- -------------------------------------------------------------------------------- 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 March 31, 2000 ------------------------------------------------- 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 April 28, 2000 ----------------------------- ------------------------------ Common Shares, $.01 par value 53,557,625 Shares Series A Common Shares, $.01 par value 6,958,391 Shares - --------------------------------------------------------------------------------
TELEPHONE AND DATA SYSTEMS, INC. -------------------------------- 1ST 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 2-13 Consolidated Statements of Income - Three Months Ended March 31, 2000 and 1999 14 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2000 and 1999 15 Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 16-17 Notes to Consolidated Financial Statements 18-25 Part II. Other Information 26 Signatures 27
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 3.4 million wireless telephone and telephone customer units. TDS's 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 wireless telephone operations through its 81.3%-owned subsidiary, United States Cellular Corporation ("U.S. Cellular") and its wireline telephone operations through its wholly-owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom"). Merger of Aerial Communications, Inc. In 1999, the Board of Directors of TDS approved a plan of merger between Aerial Communications, Inc. ("Aerial"), its over 80%-owned personal communications services company, 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. 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. 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 expected to recognize a net gain on the disposition of Aerial and, accordingly, deferred recognition of Aerial's net operating losses of $69.3 million from September 18, 1999 through March 31, 2000. The merger closed on May 4, 2000. TDS received 35,570,493 shares of VoiceStream common stock, approximately 14% of VoiceStream's common shares on a fully converted basis, valued at $3.9 billion at closing. TDS will recognize a gain of approximately $2.25 billion on this transaction. TDS was released from its guarantees of Aerial's long-term debt at the closing of the merger. In addition, the net settlement of intercompany debt due from Aerial amounting to less than $100 million was repaid at the closing of the merger. 2
RESULTS OF OPERATIONS - --------------------- Three Months Ended 3/31/00 Compared to Three Months Ended 3/31/99 - ----------------------------------------------------------------- Operating Revenues increased 11% ($49.3 million) during the first three months of 2000 primarily as a result of a 17.5% increase in customer units served. U.S. Cellular's operating revenues increased 10% ($34.1 million) as customer units served increased by 437,000, or 19.3%, since March 31, 1999, to 2,707,000. TDS Telecom operating revenues increased 12% ($15.2 million) as total access lines increased by 63,900, or 11%, since March 31, 1999 to 662,300. Operating Expenses rose 10% ($36.4 million) in the first three months of 2000 reflecting growth in operations. U.S. Cellular's operating expenses increased 9% ($25.1 million) and TDS Telecom's expenses increased 11% ($11.3 million). Operating Income increased 16% to $92.0 million in the first three months of 2000 from $79.1 million in 1999. U.S. Cellular's operating income increased 17% to $61.2 million in the first three months of 2000 from $52.1 million in 1999 and its operating income margin, as a percentage of service revenues, expanded to 17.7% in 2000 from 16.5% in 1999. TDS Telecom's operating income increased 14% to $30.9 million in the first three months of 2000 from $27.0 million in 1999 and its operating margin expanded to 21.4% in 2000 from 20.9% in 1999. Investment and Other Income (Expense) totaled $9.3 million in 2000 and $10.5 million in 1999. Investment Income, net, the Company's share of income in unconsolidated entities in which the Company has a minority interest, and follows the equity method of accounting decreased 75% ($5.0 million) in the first three months of 2000. The decrease was primarily due to decreased operating results related to the paging interest offset somewhat by an increase in the aggregate operating results of minority-owned cellular interests. Investment income is net of amortization relating to these minority interests. As of March 31, 2000, the carrying value of the paging investment was approximately $78 million. The Company has evaluated the carrying value of the paging investment and will continue to review the carrying value considering the operations of the investment and the general conditions of the paging industry. Minority Share of Income includes the minority public shareholders' share of U.S. Cellular's net income, the minority shareholders' or partners' share of U.S. Cellular's subsidiaries' net income or loss and other minority interests. The increase in minority share of income is primarily due to the increase in U.S. Cellular's net income. 3
<TABLE> <CAPTION> Three Months Ended March 31, ---------------------------- 2000 1999 Change ---- ---- ------ (Dollars in thousands) <S> <C> <C> <C> Minority Share of Income U.S. Cellular Minority Public Shareholders' $ (9,037) $ (5,297) $ (3,740) Minority Shareholders' or Partners' (1,015) (1,483) 468 --------- --------- --------- (10,052) (6,780) (3,272) Other (193) (181) (12) --------- --------- --------- $(10,245) $ (6,961) $ (3,284) ========= ========= ========= </TABLE> Gain on Sale of Cellular and Other Investments totaled $17.9 million in the first three months of 2000 and $11.6 million in the first three months of 1999 as the Company sold certain non- strategic minority cellular interests and other investments. Interest Expense decreased 11% ($2.7 million) in the first three months of 2000. The decline in interest expense is primarily due to reduced short-term debt balances. Income Tax Expense increased 33% ($8.1 million) in 2000 primarily due to increased pretax income as a result of improved operations. The overall effective tax rate on continuing operations was 45.6% in 2000 and 42.9% in 1999. The increase in the effective tax rate was primarily due to the tax effect of the gains. Net Income From Continuing Operations totaled $39.4 million, or $.63 diluted earnings per share, in the first three months of 2000, compared to $33.0 million, or $.52 diluted earnings per share, in the first three months of 1999. The increase in net income from continuing operations and earnings per share primarily reflects improved operating results. A summary of net income available to common and diluted earnings per share from continuing operations and gains from the sale of cellular and other investments is shown below. <TABLE> <CAPTION> Three Months Ended March 31, ------------------- 2000 1999 ------- ------- (Dollars in thousands, except per share amounts) <S> <C> <C> Net Income From Continuing Operations Operations $ 32,261 $ 26,013 Gains 7,090 7,021 ------- -------- $ 39,351 $ 33,034 ------- -------- Diluted Earnings Per Share From Continuing Operations Operations $ .52 $ .41 Gains .11 .11 ------- -------- $ .63 $ .52 ======= ======== </TABLE> Net Income Available to Common totaled $39.2 million, or $.63 diluted earnings per share, in the 4
first three months of 2000, compared to $10.1 million, or $.16 diluted earnings per share, in the first three months of 1999. The net income available to common in 1999 was reduced by the Loss From Discontinued Operations of $22.6 million or $.36 per diluted share. Losses of $25.1 million in the first three months of 2000 have been deferred and will be offset against the expected gain upon closing of the merger. U.S. CELLULAR OPERATIONS TDS provides wireless telephone service through United States Cellular Corporation ("U.S. Cellular"), an 81.3%-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 customer units served increased by 437,000, or 19.3%, since March 31, 1999, to 2,707,000. <TABLE> <CAPTION> Three Months Ended March 31, --------------------- 2000 1999 ------ ------ (Dollars in thousands) <S> <C> <C> Operating Revenue Local retail $ 247,540 $ 213,511 Inbound roaming 73,251 70,964 Long-distance and other 25,169 30,719 -------- -------- Service Revenue 345,960 315,194 Equipment sales 14,127 10,791 -------- -------- 360,087 325,985 -------- -------- Operating Expenses System operations 47,184 58,691 Marketing and selling 69,458 58,305 Cost of equipment sold 34,597 25,441 General and administrative 81,687 79,519 Depreciation 51,169 41,616 Amortization 14,839 10,299 -------- -------- 298,934 273,871 -------- -------- Operating Income $ 61,153 $ 52,114 ======== ======== </TABLE> Operating revenue increased 10% ($34.1 million) in the first three months of 2000 primarily related to the increase in customer units. However, total average monthly service revenue per customer decreased $3.70 to $43.48 in the first three months of 2000 from $47.18 in 1999. The decline in average monthly service revenue per customer is primarily related to lower retail revenue per customer ($.85), the larger increase in the customer base than in roaming revenues ($1.41) and the reduction in long-distance charges on roaming minutes of use ($1.44). Local retail revenue increased 16% ($34.0 million) in the first three months of 2000 due primarily to the 19.3% customer growth. Average local minutes of use per retail customer increased 27% to 128 in 2000 from 101 in 1999, while average local retail revenue per minute continued to decline in 2000. Competitive pressures and U.S. Cellular's use of pricing and other incentive programs in order to stimulate overall usage resulted in a lower average revenue per minute of use. Average monthly 5
local retail revenue per customer declined 3% ($.85) to $31.11 in 2000 from $31.96 in 1999. Inbound roaming revenue (charges to customers of other systems who use U.S. Cellular's cellular systems when roaming) increased 3% ($2.3 million) in the first three months of 2000. The growth in inbound roaming revenue in 2000 was affected by an increase in roaming minutes of use and a decrease in revenue per minute due to the downward 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 pricing programs offered by other wireless companies. 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 of use. Management anticipates that the growth rate in inbound roaming minutes of use will be slower throughout 2000 due to these pricing programs being present in both periods of comparison. Additionally, as new wireless operators begin service in U.S. Cellular markets, roaming partners could switch their business to these new operators, further slowing the growth in inbound roaming minutes of use. It is also anticipated that average inbound roaming revenue per minute of use will also continue to decline. Average monthly inbound roaming revenue per U.S. Cellular customer decreased 13% ($1.41) to $9.21 in 2000 compared to $10.62 in 1999. The decrease is attributable to a larger increase in the U.S. Cellular customer base than in inbound roaming revenue. Long-distance and other revenue decreased 18% ($5.6 million) in the first three months of 2000. While the volume of long-distance calls have increased, long-distance revenue declined due to 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 31% ($1.44) to $3.16 in 2000 compared to $4.60 in 1999. Operating expenses increased 9% ($25.1 million) during the first three months of 2000. The increase is primarily related to costs incurred to expand the customer base and increased depreciation and amortization expense, offset somewhat by a decrease in system operations expense. Costs to expand the customer base consist of marketing and selling expenses and the cost of equipment sold. Marketing and selling expenses increased 19% ($11.2 million) in the first three months of 2000 while cost of equipment sold increased 36% ($9.2 million). These expenses, less equipment sales revenue, represent the cost to acquire a new customer. Equipment sales revenue increased 31% ($3.3 million) in the first three months of 2000. Cost per gross customer addition increased to $338 in 2000 from $319 in 1999. Gross customer activations increased to 266,000 in 2000 from 229,000 in 1999. The increase in cost per gross customer addition was primarily driven by increased commissions, which resulted from an increase in percentage of gross activations produced by agents, and an increase in equipment subsidies primarily driven by the sale of more dual-mode phones, which on average generate greater equipment subsidies than the sale of analog phones. The increase in sales of dual-mode phones is related to the growth in number of U.S. Cellular's systems providing digital coverage, which enables U.S. Cellular to offer its customers more features, better clarity and increased roaming capabilities. System operations expenses (costs to provide service) decreased 20% ($11.5 million) and 6
consumed 13.6% of service revenues in 2000 and 18.6% in 1999. System operations expenses include customer usage expenses and maintenance, utility and cell site expenses. The decrease in system operations expense was primarily due to the $16.1 million decrease in net outbound roaming expenses reflecting a reduction in cost per minute of use related to the lower roaming prices in the industry discussed previously. The decrease was partially offset by the effect of increases in local and roaming minutes of use. General and administrative expenses increased 3% ($2.2 million) and consumed 23.6% of service revenues in 2000 and 25.2% in 1999. The overall increase in administrative expenses reflects the growing customer base and other expenses incurred related to the growth in U.S. Cellular's business. U.S. Cellular incurred additional costs in 2000 by providing dual-mode phone units to customers who migrated from analog to digital rate plans. This increase was partially offset by decreases in consulting expenses and nonincome taxes. Depreciation expense increased 23% ($9.6 million) in 2000 primarily due to the 12% increase in average fixed assets since March 31, 1999, and a reduction in the useful lives of certain assets beginning in 2000. Amortization expense increased 44% ($4.5 million) in 2000 primarily related to U.S. Cellular's new billing and information system. Beginning October 1, 1999, U.S. Cellular began amortizing the development costs of the new billing and information system, totaling $118 million, over a seven year period. Operating income increased 17% ($9.0 million) to $61.2 million in the first three months of 2000. The improvement was primarily driven by the substantial growth in customer units and revenue. Operating margin, as a percent of service revenue, improved to 17.7% in 2000 compared to 16.5% in 1999. Management expects service revenues to continue to grow during the remainder of 2000; however, management anticipates that 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 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 four years. U.S. Cellular expects PCS operators to continue deployment of PCS in portions of all of its market clusters throughout 2000 and 2001. U.S. Cellular has increased its advertising since 1997 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. 7
TDS TELECOM OPERATIONS TDS operates its wireline telephone business through TDS Telecommunications Corporation ("TDS Telecom"), a wholly-owned subsidiary. Total access lines served by TDS Telecom increased by 63,900, or 11%, since March 31, 1999 to 662,300. TDS Telecom's 104 incumbent local exchange ("ILEC") subsidiaries served 576,100 access lines at March 31, 2000, a 4% increase over the 554,900 access lines at March 31, 1999. TDS Telecom's competitive local exchange ("CLEC") subsidiaries served 86,200 access lines at March 31, 2000 compared to 43,500 access lines at March 31, 1999. TDS Telecom plans to expand its CLEC operations into certain mid-sized cities which are geographically proximate to existing TDS Telecom markets. <TABLE> <CAPTION> Three Months Ended March 31, ------------------- 2000 1999 ------ ------ (Dollars in thousands) <S> <C> <C> Local Telephone Operations Operating Revenue Local service $ 40,111 $ 36,389 Network access and long-distance 69,256 66,297 Miscellaneous 17,004 15,601 --------- --------- 126,371 118,287 --------- --------- Operating Expenses Operating expenses 62,035 59,558 Depreciation and Amortization 30,760 29,272 --------- --------- 92,795 88,830 --------- --------- Local Telephone Operating Income $ 33,576 $ 29,457 --------- ---------- Competitive Local Exchange Operations Operating Revenue $ 18,214 $ 11,103 --------- --------- Operating Expenses Operating expenses 18,968 12,321 Depreciation and Amortization 1,960 1,285 --------- ---------- 20,928 13,606 --------- ---------- Competitive Local Exchange Operating (Loss) (2,714) (2,503) ---------- ---------- Intercompany revenues (415) (425) Intercompany expenses (415) (425) ---------- ---------- Operating Income $ 30,862 $ 26,954 ========= ========== </TABLE> Operating revenue increased 12% ($15.2 million) in the first three months of 2000, reflecting primarily customer growth. Revenue from local telephone operations increased 7% ($8.1 million) in the first three months of 2000. Average monthly revenue per access line increased 3% ($1.88) to $73.41 in the first three months of 2000 from $71.53 in the first three months of 1999. Local service revenue increased 10% ($3.7 million) during 2000. Access line growth increased revenues by $1.7 million while the sale of custom-calling and advanced features increased revenues by $1.3 million. Rate increases added $750,000 to revenues. Average monthly local service revenue per access line was $23.30 in 2000 8
and $22.01 in 1999. Network access and long-distance revenue increased 4% ($3.0 million) during 2000. Revenue generated from access minute growth due to increased network usage increased $1.6 million in 2000. Compensation from state and national revenue pools due to increased costs of providing network access added $1.0 million to revenues. Average monthly network access and long-distance revenue per access line was $40.23 in 2000 and $40.09 in 1999. Miscellaneous revenue increased 9% ($1.4 million) during 2000. Average monthly miscellaneous revenue per access line was $9.88 in 2000 and $9.43 in 1999. Revenue from competitive local exchange operations increased 64% ($7.1 million) in the first three months of 2000 as access lines served increased to 86,200 at March 31, 2000 from 43,500 at March 31, 1999. Operating expenses increased 11% ($11.3 million) during 2000. Expenses from local telephone operations increased by 4% ($4.0 million) in the first three months of 2000. Local telephone expenses as a percent of local telephone revenues were 73.4% in the first three months of 2000 and 75.1% in 1999. Cash operating expenses increased by 4% ($2.5 million) in 2000 while depreciation and amortization increased 5% ($1.5 million). Local telephone operating expenses are expected to increase due to inflation and the development and introduction of new revenue-producing programs. Competitive local exchange operating expenses increased 54% ($7.3 million) in the first three months of 2000 due primarily to the costs incurred to grow the customer base and provide competitive local exchange services. Operating income increased 14% ($3.9 million) to $30.9 million in the first three months of 2000 reflecting improved local telephone operations operating results. Operating income from local telephone operations increased 14% ($4.1 million) to $33.6 million. Operating loss from competitive local exchange operations increased 8% ($211,000). Operating income from local telephone operations should remain fairly stable or increase slightly with expense increases due to inflation and additional revenue and expenses from new or expanded product offerings. Operating income from competitive local exchange operations is expected to decline somewhat in the next three quarters due to costs associated with continued expansion into new markets. Revenue Recognition In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements ("SAB 101")." SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial satements. On March 24, 2000, the SEC issued Staff Accounting Bulletin No. 101A "Amendment: Revenue Recognition in Financial Statements". SAB 101A allows companies to defer the reporting of a change in accounting principle, as required by SAB 101, until the second quarter of the current fiscal year. Management is currently analyzing the impact of this bulletin. 9
FINANCIAL RESOURCES AND LIQUIDITY Cash Flows From Continuing Operating Activities. The Company is generating substantial internal funds from the operations of U.S. Cellular and TDS Telecom. Cash flows from operating activities totaled $144.6 million in the first three months of 2000 compared to $100.5 million in 1999. Net income from continuing operations excluding all noncash items increased 23% ($27.8 million) to $147.4 million in the first three months of 2000. The increase primarily reflects the 18% ($29.2 million) growth in aggregate operating cash flow (operating income plus depreciation and amortization). Changes in assets and liabilities from operations required $2.8 million in 2000 and $19.1 million in 1999. <TABLE> <CAPTION> Three Months Ended March 31, ----------------------- 2000 1999 ------ ------ (Dollars in thousands) <S> <C> <C> Net Income from continuing operations $ 39,351 $ 33,034 Noncash items included in Net Income from continuing operations 108,042 86,512 --------- ---------- Net Income from continuing operations excluding all noncash items 147,393 119,546 Changes in assets and liabilities from operations (2,800) (19,072) ---------- ---------- $ 144,593 $ 100,474 ========= ========== </TABLE> Cash Flows From Continuing Investing Activities. TDS makes substantial investments each year to acquire, construct, operate and maintain modern high-quality communications networks and facilities as a basis for creating long-term value for shareowners. Cash flows from investing activities required $48.5 million in the first three months of 2000 compared to $96.4 million in 1999 reflecting primarily capital expenditures. Capital expenditures required $75.9 million in 2000 and $106.2 million in 1999. Acquisitions, net of cash acquired, required $8.1 million in 1999. The sales of non-strategic cellular interests and other investments provided $22.5 million in 2000, and $14.3 million in 1999, reducing total cash flows required for investing activities in each period. The primary purpose of TDS's construction and expansion strategy is to continually expand and improve the quality of its telecommunications networks in order to provide improved services to customers. U.S. Cellular capital expenditures totaled $59.8 million in 2000 and $84.7 million in 1999 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 $16.1 million in 2000 and $21.6 million in 1999 representing amounts spent on accommodating growth in existing ILEC markets and expansion of new and existing CLEC markets. Cash Flows From Continuing Financing Activities. Cash flows from financing activities required $111.9 million in the first three months of 2000 and provided $35.7 million in 1999. During the first three months of 2000, TDS paid $59.6 million to repurchase TDS Common Shares and U.S. Cellular paid $51.5 million to repurchase U.S. Cellular Common Shares. The Company increased Notes Payable balances by $7.7 million in 2000 and $40.6 million in 1999. Dividends paid on Common and 10
Preferred Shares, excluding dividends reinvested, totaled $7.8 million in 2000 and $7.2 million in 1999. In February 2000, the TDS Board of Directors authorized the repurchase of up to 2.0 million TDS Common Shares. As of March 31, 2000, the Company has repurchased 545,000 common shares under this program. In March 2000, the U.S. Cellular Board of Directors authorized the repurchase of up to 1.4 million U.S. Cellular Common Shares. A total of 652,300 common shares were repurchased under this program as of March 31, 2000. An additional 165,000 U.S. Cellular Common Shares were purchased in the first quarter of 2000 pursuant to a previously authorized program to repurchase a limited amount of shares on a quarterly basis, primarily for use in employee benefit plans. Cash Flows From Discontinued Operations. Cash outflows from discontinued operations totaled $51.3 million in 2000 compared to $36.4 million in 1999 reflecting primarily amounts borrowed from TDS to fund the operating activities of Aerial. LIQUIDITY TDS anticipates that the aggregate resources required for 2000 will include approximately $330 million for U.S. Cellular capital additions and $140 million for TDS Telecom capital additions. TDS and its subsidiaries had cash and temporary investments totaling $47.9 million at March 31, 2000. TDS also had $587 million of bank lines of credit for general corporate purposes at March 31, 2000. Unused amounts of such lines totaled $579.3 million. These line of credit agreements provide for borrowings at negotiated rates up to the prime rate. U.S. Cellular plans to finance its cellular construction program using primarily internally generated cash. U.S. Cellular's operating cash flow totaled $508.9 million for the twelve months ended March 31, 2000, up 25% ($100.5 million) from 1999. U.S. Cellular had $500 million of bank lines of credit for general corporate purposes at March 31, 2000, all of which was unused. These line of credit agreements provide for borrowings at the London InterBank Offered Rate ("LIBOR") plus 26.5 basis points. TDS Telecom plans to finance its construction program using primarily internally generated cash supplemented by long-term financing from federal government programs. TDS Telecom's operating cash flow totaled $244.0 million for the twelve months ended March 31, 2000, up 14% ($29.5 million) from 1999. At March 31, 2000, TDS Telecom telephone subsidiaries had $112.8 million in unadvanced loan funds from federal government programs to finance the telephone construction activities. Pursuant to current Board authorizations discussed above, TDS and U.S. Cellular plan to continue the repurchase of their common shares, as market conditions warrant, on the open market or at negotiated prices in private transactions. In May 2000, the U.S. Cellular Board of Directors authorized the repurchase of an additional 1.4 million U.S. Cellular Common Shares. The repurchase programs are intended to create value for the shareholders. The repurchases of common shares will be funded by internal cash flow, supplemented by short-term borrowings. 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 11
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. U.S. Cellular's LYONs are convertible, at the option of their 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 Liquid Yield Option Note ('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, U.S. Cellular will be required, at the option of each holder of LYONs, to purchase LYONs for a price of $411.99 for each LYON (the "Put Value"). Each LYON has a face value of $1,000.00 at maturity. Pursuant to the preceding terms, on May 15, 2000, U.S. Cellular commenced a tender offer to purchase the LYONs for cash in the amount of $411.99 for each LYON. Pursuant to the terms of the LYONs, U.S. Cellular has elected not to become obligated to offer to purchase the LYONs at their accreted value as of June 15, 2005. 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 the 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 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 the event that any holders of LYONs exercise this option, U.S. Cellular intends to finance such purchases using cash on hand and, if necessary, borrowing under its $500 million bank lines of credit. In addition, under the terms of the LYONs, U.S. Cellular may, at any time 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 LYONs must be notified of such redemption between 30 and 60 days prior to the date of the redemption. During the period between the date of notice and the redemption date, as at any other time, any holder of LYONs may exercise his conversion rights. The U.S. Cellular Board of Directors has authorized management to opportunistically repurchase LYONs in private transactions. U.S. Cellular may also purchase a limited amount of Lyons in open-market transactions from time to time. 12
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, 1999. TDS maintains a portfolio of available for sale marketable equity securities which resulted primarily from the sale of non-strategic assets. The market value of these investments, principally Vodafone AirTouch plc American Depository Receipts, Illuminet Holdings, Inc. common shares, and Rural Cellular Corporation common shares, amounted to $893.8 million at March 31, 2000. A hypothetical 10% decrease in the share prices of these investments would result in a $89.4 million decline in the market value of the investments. 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 Quarterly 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, * availability of future financing, and * changes in growth in cellular customers, penetration rates and churn rates. 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. 13
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME --------------------------------- Unaudited --------- <TABLE> <CAPTION> Three Months Ended March 31, -------------------- 2000 1999 ------ ------ (Dollars in thousands, except per share amounts) <S> <C> <C> OPERATING REVENUES U.S. Cellular $ 360,087 $ 325,985 TDS Telecom 144,170 128,965 --------- --------- 504,257 454,950 --------- ---------- OPERATING EXPENSES U.S. Cellular 298,934 273,871 TDS Telecom 113,308 102,011 --------- ---------- 412,242 375,882 --------- ---------- OPERATING INCOME 92,015 79,068 --------- ---------- INVESTMENT AND OTHER INCOME Interest and dividend income 2,470 1,702 Investment income, net of amortization 1,659 6,643 Gain on sale of cellular and other investments 17,851 11,551 Other (expense), net (2,411) (2,389) Minority share of (income) (10,245) (6,961) ---------- ---------- 9,324 10,546 ---------- ---------- INCOME BEFORE INTEREST AND INCOME TAXES 101,339 89,614 Interest expense 22,829 25,563 Minority interest in income of subsidiary trust 6,203 6,203 ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 72,307 57,848 Income tax expense 32,956 24,814 ---------- ---------- NET INCOME FROM CONTINUING OPERATIONS 39,351 33,034 ---------- ---------- Discontinued Operations -- (43,149) Tax effect of discontinued operations -- 20,515 ---------- ---------- DISCONTINUED OPERATIONS - NET OF TAX -- (22,634) ---------- ---------- NET INCOME 39,351 10,400 Preferred Dividend Requirement (134) (350) ---------- ---------- NET INCOME AVAILABLE TO COMMON $ 39,217 $ 10,050 ========= ========== WEIGHTED AVERAGE COMMON SHARES (000s) 61,078 61,279 BASIC EARNINGS PER SHARE Continuing operations $ 0.64 $ 0.53 Discontinued Operations -- (0.37) ---------- ---------- $ 0.64 $ 0.16 ========= ========== DILUTED EARNINGS PER SHARE Continuing Operations $ 0.63 $ 0.52 Discontinued Operations -- (0.36) ---------- ---------- $ 0.63 $ 0.16 ========= ========== DIVIDENDS PER SHARE $ .12 $ .115 ========= ========== </TABLE> [FN] The accompanying notes to financial statements are an integral part of these statements. </FN> 14
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Unaudited --------- <TABLE> <CAPTION> Three Months Ended March 31, ------------------ 2000 1999 ------ ------ (Dollars in thousands) <S> <C> <C> CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES Net income from continuing operations $ 39,351 $ 33,034 Add (Deduct) adjustments to reconcile net income from continuing operations to net cash provided by operating activities Depreciation and amortization 98,729 82,471 Deferred taxes 8,588 7,896 Investment income (4,958) (9,867) Minority share of income 10,245 6,961 Gain on sale of cellular and other investments (17,851) (11,551) Noncash interest expense 4,581 4,401 Other noncash expense 8,708 6,201 Change in accounts receivable 44,680 13,554 Change in materials and supplies 418 4,848 Change in accounts payable (25,636) (20,673) Change in accrued interest (13,347) (13,148) Change in accrued taxes 433 2,438 Change in other assets and liabilities (9,348) (6,091) --------- --------- 144,593 100,474 --------- --------- CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES Capital expenditures (75,908) (106,243) Acquisitions, net of cash acquired -- (8,131) Investments in and advances to investment entities and license costs (730) 1,633 Distributions from investments 5,827 6,100 Proceeds from investment sales 22,500 14,295 Other investing activities (194) (4,011) --------- --------- (48,505) (96,357) --------- --------- CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES Long-term debt borrowings 837 1,756 Repayments of long-term debt (3,773) (3,846) Change in notes payable 7,700 40,637 Dividends paid (7,835) (7,183) Repurchase of Common Shares (59,571) -- Purchase of subsidiary common stock (51,522) -- Other financing activities 2,223 4,385 --------- --------- (111,941) 35,749 --------- --------- CASH FLOWS FROM DISCONTINUED OPERATIONS (51,319) (36,399) --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS - (67,172) 3,467 Beginning of period 111,010 45,139 ---------- --------- End of period $ 43,838 $ 48,606 ========== ========= </TABLE> [FN] The accompanying notes to financial statements are an integral part of these statements. </FN> 15
<TABLE> <CAPTION> TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------ (Unaudited) March 31, December 31, 2000 1999 ---------- ---------- (Dollars in thousands) <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 43,838 $ 111,010 Temporary investments 4,045 4,983 Accounts receivable from customers and others 274,136 317,025 Materials and supplies, at average cost, and other current assets 76,751 74,990 ---------- ---------- 398,770 508,008 ---------- ---------- INVESTMENTS Intangible Assets Cellular license acquisition costs, net 1,150,004 1,156,175 Franchise costs and other costs, net 176,365 177,677 Investments in unconsolidated entities 262,045 272,601 Marketable equity securities 893,844 843,280 Other investments 28,799 28,837 ---------- ---------- 2,511,057 2,478,570 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, NET U.S. Cellular 1,206,017 1,206,467 TDS Telecom 873,317 889,422 ---------- ---------- 2,079,334 2,095,889 ---------- ---------- OTHER ASSETS AND DEFERRED CHARGES 54,000 56,216 ---------- ---------- NET ASSETS OF DISCONTINUED OPERATIONS 288,292 237,145 ---------- ---------- TOTAL ASSETS $ 5,331,453 $ 5,375,828 ========== ========== </TABLE> [FN] The accompanying notes to financial statements are an integral part of these statements. </FN> 16
<TABLE> <CAPTION> TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ (Unaudited) March 31, December 31, 2000 1999 --------- --------- (Dollars in thousands) <S> <C> <C> CURRENT LIABILITIES Current portion of long-term debt $ 14,953 $ 14,967 Notes payable 7,700 -- Accounts payable 177,735 206,937 Advance billings and customer deposits 47,705 43,965 Accrued interest 10,145 23,492 Accrued taxes 20,148 19,773 Accrued compensation 29,574 35,939 Other current liabilities 25,563 24,599 ----------- ---------- 333,523 369,672 ----------- ---------- DEFERRED LIABILITIES AND CREDITS 450,979 424,515 ----------- ---------- LONG-TERM DEBT, excluding current portion 1,277,774 1,279,877 ----------- ---------- MINORITY INTEREST in subsidiaries 499,295 509,658 ----------- ---------- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES of Subsidiary Trusts Holding Solely Company Subordinated Debentures (a) 300,000 300,000 ----------- ---------- PREFERRED SHARES 8,806 9,005 ----------- ---------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $.01 per share 554 554 Series A Common Shares, par value $.01 per share 70 70 Capital in excess of par value 1,874,786 1,897,402 Treasury Shares, at cost (1,725,889 and 1,237,207 shares, respectively) (158,789) (102,975) Accumulated other comprehensive income 203,960 179,071 Retained earnings 540,495 508,979 ------------ ------------ 2,461,076 2,483,101 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,331,453 $ 5,375,828 =========== ============ </TABLE> [FN] (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. </FN> 17
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 March 31, 2000 and December 31, 1999, and the results of operations and cash flows for the three months ended March 31, 2000 and 1999. The results of operations for the three months ended March 31, 2000 and 1999, are not necessarily indicative of the results to be expected for the full year. 2. Discontinued Operations In 1999, the Board of Directors of TDS approved a plan of merger between Aerial Communications, Inc. ("Aerial"), its over 80%-owned personal communications services company, 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. 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. 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. 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. TDS expected to recognize a net gain on the disposition of Aerial and, accordingly, has deferred recognition of Aerial's net operating losses of $25.1 million in the first quarter of 2000 and $69.3 million from September 18, 1999 through March 31, 2000. See Footnote 10 - Subsequent Event. 18
Net assets of discontinued operations are as follows: <TABLE> <CAPTION> March 31, 2000 December 31, 1999 -------------- ----------------- (Dollars in thousands) <S> <C> <C> Current Assets Cash and temporary investments $ 20,835 $ 5,261 Accounts receivable 37,159 32,223 Inventory 9,798 8,336 Other current assets 5,946 5,565 Investments Broadband PCS license costs, net 301,952 303,913 Other Investments 6,717 3,263 Property, plant and equipment 620,232 619,913 Other assets and deferred charges 197 204 Current portion vendor credit agreement (121,273) (103,765) Accounts payable (31,518) (35,230) Accrued taxes (7,325) (7,419) Accrued compensation (6,552) (9,732) Other accrued expenses (4,971) (4,676) Deferred income tax liability (146,284) (147,696) Long-term debt (255,664) (250,846) Minority interest in subsidiaries (210,248) (226,348) Losses deferred after measurement date 69,291 44,179 ---------- ---------- $ 288,292 $ 237,145 ========== ========== </TABLE> 19
Summarized income statement information relating to discontinued operations, excluding any corporate charges and intercompany interest expense, is as follows: <TABLE> <CAPTION> Three Months Ended March 31, ---------------------- 2000 1999 ----- ------ (Dollars in thousands) <S> <C> <C> Revenues $ 67,529 $ 50,541 Expenses 121,472 100,375 --------- ---------- Operating (Loss) (53,943) (49,834) Minority share of loss 11,655 10,102 Other income 5,255 1,591 Interest expense (6,330) (5,008) ---------- ---------- (Loss) Before Income Taxes (43,363) (43,149) Income tax benefit 18,251 20,515 ---------- ---------- Net (Loss) $ (25,112) $ (22,634) Losses deferred after measurement date 25,112 -- ---------- ---------- Net (Loss) From Discontinued Operations $ -- $ (22,634) ========== ========== </TABLE> Summarized cash flow statement information relating to discontinued operations is as follows: <TABLE> <CAPTION> Three Months Ended March 31, ----------------------- 2000 1999 ------ ------ (Dollars in thousands) <S> <C> <C> Cash flows from operating activities $ (18,173) $ (31,327) Cash flows from financing activities (4,444) 739 Cash flows from investing activities (13,128) (5,924) --------- --------- Cash provided (used) by discontinued operations (35,745) (36,512) (Increase) decrease in cash included in Net assets of discontinued operations (15,574) 113 --------- --------- Cash flows from discontinued operations $ (51,319) $ (36,399) ========= ========= </TABLE> 20
3. Marketable Equity Securities Marketable equity securities include the Company's investments in equity securities, primarily Vodafone AirTouch plc American Depository Receipts ("VOD ADRs"), Illuminet Holdings, Inc. common shares and Rural Cellular Corporation common shares. These securities are classified as available-for-sale and stated at fair market value. Information regarding the Company's marketable equity securities is summarized below. <TABLE> <CAPTION> March 31, 2000 December 31, 1999 -------------- ---------------- (Dollars in thousands) <S> <C> <C> Available-for-sale Equity Securities Aggregate Fair Value $ 893,844 $ 843,280 Adjusted Basis 517,870 517,870 ---------- --------- Gross Unrealized Holding Gains 375,974 325,410 Tax Effect 150,450 130,616 ---------- ---------- Unrealized Holding Gains, net of tax 225,524 194,794 Minority Share of Unrealized Holding Gains 21,564 15,723 ---------- ---------- Net Unrealized Holding Gains $ 203,960 $ 179,071 ========== ========== </TABLE> 4. Common Stockholders' Equity In February 2000, the TDS Board of Directors authorized the repurchase of up to 2.0 million TDS Common Shares. As of March 31, 2000, TDS has repurchased 545,000 common shares under this program. 5. Gains from Sale of Cellular and Other Investments Gains from the sale of cellular interests and other investments primarily reflect gains recorded on the sale of a minority cellular interest in 2000 and a minority cellular interest and certain other investments in 1999. 21
6. Other Comprehensive Income The Company's Comprehensive Income includes Net Income and Unrealized Gains from Marketable Equity Securities that are classified as "available-for-sale". The following table summarizes the Company's Comprehensive Income. <TABLE> <CAPTION> Three Months Ended March 31, -------------------- 2000 1999 ------ ------ (Dollars in thousands) <S> <C> <C> Accumulated Other Comprehensive Income Balance, beginning of period $ 179,071 $ 75,609 Unrealized gains on securities 50,564 129,727 Income tax effect (19,834) (52,092) ---------- ---------- 30,730 77,635 Minority share of unrealized gains (5,841) (11,809) ---------- ---------- Net unrealized gains 24,889 65,826 ---------- ---------- Balance, end of period $ 203,960 $ 141,435 ========== ========== </TABLE> <TABLE> <CAPTION> Three Months Ended March 31, ---------------------- 2000 1999 ---- ---- (Dollars in thousands) <S> <C> <C> Comprehensive Income Net Income $ 39,351 $ 10,400 Net unrealized gains (losses) on securities 24,889 65,826 ------- -------- $64,240 $ 76,226 ======= ======== </TABLE> 22
7. Earnings Per Share The amounts used in computing Earnings per Common Share and the effect on income and the weighted average number of Common and Series A Common Shares of dilutive potential common stock are as follows: <TABLE> <CAPTION> Three Months Ended March 31, -------------------- 2000 1999 ---- ---- (Dollars in thousands) <S> <C> <C> Net Income from Continuing Operations $ 39,351 $ 33,034 Less: Preferred Dividends (134) (350) --------- --------- Net Income from Continuing Operations used in Basic Earnings per Share 39,217 32,684 Loss on Discontinued Operations -- (22,634) --------- --------- Net Income Available to Common used in Basic Earnings per Share $ 39,217 $ 10,050 ======== ========= Net Income from Continuing Operations used in Basic Earnings per Share $ 39,217 $ 32,684 Reduction in preferred dividends if Preferred Shares converted in Common Shares 78 110 Minority income adjustment (206) (477) --------- --------- Net Income from Continuing Operations used in Diluted Earnings per Share $ 39,089 $ 32,317 Loss on Discontinued Operations -- (22,634) -------- --------- Net Income Available to Common used in Diluted Earnings per share $ 39,089 $ 9,683 ======== ========= Weighted Average Number of Common Shares used in Basic Earnings per Share 61,078 61,279 Effect of Dilutive Securities: Common Shares outstanding if Preferred Shares converted 216 323 Stock options and stock appreciation rights 530 193 Common Shares issuable 13 13 -------- --------- Weighted Average Number of Common Shares used in Diluted Earnings per Share 61,837 61,808 ======== ========= </TABLE> [FN] 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. </FN> 23
8. Supplemental Cash Flow Information Cash and cash equivalents include cash and those short-term, highly liquid investments with original maturities of three months or less. Those investments with original maturities of more than three months to twelve months are classified as temporary investments. Temporary investments are stated at cost, which approximates market. Those investments with original maturities of more than 12 months are classified with other investments and are stated at amortized cost. TDS acquired certain cellular licenses in 1999. In conjunction with these acquisitions, the following assets were acquired and liabilities assumed and Common Shares issued. <TABLE> <CAPTION> Three Months Ended March 31, ------------------- 1999 ---- (Dollars in thousands, except per share amounts) <S> <C> Cellular licenses $ 5,464 Decrease in minority interest 2,667 ------ Decrease in cash due to acquisitions $ 8,131 ====== </TABLE> The following table summarizes interest and income taxes paid, and other noncash transactions. <TABLE> <CAPTION> Three Months Ended March 31, -------------------- 2000 1999 ---- ---- (Dollars in thousands) <S> <C> <C> Interest Paid Continuing Operations $ 31,418 $ 34,135 Discontinued Operations 1,448 533 Income Taxes Paid (net of income tax refund received of $15,000 in 2000) (6,233) 6,515 Common Shares issued by TDS for conversion of TDS Preferred Stock $ -- $ 1,874 </TABLE> 24
9. Business Segment Information Financial data for the Company's business segments for each of the three month periods ended or at March 31, 2000 and 1999 are as follows: <TABLE> <CAPTION> Three Months Ended Discontinued or at March 31, 2000 U.S. Cellular TDS Telecom All Other (1) Operations Total - -------------------- ------------- ----------- ------------ ---------- ----- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Operating revenues $ 360,087 $ 144,170 $ -- $ -- $ 504,257 Operating cash flow 127,161 63,582 -- -- 190,743 Depreciation and amortization expense 66,008 32,720 -- -- 98,782 Operating income 61,153 30,862 -- -- 92,015 Total Assets 3,325,817 1,441,235 276,109 288,292 5,331,453 Capital expenditures $ 59,831 $ 16,077 $ -- $ -- $ 75,908 Three Months Ended Discontinued or at March 31, 1999 U.S. Cellular TDS Telecom All Other (1) Operations Total - -------------------- ------------- ----------- ------------- ---------- ----- (Dollars in thousands) Operating revenues $ 325,985 $ 128,965 $ -- $ -- $ 454,950 Operating cash flow 104,029 57,511 -- -- 161,540 Depreciation and amortization expense 51,915 30,557 -- -- 82,472 Operating income 52,114 26,954 -- -- 79,068 Total Assets 3,129,795 1,386,966 165,359 459,568 5,141,688 Capital expenditures $ 84,688 $ 21,555 $ -- $ -- $ 106,243 </TABLE> [FN] (1) Consists of the TDS Corporate operations and all other businesses not included in the U.S. Cellular or TDS Telecom segments. </FN> 10. Subsequent Event The merger between Aerial and VoiceStream closed on May 4, 2000. TDS received 35,570,493 shares of VoiceStream common stock, approximately 14% of VoiceStream's common shares on a fully converted basis, valued at $3.9 billion at closing. TDS will recognize a gain of approximately $2.25 billion on this transaction. TDS was released from its guarantees of Aerial's long-term debt at the closing of the merger. In addition, the net settlement of intercompany debt due from Aerial amounting to less than $100 million was repaid at the closing of the merger. 25
PART II. OTHER INFORMATION Item 1. Legal Proceedings. - --------------------------- On April 11, 2000, two affiliates of U.S. Cellular, along with two unrelated wireless carriers, filed a declaratory judgment action in the United States District Court for the Northern District of Iowa against the Iowa Attorney General. This action was in response to the Attorney General's ongoing investigation of certain wireless industry practices involving wireless service agreements and related matters. The suit by U.S. Cellular and the other wireless carriers seeks to have certain state laws declared inapplicable to wireless service agreements and such practices. In response, the Iowa Attorney General filed suit in the Iowa State District Court for Polk County against U.S. Cellular, alleging violations of various state consumer credit and other consumer protection laws. The Attorney General is seeking injunctive relief, barring the enforcement of contracts in excess of four months, and related relief. The Attorney General is also seeking unspecified reimbursements for customers, statutory fines ($40,000 for certain violations and $5,000 for others, per violation) as well as fees and costs. This case has since been removed to the U. S. District Court for the Southern District of Iowa. U.S. Cellular vigorously denies the allegations of the Iowa Attorney General and intends to vigorously contest this case. Item 6. Exhibits and Reports on Form 8-K. - ------------------------------------------ (a) Exhibit 11 - Computation of earnings per common share is included herein as footnote 7 to the financial statements. (b) Exhibit 12 - Statement regarding computation of ratios. (c) Exhibit 27 - Financial Data Schedule for the three months ended March 31, 2000. (d) Reports on Form 8-K filed during the quarter ended March 31, 2000. The Company filed a Current Report on Form 8-K, dated February 24, 2000 for the purpose of filing two news releases by the Company. The first news release, dated February 24, 2000, announced that Shareholders of VoiceStream Wireless Corporation, Omnipoint Corporation, and Aerial Communications, Inc. overwhelmingly approved the merger between VoiceStream and Omnipoint, and VoiceStream and Aerial. The second news release, dated February 25, 2000, announced the authorization by the Board of Directors to repurchase up to 2,000,000 Common Shares or approximately 3.7% of the Company's public float. The Current Report was filed on February 28, 2000. 26
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 May 15, 2000 /s/ Sandra L. Helton - ------------------------------------- ------------------------------------- Sandra L. Helton, Executive Vice President-Finance (Chief Financial Officer) Date May 15, 2000 /s/ D. Michael Jack - ------------------------------------ ------------------------------------- D. Michael Jack, Vice President and Controller (Principal Accounting Officer) Signature page to TDS First Quarter 2000 Form 10Q. 27