-----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, VrU1z25zWbc+ASC/hhMnRBcTqfgDOxpoAQR2VlODkw/IoOOp9cSP8j5LtgjvScK5 CifK9KxKElN8E1wU9TrVFw== 0001051512-99-000028.txt : 19991115 0001051512-99-000028.hdr.sgml : 19991115 ACCESSION NUMBER: 0001051512-99-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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-Q SEC ACT: SEC FILE NUMBER: 001-14157 FILM NUMBER: 99750232 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-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------ ------------------------ Commission File Number 001-14157 - -------------------------------------------------------------------------------- TELEPHONE AND DATA SYSTEMS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-2669023 - ------------------------------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 30 North LaSalle Street, Chicago, Illinois 60602 ---------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 630-1900 Not Applicable ----------------------------------------- (Former address of principal executive offices) (Zip Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 29, 1999 - --------------------------------------- ------------------------------- Common Shares, $.01 par value 54,799,542 Shares Series A Common Shares, $.01 par value 6,956,464 Shares - -------------------------------------------------------------------------------- TELEPHONE AND DATA SYSTEMS, INC. -------------------------------- 3rd QUARTER REPORT ON FORM 10-Q ------------------------------- INDEX ----- Page No. -------- Part I. Financial Information Management's Discussion and Analysis of Results of Operations and Financial Condition 2-19 Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 1999 and 1998 20 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1999 and 1998 21 Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 22-23 Notes to Consolidated Financial Statements 24-32 Part II. Other Information 33 Signatures 34 PART I. FINANCIAL INFORMATION ----------------------------- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS ------------------------------------------------------------- AND FINANCIAL CONDITION ----------------------- Telephone and Data Systems, Inc. ("TDS" or the "Company") is a diversified telecommunications company which provides high-quality telecommunications services to 3.1 million cellular telephone and telephone customers. TDS's long-term business development strategy is to expand its existing operations through internal growth and acquisitions, and to explore and develop telecommunications businesses that management believes utilize TDS's expertise in customer-based telecommunications. The Company conducts substantially all of its cellular telephone operations through its 80.9%-owned subsidiary, United States Cellular Corporation ("U.S. Cellular") and its telephone operations through its wholly-owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom"). The Company continues to operate its personal communications service ("PCS") operations through its 82.1%-owned subsidiary, Aerial Communications Inc. ("Aerial"), pending its merger with VoiceStream Wireless Corporation ("VoiceStream") as discussed below. Merger of Aerial Communications, Inc. On September 17, 1999, the Board of Directors of TDS decided not to pursue a spin-off of Aerial and approved a plan of merger between Aerial and VoiceStream. As a result of the board's approval of the plan, the consolidated financial statements and supplemental data of TDS have been adjusted to reflect the results of operations and net assets of Aerial as discontinued operations in accordance with generally accepted accounting principles. Financial statements for prior periods have been reclassified to conform to current year presentation. See "Discontinued Operations." RESULTS OF OPERATIONS - --------------------- Nine Months Ended 9/30/99 Compared to Nine Months Ended 9/30/98 - --------------------------------------------------------------- Operating Revenues increased 21% ($257.9 million) during the first nine months of 1999 primarily as a result of a 19% increase in customers served and an increase in cellular roaming activity. U.S. Cellular's operating revenues increased 25% ($210.9 million) as customers served increased by 435,000, or 22%, since September 30, 1998, to 2,453,000 and as roaming revenue increased by 38% in 1999. TDS Telecom operating revenues increased 13% ($47.0 million) as total access lines increased by 66,200, or 12%, since September 30, 1998 to 633,800. Operating Expenses rose 17% ($164.0 million) in the first nine months of 1999 reflecting growth in operations. U.S. Cellular's operating expenses increased 19% ($136.6 million) and TDS Telecom's expenses increased 10% ($27.4 million). Operating Income increased 52% to $307.7 million in the first nine months of 1999 from $202.4 2 million in 1998. U.S. Cellular's operating income increased 51% to $220.1 million in the first nine months of 1999 and its operating income margin, as a percentage of service revenues, increased to 21.5% in 1999 from 17.8% in 1998. TDS Telecom's operating income increased 29% to $87.6 million in the first nine months of 1999 and its operating margin increased to 21.8% in 1999 from 19.1% in 1998.
Nine Months Ended September 30, ---------------------------------- 1999 1998 Change --------- --------- --------- (Dollars in thousands) Operating Income from Ongoing Operations U.S. Cellular $ 220,126 $ 145,807 $ 74,319 TDS Telecom 87,607 68,025 19,582 --------- --------- --------- 307,733 213,832 93,901 American Paging Operating (Loss) -- (11,406) 11,406 --------- --------- --------- Operating Income $ 307,733 $ 202,426 $ 105,307 ========= ========= =========
TDS contributed substantially all of the assets and certain limited liabilities of American Paging, Inc. ("American Paging") to a previously unrelated limited liability corporation for a 30% interest in that corporation effective March 31, 1998. American Paging's revenues were netted against its expenses with the resulting operating loss reported as American Paging Operating (Loss). American Paging's revenues totaled $17.8 million and operating expenses totaled $29.2 million for the three months ended March 31, 1998. Beginning April 1, 1998, TDS followed the equity method of accounting for this investment and reported these results as a component of Investment Income. Investment and Other Income (Expense) totaled $300.4 million in 1999 and $202.5 million in 1998. Gain on Sale of Cellular and Other Investments totaled $345.9 million in the first nine months of 1999 and $235.4 million in the first nine months of 1998. TDS recognized a $327.1 million gain in the second quarter of 1999 on the difference between its historical basis in its investment in AirTouch Communications, Inc. ("AirTouch") common shares and the value of Vodafone AirTouch plc American Depository Receipts and cash received in the merger of AirTouch and Vodafone Group plc. The AirTouch common shares were received in 1998 as a result of the sale of certain minority cellular interests to AirTouch resulting in a $198.6 million gain. The remaining gains in 1999 and 1998 resulted when the Company sold or traded certain non-strategic minority cellular interests and other investments. Investment Income, net, the Company's share of income from primarily cellular investments in which the Company has a minority interest and follows the equity method of accounting decreased 17% ($3.9 million) in the first nine months of 1999. The decrease was primarily due to decreased operating results of certain minority cellular interests, the sale of certain minority cellular interests in the first quarter of 1998 and increased amortization related to the paging interest, offset somewhat by TDS's $7.8 million share of a one-time gain reported by an equity-method investment in the third quarter of 1999. Investment income is net of amortization relating to these minority interests. 3 Minority Share of Income includes the minority public shareholders' share of U.S. Cellular's net income, and the minority shareholders' or partners' share of U.S. Cellular's and TDS Telecom's subsidiaries' and certain other TDS subsidiaries' net income or loss. The increase in minority share of income is primarily due to the increase in U.S. Cellular's net income and the resulting minority public shareholders' portion of such income.
Nine Months Ended September 30, --------------------------------- 1999 1998 Change --------- --------- --------- (Dollars in thousands) Minority Share of Income U.S. Cellular Minority Public Shareholders' $(53,516) $(37,476) $(16,040) Minority Shareholders' or Partners' (6,156) (4,401) (1,755) --------- --------- --------- (59,672) (41,877) (17,795) Telephone Subsidiaries and Other (510) (506) (4) --------- --------- --------- $(60,182) $(42,383) $(17,799) ========= ========= =========
Interest Expense decreased 7% ($5.9 million) in the first nine months of 1999. The decline in interest expense is primarily due to reduced short-term debt balances, offset somewhat by an increase in long-term debt. Minority Interest in Income of Subsidiary Trust (Trust Preferred Securities Distributions) increased 8% ($1.3 million) in the first nine months of 1999. The increase reflects a full three quarters of distributions on the $150 million of additional securities issued in February 1998. Income Tax Expense increased 65% ($82.9 million) in 1999 primarily due to the increased pretax income as a result of improved operations and the increase in gains recorded in 1999. 4 Net Income From Continuing Operations totaled $302.7 million, or $4.82 diluted earnings per share, in the first nine months of 1999, compared to $177.8 million, or $2.84 diluted earnings per share, in the first nine months of 1998. The increase in net income from continuing operations and earnings per share reflects improved operating results as well as significant gains from the sale of cellular and other investments. A summary of net income available to common and diluted earnings per share from continuing operations and gains is shown below.
Nine Months Ended September 30, -------------------------- 1999 1998 ----------- ----------- (Dollars in thousands, except per share amounts) Net Income From Continuing Operations Operations $ 111,186 $ 58,247 Gains 191,489 119,509 ----------- ----------- $ 302,675 $ 177,756 =========== =========== Diluted Earnings Per Share From Continuing Operations Operations $ 1.75 $ .91 Gains 3.07 1.93 ----------- ----------- $ 4.82 $ 2.84 =========== ===========
Loss From Discontinued Operations decreased 24% to $84.2 million, or $1.35 per diluted share in the first nine months of 1999 from $110.9 million, or $1.79 per diluted share in the first nine months of 1998. Losses of $5.6 million subsequent to September 17, 1999 have been deferred and will be offset against the expected gain upon closing of the merger. Net Income Available to Common totaled $217.5 million, or $3.47 diluted earnings per share, in the first nine months of 1999, compared to $65.5 million, or $1.05 diluted earnings per share, in the first nine months of 1998. 5 U.S. CELLULAR OPERATIONS TDS provides cellular telephone service through United States Cellular Corporation ("U.S. Cellular"), an 80.9%-owned subsidiary. U.S. Cellular owns, manages and invests in cellular markets throughout the United States. Rapid growth in the customer base is a primary reason for the growth in U.S. Cellular's results of operations. The number of customers served increased by 435,000, or 22%, since September 30, 1998, to 2,453,000.
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ----------------------------- 1999 1998 1999 1998 ------------- ------------ ------------ ------------ (Dollars in thousands) Operating Revenue Local retail $ 241,667 $ 200,885 $ 689,672 $ 569,192 Inbound roaming 91,713 71,880 241,790 174,761 Long-distance and other 26,760 31,156 92,395 77,243 ------------- ------------- ------------ ------------ Service Revenue 360,140 303,921 1,023,857 821,196 Equipment sales 13,061 10,026 36,281 28,016 ------------- ------------- ------------ ------------ 373,201 313,947 1,060,138 849,212 ------------- ------------- ------------ ------------ Operating Expenses System operations 44,807 53,817 165,139 143,127 Marketing and selling 66,848 55,546 188,533 156,875 Cost of equipment sold 27,915 22,776 81,015 63,881 General and administrative 80,627 67,265 239,500 191,785 Depreciation 47,031 40,795 135,332 117,593 Amortization 10,413 11,233 30,493 30,144 ------------- ------------- ------------ ------------ 277,641 251,432 840,012 703,405 ------------- ------------- ------------ ------------ Operating Income $ 95,560 $ 62,515 $ 220,126 $ 145,807 ============= ============= ============ ============
Operating revenue increased 25% ($210.9 million) in the first nine months of 1999. Total average monthly service revenue per customer increased less than 1% ($.19) to $49.06 in the first nine months of 1999 from $48.87 in 1998. The increase in average monthly service revenue per customer resulted from increases in minutes of use on U.S. Cellular's systems. Substantial increases in inbound roaming minutes of use were partially offset by a 24% decrease in revenue per minute of use, resulting in an 11% increase in average monthly roaming revenue per customer. However, the increase in average monthly local retail minutes of use was more than offset by the decline in revenue per minute of use, resulting in a 2% decrease in monthly local retail revenue per customer. Average monthly service revenue per customer is expected to decline for the full year of 1999 compared to 1998, despite the slight increase through nine months of 1999, as local retail and inbound roaming revenue per minute of use continue to decline, growth in inbound roaming minutes of use slows and U.S. Cellular further penetrates the consumer market. Local retail revenue increased 21% ($120.5 million) in the first nine months of 1999 due primarily to the 22% customer growth. Average local minutes of use per retail customer increased 11% to 115 in 1999 from 104 in 1998, while average local retail revenue per minute declined by 12% to $.29 in 1999 from $.33 in 1998. U.S. Cellular's use of pricing and other incentive programs in order to stimulate overall usage, and competitive pressures resulted in a lower average revenue per minute of use. Average monthly local retail revenue per customer declined 2% ($.83) to $33.04 in 1999 from $33.87 in 1998. 6 Inbound roaming revenue (charges to customers of other systems who use U.S. Cellular's cellular systems when roaming) increased 38% ($67.0 million) in the first nine months of 1999. Roaming minutes of use increased substantially in 1999, while average inbound roaming revenue per minute declined by 24% in 1999 reflecting the downward industry-wide trend in negotiated rates. Both the increase in minutes of use and the decrease in revenue per minute of use were significantly affected by certain "one rate" programs offered by other wireless companies beginning in the second half of 1998. Wireless customers who sign up for these programs are given price incentives to roam in other markets, including U.S. Cellular's markets, thus driving an increase in U.S. Cellular's inbound roaming minutes. The increase in inbound roaming minutes of use is expected to be slower in the fourth quarter of 1999 and in 2000 as the effect of "one rate" programs becomes present in both periods of comparison. Average monthly inbound roaming revenue per customer increased 11% ($1.18) to $11.58 in 1999 compared to $10.40 in 1998. The increase in average monthly inbound roaming revenue per U.S. Cellular customer is attributable to a larger increase in inbound roaming revenue than in the U.S. Cellular customer base. Long-distance and other revenue increased 20% ($15.2 million) in the first nine months of 1999 as the volume of long-distance calls billed by U.S. Cellular increased, primarily from inbound roamers using U.S. Cellular's systems to make long-distance calls. Growth in long-distance revenue was slowed by price reductions primarily related to long-distance charges on roaming minutes of use. These reductions, similar to the price reductions on roaming airtime charges, are a continuation of the industry trend toward reduced per minute prices. The price reductions also reduced the growth in the outbound roaming expense component of system operations expense by approximately the same amount, resulting in no material effect on U.S. Cellular's operating cash flow or operating income. Average monthly long-distance and other revenue per customer decreased 4% ($.17) to $4.43 in 1999 compared to $4.60 in 1998. Operating expenses increased 19% ($136.6 million) during the first nine months of 1999. Costs to provide service (system operations expenses) as a percent of service revenue were 16.1% in 1999 and 17.4% in 1998. System operations expenses include customer usage expenses and maintenance, utility and cell site expenses. Customer usage expenses increased 13% ($12.8 million) and consumed 10.7% of service revenues in 1999 and 11.8% in 1998. The increase in customer usage expense was primarily due to the $11.2 million increase in costs related to the increase in average monthly local retail minutes of use per customer and the substantial increase in inbound roaming minutes of use. Net outbound roaming usage expense increased $1.3 million reflecting growth in minutes used by U.S. Cellular's customers on other systems, offset by lower costs per roaming minute of use. These lower costs are related to the lower roaming prices in the industry discussed previously. Maintenance, utility and cell site expenses increased 20% ($9.2 million) and consumed 5.4% of service revenues in 1999 and 5.7% in 1998. The number of cell sites operated increased to 2,235 in 1999 from 1,958 in 1998. Costs to expand the customer base consist of marketing and selling expenses and the cost of equipment sold. Selling and marketing expenses increased 20% ($31.7 million) in the first nine months of 1999 while cost of equipment sold increased 27% ($17.1 million). These expenses, less equipment sales revenue, represent the cost to acquire a new customer. Equipment sales revenue increased 29% ($8.3 million) in the first nine months of 1999. Cost per gross customer addition increased to $343 in 1999 from $314 in 1998 while gross customer activations increased to 681,000 in 1999 from 614,000 in 1998. The increase in cost per gross customer addition was primarily driven by increased commissions, and additional advertising expenses incurred to promote the U.S. Cellular brand name and to distinguish its service offerings from those of its competitors. Also 7 contributing was an increase in equipment sales losses primarily driven by the sale of more dual-mode phones, which on average generate greater equipment losses than the sale of analog phones. The increase in sales of dual-mode phones is related to U.S. Cellular's ongoing conversion of its systems to digital coverage, which enables U.S. Cellular to offer its customers more features, better clarity and increased roaming capabilities. General and administrative expenses increased 25% ($47.7 million) and consumed 23.4% of service revenues in 1999 and 1998. The overall increase in administrative expenses reflects the growing customer base in existing markets and an expansion of local office and corporate staff necessitated by such growth. U.S. Cellular also incurred additional costs in 1999 related to its communications centers, which were created to centralize certain customer service functions; the conversion to a new billing system; and providing dual-mode phone units to customers who migrated from analog to digital rate plans. Depreciation and amortization expense increased 12% ($18.1 million) and consumed 16.2% of service revenues in 1999 and 18.0% in 1998. Depreciation expense increased 15% ($17.7 million) in 1999 primarily due to the 17% increase in average fixed assets since September 30, 1998. Beginning October 1, 1999, capitalized development costs related to U.S. Cellular's new billing and information system, totaling approximately $118 million, will be amortized over a period of seven years. Operating income increased 51% ($74.3 million) to $220.1 million in the first nine months of 1999. The improvement was primarily driven by the substantial growth in customers and revenue. Operating margin, as a percent of service revenue, improved to 21.5% in 1999 compared to 17.8% in 1998. Although service revenues increased 25%, customers increased by 22% and average monthly revenue per customer increased by less than 1% in the first nine months of 1999, management does not expect service revenues to continue to grow faster than the customer base for the remainder of 1999 and in 2000. Management continues to believe seasonal trends exist in both service revenue, which tend to increase more slowly in the first and fourth quarters, and operating expenses which tend to be higher in the fourth quarter due to increased marketing activities and customer growth, which may cause operating income to vary from quarter to quarter. Additionally, competitors licensed to provide PCS services have initiated service in certain of U.S. Cellular's markets over the past three years. U.S. Cellular expects PCS operators to continue deployment of PCS in portions of all of its market clusters throughout 1999 and 2000. U.S. Cellular has increased its advertising to promote its brand and to distinguish its service from other wireless communications providers. U.S. Cellular's management continues to monitor other wireless communications providers' strategies to determine how this additional competition is affecting U.S. Cellular's results. Management anticipates that customer growth will be lower in the future, primarily as a result of the increase in the number of competitors in U.S. Cellular's markets. 8 TDS TELECOM OPERATIONS TDS operates its landline telephone business through TDS Telecommunications Corporation ("TDS Telecom"), a wholly-owned subsidiary. Total access lines served by TDS Telecom increased by 66,200, or 12%, since September 30, 1998 to 633,800. TDS Telecom's 104 incumbent local exchange ("ILEC") subsidiaries served 570,800 access lines at September 30, 1999, a 5% increase over the 543,200 access lines at September 30, 1998. TDS Telecom's competitive local exchange ("CLEC") subsidiaries served 63,000 access lines at September 30, 1999 compared to 24,400 access lines at September 30, 1998. TDS Telecom began providing services as a CLEC in the first quarter of 1998. TDS Telecom plans to slowly expand its CLEC operations into certain second and third-tier cities which are geographically proximate to existing TDS Telecom ILEC and CLEC areas.
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (Dollars in thousands) Operating Revenue ILEC Revenue Local service $ 38,623 $ 34,828 $ 113,212 $ 100,949 Network access and long-distance 65,732 62,406 199,905 187,423 Miscellaneous 19,142 17,314 52,206 49,411 ------------ ------------ ------------ ------------ Total ILEC Revenue 123,497 114,548 365,323 337,783 CLEC Revenue 14,423 7,714 38,741 20,000 Intercompany Revenue (482) (839) (1,354) (2,039) ------------ ------------ ------------ ------------ Total Operating Revenue 137,438 121,423 402,710 355,744 ------------ ------------ ------------ ------------ Operating Expenses ILEC Expenses Network operations 25,409 23,165 71,338 67,451 Depreciation and Amortization 29,394 27,959 87,761 81,312 Customer operations 20,199 18,151 59,271 54,834 Corporate operations 17,590 19,505 53,356 59,589 ------------ ------------ ------------ ------------ Total ILEC Expenses 92,592 88,780 271,726 263,186 CLEC Expenses 15,891 10,307 44,731 26,572 Intercompany Expenses (482) (839) (1,354) (2,039) ------------ ------------ ------------ ------------ Total Operating Expenses 108,001 98,248 315,103 287,719 ------------ ------------ ------------ ------------ Operating Income $ 29,437 $ 23,175 $ 87,607 $ 68,025 ============ ============ ============ ============
Operating revenue increased 13% ($47.0 million) in the first nine months of 1999 reflecting primarily customer growth. Revenue from ILEC operations increased 8% ($27.5 million) in the first nine months of 1999. Average monthly revenue per access line increased 3% ($1.95) to $72.55 in the first nine months of 1999 from $70.60 in the first nine months of 1998. Local service revenue increased 12% ($12.3 million) during 1999. Access line growth of 5% increased revenues by $5.0 million while the sale of custom-calling and advanced features increased revenues by $4.3 million. Rate increases pushed up revenue by $2.9 million. Average monthly local service revenue per access line was $22.48 in 9 1999 and $21.10 in 1998. Network access and long-distance revenue increased 7% ($12.5 million) during 1999. Revenue generated from access minute growth due to increased network usage increased $8.9 million in 1999. Compensation from state and national revenue pools due to increased costs of providing network access added $4.0 million to revenues. Average monthly network access and long-distance revenue per access line was $39.70 in 1999 and $39.17 in 1998. Miscellaneous revenue increased 6% ($2.8 million) during 1999. Average monthly miscellaneous revenue per access line was $10.37 in 1999 and $10.33 in 1998. Revenue from CLEC operations increased 94% ($18.7 million) in the first nine months of 1999 as access lines served increased to 63,000 at September 30, 1999 from 24,400 at September 30, 1998. Operating expenses increased 10% ($27.4 million) during 1999 due to growth in ILEC operations and the development of CLEC operations. Expenses from ILEC operations increased by 3% ($8.5 million) in the first nine months of 1999. The costs to provide service to customers increased 6% ($3.9 million), primarily for increased wages and benefits expenses, and consumed 19.5% of ILEC revenues in 1999 and 20.0% in 1998. Costs to serve customers increased 8% ($4.4 million) and consumed 16.2% of ILEC revenues in 1999 and 1998. Corporate expenses decreased 10% ($6.2 million) primarily due to improved efficiencies and cost controls, and consumed 14.6% of ILEC revenues in 1999 and 17.6% in 1998. Depreciation and amortization increased 8% ($6.4 million), primarily due to increased investment in facilities, and consumed 24.0% of ILEC revenues in 1999 and 24.1% in 1998. CLEC operating expenses increased 68% ($18.2 million) in the first nine months of 1999 as the CLEC subsidiaries continue to grow their customer base. Operating income increased 29% ($19.6 million) to $87.6 million in the first nine months of 1999 reflecting improved ILEC and CLEC operating results. Operating income from ILEC operations increased 25% ($19.0 million) to $93.6 million. Operating loss from CLEC operations decreased 9% ($582,000) reflecting the improved operating results. 10 Three Months Ended September 30, 1999 Compared to Three Months Ended September - -------------------------------------------------------------------------------- 30, 1998 - -------- Operating Revenues increased 17% ($75.3 million) during the third quarter of 1999 for reasons generally the same as the first nine months. U.S. Cellular revenues increased 19% ($59.3 million) in 1999. Local retail revenue increased 20% ($40.8 million) in the third quarter of 1999, while inbound roaming revenue increased 28% ($19.8 million). Average monthly service revenue per customer was $49.73 in the third quarter of 1999 and $51.40 in 1998. TDS Telecom revenues increased 13% ($16.0 million) in the third quarter of 1999 due to the growth in ILEC operations ($8.9 million) and growth in CLEC operations ($6.7 million). Average monthly revenue per ILEC access line increased to $72.58 in the third quarter of 1999 from $70.64 in 1998. Operating Expenses rose 10% ($36.0 million) during the third quarter of 1999 for reasons generally the same as the first nine months. U.S. Cellular expenses increased 10% ($26.2 million). System operations expense decreased 17% ($9.0 million), driven by lower costs for minutes used by U.S. Cellular's customers when roaming. Marketing and selling expenses, including cost of equipment sold, increased 21% ($16.4 million). Cost per gross customer addition increased to $358 in the third quarter of 1999 from $324 in 1998. General and administrative expense increased 20% ($13.4 million). Depreciation and amortization expense increased 10% ($5.4 million). TDS Telecom expenses increased 10% ($9.8 million) due to growth in ILEC operations ($3.8 million) and in CLEC operations ($5.6 million) for reasons generally the same as the first nine months. Operating Income increased $39.3 million to $125.0 million in the third quarter of 1999. U.S. Cellular's operating income increased $33.0 million reflecting continued growth in customers and revenues. TDS Telecom's operating income increased $6.3 million reflecting the improved results from ILEC and CLEC activities.
Three Months Ended September 30, ---------------------------------------- 1999 1998 Change -------- -------- -------- (Dollars in thousands) Operating Income U.S. Cellular $ 95,560 $ 62,515 $ 33,045 TDS Telecom 29,437 23,175 6,262 -------- -------- -------- Operating Income $124,997 $ 85,690 $ 39,307 ======== ======== ========
Investment and Other Income (Expense) totaled $200,000 in 1999 and ($2.6) million in 1998. Gain on Sale of Cellular and Other Investments totaled $6.0 million in the third quarter of 1999 compared to $3.4 million in 1998. Investment Income increased 96% ($5.7 million) to $11.6 million primarily due to TDS's $7.8 million share of a one-time gain reported by an equity-method investment. 11 Minority Share of (Income) Loss increased $6.2 million in the third quarter of 1999 primarily for reasons generally the same as the first nine months.
Three Months Ended September 30, ------------------------------------ 1999 1998 Change -------- -------- -------- (Dollars in thousands) Minority Share of (Income) Loss United States Cellular Minority Shareholders' Share $(11,068) $ (6,722) $ (4,346) Minority Partners' Share (3,077) (1,707) (1,370) -------- -------- -------- (14,145) (8,429) (5,716) Telephone Subsidiaries and Other (282) 188 (470) -------- -------- -------- $(14,427) $ (8,241) $ (6,186) ======== ======== ========
Interest Expense decreased 9% ($2.5 million) to $25.2 million in the third quarter of 1999 for reasons generally the same as the first nine months. Minority Interest in Income of Subsidiary Trusts reflects the preferred distribution requirement of the $300 million of Trust Originated Preferred Securities outstanding. Income Tax Expense increased 79% ($18.0 million) to $40.9 million in the third quarter of 1999 from $22.9 million in 1998 primarily due to the increased pretax income as a result of improved operations. Net Income From Continuing Operations totaled $52.9 million, or $.84 diluted earnings per share, in the third quarter of 1999, compared to $26.3 million, or $.41 diluted earnings per share, in the third quarter of 1998. The increase in net income and earnings per share reflects improved operating results. A summary of net income available to common and diluted earnings per share from continuing operations and gains is shown below.
Three Months Ended September 30, ------------------------- 1999 1998 ---------- ----------- (Dollars in thousands, except per share amounts) Net Income From Continuing Operations Operations $ 51,017 $ 24,380 Gains 1,919 1,902 ---------- ----------- $ 52,936 $ 26,282 ========== =========== Diluted Earnings Per Share From Continuing Operations Operations $ .81 $ .38 Gains .03 .03 ---------- ----------- $ .84 $ .41 ========== ===========
Loss From Discontinued Operations increased 37% to $27.4 million, or $.44 per diluted share in the third quarter of 1999 from $20.0 million, or $.32 per diluted share in the third quarter of 1998. Losses of $5.6 million subsequent to September 17, 1999 have been deferred and will be offset against the expected gain upon closing of the merger. 12 Net Income Available to Common totaled $25.2 million, or $.40 diluted earnings per share, in the third quarter of 1999, compared to $5.9 million, or $.09 diluted earnings per share, in the third quarter of 1998. FINANCIAL RESOURCES AND LIQUIDITY TDS and its subsidiaries operate relatively capital and marketing intensive businesses. U.S. Cellular's increasing internal cash flow, TDS Telecom's steady internal cash flow and cash received from the sale of cellular interests and other investments have reduced the overall need for external financing of these businesses. However in recent years, TDS has obtained substantial funds from external sources to finance Aerial's operations and construction activities and for general corporate purposes. On September 17, 1999, the Board of Directors of TDS approved a plan of merger between Aerial and VoiceStream. See "Discontinued Operations." Cash Flows From Continuing Operating Activities. TDS is generating substantial internal funds from the rapid growth in U.S. Cellular's customers and revenues and TDS Telecom's steady growth in customers and revenues. Cash flows from operating activities totaled $356.1 million in the first nine months of 1999 compared to $287.0 million in 1998. U.S. Cellular's operating cash flow (operating income plus depreciation and amortization) totaled $386.0 million in the first nine months of 1999 (up 31%) while TDS Telecom's operating cash flow totaled $179.6 million (up 19%). American Paging's operating cash outflow of $3.5 million in the first nine months of 1998 occurred prior to April 1, 1998 when TDS contributed substantially all the assets and certain limited liabilities of American Paging to an unrelated limited liability corporation. Beginning April 1, 1998, TDS followed the equity method of accounting for this investment. Cash flows for other operating activities (investment and other income, interest and income tax expense, and changes in working capital and other assets and liabilities) required $209.5 million in the first nine months of 1999 and $154.3 million in 1998. The increase is primarily related to the changes in working capital items.
Nine Months Ended September 30, --------------------------------------- 1999 1998 Change --------- --------- --------- (Dollars in thousands) Operating cash flow U.S. Cellular $ 385,951 $ 293,544 $ 92,407 TDS Telecom 179,625 151,324 28,301 American Paging -- (3,511) 3,511 --------- --------- --------- 565,576 441,357 124,219 Other operating activities (209,456) (154,322) (55,134) --------- --------- --------- $ 356,120 $ 287,035 $ 69,085 ========= ========= =========
Cash Flows From Continuing Financing Activities. TDS has used short-term debt to finance construction and operations, for acquisitions and for general corporate purposes. TDS has taken advantage of attractive opportunities from time-to-time to reduce short-term debt with proceeds from the sale of long-term debt and equity securities, including sales of debt and equity securities by subsidiaries. 13 Cash flows from financing activities required $70.4 million in the first nine months of 1999 and $30.1 million in 1998. During 1999, the Company reduced Notes Payable balances by $43.7 million primarily through internally generated cash. During 1998, TDS received $198.2 million on the sale of eight-year 7% Notes and $144.9 million on the sale of 8.04% Trust Originated Preferred Securities. The proceeds were used to reduce notes payable balances. TDS also expended $9.1 million in 1998 to repurchase all of American Paging common shares, not owned by TDS, prior to contributing substantially all American Paging's assets and certain liabilities to a previously unrelated limited liability corporation for a 30% interest in that corporation. Dividends paid on Common and Preferred Shares, excluding dividends reinvested, totaled $22.0 million in 1999 and $21.2 million in 1998. Cash Flows From Continuing Investing Activities. TDS makes substantial investments each year to acquire, construct, operate and maintain modern high-quality communications networks and facilities as a basis for creating long-term value for shareowners. Cash flows from investing activities required $201.0 million in the first nine months of 1999 compared to $290.9 million in 1998 reflecting primarily reduced acquisition expenditures and capital expenditures. Capital expenditures required $318.9 million in 1999 and $344.7 million in 1998. Acquisitions, net of cash acquired, required $29.5 million in 1999 and $85.9 million in 1998. The sales of non-strategic cellular interests and other investments provided $120.0 million in 1999, including $46.6 million of cash received in the Vodafone/AirTouch merger, and $100.6 million in 1998, reducing total cash flows required for investing activities in each period. The primary purpose of TDS's construction and expansion program is to provide for significant customer growth, to upgrade service, to expand into new communication areas, and to take advantage of service-enhancing and cost-reducing technological developments. U.S. Cellular capital expenditures totaled $232.8 million in 1999 and $231.0 million in 1998 representing the construction of cell sites, the development of office systems and the change out of analog radio equipment for digital radio equipment. TDS Telecom capital expenditures totaled $84.8 million in 1999 and $104.7 million in 1998 representing amounts spent on accommodating growth in existing ILEC markets and expansion of new and existing CLEC markets. Cash Flows From Discontinued Operations. Cash outflows from discontinued operations totaled $49.7 million in 1999 compared to a cash inflow of $65.1 million in 1998. The cash inflow in 1998 was primarily the result of the investment by Sonera Ltd. of $200 million in a subsidiary of Aerial offset somewhat by the cash used in operating and investing activities. LIQUIDITY TDS anticipates that the aggregate resources required for 1999 will include approximately $300 million for U.S. Cellular capital additions and $125 million for TDS Telecom capital additions. At September 30, 1999, the remaining amount of capital spending approximated $107.4 million, consisting primarily of $67.2 million for cellular additions and $40.2 million for telephone additions. U.S. Cellular plans to finance its cellular construction program using primarily internally generated cash. U.S. Cellular's operating cash flow totaled $475.3 million for the twelve months ended September 30, 1999, up 36% ($124.9 million) from 1998. U.S. Cellular had $500 million of bank lines of credit for general corporate purposes at September 30, 1999, all of which was unused. These line of credit agreements provide for borrowings at the London InterBank Offered Rate ("LIBOR") plus 26.5 basis points. 14 TDS Telecom plans to finance its construction program using primarily internally generated cash supplemented by long-term financing from federal government programs and short-term financing. TDS Telecom's operating cash flow totaled $234.1 million for the twelve months ended September 30, 1999, up 17% ($34.0 million) from 1998. At September 30, 1999, TDS Telecom telephone subsidiaries had $119.1 million in unadvanced loan funds from federal government programs to finance the telephone construction program. TDS and its subsidiaries, excluding Aerial, had cash and temporary investments totaling $86.5 million at September 30, 1999. These investments are primarily the result of telephone operations' internally generated cash. While certain regulated telephone subsidiaries' debt agreements place limits on intercompany dividend payments, these restrictions are not expected to affect the Company's ability to meet its cash obligations. TDS also had $587 million of bank lines of credit for general corporate purposes at September 30, 1999. Unused amounts of such lines totaled $459.8 million. These line of credit agreements provide for borrowings at negotiated rates up to the prime rate. Management believes that internal cash flows and funds available from cash and cash equivalents, lines of credit, and longer-term financing commitments provide sufficient financial flexibility. TDS and its subsidiaries have access to public and private capital markets to help meet its long-term financing needs. TDS and its subsidiaries anticipate accessing public and private capital markets to issue debt and equity securities only when and if capital requirements, financial market conditions and other factors warrant. DISCONTINUED OPERATIONS On September 17, 1999, the Board of Directors of TDS decided not to pursue a spin-off of Aerial Communications, Inc. ("Aerial"), an 82.1%-owned subsidiary of TDS, and approved a plan of merger between Aerial and VoiceStream Wireless Corporation ("VoiceStream"). As a result of the merger, Aerial shareholders will receive 0.455 VoiceStream common shares for each share of Aerial stock they own. The conversion number is subject to adjustment (but not below 0.455 or above 0.5 of a share of VoiceStream common stock) in the event Aerial's merger with VoiceStream closes prior to the closing of the proposed merger of Omnipoint Corporation and VoiceStream and the average price of VoiceStream common stock for the 15-day trading period prior to the closing is less than $39.56 per share. Aerial public shareholders will have a right to elect to receive $18 in cash in lieu of shares of VoiceStream. The parties anticipate that the merger will be tax-free to Aerial shareholders that elect to receive VoiceStream stock. TDS and certain major shareholders of VoiceStream, including Hutchinson Telecommunication PCS (USA), have agreed to vote in favor of the merger. This merger is subject to the approval of the Aerial and VoiceStream shareholders as well as federal, state, and other regulatory approvals, including those of the Federal Communications Commission and the Federal Trade Commission. The merger is expected to close by the end of the first quarter of 2000. On November 1, 1999, TDS converted $420 million of intercompany debt due from a subsidiary of Aerial into 19.1 million Aerial Common Shares at $22 per share. On September 17, 1999, the date of the TDS Debt Replacement Agreement, the closing price of Aerial Common Shares was $20.00 per share. Any remaining intercompany debt due from Aerial, at the closing of the merger, will be due one year after the closing of the merger. TDS will be released from its guarantees of Aerial's long-term debt at the closing of the merger. Also on November 1, 1999, Sonera Corporation ("Sonera"), a Finnish telecommunications company, invested an additional $230 million into equity of Aerial and one of its subsidiaries, also at an equivalent price of $22 per Aerial share. After the equity 15 contributions by TDS and Sonera on November 1, 1999, TDS owned 82.5% of Aerial. Immediately prior to the merger, Sonera will exchange its interest in the subsidiary of Aerial for Aerial common stock. Sonera, TDS and Aerial also reached an agreement to settle all their disputes relating to Sonera's earlier investment in the Aerial subsidiary, effective at the closing of the merger. TDS expects to recognize a net gain on the ultimate disposition of Aerial and, accordingly, has deferred recognition of Aerial's net operating losses of $5.6 million from September 18, 1999 through September 30, 1999. Management expects that the amounts available to Aerial under the revolving credit agreement with TDS ($81 million as of September 30, 1999) and the additional Sonera investment of $230 million will provide sufficient funding to last until the completion of the merger with VoiceStream. MARKET RISK The Company is subject to market rate risks due to fluctuations in interest rates and equity markets. The majority of the Company's debt is in the form of long-term fixed-rate notes, debentures and trust securities with original maturities ranging up to 40 years. Accordingly, fluctuations in interest rates can lead to fluctuations in the fair value of such instruments. TDS has not entered into financial derivatives to reduce its exposure to interest rate risks. There have been no material changes to TDS's outstanding debt and trust securities instruments since December 31, 1998. TDS maintains a portfolio of available for sale marketable equity securities which resulted primarily from the sale of non-strategic investments. The market value of these investments, principally Vodafone AirTouch plc American Depository Receipts, amounted to $649.1 million at September 30, 1999. A hypothetical 10% decrease in the share prices of these investments would result in a $64.9 million decline in the market value of the investments. YEAR 2000 ISSUE The Year 2000 Issue exists because many computer systems and applications abbreviate dates using only two digits rather than four digits, e.g., "98" rather than "1998". Unless corrected, this shortcut may cause problems when the century date "2000" occurs. On that date, some computer operating systems and applications and embedded technology may recognize the date as January 1, 1900 instead of January 1, 2000. If the Company fails to correct any critical Year 2000 processing problems prior to January 1, 2000, the affected systems may either cease to function or produce erroneous data, which could have material adverse operational and financial consequences. The Company's management established a project team to address Year 2000 issues. The Company's plan to address the Year 2000 Issue consists of five general phases: (i) Awareness, (ii) Assessment, (iii) Renovation, (iv) Validation and (v) Implementation. The awareness phase consisted of establishing Year 2000 project teams at each business unit and developing an overall strategy. Management established a Year 2000 Program Office at the TDS corporate level to coordinate activities of the Year 2000 project teams, to monitor the current status of individual projects, to report periodically to the TDS Audit Committee, and to promote the exchange of information between all business units to share knowledge and solution techniques. On an ongoing basis, the project teams continue to provide Year 2000 information and updates to customers, employees and business partners. Management of each business unit has made the Year 2000 Issue a top priority. The Year 2000 effort covers the network and supporting 16 infrastructure for the provision of cellular, local switched and data telecommunications and PCS services; the operational and financial information technology ("IT") systems and applications, such as computer systems that support key business functions such as billing, finance, customer service, procurement and supply; and a review of the Year 2000 readiness efforts of the Company's critical vendors. The assessment phase included the identification of core business areas and processes, analysis of systems and hardware supporting the core business areas and the prioritization of renovation or replacement of systems and hardware that were determined not to be Year 2000 ready. Included in the assessment phase was an analysis of risk management factors such as contingency plans and legal matters. Except for the contingency plans as discussed below, the assessment phase was completed in the first quarter of 1999. The Year 2000 project teams identified those mission critical hardware, systems and applications that were not Year 2000 ready. These critical hardware, systems and applications that were not Year 2000 ready have undergone renovation. The renovation phase consisted of the remediation or replacement of mission critical systems, applications and hardware. The renovation of these mission critical hardware, systems and applications has been completed. The renovated mission critical hardware, systems and applications have undergone Year 2000 validation testing. The validation phase included testing, verifying and validating the renovated or replaced platforms, applications, databases and utilities. The validation phase consisted of independent verification testing of mission critical systems, applications and hardware as well as network and system component upgrades received from suppliers. In addition, selected Year 2000 upgrades were tested in a controlled environment that replicated the current environment and was equipped to simulate the turn of the century and leap year dates. The Company will rely on the Cellular Telecommunications Industry Association ("CTIA"), Alliance for Telecommunications Industry Solutions ("ATIS") and TELCO Forum, which formed working groups to coordinate efforts of various carriers and manufacturers to facilitate inter-network Year 2000 testing. These programs have concluded and, generally, the findings indicate that there are no known network inter-operability defects related to Year 2000 associated with the available Year 2000 ready upgrades for the networks. The Company has analyzed the findings and has installed upgrades appropriate to its network. Validation of mission critical hardware, systems and applications was substantially completed as of October 31, 1999. The implementation phase involves migrating the converted, renovated and validated mission critical systems, applications and hardware into production. This phase is expected to be completed during the fourth quarter of 1999. As with other telecommunications services providers, there exists a worst case scenario possibility that a failure to correct a Year 2000 problem in one or more of the mission critical network elements or IT applications could cause a significant disruption of, or interruption in, certain normal business functions. Management believes it has assembled the proper staffing and tools, and put in place procedures to identify and prepare all mission critical systems for the Year 2000 and believes the necessary programs are in place for a smooth Year 2000 transition. Based on the assessments and work performed to date by the project teams, management believes that any such material disruption to the operations due to failure on an internal system is unlikely. However, management cannot provide assurance that its plan to address Year 2000 readiness will be successful as the Company is subject to various risks and uncertainties. Like most other telecommunications operators, the 17 Company is highly dependent on the telecommunications network vendors to develop and provide Year 2000 ready hardware, systems and applications and on other third parties, including vendors, other telecommunications service providers, government agencies and financial institutions, to deliver reliable services and timely upgrades. The Company has contacted critical vendors requesting information about their Year 2000 readiness. The responses have been used by the Company to make its renovations and are being used in developing the Company's overall contingency plans. The Company cannot assess with certainty the magnitude of any such potential adverse impact. However, based upon risk assessment work conducted thus far, management believes that the most reasonably likely worst case scenario of the failure by the Company, its suppliers or other telecommunications carriers with which the Company interconnects to resolve Year 2000 issues would be an inability by the Company to (i) provide telecommunications services to the Company's customers, (ii) route and deliver telephone calls originating from or terminating with other telecommunications carriers, (iii) timely and accurately process service requests and (iv) timely and accurately bill its customers. In addition to lost earnings, these failures could also result in loss of customers due to service interruptions and billing errors, substantial claims by customers and increased expenses associated with stabilizing operations and executing contingency plans. The Company's contingency plan initiatives include business recovery planning and establishing command centers and critical support teams. Project teams are developing alternate processes to support critical customer functions in the event information systems or mechanized processes experience Year 2000 disruptions; as well as for repair or replacement of any affected systems or processes. The teams are also developing alternate plans for critical suppliers of products/services that fail to meet established service levels due to Year 2000 disruptions. Retention and backup procedures for customer and critical business data are being developed to provide the Company with pre-rollover recovery capabilities. The Company anticipates completing the balance of its contingency planning in the fourth quarter of 1999. The Company estimates that the total costs related to the Year 2000 project will be approximately $35 million. Through September 30, 1999, the total costs associated with the Year 2000 Issue were $27 million. The timing of expenditures may vary and is not necessarily indicative of readiness efforts or progress to date. In recent years, the Company has made capital expenditures, primarily related to upgrades of the cellular network to provide digital capabilities as well as certain financial systems, billing systems, and customer care systems which are by design thought to be Year 2000 ready. These costs are not considered to be directly related to the Year 2000 project because they were incurred as part of the Company's overall operating strategies to add digital capabilities for competitive purposes, and to improve financial systems and customer service. Though Year 2000 project costs will directly impact the reported level of net income, the Company intends to manage its total cost structure, including deferral of non-critical projects, in an effort to mitigate the impact of Year 2000 project costs. 18 PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT This Management's Discussion and Analysis of Financial Condition and Results of Operations contains "forward-looking" statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on current expectations, estimates and projections. Statements that are not historical facts, including statements about the Company's beliefs and expectations are forward-looking statements. These statements contain potential risks and uncertainties and, therefore, actual results may differ materially. TDS undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Important factors that may affect these projections or expectations include, but are not limited to: changes in the overall economy; changes in competition in markets in which TDS operates; advances in telecommunications technology; changes in the telecommunications regulatory environment; pending and future litigation; availability of future financing; completion and timing of the merger between Aerial and VoiceStream; unanticipated changes in growth in cellular and PCS customers, penetration rates, churn rates and the mix of products and services offered in our markets; and unanticipated problems with the Year 2000 Issue. Readers should evaluate any statements in light of these important factors. 19
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Unaudited Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (Dollars in thousands, except per share amounts) OPERATING REVENUES U.S. Cellular $ 373,201 $ 313,947 $ 1,060,138 $ 849,212 TDS Telecom 137,438 121,423 402,710 355,744 ------------ ------------ ------------ ------------ 510,639 435,370 1,462,848 1,204,956 ------------ ------------ ------------ ------------ OPERATING EXPENSES U.S. Cellular 277,641 251,432 840,012 703,405 TDS Telecom 108,001 98,248 315,103 287,719 ------------ ------------ ------------ ------------ 385,642 349,680 1,155,115 991,124 ------------ ------------ ------------ ------------ Operating Income from Ongoing Operations 124,997 85,690 307,733 213,832 American Paging Operating (Loss) -- -- -- (11,406) ------------ ------------ ------------ ------------ OPERATING INCOME 124,997 85,690 307,733 202,426 ------------ ------------ ------------ ------------ INVESTMENT AND OTHER INCOME Interest and dividend income 718 2,190 4,065 7,989 Investment income, net of amortization 11,585 5,902 18,878 22,796 Gain on sale of cellular and other investments 6,046 3,399 345,938 235,357 Other (expense), net (3,722) (5,851) (8,265) (21,248) Minority share of (income) (14,427) (8,241) (60,182) (42,383) ------------ ------------ ------------ ------------ 200 (2,601) 300,434 202,511 ------------ ------------ ------------ ------------ INCOME BEFORE INTEREST AND INCOME TAXES 125,197 83,089 608,167 404,937 Interest expense 25,170 27,712 76,410 82,277 Minority interest in income of subsidiary trust 6,202 6,202 18,607 17,301 ------------ ------------ ------------ ------------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 93,825 49,175 513,150 305,359 Income tax expense 40,889 22,893 210,475 127,603 ------------ ------------ ------------ ------------ NET INCOME FROM CONTINUING OPERATIONS 52,936 26,282 302,675 177,756 ------------ ------------ ------------ ------------ Discontinued Operations (48,473) (52,469) (142,250) (162,319) Tax effect of discontinued operations (21,079) (32,515) (58,060) (51,384) ------------ ------------ ------------ ------------ DISCONTINUED OPERATIONS - NET OF TAX (27,394) (19,954) (84,190) (110,935) ------------ ------------ ------------ ------------ NET INCOME 25,542 6,328 218,485 66,821 Preferred Dividend Requirement (316) (418) (1,003) (1,276) ------------ ------------ ------------ ------------ NET INCOME AVAILABLE TO COMMON $ 25,226 $ 5,910 $ 217,482 $ 65,545 ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES (000s) 61,451 61,036 61,376 60,923 BASIC EARNINGS PER SHARE Continuing operations $ 0.86 $ 0.42 $ 4.92 $ 2.90 Discontinued Operations (0.45) (0.32) (1.38) (1.82) ------------ ----------- ------------ ------------ $ 0.41 $ 0.10 $ 3.54 $ 1.08 ============ =========== ============ ============ DILUTED EARNINGS PER SHARE Continuing Operations $ 0.84 $ 0.41 $ 4.82 $ 2.84 Discontinued Operations (0.44) (0.32) (1.35) (1.79) ------------ ----------- ------------ ------------ $ 0.40 $ 0.09 $ 3.47 $ 1.05 ============ =========== ============ ============ DIVIDENDS PER SHARE $ .115 $ .11 $ .345 $ .33 ============ =========== ============ ============ The accompanying notes to financial statements are an integral part of these statements.
20 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Unaudited ---------
Nine Months Ended September 30, ---------------------- 1999 1998 --------- --------- (Dollars in thousands) CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES Net income from continuing operations $ 302,675 $ 177,756 Add (Deduct) adjustments to reconcile net income from continuing operations to net cash provided by operating activities Depreciation and amortization 257,842 238,931 Deferred taxes 124,411 67,848 Investment income (28,659) (29,897) Minority share of income 60,182 42,383 Gain on sale of cellular and other investments (345,938) (235,357) Noncash interest expense 13,315 15,072 Other noncash expense 28,450 15,811 Change in accounts receivable (51,010) (38,446) Change in materials and supplies (7,383) 169 Change in accounts payable (3,241) 16,139 Change in accrued interest (13,811) (7,706) Change in accrued taxes 914 14,682 Change in other assets and liabilities 18,373 9,650 --------- --------- 356,120 287,035 --------- --------- CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES Long-term debt borrowings 8,868 200,655 Repayments of long-term debt (17,012) (13,243) Change in notes payable (43,724) (333,894) Trust preferred securities -- 144,881 Dividends paid (21,970) (21,162) Purchase of subsidiary common stock -- (9,107) Other financing activities 3,410 1,726 --------- --------- (70,428) (30,144) --------- --------- CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES Capital expenditures (318,918) (344,701) Investments in and advances to investment entities and license costs 724 (6,356) Distributions from investments 19,225 19,748 Proceeds from investment sales 120,000 100,571 Other investing activities (392) (2,977) Acquisitions, net of cash acquired (29,527) (85,942) Change in temporary investments and marketable securities 7,868 28,732 --------- --------- (201,020) (290,925) --------- --------- CASH FLOWS FROM DISCONTINUED OPERATIONS (49,680) 65,116 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 34,992 31,082 CASH AND CASH EQUIVALENTS - Beginning of period 45,139 45,996 --------- --------- End of period $ 80,131 $ 77,078 ========= =========
The accompanying notes to financial statements are an integral part of these statements. 21 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------
(Unaudited) September 30, December 31, 1999 1998 ------------ ------------ (Dollars in thousands) CURRENT ASSETS Cash and cash equivalents $ 80,131 $ 45,139 Temporary investments 6,326 10,306 Accounts receivable from customers and others 303,316 256,833 Materials and supplies, at average cost, and other current assets 56,787 44,465 ------------ ------------ 446,560 356,743 ------------ ------------ INVESTMENTS Intangible Assets Cellular license acquisition costs, net 1,161,538 1,200,653 Franchise costs and other costs, net 178,942 181,517 Investments in unconsolidated entities 286,095 305,815 Marketable equity securities 649,137 378,812 Other investments 29,997 33,870 ------------ ------------ 2,305,709 2,100,667 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT, NET U.S. Cellular 1,217,618 1,138,585 TDS Telecom 867,560 881,507 Other 28,336 31,216 ------------ ------------ 2,113,514 2,051,308 ------------ ------------ OTHER ASSETS AND DEFERRED CHARGES 31,603 35,081 ------------ ------------ NET ASSETS OF DISCONTINUED OPERATIONS 458,772 498,805 ------------ ------------ TOTAL ASSETS $ 5,356,158 $ 5,042,604 ============ ============
The accompanying notes to financial statements are an integral part of these statements. 22 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------
(Unaudited) September 30, December 31, 1999 1998 ------------ ------------ (Dollars in thousands) CURRENT LIABILITIES Current portion of long-term debt $ 15,505 $ 15,946 Notes payable 127,165 170,889 Accounts payable 208,618 232,320 Advance billings and customer deposits 37,767 33,283 Accrued interest 10,326 24,133 Accrued taxes 24,412 23,434 Accrued compensation 31,674 24,415 Other current liabilities 28,207 24,502 ------------ ----------- 483,674 548,922 ------------ ----------- DEFERRED LIABILITIES AND CREDITS 343,450 223,877 ------------ ----------- LONG-TERM DEBT, excluding current portion 1,281,090 1,275,086 ------------ ----------- MINORITY INTEREST in subsidiaries 494,696 430,826 ------------ ----------- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES of Subsidiary Trusts Holding Solely Company Subordinated Debentures (a) 300,000 300,000 ------------ ----------- PREFERRED SHARES 21,860 25,985 ------------ ----------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $.01 per share 551 550 Series A Common Shares, par value $.01 per share 70 69 Capital in excess of par value 1,880,965 1,882,710 Treasury Shares, at cost (615,170 and 761,220 shares, respectively) (24,394) (29,439) Accumulated other comprehensive income 69,272 75,609 Retained earnings 504,924 308,409 ------------ ----------- 2,431,388 2,237,908 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,356,158 $ 5,042,604 ============ ============
(a) The sole asset of TDS Capital I is $154.6 million principal amount of 8.5% subordinated debentures due 2037 from TDS. The sole asset of TDS Capital II is $154.6 million principal amount of 8.04% subordinated debentures due 2038 from TDS. The accompanying notes to financial statements are an integral part of these statements. 23 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of September 30, 1999 and December 31, 1998, and the results of operations and cash flows for the nine months ended September 30, 1999 and 1998. The results of operations for the nine months ended September 30, 1999 and 1998, are not necessarily indicative of the results to be expected for the full year. 2. Discontinued Operations On September 17, 1999, the Board of Directors of TDS decided not to pursue a spin-off of Aerial Communications, Inc. ("Aerial"), an 82.1%-owned subsidiary of TDS, and approved a plan of merger between Aerial and VoiceStream Wireless Corporation ("VoiceStream"). As a result of the merger, Aerial shareholders will receive 0.455 VoiceStream common shares for each share of Aerial stock they own. The conversion number is subject to adjustment (but not below 0.455 or above 0.5 of a share of VoiceStream common stock) in the event Aerial's merger with VoiceStream closes prior to the closing of the proposed merger of Omnipoint Corporation and VoiceStream and the average price of VoiceStream common stock for the 15-day trading period prior to the closing is less than $39.56 per share. Aerial public shareholders will have a right to elect to receive $18 in cash in lieu of shares of VoiceStream. The parties anticipate that the merger will be tax-free to Aerial shareholders that elect to receive VoiceStream stock. TDS and certain major shareholders of VoiceStream, including Hutchinson Telecommunication PCS (USA), have agreed to vote in favor of the merger. This merger is subject to the approval of the Aerial and VoiceStream shareholders as well as federal, state, and other regulatory approvals, including those of the Federal Communications Commission and the Federal Trade Commission. The merger is expected to close by the end of the first quarter of 2000. On November 1, 1999, TDS converted $420 million of intercompany debt due from a subsidiary of Aerial into 19.1 million Aerial Common Shares at $22 per share. On September 17, 1999, the date of the TDS Debt Replacement Agreement, the closing price of Aerial Common Shares was $20.00 per share. Any remaining intercompany debt due from Aerial, at the closing of the merger, will be due one year after the closing of the merger. TDS will be released from its guarantees of Aerial's long-term debt at the closing of the merger. Also on November 1, 1999, Sonera Corporation ("Sonera"), a Finnish telecommunications company, invested an additional $230 million into equity of Aerial and one of its subsidiaries, also at an equivalent price of $22 per Aerial share. After the equity contributions by TDS and Sonera on November 1, 1999, TDS owned 82.5% of Aerial. Immediately prior to the merger, 24 Sonera will exchange its interest in the subsidiary of Aerial for Aerial common stock. Sonera, TDS and Aerial also reached an agreement to settle all their disputes relating to Sonera's earlier investment in the Aerial subsidiary, effective at the closing of the merger. TDS expects to recognize a net gain on the ultimate disposition of Aerial and, accordingly, has deferred recognition of Aerial's net operating losses of $5.6 million from September 18, 1999 through September 30, 1999. As a result of the board's approval of the plan, the consolidated financial statements of TDS and supplemental data have been adjusted to reflect the results of operations and net assets of the subsidiary as discontinued operations in accordance with generally accepted accounting principles. Financial statements for prior periods have been reclassified to conform to current year presentation. Net assets of discontinued operations are as follows:
September 30, December 31, 1999 1998 ------------- ------------ (Dollars in thousands) Current Assets Cash $ 7,559 $ 4,943 Temporary investments -- 35 Accounts receivable 31,011 27,776 Inventory 9,011 11,378 Other current assets 4,105 4,564 Investments Broadband PCS license costs, net 305,913 311,915 Other Investments 2,455 1,443 Property, plant and equipment 615,366 621,281 Other assets and deferred charges 277 411 Current portion vendor credit agreement (82,372) -- Accounts payable (34,255) (56,097) Accrued taxes (7,981) (7,015) Accrued compensation (7,666) (5,169) Other accrued expenses (6,127) (6,177) Deferred income tax liability (138,016) (123,110) Long-term debt (246,123) (278,010) Minority interest in subsidiaries -- (9,363) Losses deferred after measurement date 5,615 -- ------------- ------------ $ 458,772 $ 498,805 ============= ============
25 Summarized income statement information relating to discontinued operations, excluding any corporate charges and intercompany interest expense, is as follows:
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 1999 1998 1999 1998 --------- --------- --------- --------- (Dollars in thousands) Revenues $ 48,753 $ 38,438 $ 154,079 $ 105,872 Expenses 89,578 99,045 292,085 303,254 --------- --------- --------- --------- Operating (Loss) (40,825) (60,607) (138,006) (197,382) Minority share of loss -- 10,532 10,967 41,546 Other income (2,835) 2,451 (1) 6,682 Interest expense (4,813) (4,845) (15,210) (13,164) --------- --------- --------- --------- (Loss) Before Income Taxes (48,473) (52,469) (142,250) (162,319) Income tax benefit (21,079) (32,515) (58,060) (51,384) --------- --------- --------- --------- Net (Loss) $ (27,394) $ (19,954) $ (84,190) $(110,935) ========= ========= ========= =========
Summarized cash flow statement information relating to discontinued operations is as follows:
Nine Months Ended September 30, ---------------------- 1999 1998 ---------- --------- (Dollars in thousands) Cash flows from operating activities $ (25,683) $ (72,431) Cash flows from financing activities 2,464 200,812 Cash flows from investing activities (23,845) (63,858) ---------- ---------- Cash provided (used) by discontinued operations (47,064) 64,523 (Increase) decrease in cash included in Net assets of discontinued operations (2,616) 593 ---------- ---------- Cash flows from discontinued operations $ (49,680) $ 65,116 ========== ==========
26 3. Marketable Equity Securities Marketable equity securities include the Company's investments in equity securities, primarily Vodafone AirTouch plc American Depository Receipts ("VOD ADRs") . These securities are classified as available-for-sale and stated at fair market value. Information regarding the Company's marketable equity securities is summarized below.
September 30, December 31, 1999 1998 ------------- ------------- (Dollars in thousands) Available-for-sale Equity Securities Aggregate Fair Value $ 649,137 $ 378,812 Adjusted Basis 514,151 230,344 ------------- ------------- Gross Unrealized Holding Gains 134,986 148,468 Tax Effect 54,349 59,661 ------------- ------------- Unrealized Holding Gains, net of tax 80,637 88,807 Minority Share of Unrealized Holding Gains 11,365 13,198 ------------- ------------- Net Unrealized Holding Gains $ 69,272 $ 75,609 ============= =============
4. Gains from Sale of Cellular and Other Investments The Company recognized a $327.1 million gain in the second quarter of 1999 on the difference between its historical basis in its investment in AirTouch Communications, Inc. ("AirTouch") common shares and the value of Vodafone AirTouch plc American Depository Receipts and cash received in the merger of AirTouch and Vodafone Group plc. The AirTouch common shares were received in 1998 as a result of the sale of certain minority interests to AirTouch resulting in a $198.6 million gain. The remaining gains in 1999 and 1998 resulted when the Company sold or traded certain non-strategic minority cellular interest and other investments. 27 5. Other Comprehensive Income The Company's Comprehensive Income includes Net Income and Unrealized Gains from Marketable Equity Securities that are classified as "available-for-sale". The following table summarizes the Company's Comprehensive Income.
Nine Months Ended September 30, ---------------------- 1999 1998 --------- --------- (Dollars in thousands) Accumulated Other Comprehensive Income Balance, beginning of period $ 75,609 $ 683 Add: Unrealized gains on securities 313,631 67,669 Income tax effect 125,533 24,583 --------- --------- 188,098 43,086 Minority share of unrealized gains 27,822 6,480 --------- --------- Net unrealized gains 160,276 36,606 --------- --------- Deduct: Recognized gains on securities 327,113 -- Income tax expense 130,845 -- --------- --------- 196,268 -- Minority share of recognized gain 29,655 -- --------- --------- Net recognized gains included in Net Income 166,613 -- --------- --------- Net change in unrealized gains included in Comprehensive Income (6,337) 36,606 --------- --------- Balance, end of period $ 69,272 $ 37,289 ========= =========
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ---------------------- 1999 1998 1999 1998 --------- --------- --------- --------- (Dollars in thousands) Comprehensive Income Net Income $ 25,542 $ 6,328 $ 218,485 $ 66,821 Net unrealized gains (losses) on securities 62,625 (4,951) (6,337) 36,606 --------- --------- --------- --------- $ 88,167 $ 1,377 $ 212,148 $ 103,427 ========= ========= ========= =========
28 6. Earnings Per Share The amounts used in computing Earnings per Common Share and the effect on income and the weighted average number of Common and Series A Common Shares of dilutive potential common stock are as follows:
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- (Dollars in thousands) Net Income from Continuing Operations $ 52,936 $ 26,282 $ 302,675 $ 177,756 Less: Preferred Dividends (316) (418) (1,003) (1,276) ----------- ----------- ----------- ----------- Net Income from Continuing Operations used in Basic Earnings per Share 52,620 25,864 301,672 176,480 Loss on Discontinued Operations (27,394) (19,954) (84,190) (110,935) ----------- ----------- ----------- ----------- Net Income Available to Common used in Basic Earnings per Share $ 25,226 $ 5,910 $ 217,482 $ 65,545 =========== =========== =========== =========== Net Income from Continuing Operations used in Basic Earnings per Share $ 52,620 $ 25,864 $ 301,672 $ 176,480 Reduction in preferred dividends if Preferred Shares converted in Common Shares 289 179 916 787 Minority income adjustment (621) (458) (1,954) (1,438) ----------- ----------- ----------- ----------- Net Income from Continuing Operations used in Diluted Earnings per Share $ 52,288 $ 25,585 $ 300,634 $ 175,829 Loss on Discontinued Operations (27,394) (19,954) (84,190) (110,935) ----------- ----------- ----------- ----------- Net Income Available to Common used in Diluted Earnings per share $ 24,894 $ 5,631 $ 216,444 $ 64,894 =========== =========== =========== =========== Weighted Average Number of Common Shares used in Basic Earnings per Share 61,451 61,036 61,376 60,923 Effect of Dilutive Securities: Common Shares outstanding if Preferred Shares converted 564 581 611 873 Stock options and stock appreciation rights 391 105 308 124 Common Shares issuable 13 13 13 14 ----------- ----------- ----------- ----------- Weighted Average Number of Common Shares used in Diluted Earnings per Share 62,419 61,735 62,308 61,934 =========== =========== =========== ===========
The minority income adjustment reflects the additional minority share of U.S. Cellular's income computed as if all of U.S. Cellular's issuable securities were outstanding. 7. Supplemental Cash Flow Information Cash and cash equivalents include cash and those short-term, highly liquid investments with original maturities of three months or less. Those investments with original maturities of more than three 29 months to twelve months are classified as temporary investments. Temporary investments are stated at cost, which approximates market. Those investments with original maturities of more than 12 months are classified with other investments and are stated at amortized cost. TDS acquired certain cellular licenses in 1999 and certain cellular licenses, operating companies and telephone companies in 1998. In conjunction with these acquisitions, the following assets were acquired and liabilities assumed and Common Shares issued.
Nine Months Ended September 30, --------------------- 1999 1998 -------- --------- (Dollars in thousands, except per share amounts) Property, plant and equipment $ 4,248 $ 13,271 Cellular licenses 19,879 68,695 Equity method investment in cellular interests (748) (2,317) Franchise costs 1,034 5,477 Long-term debt (987) (4,634) Deferred credits (254) (991) Other assets and liabilities, excluding cash and cash equivalents 2,673 3,301 Decrease in Minority interest 3,682 13,168 Common Shares issued -- (10,028) -------- -------- Decrease in cash due to acquisitions $ 29,527 $ 85,942 ======== ========
The following table summarizes interest and income taxes paid, and other noncash transactions.
Nine Months Ended September 30, ---------------------- 1999 1998 ---------- ---------- (Dollars in thousands) Interest Paid Continuing Operations $ 76,423 $ 74,682 Discontinued Operations 2,252 1,584 Income Taxes Paid (net of income tax refund received of $10,000 in 1998) 18,697 6,754 Common Shares issued by TDS for conversion of TDS Preferred Stock $ 3,800 $ 5,162
30 8. Business Segment Information Financial data for the Company's business segments for each of the three and nine month periods ended or at September 30, 1999 and 1998 are as follows:
Three Months Ended or at September 30, 1999 U.S. Cellular TDS Telecom Aerial All Other Total - ------------------------ ------------- ------------- ------------- ------------- ------------- Dollars in thousands) Operating revenues $ 373,201 $ 137,438 $ 56,777 $ -- $ 567,416 Operating cash flow 153,004 60,367 (26,162) -- 187,209 Depreciation and amortization expense 57,444 30,930 22,471 -- 110,845 Operating income (loss) 95,560 29,437 (48,633) -- 76,364 Total Assets 3,456,921 1,711,711 953,736 3,400,871 9,523,239 Capital expenditures $ 70,962 $ 36,004 $ 13,798 $ (4,592) $ 116,172 Three Months Ended or at September 30, 1998 U.S. Cellular TDS Telecom Aerial All Other Total - ------------------------ ------------- ------------- ------------- ------------- -------------- (Dollars in thousands) Operating revenues $ 313,947 $ 121,423 $ 38,438 $ -- $ 473,808 Operating cash flow 114,543 51,915 (40,465) -- 125,993 Depreciation and amortization expense 52,028 28,740 20,142 -- 100,910 Operating income (loss) 62,515 23,175 (60,607) -- 25,083 Total Assets 2,884,834 1,525,496 974,138 3,363,779 8,748,247 Capital expenditures $ 93,976 $ 42,218 $ 16,480 $ 6,067 $ 158,741 Nine Months Ended or at September 30, 1999 U.S. Cellular TDS Telecom Aerial All Other Total - ------------------------ ------------- ------------- ------------- ------------- ------------- (Dollars in thousands) Operating revenues $ 1,060,138 $ 402,710 $ 162,103 $ -- $ 1,624,951 Operating cash flow 385,951 179,625 (79,134) -- 486,442 Depreciation and amortization expense 165,825 92,018 66,681 -- 324,524 Operating income (loss) 220,126 87,607 (145,815) -- 161,918 Total Assets 3,456,921 1,711,711 953,736 3,400,871 9,523,239 Capital expenditures $ 232,814 $ 84,759 $ 26,764 $ 1,345 $ 345,682 Nine Months Ended or at September 30, 1998 U.S. Cellular TDS Telecom Aerial All Other Total - ------------------------ ------------- ------------- ------------- ------------- ------------- (Dollars in thousands) Operating revenues $ 849,212 $ 355,744 $ 105,872 $ 17,783 $ 1,328,611 Operating cash flow 293,544 151,324 (136,300) (3,511) 305,057 Depreciation and amortization expense 147,737 83,299 61,082 7,895 300,013 Operating income (loss) 145,807 68,025 (197,382) (11,406) 5,044 Total Assets 2,884,834 1,525,496 974,138 3,363,779 8,748,247 Capital expenditures $ 230,968 $ 104,650 $ 64,541 $ 9,083 $ 409,242
31
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (Dollars in thousands) Reconciliation of Segment Revenue to Consolidated Revenues: Total Revenues for reportable segments $ 567,416 $ 473,808 $ 1,624,951 $ 1,328,611 Aerial Revenues included in "Discontinued Operations" (48,753) (38,438) (154,079) (105,872) Aerial Revenues included in the deferred losses from September 17, 1999 to September 30, 1999 (8,024) -- (8,024) -- American Paging Revenues included in "American Paging Operating (Loss)" -- -- -- (17,783) ------------ ------------ ------------ ------------ Consolidated Revenues $ 510,639 $ 435,370 $ 1,462,848 $ 1,204,956 ============ ============ ============ ============
September 30, -------------------------- 1999 1998 ----------- ----------- Reconciliation of Segment Total Assets to Consolidated Total Assets: Total Assets for reportable segments $ 9,523,239 $ 8,748,247 Intercompany eliminations (1) (3,650,154) (3,319,282) Aerial liabilities reported to net assets of discontinued operations (516,927) (486,731) ----------- ----------- Consolidated Total Assets $ 5,356,158 $ 4,942,234 =========== ===========
(1) Intercompany eliminations consist primarily of the elimination of TDS's book value in its subsidiaries and the elimination of intercompany receivables. 32 PART II. OTHER INFORMATION Item 1. Legal Proceedings. - --------------------------- On September 21, 1999, Herbert Behrens, who purports to be a stockholder of Aerial, filed a putative class action complaint on behalf of stockholders of Aerial in the Court of Chancery of the State of Delaware in New Castle County. The complaint names as defendants Aerial, TDS, certain directors of Aerial and TDS, and VoiceStream in connection with the transactions contemplated by the Agreement and Plan of Reorganization and the related agreements, particularly the Debt/Equity Replacement Agreement. The complaint alleges a breach of fiduciary duties by the defendants, including in connection with the proposed exchange of $420 million of debt owed by Aerial to TDS for Aerial common stock at $22.00 per share. The complaint alleges that this action benefits TDS at the expense of Aerial's public stockholders and seeks to have the transactions contemplated by the Agreement and Plan of Reorganization enjoined or, if they are consummated, to have them rescinded and to recover unspecified damages, fees and expenses. TDS and Aerial believes that this lawsuit is without merit and intends to vigorously defend against this lawsuit. Item 6. Exhibits and Reports on Form 8-K. - ------------------------------------------ (a) Exhibit 11 - Computation of earnings per common share is included herein as footnote 6 to the financial statements. (b) Exhibit 12 - Statement regarding computation of ratios. (c) Exhibit 27 - Financial Data Schedule for the nine months ended September 30, 1999. (d) Reports on Form 8-K filed during the quarter ended September 30, 1999: TDS filed a Current Report on Form 8-K on September 28, 1999, dated September 17, 1999, which announced that TDS would not pursue a spin-off of Aerial Communications, Inc. Instead, TDS will exchange its shares in Aerial for VoiceStream Wireless Corporation stock in conjunction with the announced merger between Aerial and VoiceStream. The Current Report also included various documents related to the merger as exhibits. 33 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELEPHONE AND DATA SYSTEMS, INC. -------------------------------- (Registrant) Date November 11, 1999 /s/ Sandra L. Helton ------------------- ------------------------------------------- Sandra L. Helton, Executive Vice President-Finance (Chief Financial Officer) Date November 12, 1999 /s/ Gregory J. Wilkinson ------------------- ------------------------------------------ Gregory J. Wilkinson, Vice President and Controller (Principal Accounting Officer) Signature page to TDS Third Quarter 1999 Form 10Q. 34 EX-12 2 COMPUTATION OF EARNINGS TO FIXED CHARGES RATIOS Exhibit 12
TELEPHONE AND DATA SYSTEMS, INC. RATIOS OF EARNINGS TO FIXED CHARGES For the Nine Months ended September 30, 1999 (Dollars In Thousands) EARNINGS: Income from Continuing Operations before income taxes $ 513,150 Add (Deduct): Minority Share of Losses (31) Earnings on Equity Method (18,878) Distributions from Minority Subsidiaries 19,225 Amortization of Capitalized Interest 2 Minority interest in majority-owned subsidiaries that have fixed charges 54,121 --------- 567,589 Add fixed charges: Consolidated interest expense 95,017 Interest Portion (1/3) of Consolidated Rent Expense 9,833 --------- $ 672,439 ========= FIXED CHARGES: Consolidated interest expense $ 95,017 Interest Portion (1/3) of Consolidated Rent Expense 9,833 --------- $ 104,850 ========= RATIO OF EARNINGS TO FIXED CHARGES 6.41 ========= Tax-Effected Redeemable Preferred Dividends $ 85 Fixed Charges 104,850 --------- Fixed Charges and Redeemable Preferred Dividends $ 104,935 ========= RATIO OF EARNINGS TO FIXED CHARGES AND REDEEMABLE PREFERRED DIVIDENDS 6.41 ========= Tax-Effected Preferred Dividends $ 1,614 Fixed Charges 104,850 --------- Fixed Charges and Preferred Dividends $ 106,464 ========= RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS 6.32 =========
EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated financial statements of Telephone and Data Systems, Inc. as of September 30, 1999, and is qualified in its entirety by reference to such financial statements. 1,000 9-mos DEC-31-1999 JAN-01-1999 SEP-30-1999 80,131 649,137 312,938 9,622 35,107 446,560 3,396,538 1,283,024 5,356,158 483,674 1,281,090 0 21,860 621 2,430,767 5,356,158 0 1,462,848 0 1,155,115 (300,434) 0 95,017 513,150 210,475 302,675 (84,190) 0 0 218,485 3.54 3.47
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