series A Common Shares. The purchase price of the shares is 95% of the market value, based on the average of the daily high and low sales prices for TDS's Common Shares on the American Stock Exchange for the ten trading days preceding the date on which the purchase is made. Stock-based Compensation Plans TDS had reserved 2,852,716 Common Shares for options granted and to be granted to key employees. TDS has established certain plans that provide for the grant of stock options to officers and employees. The options are exercisable over a specified period not in excess of ten years. The options expire from 2000 to 2009 or 30 days after the date of the employee's termination of employment, if earlier. TDS accounts for stock options, stock appreciation rights ("SARs") and employee stock purchase plans under Accounting Principles Board ("APB") Opinion No. 25. No compensation costs have been recognized for the stock option and employee stock purchase plans. Compensation expense for SARs, measured on the difference between the year-end market price of the Common Shares and SAR prices, was $91,000 in 1997. Had compensation cost for all plans been determined consistent with SFAS No. 123 "Accounting for Stock-Based Compensation," the Company's net income and earnings per share from continuing operations would have been reduced to the following pro forma amounts:
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Income from Continuing Operations As Reported $ 314,151 $ 201,399 $ 99,745 Pro Forma 311,062 197,226 97,791 Basic Earnings per Share from Continuing Operations As Reported 5.09 3.28 1.63 Pro Forma 5.04 3.21 1.59 Diluted Earnings per Share from Continuing Operations As Reported 5.02 3.22 1.59 Pro Forma $ 4.97 $ 3.15 $ 1.56 - --------------------------------------------------------------------------------
A summary of the status of TDS stock option plans at December 31, 1999, 1998 and 1997 and changes during the years then ended is presented in the table and narrative below:
Weighted Weighted Number Average Average of Shares Option Prices Fair Values - -------------------------------------------------------------------------------- Stock Options: Outstanding December 31, 1996 (405,996 exercisable) 591,438 $34.08 Granted 68,137 $43.90 $10.61 Exercised (43,824) $19.51 Canceled (41,243) $40.78 -------- Outstanding December 31, 1997 (492,917 exercisable) 574,508 $35.87 Granted 463,433 $42.09 $11.73 Exercised (21,227) $30.36 Canceled (14,089) $47.45 -------- Outstanding December 31, 1998 (776,653 exercisable) 1,002,625 $38.70 Granted 124,470 $63.82 $25.51 Exercised (199,278) $31.32 Canceled (9,700) $43.75 -------- Outstanding December 31, 1999 (812,748 exercisable) 918,117 $43.66 ================================================================================
37 Notes to Consolidated Financial Statements Of the options outstanding at December 31, 1999, 812,748 options are exercisable, have exercise prices between $4.15 and $108.34 with a weighted average exercise price of $43.66, and a weighted average remaining contractual life of 6.8 years. The remaining 105,369 options are not exercisable, have exercise prices between $50.44 and $108.34 with a weighted average exercise price of $63.82, and a weighted average remaining contractual life of 9.5 years. STOCK OPTIONS. The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997, respectively: risk-free interest rates of 5.2%, 5.2% and 6.1%; expected dividend yields of 0.6%, 1.0% and 1.0%; expected lives of 7.5 years, 7.0 years and 5.0 years and expected volatility of 27.3%, 20.4% and 19.2%. STOCK APPRECIATION RIGHTS allow the grantee to receive an amount in cash or Common Shares, or a combination thereof, equivalent to the difference between the exercise price and the fair market value of Common Shares on the exercise date. At the beginning of 1997, 10,070 rights were outstanding. During 1997, an additional 630 rights were granted and 10,700 rights were exercised. All rights expired March 1997. The fair value of each stock appreciation right grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1997: risk-free interest rate of 4.9%; expected dividend yield of 1.0%; expected life of 0.1 year; and expected volatility of 20.5%. EMPLOYEE STOCK PURCHASE PLAN. TDS had reserved 204,808 Common Shares for sale to the employees of TDS and its subsidiaries. Note 18 Employee Benefit Plans Pension Plan The Company sponsors two qualified noncontributory defined contribution pension plans. One plan (the "TDS Plan")provides benefits for the employees of TDS, TDS Telecom and substantially all of the telephone company subsidiaries. (Employees of certain telephone subsidiaries are covered under other pension plans or receive direct pension payments.) The other plan provides pension benefits for U.S. Cellular employees. Under these plans, pension costs are calculated separately for each participant and are funded currently. TDS also sponsors an unfunded non-qualified deferred compensation plan to supplement the benefits under these plans to offset the reduction of benefits caused by the limitation on annual employee compensation under the tax laws. Total pension costs were $8.4 million, $7.3 million and $5.0 million in 1999, 1998 and 1997, respectively. Other Postretirement Benefits The Company sponsors two defined benefit postretirement plans that cover most of the employees of TDS, TDS Telecom and its telephone subsidiaries. One plan provides medical benefits and the other plan provides life insurance benefits. Both plans are contributory, with retiree contributions adjusted annually. The medical plan anticipates future cost sharing changes that are consistent with the Company's intent to increase retiree contributions by the health care cost trend rate. An amount not to exceed 25% of the total contribution to the TDS Plan will be contributed to fund the cost of the medical benefits annually. An additional contribution equal to a reasonable amortization of the past service cost may be made without regard to the 25% limitation described above. 38 Notes to Consolidated Financial Statements The following table reconciles the beginning and ending balances of the benefit obligation and the fair value of plan assets for the other postretirement benefit plans:
DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Change in Benefit Obligation Benefit obligation at beginning of year $ 21,336 $ 21,339 Service cost 1,019 933 Interest cost 1,475 1,486 Amendments 258 198 Actuarial gain (2,309) (1,968) Benefits paid (680) (652) ---------------------------------------- Benefit obligation at end of year 21,099 21,336 ---------------------------------------- Change in Plan Assets Fair value of plan assets at beginning of year 18,976 14,604 Actual return on plan assets 3,263 723 Employer contribution 2,626 2,171 Acquisition -- 2,130 Benefits paid (680) (652) ---------------------------------------- Fair value of plan assets at end of year 24,185 18,976 ---------------------------------------- Funded Status 3,086 (2,360) Unrecognized net actuarial gain (13,243) (8,517) Unrecognized prior service cost 1,546 1,414 ---------------------------------------- (Accrued) benefit cost $ (8,611) $ (9,463) ================================================================================
The following table sets forth the weighted average assumptions used in accounting for the plans:
DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------- Discount rate 7.5% 7.0% Expected return on plan assets 8.0% 8.0% - --------------------------------------------------------------------------------
For measurement purposes, an 8.6% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999; the rate was assumed to decrease over six years to 6.1% and to remain at 6.1% thereafter. Net periodic benefit cost for the years ended December 31, 1999, 1998 and 1997 include the following components:
YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Service cost $ 1,019 $ 933 $ 875 Interest cost on accumulated postretirement benefit obligation 1,475 1,486 1,346 Expected return on plan assets (1,498) (1,271) (632) Net amortization and deferral (228) (160) (344) ---------------------------------------- Net postretirement cost $ 768 $ 988 $1,245 ================================================================================
The health care cost trend rate assumption has a significant effect on the amounts reported. A one-percentage-point increase or decrease in assumed health care cost trend rates would have the following effects:
1 Percentage Point Increase Decrease - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Effect on total of service and interest cost components $686 $390 Effect on postretirement benefit obligation $3,713 $2,919 - --------------------------------------------------------------------------------
Note 19 Commitments and Contingencies Construction and Expansion The primary purpose of TDS's construction and expansion strategy is to provide for normal growth, to upgrade communications service, to expand into new communication areas, and to take advantage of service-enhancing and cost-reducing technological developments. The U.S. Cellular capital additions budget totals approximately $330 million for 2000, primarily to add additional cell sites to expand and enhance coverage, including adding digital service capabilities to its systems. The TDS Telecom capital additions budget totals approximately $125 million for 2000, including approximately $95 million for the local telephone markets to provide for normal growth, and to upgrade plant and equipment to provide enhanced services and $30 million for the competitive local exchange business to build switching and other network facilities to expand current markets and enter new markets. 39 Notes to Consolidated Financial Statements Lease Commitments TDS and its subsidiaries have leases for certain cellular plant facilities, office space and data processing equipment, most of which are classified as operating leases. For the years 1999, 1998 and 1997, rent expense for noncancelable, long-term leases was $31.2 million, $30.5 million and $25.7 million, respectively, and rent expense under cancelable, short-term leases was $14.6 million, $8.8 million and $6.3 million, respectively. At December 31, 1999, the aggregate minimum rental commitments under noncancelable, long-term operating leases were as follows:
Minimum Future Rental Payments - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 2000 $32,956 2001 31,091 2002 26,524 2003 20,520 2004 16,659 Thereafter 76,475 - --------------------------------------------------------------------------------
Advance to Aerial TDS has agreed to advance approximately $280 million to Aerial under the revolving credit agreement between TDS and a subsidiary of Aerial. At December 31, 1999, TDS had loaned a total of $37.8 million to Aerial. At the time of the merger, under certain circumstances, TDS is required to advance funds to a subsidiary of Aerial to bring the amount outstanding under the revolving credit agreement to $315 million. The $315 million outstanding will be repaid by VoiceStream one year from the date of the merger, or earlier at VoiceStream's option. Contingencies The Company is involved in legal proceedings before the Federal Communications Commission and various state and federal courts from time to time. Management does not believe that any of such proceedings should have a material adverse impact on the financial position, results of operations or cash flows of the Company Note 20 Business Segment Information TDS has two reportable segments - cellular telephone operations and local telephone operations. The Company conducts substantially all of its cellular operations through its 80.7%-owned subsidiary United States Cellular Corporation ("U.S. Cellular"). At December 31, 1999, U.S. Cellular provided cellular telephone service to 2,602,000 customers through 139 majority-owned and managed cellular systems in 25 states. The Company conducts its telephone operations through its wholly-owned subsidiary TDS Telecommunications Corporation ("TDS Telecom"). At December 31, 1999, TDS Telecom operated 104 telephone companies serving 571,700 access lines and two competitive local exchange carriers serving 74,100 access lines in 28 states. In September 1999, TDS approved a plan of merger between Aerial and VoiceStream. The results of operations and net assets of Aerial are reflected as discontinued operations in the consolidated financial statements. See Note 1--Discontinued Operations. Effective March 31, 1998, TDS contributed substantially all of the assets and certain, limited liabilities of American Paging, Inc. to a previously unrelated limited liability corporation for a 30% interest in that corporation. American Paging's revenues are netted against its expenses in the Consolidated Statements of Operations with the resulting operating loss reported as American Paging Operating (Loss). American Paging's revenues totaled $17.8 million and operating expenses totaled $29.2 million for the three month period ended March 31, 1998, and revenues totaled $94.4 million and operating expenses totaled $129.7 million for the year ended December 31, 1997. Beginning April 1, 1998, TDS followed the equity method of accounting for this investment. U.S. Cellular and TDS Telecom are billed for all services they receive from TDS, consisting primarily of information processing and general management services. Such billings are based on expenses specifically identified to U.S. Cellular and TDS Telecom and on allocations of common expenses. Management believes the method used to allocate common expenses is reasonable and that all expenses and costs applicable to U.S. Cellular and TDS Telecom are reflected in the accompanying business segment information on a basis which is representative of what they would have been if U.S. Cellular and TDS Telecom operated on a stand-alone basis. 40 Notes to Consolidated Financial Statements Financial data for the Company's business segments for each of the years ended December 31, 1999, 1998 and 1997 are as follows:
DISCONTINUED YEAR ENDED OR AT DECEMBER 31, 1999 U.S. CELLULAR TDS TELECOM ALL OTHER(1) OPERATIONS TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Operating revenues $ 1,417,181 $ 545,917 $ -- $ -- $ 1,963,098 Operating cash flow 485,814 237,901 -- -- 723,715 Depreciation and amortization expense 229,972 123,350 -- -- 353,322 Operating income 255,842 114,551 -- -- 370,393 Significant noncash items: Deferred taxes(2) 134,130 26,652 (8,560) -- 152,222 Investment income 30,374 1,369 (419) -- 31,324 Minority share of (income) loss (64,559) (568) 10 -- (65,117) Gain on sale of cellular and other investments 266,744 79,071 123 -- 345,938 Noncash interest expense 18,297 -- -- -- 18,297 Total Assets 3,331,590 1,472,556 334,537 237,145 5,375,828 Investment in equity method investees 122,522 26,271 113,566 -- 262,359 Capital expenditures $ 277,450 $ 122,181 $ -- $ -- $ 399,631 ====================================================================================================================================
DISCONTINUED YEAR ENDED OR AT DECEMBER 31, 1998 U.S. CELLULAR TDS TELECOM ALL OTHER(1) OPERATIONS TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Operating revenues $ 1,162,467 $ 488,104 $ -- $ -- $ 1,650,571 Operating cash flow 382,854 205,814 (3,510) -- 585,158 Depreciation and amortization expense 206,779 111,402 7,896 -- 326,077 Operating income (loss) 176,075 94,412 (11,406) -- 259,081 Significant noncash items: Deferred taxes, net(2) 107,201 17,471 (48,744) -- 75,928 Investment income 42,451 1,121 (2,798) -- 40,774 Minority share of income (47,122) (339) -- -- (47,461) Gain on sale of cellular and other investments 215,154 38,803 8,741 -- 262,698 Noncash interest expense 20,189 -- -- -- 20,189 Total Assets 3,011,237 1,352,554 180,008 498,805 5,042,604 Investment in equity method investees 132,133 28,987 125,024 -- 286,144 Capital expenditures $ 320,417 $ 143,126 $ -- $ -- $ 463,543 ====================================================================================================================================
DISCONTINUED YEAR ENDED OR AT DECEMBER 31, 1997 U.S. CELLULAR TDS TELECOM ALL OTHER(1) OPERATIONS TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Operating revenues $ 876,965 $ 437,624 $ -- $ -- $ 1,314,589 Operating cash flow 261,922 198,164 (3,267) -- 456,819 Depreciation and amortization expense 132,379 98,021 32,040 -- 262,440 Operating income (loss) 129,543 100,143 (35,307) -- 194,379 Significant noncash items: Deferred taxes, net(2) 24,077 2,691 (24,796) -- 1,972 Investment income 77,121 3,285 3,262 -- 83,668 Minority share of income (33,562) (1,155) (5) -- (34,722) Gain on sale of cellular and other investments 30,318 722 10,398 -- 41,438 Noncash interest expense 15,948 -- -- -- 15,948 Total Assets 2,508,916 1,244,174 235,010 573,857 4,561,957 Investment in equity method investees 197,786 42,167 25,501 -- 265,454 Capital expenditures $ 318,748 $ 151,460 $ 18,625 $ -- $ 488,833 ====================================================================================================================================
(1) CONSISTS OF THE TDS CORPORATE OPERATIONS, AMERICAN PAGING OPERATIONS AND ALL OTHER BUSINESSES NOT INCLUDED IN THE U.S. CELLULAR OR TDS TELECOM SEGMENTS. (2) TAX BENEFITS ASSOCIATED WITH NET OPERATING LOSS CARRYFORWARDS REMAIN AT THE TDS CORPORATE LEVEL. 41 Report of Independent Public Accountants To the Stockholders and Board of Directors of Telephone and Data Systems, Inc.: We have audited the accompanying consolidated balance sheets of Telephone and Data Systems, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Telephone and Data Systems, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen - ------------------- Arthur Andersen LLP Chicago, Illinois January 26, 2000 42 Consolidated Quarterly Income Information (Unaudited)
QUARTER ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 - ----------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 Operating Revenues $ 454,950 $ 497,259 $ 510,639 $ 500,250 Operating Income from Ongoing Operations 79,068 103,668 124,997 62,660 Gain on Sale of Cellular and Other Investments 11,551 328,341 6,046 -- Net Income Available to Common from Continuing Operations 32,684 216,368 52,620 11,331 From Operations 25,663 33,819 50,701 11,331 From Gains 7,021 182,549 1,919 -- Net Income Available to Common $ 10,050 $ 182,206 $ 25,227 $ 11,331 Weighted Average Shares Outstanding (000s) 61,279 61,399 61,451 61,614 Basic Earnings per Share from Continuing Operations $ .53 $ 3.52 $ .86 $ .18 Diluted Earnings per Share from Continuing Operations .52 3.47 .84 .18 From Operations .41 .54 .81 .18 From Gains .11 2.93 .03 -- Basic Earning per Share .16 2.97 .41 .18 Diluted Earnings per Share $ .16 $ 2.92 $ .40 $ .18 1998 Operating Revenues $ 359,323 $ 410,263 $ 435,370 $ 445,615 Operating Income from Ongoing Operations 55,187 72,955 85,690 56,655 Gain on Sale of Cellular and Other Investments 221,442 10,516 3,399 27,341 Net Income Available to Common from Continuing Operations 128,725 21,891 25,864 23,268 From Operations 16,241 16,768 23,963 8,214 From Gains 112,484 5,123 1,901 15,054 Net Income Available to Common $ 73,730 $ (14,095) $ 5,910 $ (2,788) Weighted Average Shares Outstanding (000s) 60,750 60,984 61,036 61,157 Basic Earnings per Share from Continuing Operations $ 2.12 $ .36 $ .42 $ .38 Diluted Earnings per Share from Continuing Operations 2.08 .35 .41 .37 From Operations .26 .27 .38 .13 From Gains 1.82 .08 .03 .24 Basic Earnings per Share 1.21 (.23) .10 (.05) Diluted Earnings per Share $ 1.19 $ (.23) $ .09 $ (.05) - ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON FROM CONTINUING OPERATIONS FOR 1999 AND 1998 INCLUDED SIGNIFICANT GAINS FROM THE SALES OF CELLULAR AND OTHER INVESTMENTS. THE TABLE ABOVE SUMMARIZES THE EFFECT OF THE GAINS ON NET INCOME AVAILABLE TO COMMON FROM CONTINUING OPERATIONS AND DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS. MANAGEMENT BELIEVES U.S. CELLULAR'S OPERATING RESULTS REFLECT SEASONALITY IN BOTH SERVICE REVENUES, WHICH TEND TO INCREASE MORE SLOWLY IN THE FIRST AND FOURTH QUARTERS, AND OPERATING EXPENSES, WHICH TEND TO BE HIGHER IN THE FOURTH QUARTER DUE TO INCREASED MARKETING ACTIVITIES AND CUSTOMER GROWTH. THIS SEASONALITY MAY CAUSE OPERATING INCOME TO VARY FROM QUARTER TO QUARTER. INFORMATION PRESENTED FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998, JUNE 30, 1999 AND 1998, AND DECEMBER 31, 1998 VARY FROM AMOUNTS PREVIOUSLY REPORTED ON FORM 10-Q OR FORM 10-K AS THESE PERIODS HAVE BEEN RESTATED TO REFLECT THE RESULTS OF OPERATIONS OF AERIAL AS DISCONTINUED OPERATIONS. 43 Shareowners' Information TDS Stock and Dividend Information TDS's Common Shares are listed on the American Stock Exchange ("AMEX") under the symbol "TDS" and in the newspapers as "TeleData." As of February 29, 2000, TDS Common Shares were held by 2,742 record owners and the Series A Common Shares were held by 56 record owners. TDS has paid cash dividends on Common Shares since 1974, and paid dividends of $.46 and $.44 per Common and Series A Common Share during 1999 and 1998, respectively. The Common Shares of United States Cellular Corporation, an 80.7%-owned subsidiary of TDS, are listed on the AMEX under the symbol "USM" and in the newspapers as "US Cellu." The Common Shares of Aerial Communications, Inc., an 82.1%-owned subsidiary of TDS are listed on the NASDAQ National Market under the symbol "AERL" and in the newspapers as "AerialComm." Market Price Per Common Share by Quarter TDS's Series A Common Shares and Preferred Shares are not actively traded and therefore, quotations are not reported for such securities. Dividends on TDS's Preferred Shares have been paid quarterly since the dates of issue. The high and low sales prices of the Common Shares on the AMEX as reported by the Dow Jones News Service are as follows:
1999 1st 2nd 3rd 4th - -------------------------------------------------------------------------------- High $58.00 73.50 89.25 136.87 Low $44.13 55.44 65.81 87.25 Dividends Paid $ .115 .115 .115 .115 - -------------------------------------------------------------------------------- 1998 1st 2nd 3rd 4th - -------------------------------------------------------------------------------- High $50.13 49.75 44.25 47.88 Low $43.19 38.25 30.94 30.63 Dividends Paid $ .11 .11 .11 .11 - --------------------------------------------------------------------------------
44 EX-21 8 EXHIBIT 21 Exhibit 21 TELEPHONE AND DATA SYSTEMS, INC. SUBSIDIARY AND AFFILIATED COMPANIES DECEMBER 31, 1999
STATE OF INCORPORATION ------------- U.S. CELLULAR U.S. CELLULAR CORPORATION DELAWARE APPLETON CELLULAR TELEPHONE COMPANY Partnership BANGOR CELLULAR TELEPHONE CO., L.P. Partnership CALIFORNIA RURAL SERVICE AREA #1, INC. CALIFORNIA CAROLINA CELLULAR, INC. NORTH CAROLINA CEDAR RAPIDS CELLULAR TELEPHONE, L.P. Partnership CELLULAR AMERICA, INC. PENNSYLVANIA CELLVEST, INC. DELAWARE CENTRAL FLORIDA CELLULAR TELEPHONE COMPANY, INC. FLORIDA CHARLOTTESVILLE MSA CELLULAR PARTNERSHIP Partnership COMMUNITY CELLULAR TELEPHONE COMPANY TEXAS CROOK COUNTY RSA LIMITED PARTNERSHIP Partnership DAVENPORT CELLULAR TELEPHONE COMPANY Partnership DAVENPORT CELLULAR TELEPHONE COMPANY, INC. DELAWARE DUBUQUE CELLULAR TELEPHONE, L.P. Partnership EASTERN NORTH CAROLINA CELLULAR JOINT VENTURE (GP) Partnership EAU CLAIRE MSA, INC. WISCONSIN FLORIDA RSA # 8, INC. DELAWARE GEORGIA RSA # 11, INC. GEORGIA GRAY BUTTE JOINT VENTURE Partnership GREEN BAY CELLTELCO PARTNERSHIP Partnership HARDY CELLULAR TELEPHONE COMPANY DELAWARE HBM, INC. DELAWARE HUMPHREY COUNTY CELLULAR, INC. DELAWARE ILLINOIS RSA # 3, INC. ILLINOIS INDIANA 8 SERVICE COMPANY DELAWARE INDIANA RSA # 4, INC. DELAWARE INDIANA RSA # 5, INC. INDIANA INDIANA RSA NO. 4 L.P. Partnership INDIANA RSA NO. 5 L.P. Partnership IOWA # 13, INC. DELAWARE IOWA RSA # 3, INC. DELAWARE IOWA RSA # 9, INC. DELAWARE IOWA RSA # 12, INC. DELAWARE JACKSONVILLE CELLULAR PARTNERSHIP Partnership JACKSONVILLE CELLULAR TELEPHONE CO. DELAWARE JANESVILLE CELLULAR TELEPHONE COMPANY, INC. DELAWARE JOPLIN CELLULAR TELEPHONE COMPANY, INC. DELAWARE JOPLIN CELLULAR TELEPHONE COMPANY, L.P. Partnership KANSAS # 15 LP Partnership KANSAS RSA # 15, INC. OHIO KENOSHA CELLULAR TELEPHONE, L.P. Partnership LACROSSE CELLULAR TELEPHONE COMPANY, INC. DELAWARE LEWISTON CELLTELLCO PARTNERSHIP Partnership MADISON CELLULAR TELEPHONE COMPANY Partnership MAINE RSA # 1, INC. MAINE MAINE RSA # 4, INC. MAINE MAINE RSA NO. 4 LIMITED PARTNERSHIP Partnership MANCHESTER-NASHUA CELLULAR TELEPHONE, L.P. Partnership MCDANIEL CELLULAR TELEPHONE COMPANY DELAWARE MEDFORD PAGING, INC. OREGON MINNESOTA INVCO OF RSA # 5, INC. DELAWARE MINNESOTA INVCO OF RSA # 7, INC. DELAWARE MINNESOTA INVCO OF RSA # 8, INC. DELAWARE MINNESOTA INVCO OF RSA # 9, INC. DELAWARE
TELEPHONE AND DATA SYSTEMS, INC. SUBSIDIARY AND AFFILIATED COMPANIES DECEMBER 31, 1999
STATE OF INCORPORATION ------------- MINNESOTA INVCO OF RSA # 10, INC. DELAWARE MINNESOTA INVCO OF RSA # 11, INC. DELAWARE MISSOURI # 15 RURAL CELLULAR, INC. MISSOURI MISSOURI RSA 11, INC. DELAWARE N.H. #1 RURAL CELLULAR, INC. NEW HAMPSHIRE NELSON-BALL GROUND CELLULAR TELEPHONE & SERVICES, INC. GEORGIA NORTH CAROLINA RSA # 4, INC. DELAWARE NORTH CAROLINA RSA # 6, INC. CALIFORNIA NORTH CAROLINA RSA # 9, INC. NORTH CAROLINA NORTH CAROLINA RSA 1 PARTNERSHIP Partnership OHIO STATE CELLULAR PHONE COMPANY, INC. FLORIDA OREGON RSA # 2, INC. OREGON OREGON RSA # 3, INC. OREGON OREGON RSA # 6, INC. OREGON OREGON RSA NO. 2 LIMITED PARTNERSHIP Partnership OREGON RSA NO. 3 LIMITED PARTNERSHIP Partnership PEACE VALLEY CELLULAR TELEPHONE COMPANY DELAWARE RACINE CELLULAR TELEPHONE COMPANY Partnership SHEBOYGAN CELLULAR TELEPHONE COMPANY, INC. DELAWARE SOUTH CANAAN CELLULAR TELEPHONE COMPANY PENNSYLVANIA ST. LAWRENCE SEAWAY RSA CELLULAR, LP Partnership TENNESSEE RSA # 3, INC. DELAWARE TENNESSEE RSA # 4 SUB 2, INC. TENNESSEE TEXAHOMA CELLULAR TELEPHONE COMPANY TEXAS TEXAHOMA CELLULAR, L.P. Partnership TEXAS # 20 RURAL CELLULAR, INC. TEXAS TEXAS INVCO OF RSA # 6, INC. DELAWARE TOWNSHIP CELLULAR TELEPHONE CO. DELAWARE TRI-CITIES PAGING, INC. WASHINGTON TRI-STATES CELLULAR COMMUNICATIONS, INC. MISSOURI TULSA GENERAL PARTNER, INC. DELAWARE UNITED STATES CELLULAR INVESTMENT COMPANY, INC. DELAWARE UNITED STATES CELLULAR INVESTMENT CO. OF ALLENTOWN PENNSYLVANIA UNITED STATES CELLULAR INVESTMENT COMPANY OF EAU CLAIRE WISCONSIN UNITED STATES CELLULAR INVESTMENT COMPANY OF FRESNO, INC. CALIFORNIA UNITED STATES CELLULAR INVESTMENT COMPANY OF GREEN BAY, INC. WISCONSIN UNITED STATES CELLULAR INVESTMENT COMPANY OF OKLAHOMA CITY OKLAHOMA UNITED STATES CELLULAR INVESTMENT COMPANY OF PORTSMOUTH, INC. NEW HAMPSHIRE UNITED STATES CELLULAR INVESTMENT COMPANY OF ROCKFORD DELAWARE UNITED STATES CELLULAR INVESTMENT COMPANY OF SANTA CRUZ, INC. CALIFORNIA UNITED STATES CELLULAR INVESTMENT COMPANY OF ST. CLOUD MINNESOTA UNITED STATES CELLULAR INVESTMENT CORPORATION OF LOS ANGELES INDIANA UNITED STATES CELLULAR OPERATING COMPANY, INC. DELAWARE UNITED STATES CELLULAR OPERATING COMPANY OF APPLETON, INC. INDIANA UNITED STATES CELLULAR OPERATING COMPANY OF BANGOR MAINE UNITED STATES CELLULAR OPERATING COMPANY OF BILOXI MISSISSIPPI UNITED STATES CELLULAR OPERATING COMPANY OF CEDAR RAPIDS DELAWARE UNITED STATES CELLULAR OPERATING COMPANY OF COLUMBIA MISSOURI UNITED STATES CELLULAR OPERATING COMPANY -- DES MOINES IOWA UNITED STATES CELLULAR OPERATING COMPANY OF DUBUQUE IOWA UNITED STATES CELLULAR OPERATING COMPANY OF FT. PIERCE FLORIDA UNITED STATES CELLULAR OPERATING COMPANY OF JOPLIN MISSOURI UNITED STATES CELLULAR OPERATING COMPANY OF KENOSHA DELAWARE UNITED STATES CELLULAR OPERATING COMPANY OF KNOXVILLE TENNESSEE UNITED STATES CELLULAR OPERATING COMPANY OF LACROSSE, INC. WISCONSIN UNITED STATES CELLULAR OPERATING COMPANY OF LEWISTON-AUBURN MAINE UNITED STATES CELLULAR OPERATING COMPANY OF MANCHESTER-NASHUA, INC. NEW HAMPSHIRE
TELEPHONE AND DATA SYSTEMS, INC. SUBSIDIARY AND AFFILIATED COMPANIES DECEMBER 31, 1999
STATE OF INCORPORATION ------------- UNITED STATES CELLULAR OPERATING COMPANY OF MEDFORD OREGON UNITED STATES CELLULAR OPERATING COMPANY OF RICHLAND WASHINGTON UNITED STATES CELLULAR OPERATING COMPANY OF TULSA, INC. OKLAHOMA UNITED STATES CELLULAR OPERATING COMPANY OF WATERLOO IOWA UNITED STATES CELLULAR OPERATING COMPANY OF WAUSAU, INC. WISCONSIN UNITED STATES CELLULAR OPERATING COMPANY OF YAKIMA WASHINGTON UNITED STATES CELLULAR TELEPHONE COMPANY (GREATER KNOXVILLE), L.P. Partnership UNITED STATES CELLULAR TELEPHONE COMPANY OF GREATER TULSA, L.L.C. OKLAHOMA UNIVERSAL CELLULAR FOR EAU CLAIRE MSA, INC. WISCONSIN USCC PAYROLL CORPORATION DELAWARE USCC REAL ESTATE CORPORATION DELAWARE USCIC OF AMARILLO, INC. DELAWARE USCIC OF BROWNSVILLE, INC. DELAWARE USCIC OF JACKSON, INC. DELAWARE USCIC OF MCALLEN, INC. DELAWARE USCIC OF NORTH CAROLINA RSA # 1, INC. DELAWARE USCIC OF OHIO RSA #9, INC. (f.k.a. Carry Phone, Inc.) DELAWARE USCOC OF CHARLOTTESVILLE, INC. VIRGINIA USCOC OF CORPUS CHRISTI, INC. TEXAS USCOC OF CUMBERLAND, INC. MARYLAND USCOC OF GREATER IOWA, INC PENNSYLVANIA USCOC OF HAWAII 3, INC. DELAWARE USCOC OF IDAHO RSA # 5, INC DELAWARE USCOC OF ILLINOIS RSA # 1, INC. VIRGINIA USCOC OF ILLINOIS RSA # 4, INC. ILLINOIS USCOC OF IOWA RSA # 1, INC. IOWA USCOC OF IOWA RSA # 16, INC. DELAWARE USCOC OF JACKSONVILLE, INC. NORTH CAROLINA USCOC OF JACK-WIL, INC. DELAWARE USCOC OF MISSOURI RSA # 13, INC. DELAWARE USCOC OF MISSOURI RSA # 5, INC. ILLINOIS USCOC OF NEW HAMPSHIRE RSA # 2, INC. DELAWARE USCOC OF NORTH CAROLINA RSA # 7, INC. NORTH CAROLINA USCOC OF OHIO RSA #7, INC. COLORADO USCOC OF OKLAHOMA RSA # 10, INC. OKLAHOMA USCOC OF OREGON RSA # 5, INC. DELAWARE USCOC OF PENNSYLVANIA RSA #10-B2, INC. DELAWARE USCOC OF PORTLAND, INC. MAINE USCOC OF ROCKFORD, INC. ILLINOIS USCOC OF SOUTH CAROLINA RSA # 4, INC. SOUTH CAROLINA USCOC OF TALLAHASSEE FLORIDA USCOC OF TEXAHOMA TEXAS USCOC OF VICTORIA, INC. TEXAS USCOC OF VIRGINIA RSA # 2, INC. VIRGINIA USCOC OF VIRGINIA RSA # 3, INC. VIRGINIA USCOC OF WASHINGTON 4, INC. DELAWARE USCOC OF WILMINGTON, INC. NORTH CAROLINA USCOC OF WISCONSIN RSA #7, INC. DELAWARE VERMONT RSA NO. 2-B2, INC. DELAWARE VICTORIA CELLULAR CORPORATION TEXAS VICTORIA CELLULAR PARTNERSHIP Partnership VIRGINIA RSA # 4, INC. VIRGINIA VIRGINIA RSA # 7, INC. VIRGINIA WARD BUTTE JOINT VENTURE Partnership WASHINGTON RSA # 5, INC. WASHINGTON WATERLOO / CEDAR FALLS CELLTELCO PARTNERSHIP Partnership WESTERN SUB-RSA LIMITED PARTNERSHIP Partnership WILMINGTON CELLULAR PARTNERSHIP Partnership WILMINGTON CELLULAR TELEPHONE CO. NORTH CAROLINA
TELEPHONE AND DATA SYSTEMS, INC. SUBSIDIARY AND AFFILIATED COMPANIES DECEMBER 31, 1999
STATE OF INCORPORATION ------------- YAKIMA MSA LIMITED PARTNERSHIP Partnership YAKIMA VALLEY PAGING LIMITED PARTNERSHIP Partnership TDS TELECOMMUNICATIONS TDS TELECOMMUNICATIONS CORPORATION DELAWARE INCUMBENT LOCAL EXCHANGE COMPANIES AMELIA TELEPHONE CORPORATION VIRGINIA ARCADIA TELEPHONE COMPANY OHIO ARIZONA TELEPHONE COMPANY ARIZONA ARVIG TELECOM, INC. MINNESOTA ARVIG TELEPHONE COMPANY MINNESOTA ASOTIN TELEPHONE COMPANY WASHINGTON BADGER TELECOM, INC. WISCONSIN BARNARDSVILLE TELEPHONE COMPANY NORTH CAROLINA BLACK EARTH TELEPHONE COMPANY, INC. WISCONSIN BLUE RIDGE TELEPHONE COMPANY GEORGIA BONDUEL TELEPHONE COMPANY WISCONSIN BRIDGEWATER TELEPHONE COMPANY MINNESOTA BURLINGTON, BRIGHTON & WHEATLAND TELEPHONE COMPANY WISCONSIN BUTLER TELEPHONE COMPANY, INC. ALABAMA CALHOUN CITY TELEPHONE COMPANY, INC. MISSISSIPPI CAMDEN TELEPHONE COMPANY INDIANA CAMDEN TELEPHONE AND TELEGRAPH COMPANY, INC. GEORGIA CENTRAL STATE TELEPHONE COMPANY WISCONSIN CHATHAM TELEPHONE COMPANY MICHIGAN CLEVELAND COUNTY TELEPHONE COMPANY, INC. ARKANSAS COMMUNICATIONS CORPORATION OF INDIANA INDIANA COMMUNICATIONS CORPORATION OF MICHIGAN MICHIGAN COMMUNICATIONS CORPORATION OF SOUTHERN INDIANA INDIANA CONCORD TELEPHONE EXCHANGE, INC. TENNESSEE CONTINENTAL TELEPHONE COMPANY OHIO DANUBE COMMUNICATIONS, INC. MINNESOTA DECATUR TELEPHONE COMPANY ARKANSAS DELTA COUNTY TELE-COMM, INC. COLORADO DEPOSIT TELEPHONE COMPANY NEW YORK EASTCOAST TELECOM, INC. WISCONSIN EDWARDS TELEPHONE COMPANY, INC. NEW YORK GRANTLAND TELECOM, INC. WISCONSIN HAMPDEN TELEPHONE COMPANY MAINE HAPPY VALLEY TELEPHONE COMPANY CALIFORNIA HARTLAND & ST. ALBANS TELEPHONE COMPANY MAINE HOME TELEPHONE COMPANY, INC. INDIANA HOME TELEPHONE COMPANY OREGON HOME TELEPHONE COMPANY OF PITTSBORO, INC. INDIANA HORNITOS TELEPHONE COMPANY CALIFORNIA HUMPHREYS COUNTY TELEPHONE COMPANY TENNESSEE ISLAND TELEPHONE COMPANY MICHIGAN KEARSARGE TELEPHONE COMPANY NEW HAMPSHIRE LESLIE COUNTY TELEPHONE COMPANY KENTUCKY LEWIS RIVER TELEPHONE COMPANY WASHINGTON LEWISPORT TELEPHONE COMPANY, INC. KENTUCKY LITTLE MIAMI COMMUNICATIONS CORPORATION OHIO LUDLOW TELEPHONE COMPANY VERMONT MAHANOY & MAHANTANGO TELEPHONE COMPANY PENNSYLVANIA MCCLELLANVILLE TELEPHONE COMPANY, INC. SOUTH CAROLINA
TELEPHONE AND DATA SYSTEMS, INC. SUBSIDIARY AND AFFILIATED COMPANIES DECEMBER 31, 1999
STATE OF INCORPORATION ------------- MCDANIEL TELEPHONE COMPANY DELAWARE MID-AMERICA TELEPHONE, INC. OKLAHOMA MID-STATE TELEPHONE COMPANY MINNESOTA MIDWAY TELEPHONE COMPANY WISCONSIN MOUNT VERNON TELEPHONE COMPANY WISCONSIN MYRTLE TELEPHONE COMPANY MISSISSIPPI NELSON BALLGROUND TELEPHONE COMPANY GEORGIA NEW CASTLE TELEPHONE COMPANY VIRGINIA NEW LONDON TELEPHONE COMPANY MISSOURI NORTHFIELD TELEPHONE COMPANY VERMONT NORWAY TELEPHONE COMPANY, INC. SOUTH CAROLINA OAKMAN TELEPHONE COMPANY, INC. ALABAMA OAKWOOD TELEPHONE COMPANY OHIO OKLAHOMA COMMUNICATION SYSTEMS, INC. OKLAHOMA ORCHARD FARM TELEPHONE COMPANY MISSOURI ORISKANY FALLS TELEPHONE CORPORATION NEW YORK PEOPLES TELEPHONE COMPANY ALABAMA PERKINSVILLE TELEPHONE COMPANY, INC. VERMONT PORT BYRON TELEPHONE COMPANY NEW YORK POTLATCH TELEPHONE COMPANY IDAHO QUINCY TELEPHONE COMPANY FLORIDA RIVERSIDE TELECOM, INC. WISCONSIN S & W TELEPHONE COMPANY, INC. INDIANA SALEM TELEPHONE COMPANY, INC. KENTUCKY SALUDA MOUNTAIN TELEPHONE COMPANY DELAWARE SCANDINAVIA TELEPHONE COMPANY WISCONSIN SERVICE TELEPHONE COMPANY, INC. NORTH CAROLINA SHIAWASSEE TELEPHONE COMPANY MICHIGAN SOMERSET TELEPHONE COMPANY MAINE SOUTHEAST MISSISSIPPI TELEPHONE COMPANY MISSISSIPPI SOUTHWESTERN TELEPHONE COMPANY ARIZONA ST STEPHEN TELEPHONE COMPANY SOUTH CAROLINA STOCKBRIDGE & SHERWOOD TELEPHONE COMPANY, INC. WISCONSIN STOUTLAND TELEPHONE COMPANY MISSOURI STRASBURG TELEPHONE COMPANY COLORADO SUGAR VALLEY TELEPHONE COMPANY PENNSYLVANIA TELLICO TELEPHONE COMPANY, INC. TENNESSEE TENNESSEE TELEPHONE COMPANY TENNESSEE TENNEY TELEPHONE COMPANY WISCONSIN THE ISLAND TELEPHONE COMPANY MAINE THE MERCHANTS & FARMERS TELEPHONE COMPANY INDIANA TIPTON TELEPHONE COMPANY, INC. INDIANA TOWNSHIP TELEPHONE COMPANY DELAWARE TRI-COUNTY TELEPHONE COMPANY, INC. INDIANA TROY TELEPHONE COMPANY, INC. IDAHO UTELCO, INC. WISCONSIN VANLUE TELEPHONE COMPANY OHIO VERNON TELEPHONE COMPANY NEW YORK VIRGINIA TELEPHONE COMPANY VIRGINIA WARREN TELEPHONE COMPANY MAINE WAUNAKEE TELEPHONE COMPANY, INC. WISCONSIN WEST PENOBSCOT TELEPHONE & TELEGRAPH COMPANY MAINE WILLISTON TELEPHONE COMPANY SOUTH CAROLINA WINSTED TELEPHONE COMPANY MINNESOTA WINTERHAVEN TELEPHONE COMPANY CALIFORNIA WOLVERINE TELEPHONE COMPANY MICHIGAN WYANDOTTE TELEPHONE CO. OKLAHOMA
TELEPHONE AND DATA SYSTEMS, INC. SUBSIDIARY AND AFFILIATED COMPANIES DECEMBER 31, 1999
STATE OF INCORPORATION ------------- OTHER COMPANIES ARVIG CELLULAR, INC. MINNESOTA CAMDEN CELLULAR, INC. DELAWARE DELTA COUNTY CATV, INC. COLORADO GEORGIA RSA # 12 PARTNERSHIP GEORGIA GLENNA-MARIE CORPORATION INDIANA METROPLEX COMMUNICATIONS CORPORATION WASHINGTON METROPLEX CABLE INC. WASHINGTON PEQUOT LAKES CABLE COMPANY MINNESOTA TDS DATACOM, INC. DELAWARE TDS METROCOM, INC. DELAWARE TDS TELECOM SERVICE CORPORATION IOWA TRI-COUNTY COMMUNICATIONS CORPORATION INDIANA TRI-COUNTY LONG DISTANCE INDIANA U.S. LINK, INC. MINNESOTA AERIAL COMMUNICATIONS AERIAL COMMUNICATIONS, INC. DELAWARE AERIAL OPERATING COMPANY, INC. DELAWARE APT COLUMBUS, INC. DELAWARE APT HOUSTON, INC. DELAWARE APT KANSAS CITY, INC. DELAWARE APT MINNEAPOLIS, INC. DELAWARE APT TAMPA / ORLANDO, INC. DELAWARE APT PITTSBURGH GENERAL PARTNER, INC. PENNSYLVANIA APT PITTSBURGH LIMITED PARTNERSHIP Partnership TDS GROUP AFFILIATE FUND DELAWARE COMMVEST, INC. DELAWARE NATIONAL TELEPHONE & TELEGRAPH COMPANY CALIFORNIA RUDEVCO, INC. CALIFORNIA SUTTLE PRESS INC. WISCONSIN TDS CABLE COMMUNICATIONS CORP. IOWA TDS CAPITAL TRUST I DELAWARE TDS CAPITAL TRUST III DELAWARE TDS CAPITAL TRUST III DELAWARE TDS REAL ESTATE INVESTMENT CORPORATION WISCONSIN TELECOM TECHNOLOGIES FUND LLC (TTF) VOLUTEER TV CABLE CO. TENNESSEE PAGING API MERGER CORP. DELAWARE AMERICAN PAGING, INC. (OF CALIFORNIA) CALIFORNIA PAGING HOLDING CO. DELAWARE
EX-23 9 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of Telephone and Data Systems, Inc. of our report dated January 26, 2000 on the consolidated financial statements of Telephone and Data Systems, Inc. and Subsidiaries, (the "Company") included in the Company's 1999 Annual Report to Shareholders, to the inclusion in this Form 10-K of our report dated January 26, 2000 on the financial statement schedules of the Company and to the incorporation by reference of such reports into the Company's previously filed S-8 Registration Statements, File No. 33-1192, File No. 33-35172, File No. 33-57257, File No. 33-64035, File No. 333-01041, File No. 333-23947, File No. 333-58121, File No. 333-58127, File No. 333-76453 and File No. 333-58121, and into the Company's previously filed S-3 Registration Statements, File No. 33-8564, File No. 33-8857, File No. 33-68456, File No. 33-59435 and File No. 333-38355, and into the Company's previously filed S-4 Registration Statements, File No. 33-45570 and File No. 33-64293. ARTHUR ANDERSEN LLP Chicago, Illinois March 29, 2000 EX-27.1 10 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF TELEPHONE AND DATA SYSTEMS, INC. AS OF DECEMBER 31, 1999, AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 111,010 843,280 327,550 10,525 39,880 508,008 3,373,209 1,227,320 5,375,828 369,672 1,279,877 0 9,005 624 2,482,477 5,375,828 0 1,963,098 0 1,592,705 (296,728) 0 124,794 542,327 228,176 314,151 (84,190) 0 0 229,961 3.72 3.67
EX-27.2 11 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF TELEPHONE AND DATA SYSTEMS INC. AS OF MARCH 31, 1999 AND JUNE 30, 1999, AND FOR THE PERIODS THEN ENDED RESTATED TO REFLECT AERIAL COMMUNICATIONS, INC. AS DISCONTINUED OPERATION, AND IS QUALFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS DEC-31-1999 DEC-31-1999 JAN-01-1999 JAN-01-1999 MAR-31-1999 JUN-30-1999 48,606 79,359 509,912 524,584 250,739 331,145 7,221 7,962 21,778 33,032 344,703 464,842 3,163,142 3,231,846 1,115,220 1,164,665 5,141,688 5,307,223 547,080 555,457 1,277,222 1,277,838 0 0 24,029 23,025 619 621 2,311,788 2,353,280 5,141,688 5,307,223 0 0 454,950 952,209 0 0 375,882 769,473 (10,546) (300,234) 0 0 31,766 63,645 57,848 419,325 24,814 169,586 33,034 249,739 (22,634) (56,796) 0 0 0 0 10,400 192,943 0.16 3.13 0.16 3.08 THE AMOUNTS ABOVE HAVE BEEN RESTATED TO REFLECT AERIAL COMMUNICATIONS, INC. AS A DISCONTINUED OPEARTION.
EX-27.3 12 EXHIBIT 27.3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF TELEPHONE AND DATA SYSTEMS, INC. AS OF MARCH 31, 1998, JUNE 30, 1998, SEPTEMBER 30, 1999 AND DECEMBER 31, 1998, AND FOR THE PERIODS THEN ENDED RESTATED TO REFLECT AERIAL COMMUNICATIONS, INC. AS A DISCONTINUED OPERATION, AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998 JAN-01-1998 JAN-01-1998 JAN-01-1998 JAN-01-1998 MAR-31-1998 JUN-30-1998 SEP-30-1998 DEC-31-1998 65,670 90,009 77,078 45,139 248,482 308,395 299,161 382,706 218,351 242,058 259,779 263,565 7,419 5,195 6,060 6,732 20,949 20,419 22,840 25,243 339,312 385,092 387,706 356,743 2,828,659 2,859,877 2,959,605 3,078,053 942,991 977,550 1,032,312 1,057,961 4,770,458 4,892,097 4,942,234 5,042,604 697,875 801,222 496,969 548,922 1,072,479 1,072,449 1,273,942 1,275,086 0 0 0 0 29,116 27,437 27,016 25,985 61,673 618 618 619 1,996,491 2,070,679 2,212,284 2,237,289 4,770,458 4,892,097 4,942,234 5,042,604 0 0 0 0 359,323 769,586 1,204,956 1,650,571 0 0 0 0 304,136 641,444 991,124 1,380,084 (192,624) (193,706) (191,105) (207,845) 0 0 0 0 32,440 65,664 99,578 131,875 215,371 256,184 305,359 346,457 86,206 104,710 127,603 145,058 129,165 151,474 177,756 201,399 (54,995) (90,981) (110,935) (136,991) 0 0 0 0 0 0 0 0 74,170 60,493 66,821 64,408 1.21 0.98 1.08 1.03 1.19 0.96 1.05 1.01 THE AMOUNTS ABOVE HAVE BEEN RESTATED TO REFLECT AERIAL COMMUNICATIONS, INC. AS A DISCONTINUED OPERATIONS.
EX-27.4 13 EXHIBIT 27.4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF TELEPHONE AND DATA SYSTEMS, INC. AS OF DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED RESTATED TO REFLECT AERIAL COMMUNICATIONS, INC. AS A DISCONTINUED OPERATION, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 45,996 1,621 230,933 7,850 29,178 350,297 2,848,163 955,607 4,561,957 799,255 1,067,778 0 32,467 61,379 1,906,740 4,561,957 0 1,314,589 0 1,084,903 (50,997) 0 93,533 187,150 87,405 99,745 (109,294) 0 0 (9,549) (0.19) (0.21) THE AMOUNTS ABOVE HAVE BEEN RESTATED TO REFLECT AERIAL COMMUNICATIONS, INC. AS A DISCONTINUED OPERATIONS.
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