|
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, providing high-quality telecommunications services
to over 4.5 million wireless telephone and wireline 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 providing customer focused telecommunications services. The Company
conducts substantially all of its wireless telephone operations through its
82.2%-owned subsidiary, United States Cellular Corporation (“U.S.
Cellular”) and its wireline telephone operations through its wholly owned
subsidiary, TDS Telecommunications Corporation (“TDS Telecom”).
The following discussion
and analysis should be read in conjunction with the Company’s interim
consolidated financial statements and footnotes included herein, and with the
Company’s audited consolidated financial statements and footnotes,
Management’s Discussion and Analysis of Results of Operations and Financial
Condition and the description of the Company’s business included in Item 1
of the Company’s Annual Report on Form 10-K for the year ended December 31,
2001, which are incorporated by reference herein.
RESULTS OF
OPERATIONS
Six Months Ended
6/30/02 Compared to Six Months Ended 6/30/01
Operating Revenues
increased 12% ($146.3 million) during the first six months of 2002 primarily
as a result of an 11% increase in customer units served from internal growth and
acquisitions. U.S. Cellular’s operating revenues increased 10% ($91.1
million) as customer units served increased by 253,000, or 8%, since June 30,
2001, to 3,547,000 through internal growth. TDS Telecom operating revenues
increased 17% ($55.3 million) as equivalent access lines increased by 179,400,
or 23%, since June 30, 2001, to 949,900 through internal growth and
acquisitions.
Operating
Expenses rose 13% ($132.5 million) in the first six months of 2002 reflecting
growth in operations. U.S. Cellular's operating expenses increased 8% ($64.3
million) and TDS Telecom's expenses increased 26% ($68.2 million).
Operating Income
increased 7% ($13.9 million) to $226.6 million in the first six months of 2002
from $212.7 million in 2001 primarily as a result of ceasing amortization of
license costs and goodwill effective January 1, 2002 due to the adoption of SFAS
No. 142 as discussed below. U.S. Cellular’s operating income increased 18%
($26.8 million) to $178.9 million in the first six months of 2002 from $152.1
million in 2001 and its operating income margin, as a percentage of service
revenues, increased to 18.6% in 2002 from 17.2% in 2001. TDS Telecom’s
operating income decreased 21% ($12.9 million) to $47.7 million in the first six
months of 2002 from $60.6 million in 2001 and its operating margin declined to
12.5% in 2002 from 18.5% in 2001. The decrease in TDS Telecom’s operating
income and margin was primarily due to increased reserves for uncollectible
receivables related to the WorldCom and Global Crossing bankruptcy filings and
increased operating losses from expanding the competitive local exchange
business.
TDS adopted Statement of
Financial Accounting Standards (“SFAS”) No. 142 effective January
2
1,
2002, and ceased the amortization of license costs and goodwill on that date.
TDS determined that no impairment charge was required upon the completion of the
initial impairment review required by SFAS No. 142. For the six months ended
June 30, 2001, amortization of license costs and goodwill included in U.S.
Cellular’s and TDS Telecom’s depreciation and amortization captions
totaled $18.0 million and $3.4 million, respectively.
Investment and Other
Income (Expense) totaled $(1,687.5) million in 2002 and $(620.1) million in
2001.
Interest and dividend
income increased $40.7 million to $50.2 million in the first six months of 2002.
The increase primarily relates to a $45.3 million dividend the Company recorded
on its investment in Deutsche Telekom, offset somewhat by a $5.1 million
reduction in interest income. This is the first time that TDS has been a record
holder on Deutsche Telekom’s annual dividend declaration date.
(Loss) on marketable
securities and other investments totaled $(1,756.5) million in the first six
months of 2002 and $(644.9) million in the first six months of 2001. Management
determined that the decline in value of marketable securities relative to its
cost basis was other than temporary in 2002 and charged a $1,756.5 million loss
to the statement of operations. The loss primarily includes a loss of $1,363.3
million recognized by TDS on its investment in Deutsche Telekom ordinary shares
and a loss of $243.8 million recognized by U.S. Cellular and $64.3 million
recognized by TDS Telecom on their investment in Vodafone AirTouch plc American
Depository Receipts (“ADRs”).
In May 2001, TDS realized a
pre-tax loss of $644.9 million as a result of the merger between VoiceStream
Wireless Corporation and Deutsche Telekom AG. The loss was due to the decline in
the market price of VoiceStream common stock between the time that TDS acquired
the stock on May 4, 2000 and the merger on May 31, 2001.
Investment
Income, net, increased $1.6 million to $18.8 million in the first six months of
2002. Investment income represents the Company's share of income in
unconsolidated entities in which the Company has a minority interest and follows
the equity method of accounting.
TDS adopted SFAS No. 145 in
the second quarter of 2002. SFAS No. 145, among other things, rescinds SFAS No.
4 “Reporting Gains and Losses from Extinguishment of Debt.” TDS no
longer reports losses from the U.S. Cellular liquid yield option notes
(“LYONs”) conversions for cash as extraordinary losses. Losses on
extinguishment of debt, net of tax and minority interest, totaling $4.2 million,
or $0.07 per diluted share, reported as an extraordinary loss in the first six
months of 2001, have been reclassed into other (expense), net.
Interest Expense
increased 6% ($3.5 million) in the first six months of 2002. The increase in
interest expense is primarily due to the issuance of $500 million of 7.6% Series
A Notes in December 2001 ($19.0 million) offset by a decrease in average
short-term debt balances and related interest expense ($11.6 million), a $116.5
million reduction in medium-term notes ($5.1 million), and a reduction in LYONs
interest expense ($0.9 million).
Income Tax Expense
(Benefit) totaled a benefit of $(588.0) million in 2002, a change of $404.1
million from a benefit of $(183.8) million in 2001. A tax benefit of $686.2
million was recognized in 2002 related to the other than temporary loss on
marketable securities. A tax benefit of $259.7 million was recognized in 2001
related to the loss on the VoiceStream/Deutsche Telekom merger. The effective
tax (benefit) rate was (38.4)% in 2002 and (38.7)% in 2001. The effective tax
rate, excluding the effects of loss on marketable securities and other
investments, was 43.8% in 2002 and 44.7% in 2001.
3
Minority Share of
(Income) Loss 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. U.S. Cellular’s minority public shareholders’
share of income in 2002 was reduced by $25.9 million due to U.S. Cellular’s
$145.6 million, net of tax, write down of marketable securities in 2002.
|
Six Months Ended
June 30,
--------------------
2002 2001 Change
-------- -------- --------
(Dollars in thousands)
Minority Share of (Income) Loss
U.S. Cellular
Minority Public Shareholders' $ 8,053 $(15,724) $ 23,777
Minority Shareholders' or Partners' (2,725) (4,528) 1,803
-------- -------- --------
5,328 (20,252) 25,580
Other (24) (40) 16
-------- -------- --------
$ 5,304 $(20,292) $ 25,596
======== ======== ========
| Net Income
(Loss) Available to Common totaled $(939.0) million, or $(16.02) per diluted
share, in the first six months of 2002, compared to $(311.7) million, or $(5.31)
per diluted share, in the first six months of 2001. Income from operations,
excluding the Deutsche Telekom dividend recorded in 2002, losses on marketable
securities and other investments, amortization of license costs and goodwill in
2001, and losses on conversions of LYONs, was $77.7 million, or $1.32 per
diluted share in 2002 compared to $91.7 million, or $1.55 per diluted share in
2001. The decline is primarily due to operating losses from the developing CLEC
business and additional bad debt expense due to the WorldCom and Global Crossing
bankruptcy filings. A summary of net income available to common and diluted
earnings per share is shown below. |
Six Months Ended
June 30,
-----------------------------
2002 2001
----------- -----------
(Dollars in thousands, except
per share amounts)
Net Income (Loss) from:
Operations $ 77,742 $ 91,683
Deutsche Telekom dividend 27,659 --
Loss on marketable securities (1,044,403) (385,223)
License and goodwill amortization -- (13,927)
Loss on conversion of LYONs -- (4,249)
----------- -----------
$ (939,002) $ (311,716)
=========== ===========
Diluted Earnings Per Share from:
Operations $ 1.32 $ 1.55
Deutsche Telekom dividend 0.47 --
Loss on marketable securities (17.81) (6.55)
License and goodwill amortization -- (0.24)
Loss on conversion of LYONs -- (0.07)
----------- ----------
$ (16.02) $ (5.31)
=========== ==========
| 4
U.S. CELLULAR
OPERATIONS
TDS provides wireless
telephone service through United States Cellular Corporation (“U.S.
Cellular”), an 82.2%-owned subsidiary. U.S. Cellular owns, manages and
invests in wireless markets throughout the United States. The number of customer
units served increased by 253,000, or 8%, since June 30, 2001, to 3,547,000. |
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Dollars in thousands)
Operating Revenue
Retail service $ 400,271 $ 357,647 $ 774,097 $ 684,187
Inbound roaming 62,337 67,328 116,667 131,354
Long-distance and other 38,545 36,187 71,502 69,580
---------- ---------- ---------- ----------
Service Revenue 501,153 461,162 962,266 885,121
Equipment Sales 26,557 14,127 43,864 29,937
---------- ---------- ---------- ----------
527,710 475,289 1,006,130 915,058
---------- ---------- ---------- ----------
Operating Expenses
System operations 118,138 105,852 226,059 201,436
Marketing and selling 83,099 67,999 163,155 139,304
Cost of equipment sold 36,588 28,204 66,955 62,016
General and administrative 113,427 106,600 221,905 215,846
Depreciation 68,957 57,673 134,934 112,917
Amortization 7,452 15,335 14,227 31,430
---------- ---------- ---------- ----------
427,661 381,663 827,235 762,949
---------- ---------- ---------- ----------
Operating Income $ 100,049 $ 93,626 $ 178,895 $ 152,109
========== ========== ========== ==========
| Operating
revenue increased 10% ($91.1 million) in the first six months of 2002 due
primarily to the increase in customer units. Total average monthly service
revenue per customer decreased slightly ($.18) to $45.82 in the first six months
of 2002 from $46.00 in 2001.
Retail service
revenue (charges to U.S. Cellular’s customers for local systems usage
and usage of systems other than their local systems) increased 13% ($89.9
million) in the first six months of 2002 due primarily to the 8% customer
growth. Average local minutes of use per retail customer increased 30% to 259 in
2002 from 199 in 2001, while average local retail revenue per minute continued
to decline in 2002. The increase in monthly local retail minutes of use was
driven by U.S. Cellular’s focus on designing incentive programs and rate
plans to stimulate overall usage. Average monthly retail service revenue per
customer increased 4% ($1.31) to $36.86 in 2002 from $35.55 in 2001.
Inbound roaming
revenue (charges to customers of other systems who use U.S. Cellular’s
wireless systems when roaming) decreased 11% ($14.7 million) in the first six
months of 2002. The decline in inbound roaming revenue in 2002 was a result of a
decrease in revenue per roaming minute of use partially offset by an increase in
roaming minutes of use. Management anticipates that the rate of growth in
inbound roaming minutes of use will be reduced due to newer customers roaming
less than existing customers, reflecting further penetration of the consumer
market. In addition, as new wireless operators begin service in U.S.
Cellular’s markets, roaming partners could switch their business to these
new operators. It is also anticipated that average inbound revenue per minute of
use will continue to decline, reflecting the general downward trend in
negotiated rates. Average monthly inbound roaming revenue per U.S. Cellular
customer decreased 19% ($1.27) to $5.56 in 2002 compared to $6.83 in 2001. The
decrease is attributable to the decrease in the amount of inbound roaming
revenue and an increase in the U.S. Cellular customer base.
5
Operating expenses
increased 8% ($64.3 million) during the first six months of 2002. The increase
is primarily related to increased costs to provide service and expand the
customer base, increased general and administrative expense, and increased depreciation.
System operations expenses
(costs to provide service) increased 12% ($24.6 million) and represented 23% of
service revenues in 2002 and 2001. System operations expenses include customer
usage expenses and maintenance, utility and cell site expenses. This increase
was primarily due to an increase in the cost of minutes used on the systems
($11.0 million), an increase in the cost of maintaining the network ($6.9
million) and an increase in the costs associated with customer roaming on other
companies systems ($6.7 million). Management expects system operations expenses
to increase over the next few years, driven by increases in the number of cell
sites and increase in minutes of use on the U.S. Cellular system and on other
systems when roaming. The number of cell sites increased to 3,145 at June 30,
2002 from 2,688 at June 30, 2001.
Costs to expand the
customer base consist of marketing and selling expenses and the cost of
equipment sold. These expenses, less equipment sales revenue, represent the cost
to acquire a new customer. Cost per gross customer addition increased to $378 in
2002 from $325 in 2001 primarily due to the increase in marketing and selling
expenses and the lower number of gross customer activations. These costs included those related to the development
of U.S. Cellular’s data services strategies, which
increased cost per gross customer activation by $12, in 2002. Gross customer
activations decreased to 493,000 in 2002 from 527,000 in 2001 due to the weaker
economy and increased competition.
Marketing and selling
expenses increased 17% ($23.9 million) in the first six months of 2002. The
increase in 2002 was primarily due to enhancements made to U.S. Cellular’s
merchandise management and telesales processes and the development of data
services strategies ($12.7 million), and increases in advertising costs related
to second quarter 2002 pricing promotions ($4.2 million). Also, during the
second half of 2001, the Company changed certain agent compensation plans to
reduce the base commission payment and
include future residual payments to agents. Such residual payments recognize the
agent’s role in providing ongoing customer support, promote agent loyalty
and encourage agent sales to customers who are more likely to have greater usage
and remain customers for a longer period of time. As a greater percentage of the
Company’s customer base becomes activated by agents receiving residual
payments, it is possible that the Company’s aggregate residual payments to
agents may grow by a larger percentage than its customers. During the first six months of 2002,
the combination of lower customer activations and the increased residual
payments to certain agents increased costs per gross customer activation by $12.
Equipment sales revenue
increased 47% ($13.9 million) in the first six months of 2002 while cost of
equipment sold increased 8% ($4.9 million). U.S. Cellular changed its method of
distributing handsets to its agent channels in the second quarter of 2002. U.S.
Cellular began selling handsets to its agents at a price approximately equal to
its cost. Previously, the agents purchased handsets from third parties. Selling
handsets to agents enables U.S. Cellular to provide better control over handset
quality, set roaming preferences and pass along quantity discounts.
Additionally, in 2002 U.S. Cellular shifted its promotional activities from
handset-related promotion to those based on increased minutes of use packages.
As a result, revenue per handset sale increased in 2002.
General and administrative
expenses increased 3% ($6.1 million) and represented 23% of service revenues in
2002 compared to 24% in 2001. The increase in administrative expenses reflects a
$10.5 million increase in bad debt expense due to the downturn in the economy
over the past 18 months, offset somewhat by a $3.4 million reduction in customer
retention expenses.
6
Management anticipates that customer retention expenses will
increase in the future as it changes to a single digital technology platform and
certain customers will require new handsets.
Depreciation expense
increased 19% ($22.0 million) in 2002 primarily due to the 23% increase in
average fixed assets since June 30, 2001. Increased fixed asset balances in 2002
resulted from the addition of new cell sites built to improve coverage and
capacity in U.S. Cellular’s markets, the addition of digital radio channels
to the network to accommodate increased usage, upgrades to provide digital
service in more service areas and investments in billing and office systems.
Amortization
expense decreased 55% ($17.2 million) as a result of the implementation of SFAS
No. 142. U.S. Cellular determined that licenses have indefinite lives and no
longer amortizes the intangible asset. No impairment charge was required upon
the completion of the initial impairment review. Amortization of license costs
and goodwill totaled $18.0 million in 2001.
Operating income
increased 18% ($26.8 million) to $178.9 million in the first six months of 2002.
Operating margin, as a percent of service revenue, increased to 18.6% in 2002
compared to 17.2% in 2001. The increase in operating income was primarily the
result of increased service revenues, driven by growth in the number of
customers served and a decrease in amortization of licenses and goodwill due to
the implementation of SFAS No. 142. The improvement was partially offset by
increased systems operation, primarily driven by the increase in the number of
cell sites and minutes of use and marketing and selling costs, primarily driven
by increased costs related to the enhancements of U.S. Cellular’s telesales
and merchandise management processes and advertising expense.
U.S. Cellular expects each
of the above factors to continue to have an effect on operating income and
operating margins for the remainder of 2002. Any changes in the above factors,
as well as the effects of other drivers of U.S. Cellular’s operating
results, may cause operating income and operating margins to fluctuate over the
next several quarters.
Management expects service
revenues to continue to grow during the remainder of 2002; however, management
anticipates that average monthly service revenue per customer may decrease as
local retail and inbound roaming revenue per minute of use decline. Management
continues to believe seasonal trends exist in both service revenue, which tends
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.
Competitors licensed to
provide Personal Communication Services (“PCS”) have initiated service
in many of U.S. Cellular’s markets over the past several years. U.S.
Cellular expects PCS operators to continue deployment of PCS throughout all of
its service areas during 2002. 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. The
effect of additional wireless competition has significantly slowed U.S. Cellular
customer growth in certain of its markets. Coupled with the downturn in the
nation’s economy, the effect of increased competition has caused U.S.
Cellular’s customer growth in these markets to be slower than expected over
the past 12 months. Management anticipates that overall customer growth for U.S.
Cellular will continue to be slower in the future, primarily as a result of the
increase in the number of competitors in U.S. Cellular’s markets and the
maturation of the wireless industry.
7
Acquisition of
Chicago 20MHz
On August 7, 2002, U.S.
Cellular completed the acquisition of all of the equity interest in Chicago 20
MHz, LLC (“Chicago 20 MHz”), including the assets and certain
liabilities of Chicago 20 MHz, from PrimeCo Wireless Communications LLC
(“PrimeCo”). Chicago 20MHz operates the PrimeCo wireless system in the
Chicago Major Trading Area (“MTA”). Chicago 20MHz is the holder of
certain FCC licenses, including a 20 megahertz PCS license in the Chicago MTA
(excluding Kenosha County, Wis.) covering 13.2 million population equivalents
(POPs). The purchase price was approximately $610 million subject to certain
working capital and other adjustments at closing. U.S. Cellular financed the
purchase using its revolving lines of credit, $175 million in 9% Series A Notes
due 2032 and proceeds from a $105 million loan from TDS. In May, U.S. Cellular
raised approximately $160 million in cash when it entered into variable prepaid
forward contracts related to its Vodafone ADRs; the proceeds from these
contracts were initially used to pay down balances outstanding under U.S.
Cellular’s revolving credit facility. See “Liquidity – Financing
of Acquisition of Chicago 20MHz.”
The Chicago MTA is the
fourth largest MTA in the United States. The markets of Chicago 20MHz are
adjacent to the Iowa, Illinois, Wisconsin and Indiana markets of U.S.
Cellular’s Midwest cluster, which is its largest market cluster. Of the
total Chicago MTA population of 13.2 million, approximately 81% is not currently
covered by U.S. Cellular’s current licenses. There is a strong community of
interest between U.S. Cellular’s existing markets and the Chicago 20MHz
markets. The Chicago MTA is the single largest roaming destination of U.S.
Cellular’s current customers.
The following
information has been provided to U.S. Cellular by PrimeCo:
Chicago 20MHz owns licenses covering 18 Basic Trading Areas (“BTAs”), that comprise the Chicago MTA, covering a
population of approximately 13.2 million based on 2001 Claritas population estimates. The Chicago MTA includes,
among others, the Chicago, Bloomington-Normal, Champaign-Urbana, Decatur-Effingham, Peoria, Rockford and
Springfield BTAs in Illinois, the South Bend and Fort Wayne BTAs in Indiana and the Benton Harbor BTA in
Michigan. The Chicago 20MHz network covers approximately 73% of the population in the licensed area.
Chicago 20MHz utilizes Code
Division Multiple Access (“CDMA”) technology in a network which serves
the Chicago MTA with over 500 cell sites. Chicago 20MHz currently serves
approximately 330,000 customers, representing a penetration rate of
approximately 2.5% based on 2001 Claritas population estimates for the licensed
area of Chicago 20MHz.
Chicago 20MHz utilizes both
direct and indirect distribution channels, with direct distribution provided
through 34 stores and kiosks, and indirect distribution through approximately
600 authorized agents. In addition, Chicago 20MHz has approximately 720
replenishment locations for prepaid customers. Chicago 20MHz markets itself
under the PrimeCo brand name. After the acquisition, U.S. Cellular will
re-launch the market under its “U.S. Cellular” brand.
At June 30, 2002, Chicago
20MHz had approximately 500 employees, none of which is represented by labor
unions.
Chicago 20MHz competes in
the Chicago MTA directly against larger and more established wireless service
providers. The other wireless carriers competing in all or part of the Chicago
MTA include Cingular, Verizon Wireless, AT&T Wireless, Sprint PCS, Nextel
and VoiceStream. These competitors provide wireless services on a substantially
national basis. As a result, they have customer bases substantially greater than
Chicago 20MHz, which is only a local competitor, and also greater than U.S.
Cellular, which is a regional competitor, and have
8
financial resources that are substantially greater than Chicago 20MHz and U.S. Cellular.
For the twelve months ended
December 31, 2001, Chicago 20MHz had net revenues of $232 million, operating
cash flow of $12 million and a net loss of $27 million. Operating cash flow is
defined as operating income plus depreciation and amortization expense.
Operating cash flow is a key financial measure but should not be construed as an
alternative to operating income, cash flows from operating activities or net
income, as determined in accordance with generally accepted accounting
principles.
9
TDS TELECOM
OPERATIONS
TDS operates its wireline
telephone business through TDS Telecommunications Corporation (“TDS
Telecom”), a wholly owned subsidiary. Total equivalent access lines served
by TDS Telecom increased by 179,400, or 23%, since June 30, 2001 to 949,900.
TDS Telecom’s
incumbent local exchange carrier (“ILEC”) subsidiaries served 706,000
equivalent access lines at June 30, 2002, a 12% (77,300 equivalent access lines)
increase over the 628,700 equivalent access lines at June 30, 2001. Acquisitions
added 64,100 equivalent access lines while internal growth added 13,200
equivalent access lines. Total long distance access minutes of use have declined
by 2.1% during the first six months of 2002 compared to the first six months of
2001. Slower growth in internal equivalent access lines and the decrease in long
distance access minutes of use are due primarily to a weaker economy, the use of
high capacity lines, DSL implementation and wireless, email and broadband
substitution.
TDS Telecom’s
competitive local exchange carrier (“CLEC”) subsidiaries served
243,900 equivalent access lines at June 30, 2002 compared to 141,800 equivalent
access lines at June 30, 2001.
Access line equivalents are
derived by converting each high capacity data line to the estimated equivalent,
in terms of capacity, number of switched access lines. The historical statistics
for the ILECs, which had been based on access lines, have been adjusted upward
to an equivalent number of access lines. The change to equivalent access line
reporting was made to account for an increasing use of data lines.
|
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(Dollars in thousands)
Local Telephone Operations
Operating Revenue
Local service $ 47,432 $ 43,626 $ 94,275 $ 86,752
Network access and long-distance 85,885 77,475 168,969 152,078
Miscellaneous 21,734 17,616 41,328 34,331
--------- --------- --------- ---------
155,051 138,717 304,572 273,161
--------- --------- --------- ---------
Operating Expenses
Operating expenses, excluding
Depreciation and amortization 83,848 68,988 160,397 133,251
Depreciation and Amortization 32,047 32,572 64,502 64,972
--------- --------- --------- ---------
115,895 101,560 224,899 198,223
--------- --------- --------- ---------
Local Telephone Operating Income $ 39,156 $ 37,157 $ 79,673 $ 74,938
--------- --------- --------- ---------
Competitive Local Exchange Operations
Operating Revenue $ 41,762 $ 28,630 $ 79,516 $ 55,247
--------- --------- --------- ---------
Operating Expenses
Operating expenses excluding
Depreciation and amortization 51,719 33,443 97,606 62,636
Depreciation and Amortization 7,180 3,727 13,872 6,925
--------- --------- --------- ---------
58,899 37,170 111,478 69,561
--------- --------- --------- ---------
Competitive Local Exchange
Operating (Loss) $ (17,137) $ (8,540) $ (31,962) $ (14,314)
--------- --------- --------- ---------
Intercompany revenues (709) (335) (1,207) (796)
Intercompany expenses (709) (335) (1,207) (796)
--------- --------- --------- ---------
Consolidated TDS Telecom
Operating Income $ 22,019 $ 28,617 $ 47,711 $ 60,624
========= ========= ========= =========
| 10
Operating revenue increased 17% ($55.3 million) in the first six months of 2002,
reflecting primarily customer growth in local telephone operations, including
acquisitions, growth in services such as long distance resale and expansion of
competitive local exchange activities.
Operating expenses
increased 26% ($68.2 million) during 2002 reflecting primarily growth in
expenses related to services such as long distance resale, ILEC acquisitions,
continued expenses from expansion of competitive local exchange activities and
uncollectible accounts from long distance providers that filed for bankruptcy.
Operating income
decreased 21% ($12.9 million) to $47.7 million in the first six months of 2002.
The decline in operating income resulted primarily from losses incurred from the
expansion of competitive local exchange operations and the write-off of
uncollectible receivables related to the bankruptcy filing of two long distance
providers offset by improved local telephone operations operating results.
Local
Telephone Operations
Operating revenues
increased 11% ($31.4 million) in 2002. Acquisitions increased revenues by $21.2
million. Revenues from reselling long distance service increased network access
and long distance revenues by $6.2 million in 2002. As of June 30, 2002, TDS
Telecom was providing long distance service to 176,300 customers compared to
88,200 customers at June 30, 2001. Data transmission service revenues, which
include Internet and DSL, increased by $3.7 million in 2002. Average monthly
revenue per equivalent access line increased 1% ($0.93) to $73.91 in 2002 from
$72.98 in 2001.
Operating expenses
increased by 13% ($26.7 million) in 2002. Cash operating expenses increased by
20% ($27.1 million) in 2002. Acquisitions increased cash operating expenses by
$13.2 million in 2002. The cost of providing long-distance service to an
increased customer base increased expenses by $3.8 million. Bad debt expense
increased by $8.8 million in 2002 related to the bankruptcy filings of WorldCom
($5.8 million) and Global Crossing ($3.0 million). Depreciation and amortization
decreased slightly ($500,000) in 2002. Acquisitions increased depreciation
expense by $4.3 million. In accordance with SFAS No. 142, TDS Telecom no longer
amortizes telephone franchise costs (goodwill). No impairment charge was
required upon the completion of the initial impairment review. Amortization
expense of goodwill amounted to $3.4 million in the first six months of 2001.
Operating income
increased 6% ($4.7 million) to $79.7 million. Acquisitions contributed $3.7
million to this increase. Excluding the write off of receivables due from
companies which have filed bankruptcy, operating income should remain fairly
stable or increase slightly in the near term with expense increases due to
inflation and additional revenue and expenses from new or expanded product
offerings.
Competitive
Local Exchange Operations
Operating
revenues increased 44% ($24.3 million) in 2002 as equivalent access lines served
increased to 243,900 at June 30, 2002 from 141,800 at June 30, 2001.
Operating expenses
increased 60% ($41.9 million) in 2002 due primarily to the costs incurred to
grow and serve the customer base and expand competitive local exchange
operations. Operating expenses include $2.6 million related to the WorldCom and
Global Crossing bankruptcies in 2002.
Operating loss
increased $17.6 million to $32.0 million. TDS Telecom expects its competitive
local exchange business to continue to grow. Operating losses are expected to
remain approximately level throughout 2002 due to increased depreciation
expenses and continued costs associated with market expansion being offset by
growing revenues.
11
Three
Months Ended June 30, 2002 Compared to Three Months Ended June 30,
2001
Operating Revenues
increased 13% ($81.5 million) during the second quarter of 2002 for reasons
generally the same as the first six months. U.S. Cellular revenues increased 11%
($52.4 million) in 2002. Retail service revenue increased 12% ($42.6 million) in
the second quarter of 2002, while inbound roaming revenue decreased 7% ($5.0
million). Average monthly service revenue per customer was $47.48 in the second
quarter of 2002 and $47.26 in 2001, primarily due to the increase in average
retail service per customer to $37.93 from $36.65. TDS Telecom revenues
increased 17% ($29.1 million) in the second quarter of 2002 due to the growth in
ILEC operations ($16.3 million) and growth in CLEC operations ($13.1 million).
Acquisitions accounted for $11.3 million of the ILEC growth. Average monthly
revenue per ILEC access line increased to $74.58 in the second quarter of 2002
from $73.86 in 2001.
Operating
Expenses rose 16% ($81.7 million) during the second quarter of 2002 for
reasons generally the same as the first six months.
U.S. Cellular expenses
increased 12% ($46.0 million). System operations expense increased 12% ($12.3
million). Marketing and selling expenses, including cost of equipment sold,
increased 24% ($23.5 million). Cost per gross customer addition increased to
$391 in the second quarter of 2002 from $346 in 2001. Gross customer activations
increased to 238,000 in the second quarter of 2002 from 237,000 in 2001. General
and Administrative expense increased 6% ($6.8 million). Depreciation
expense increased 20% ($11.3 million) while amortization expense decreased 51%
($7.9 million).
TDS Telecom expenses
increased 26% ($35.7 million) due to growth in ILEC operations ($14.3 million)
and in CLEC operations ($21.7 million) for reasons generally the same as the
first six months. Bad debt expense related to the WorldCom bankruptcy increased
ILEC expenses by $5.8 million and CLEC expenses by $2.2 million. Acquisitions
increased ILEC expenses by $8.8 million.
Operating Income
decreased slightly ($0.2 million) to $122.1 million in the second quarter of
2002. U.S. Cellular’s operating income increased 7% ($6.4 million) while
TDS Telecom’s operating income decreased 23% ($6.6 million). The decrease
at TDS Telecom reflects increased bad debt expense and losses incurred as a
result of expanding the CLEC operations offset somewhat by improved ILEC
operating results. In addition, U.S. Cellular and TDS Telecom ceased amortization of licenses and goodwill in 2002. Amortization of
licenses and goodwill totaled $8.8 million at U.S. Cellular and $1.7 million at TDS Telecom in the second quarter
of 2001.
Investment and Other
Income (Loss) totaled $(1,664.4) million in 2002 and $(631.0) million
in 2001.
Interest and dividend
income increased $44.1 million to $48.2 million in the second quarter of 2002.
The increase is due to the $45.3 million dividend the Company recorded on its
investment in Deutsche Telekom.
(Loss) on marketable
securities and other investments totaled $(1,719.1) million in the second
quarter of 2002 and $(644.9) million in the second quarter of 2001. In the
second quarter of 2002, TDS recorded a loss of $1,719.1 million from a decline
in value of marketable equity securities that management deemed other than
temporary. The loss primarily includes a loss of $1,363.3 million recognized by
TDS on its investment in Deutsche Telekom ordinary shares and a loss of $243.8
million recognized by U.S. Cellular and $64.3 million recognized by TDS Telecom
on their investment in Vodafone ADRs. In 2001, TDS realized a pre-tax loss of
$644.9 million as a result of the merger between VoiceStream Wireless
Corporation and Deutsche Telekom AG in May 2001.
Interest
Expense increased 11% ($2.8 million) to $29.1 million in the second quarter
of 2002 for
12
reasons generally the same as the first six months.
Income Tax Expense
(Benefit) totaled a benefit of $(610.0) million in 2002, a change of $395.6
million from a benefit of $(214.4) million in 2001. The effective tax (benefit)
rate was (38.7)% in 2002 and (39.6)% in 2001. The effective tax rate excluding
the effects of loss on marketable securities and other investments was 43.4% in
2002 and 43.6% in 2001.
Minority
Share of (Income) Loss changed $28.2 million in the second quarter of 2002.
U.S. Cellular's minority public shareholders' share of income in 2002 was
reduced by $25.9 million due to U.S. Cellular's $145.6 million, net of tax,
write down of marketable securities in 2002. |
Three Months Ended
June 30,
--------------------
2002 2001 Change
-------- -------- --------
(Dollars in thousands)
Minority Share of (Income) Loss
U.S. Cellular
Minority Public Shareholders' $ 15,849 $(10,346) $ 26,195
Minority Shareholders' or Partners' (610) (2,599) 1,989
-------- -------- --------
15,239 (12,945) 28,184
Other 4 (19) 23
-------- -------- --------
$ 15,243 $(12,964) $ 28,207
======== ======== ========
| Net Income (Loss)
Available to Common totaled $(952.5) million, or $(16.24) per diluted share,
in the second quarter of 2002, compared to $(339.8) million, or $(5.79) per
diluted share, in the second quarter of 2001. Income from operations, excluding
the Deutsche Telekom dividend recorded in 2002, losses on marketable securities
and other investments, amortization of license costs and goodwill in 2001, and
losses on conversions of LYONs, was $41.6 million, or $0.70 per diluted share in
2002 compared to $54.0 million, or $0.91 per diluted share in 2001. The decline
is primarily due to operating losses from the developing CLEC business and
increased bad debt expense from the WorldCom bankruptcy. A summary of net income
from continuing operations and diluted earnings per share from operations and
gains (losses) is shown below. |
Three Months Ended
June 30,
-----------------------------
2002 2001
----------- -----------
(Dollars in thousands,
except per share amounts)
Net Income (Loss) from:
Operations $ 41,611 $ 53,955
Deutsche Telekom dividend 27,659 --
Loss on marketable securities (1,021,757) (385,223)
License and goodwill amortization -- (7,303)
Loss on conversion of LYONs -- (1,261)
----------- -----------
$ (952,487) $ (339,832)
=========== ===========
Diluted Earnings Per Share from:
Operations $ 0.70 $ 0.91
Deutsche Telekom dividend 0.47 --
Losses on marketable securities (17.41) (6.56)
License and goodwill amortization -- (0.12)
Loss on conversion of LYONs -- (0.02)
----------- -----------
$ (16.24) $ (5.79)
=========== ===========
| 13
Recent
Accounting Pronouncements
SFAS No. 143,
“Accounting for Asset Retirement Obligations” was issued in June 2001,
and will become effective for the Company beginning January 1, 2003. SFAS No.
143 requires entities to record the fair value of a liability for legal
obligations associated with an asset retirement in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. The Company is currently reviewing the requirements of this new standard
and has not yet determined the impact, if any, on the Company’s financial
position or results of operations.
SFAS No. 145
“Rescission of SFAS No. 4, 44, and 64 and Technical Corrections” was
issued in April 2002, and is effective for fiscal years beginning after May 15,
2002 with early application encouraged. The provisions of SFAS No. 145 preclude
gains and losses on the extinguishment of debt from being classified as
extraordinary unless the criteria outlined in APB No. 30 “Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions” are met. The Company has elected to adopt SFAS No. 145 early
and as a result will no longer report the retirement of LYONs debt as
extraordinary. Prior year LYONs losses on debt retirements of $1.3 million and
$4.2 million, net of tax and minority interest for the three and six months
ended, respectively, previously recorded as extraordinary items, have been
reclassified as Other (expense), net in the Company’s statement of
operations, to conform with SFAS No. 145.
SFAS No. 146
“Accounting for Costs Associated with Exit or Disposal Activities” was
issued in June 2002 and will become effective for exit or disposal activities
initiated after December 31, 2002. SFAS No. 146 nullifies Emerging Issues Task
Force Issue No. 94-3 “Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity.” SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred and states that an
entity’s commitment to an exit plan, by itself, does not create a present
obligation that meets the definition of a liability. SFAS No. 146 also
establishes that fair value is the objective for initial measurement of the
liability. The Company is currently reviewing the requirements of this new
standard and has not yet determined the impact, if any, on the Company’s
financial position or results of operations.
14
FINANCIAL
RESOURCES
Cash Flows From
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 $411.3 million in the first six months of 2002 compared to
$339.6 million in 2001.
Income from operations
excluding all noncash items and including the change in accrued taxes increased
$78.3 million to $433.4 million in the first six months of 2002. Changes in
working capital and other assets and liabilities from operations, excluding the
change in accrued taxes, required $22.1 million in 2002 and $15.5 million in
2001 reflecting primarily timing differences in the payment of accounts payable
and the receipt of accounts receivable.
Cash Flows From
Investing Activities. TDS makes substantial investments each year to
acquire, construct, operate and upgrade modern high-quality communications
networks and facilities as a basis for seeking to create long-term value for
shareowners. Cash flows from investing activities required $359.6 million in the
first six months of 2002 and provided $125.6 million in 2001.
Cash expenditures for
capital additions required $327.3 million in 2002 and $344.0 million in 2001.
The primary purpose of TDS’s construction and expansion expenditures is to
provide for significant customer growth, to provide for increasing customer
usage of the network, to upgrade service, and to take advantage of
service-enhancing and cost-reducing technological developments in order to
maintain competitive services. U.S. Cellular’s capital additions totaled
$256.8 million in 2002 and $252.1 million in 2001 representing expenditures to
construct cell sites, to add digital radio channels, to
replace retired assets, to improve business systems and to change out analog
equipment for digital equipment. TDS Telecom capital expenditures for its local
telephone operations totaled $44.5 million in 2002 and $35.8 million in 2001
representing expenditures for switch modernization and outside plant facilities
to maintain and enhance the quality of service and offer new revenue
opportunities. TDS Telecom’s capital expenditures for competitive local
exchange operations totaled $26.0 million in 2002 and $56.1 million in 2001 for
switching and other network facilities.
Cash used for acquisitions,
excluding cash acquired, totaled $73.7 million in 2002 and $98.5 million in
2001. TDS’s acquisitions include primarily the purchase of controlling
interests in wireless markets and telephone properties, minority interests that
increased the ownership of majority-owned markets and wireless spectrum. TDS
acquired a telephone company and three PCS licenses in 2002, and a majority
interest in a cellular market and interests in six PCS markets in 2001. The PCS
licenses were acquired on U.S. Cellular’s behalf and through joint
ventures. The interests acquired through joint ventures are 100% owned by the
joint ventures, and U.S. Cellular is considered to have the controlling
financial interest in these joint ventures for financial reporting purposes.
TDS received a cash refund
of $47.6 million on its FCC deposits in 2002. TDS received cash totaling $570.0
million from the merger of Deutsche Telekom and VoiceStream along with 131.5
million Deutsche Telekom AG ordinary shares in 2001.
Cash Flows From
Financing Activities. Cash flows from financing activities required $147.9
million in the first six months of 2002 and $476.0 million in 2001. TDS paid
$51.0 million to retire Medium-term Notes in the first six months of 2002 that
were called at their principal face amount. In 2002, TDS and U.S. Cellular
received $178.8 million from prepaid variable forward contracts related to its
investment in Vodafone (owned by U.S. Cellular) and VeriSign. Notes Payable
balances decreased $248.4 million in 2002 and $403.0 million in 2001. The
proceeds received from the VoiceStream/Deutsche Telekom merger were used to
reduce notes payable in 2001. Dividends paid on Common and Preferred Shares,
excluding dividends reinvested,
15
totaled $17.2 million in 2002 and $16.1 million
in 2001.
During the first six months
of 2001, cash required for the repurchase of TDS common shares (110,000 shares
for an aggregate price of $10.3 million) and the settlement of late December
2000 repurchases totaled $19.4 million. During the first six months of 2001,
U.S. Cellular paid $11.0 million to settle repurchases of U.S. Cellular Common
Shares made in late December 2000. No TDS or U.S. Cellular common shares were
repurchased in 2002. In 2001, U.S. Cellular retired LYONs securities with a
carrying value of $30.4 million for cash totaling $17.2 million and 398,000 U.S.
Cellular Common Shares.
LIQUIDITY
Subject to the discussion
under “Financing of Chicago 20 MHz Acquisition” below, management
believes that internal cash flow, existing cash and cash equivalents, and funds
available from line of credit arrangements provide sufficient financial
resources to finance its near-term capital, business development and expansion
expenditures. TDS and its subsidiaries may have access to public and private
capital markets to help meet their 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.
However, the availability
of financial resources is dependent on economic events, business developments,
technological changes, financial conditions or other factors, some of which may
not be in TDS’s control. If at any time financing is not available on terms
acceptable to TDS, TDS might be required to reduce its business development and
capital expenditure plans, which could have a materially adverse effect on its
business and financial condition. TDS does not believe that any circumstances
that could materially adversely affect TDS’s liquidity or its capital
resources are currently reasonably likely to occur, but it cannot provide
assurances that such circumstances will not occur or that they will not occur
rapidly. Economic downturns, changes in financial markets or other factors could
rapidly change the availability of TDS’s liquidity and capital resources.
Continued uncertainty of access to capital for telecommunications companies,
further deterioration in the capital markets, other changes in market conditions
or other factors could limit or restrict the availability of financing on terms
and prices acceptable to TDS, which could require TDS to reduce its
construction, development and acquisition programs.
At June 30, 2002, TDS and
its subsidiaries are in compliance with all covenants and other requirements set
forth in long-term debt indentures. TDS does not have any rating downgrade
triggers that would accelerate the maturity dates of its long-term debt.
However, a downgrade in TDS’s credit rating could adversely affect its
ability to refinance existing, or obtain access to new, long-term debt in the
future.
TDS and its subsidiaries
had cash and cash equivalents totaling $44.6 million at June 30, 2002. TDS had a
$600 million revolving credit facility for general corporate purposes at June
30, 2002, all of which was unused. Borrowings bear interest at the London
Interbank Borrowing Rate (“LIBOR”) plus a contractual spread based on
the Company’s credit rating. The contractual spread was 30 basis points as
of June 30, 2002 (for a rate of 2.14% based on the LIBOR rate at June 30, 2002).
TDS also had $87 million of
additional bank lines of credit for general corporate purposes at June 30, 2002,
all of which were unused. These line of credit agreements provide for borrowings
at negotiated rates up to the prime rate (4.75% at June 30, 2002).
U.S. Cellular had a $500
million bank revolving line of credit (“1997 Revolving Credit
Facility”) for general corporate purposes at June 30, 2002, $485 million of
which was unused. This line of
16
credit provides for borrowings at LIBOR plus a
contractual spread, based on U.S. Cellular’s credit rating. The contractual
spread was 19.5 basis points as of June 30, 2002 (for a rate of 2.03% based on
the LIBOR rate at June 30, 2002).
See also
"Financing of Chicago 20MHz Acquisition" below.
TDS’s and U.S.
Cellular’s interest costs would increase if their credit rating goes down
which would increase their cost of financing, but their credit facilities would
not cease to be available solely as a result of a decline in their credit
rating. A downgrade in TDS’s credit rating could adversely affect its
ability to renew existing, or obtain access to new, credit facilities in the
future. However, the continued availability of the revolving credit facilities
requires TDS and U.S. Cellular to comply with certain negative and affirmative
covenants, maintain certain financial ratios and to represent certain matters at
the time of each borrowing. At June 30, 2002, TDS and U.S. Cellular were in
compliance with all covenants and other requirements set forth in the credit
agreements.
U.S. Cellular
filed with the SEC a shelf registration statement on Form S-3 to register the
issuance from time to time of up to $500 million of senior debt securities. This
registration statement was declared effective by the SEC in May 2002. U.S.
Cellular has not yet issued any securities under this registration
statement.
U.S. Cellular’s
capital additions budget for 2002 totals approximately $620-$640 million, not
including expenditures for the Chicago market, primarily to add cell sites to
expand and enhance coverage, to provide additional capacity to accommodate
increased network usage, to provide additional digital service capabilities
including the initial steps toward the migration to CDMA technology, to satisfy
certain regulatory requirements for specific services such as enhanced 911 and
wireless number portability, and to enhance billing and office systems. The
conversion to CDMA is expected to be completed during 2004, at an approximate
cost of $400-$450 million, spread over 2002 through 2004. The estimated capital
additions in 2002 include $80-$95 million related to the conversion. U.S.
Cellular has contracted with an infrastructure vendor to provide a substantial
portion of the equipment related to the conversion. At June 30, 2002, the
remaining amount of the capital budget approximated $363 - $383 million. U.S.
Cellular plans to finance its cellular construction program using primarily
internally generated cash and short-term debt. U.S. Cellular’s operating
cash flow totaled $649.5 million for the twelve months ended June 30, 2002, up
14% ($80.7 million) from 2001.
TDS Telecom’s capital
additions budget for 2002 approximates $175-$195 million. The incumbent local
telephone companies are expected to spend approximately $120 - $130 million to
provide for normal growth and to upgrade plant and equipment to provide enhanced
services. The competitive local exchange companies are expected to spend
approximately $55-$65 million to build switching and other network facilities to
meet the needs of a growing customer base and to expand their markets. At June
30, 2002, the remaining amount of the capital budget approximated $76 - $86
million for local telephone companies and $29-$39 million for the competitive
local exchange companies. TDS Telecom plans to finance its construction program
using primarily internally generated cash. TDS Telecom’s operating cash
flow totaled $261.9 million for the twelve months ended June 30, 2002, down 1%
($2.4 million) from 2001.
TDS reviews attractive
opportunities to acquire additional telecommunications companies and wireless
spectrum, which it believes will add value to the business. At June 30, 2002,
the Company had an agreement to acquire a telephone company serving 7,500 access
lines for aggregate cash consideration of $21.3 million. This acquisition closed
July 1, 2002.
On November 1, 2000, the
United States Bankruptcy Court for the Western District of Wisconsin confirmed a
plan of financial reorganization for Airadigm Communications, Inc., a
Wisconsin-
17
based wireless service provider. Under the terms of the plan of
reorganization, TDS and an unrelated entity have committed to provide funding to
meet certain obligations of Airadigm. Airadigm continues to operate as an
independent company providing wireless services. Pursuant to the plan of
reorganization, under certain circumstances and subject to the FCC’s rules
and regulations, TDS and the unrelated entity, or their respective designees,
may each acquire certain PCS licenses for areas of Wisconsin and Iowa as well as
other Airadigm assets. As of June 30, 2002, TDS
had provided funding of $54.7 million to Airadigm. Under the plan of
reorganization, TDS’s portion of the funding and the cost of the assets to
be acquired could possibly aggregate up to an additional $145 million. The value
of TDS’s interest in Airadigm is directly related to the fair market value
of Airadigm’s assets. There may be substantial variability of such value
and risk of decline in the value of TDS’s interest in Airadigm due to a
number of factors, including FCC determinations affecting Airadigm’s FCC
licenses. Management continues to review the valuation on a periodic basis.
U.S. Cellular is a limited
partner in a joint venture that was a successful bidder for 17 licenses in 13
markets in the January 2001 FCC spectrum auction. The cost for the 17 licenses
totaled $283.9 million. Legally the general partner controls the joint venture;
however, the Company has included the joint venture in its consolidated
financial statements because U.S. Cellular is considered to have controlling
financial interest for financial reporting purposes under GAAP. In 2001, the
joint venture acquired 5 of such licenses in 4 markets for a total of $4.1
million and had deposits with the FCC totaling $56.1 million for the remaining
licenses. In May 2002, the FCC refunded 85% of the deposits, or $47.6 million,
and retained the remaining $8.5 million of deposits pending the outcome of the
proceedings discussed below. The remaining deposits are classified as a current
asset at June 30, 2002. Subject to the final outcome of such proceedings the
joint venture’s portion of the funding could possibly aggregate up to an
additional $271.3 million to fund the acquisition of the remaining licenses. In
addition, U.S. Cellular has agreed to loan the general partner up to $20 million
that could be used by the general partner to fund its investment in the
licenses.
With respect to the
remaining 12 licenses in 9 markets, such licenses had been reauctioned by the
FCC after defaults by winning bidders in a prior auction and were made subject
by the FCC to the final outcome of certain legal proceedings initiated by the
prior winning bidders. Following the reauction, one of the prior winning bidders
obtained a court ruling that the FCC’s actions were illegal. In response to
a request of the U.S. Department of Justice and the FCC, the U.S. Supreme Court
has agreed to review this court ruling and oral arguments have been tentatively
set for October 8, 2002. In the event the prior winning bidder is successful in
this litigation, the joint venture would receive a refund of its remaining
deposit of $8.5 million made to the FCC for such 12 licenses. The joint
venture’s financial requirements would then be limited to the 5 licenses in
4 markets that it acquired in 2001. If the FCC is successful in this litigation
or the matter is otherwise resolved in a manner that will permit the joint
venture to acquire the remaining licenses, the joint venture would be required
to pay to the FCC the balance of the auction price for such licenses. The joint
venture would then have significant financial requirements to build out such
markets. The exact nature of U.S. Cellular’s financial commitment going
forward will be determined as the joint venture develops its long-term business
and financing plans.
TDS and U.S. Cellular may
continue the repurchase of their common shares, as market conditions warrant, on
the open market or at negotiated prices in private transactions. 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 and other sources.
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
18
LYONs
in open-market transactions from time to time. U.S. Cellular 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 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. U.S. Cellular may redeem the notes for cash at the issue
price plus accrued original issue discount through the date of
redemption.
TDS holds various
investments in publicly traded companies valued at $1,490.5 million as of June
30, 2002. These assets are classified for financial reporting purposes as
available-for-sale securities. TDS may purchase additional shares, sell or
transfer shares in public or private transactions and/or may enter into
privately negotiated derivative transactions to hedge the market risk of some or
all of its positions in the securities.
In May 2002, TDS entered
into variable prepaid forward contracts related to certain Vodafone (owned by
U.S. Cellular) and VeriSign securities. TDS and U.S. Cellular received $178.8
million related to the contracts which expire in five years and may be settled
in cash or securities.
In July and
through August 12th of 2002, TDS entered into variable prepaid forward contracts
with multiple parties relating to 20,028,673 Deutsche Telekom AG
ordinary shares or approximately 15% of the shares owned by TDS. TDS may enter into further contracts depending on market
conditions and other factors.
Financing of
Chicago 20MHz Acquisition
The PrimeCo acquisition
price of approximately $610 million was financed using U.S. Cellular’s
revolving lines of credit, proceeds of $175 million from the 9% Series A Notes
due 2032 and proceeds from a $105 million loan from TDS. In May, U.S. Cellular
raised approximately $160 million in cash when it entered into variable prepaid
forward contracts related to its Vodafone ADRs; the proceeds from these
contracts were initially used to pay down balances outstanding under U.S.
Cellular’s revolving credit facility. U.S. Cellular has obtained a
five-year credit facility, amended in July 2002 to provide up to $325 million in
financing (“2002 Revolving Credit Facility”), which may be used to
finance the purchase of PrimeCo and for other purposes.
U.S. Cellular’s 2002
Revolving Credit Facility permits revolving loans on terms and conditions
substantially similar to U.S. Cellular’s existing $500 million 1997
Revolving Credit Facility, except for the interest rate and certain additional
provisions. The terms of the 2002 Revolving Credit Facility provide for
borrowings with interest at LIBOR plus a margin percentage based on U.S.
Cellular’s credit rating. Based on its current credit rating, the margin
percentage is 55 basis points (for a rate of 2.39% as of June 30, 2002). Also,
U.S. Cellular needs to comply with certain financial covenants. The covenants
include limitations on the ratios of funded debt to capitalization, earnings
before interest, taxes depreciation and amortization (“EBITDA”) to
interest expense, and funded debt to EBITDA. The 2002 Revolving Credit Facility
places other requirements on U.S. Cellular, including the sale or placement of
at least $175 million of debt securities on terms reasonably satisfactory to the
lenders.
The 9% Series A Notes due 2032 were issued to PrimeCo in a private placement. The notes are callable by U.S.
Cellular at the principal amount after five years. In connection with the purchase of Chicago 20MHz from
PrimeCo, U.S. Cellular entered into an agreement pursuant to which U.S. Cellular provided PrimeCo and transferees
of PrimeCo rights to have such notes registered with the SEC for resale. At the closing of the acquisition of
Chicago 20MHz, PrimeCo delivered a notice to U.S. Cellular to request that U.S. Cellular cause all of the $175
million principal amount of such notes to be registered for resale in a shelf registration statement. U.S.
Cellular has agreed to use commercially reasonable efforts to cause such registration statement
19
to be filed
within 10 days after the receipt of such request. The request for registration was provided by PrimeCo on August
7, 2002.
The six year $105 million
loan from TDS has an interest rate of 8.1%, payable quarterly, and has no
prepayment penalty. This loan is subordinated to the the 2002 Revolving Credit
Facility.
U.S. Cellular filed with
the SEC a shelf registration statement on Form S-3 to register the issuance from
time to time of up to $500 million of senior debt securities. This registration
statement was declared effective by the SEC in May 2002.
Subsequent to its
acquisition of Chicago 20MHz, U.S. Cellular began reevaluating its capital
spending plans for the remainder of 2002. U.S. Cellular expects to incur
approximately $90 million in capital expenditures during the first year
following the Chicago 20MHz acquisition, to improve coverage in the Chicago
20MHz network, including an upgrade of the current CDMA system to 1XRTT, and to
enhance its marketing distribution in the Chicago market. U.S. Cellular is
currently evaluating what portion of the $90 million will be invested during
2002.
Additionally, as a result
of the completion of the Chicago 20MHz acquisition, U.S. Cellular is
reevaluating the timing of certain portions of its planned migration to a single
digital equipment platform. Any changes that result from this reevaluation could
accelerate capital expenditures previously planned for 2003 into 2002, in order
to migrate some service areas to the new platform sooner and minimize U.S.
Cellular’s investment in infrastructure and handsets which would be used on
the old platform.
MARKET RISK
TDS is subject to market
rate risks due to fluctuations in interest rates and equity markets. The
majority of TDS’s debt is in the form of long-term, fixed-rate notes,
convertible debt, debentures and trust securities with original maturities
ranging up to 40 years. Accordingly, fluctuations in interest rates can lead to
significant fluctuations in the fair value of such instruments. As of June 30,
2002, TDS had not entered into any significant financial derivatives to reduce
its exposure to interest rate risks.
TDS maintains a portfolio
of available-for-sale marketable equity securities. The market value of these
investments aggregated $1,490.5 million at June 30, 2002 and $2,700.2 million at
December 31, 2001. As of June 30, 2002, the net unrealized holding loss, net of
tax and minority interest, included in accumulated other comprehensive loss
totaled $20.4 million following the recognition in the statement of operations
of a loss related to TDS’s investments in marketable securities of $1,044.4
million, net of tax and minority interest, as a result of management’s
determination that unrealized losses with respect to the investments were
“other than temporary.” Management continues to review the valuation
of the investments on a periodic basis. If management determines in the future
that an unrealized loss is other than temporary, the loss will be recognized and
recorded in the statement of operations.
In May 2002, TDS entered
into a contract with a third party relating to its ownership of 2.4 million
shares of VeriSign, Inc. The contract, known as a variable prepaid forward,
provides a collar to the stock price for five years. TDS received aggregate
proceeds from the contract of $18.9 million which consisted of a net premium
received on the collar of $2.7 million and a loan. The principle amount of the
contract at maturity is $20.8 million and has an effective interest rate of
5.1%. There are no payments of interest during the contract period. The collar
limits TDS’s exposure to movement in the VeriSign stock price through the
use of caps and floors. The collar limits TDS’s downside risk to $8.82 per
share and limits the upside potential to $11.46 per share. This contract is
accounted for as a fair value hedge. At the expiration of the contract, TDS may
settle the contract by delivering cash or VeriSign shares.
20
Also in May 2002, U.S.
Cellular entered into contracts with third parties relating to its ownership of
10.2 million ADRs of Vodafone. Each contract, known as a variable prepaid
forward, provides a collar to the stock price for five years, and, taken
together, the contracts allowed U.S. Cellular to borrow approximately $160
million against the stock. The collars limit U.S. Cellular’s exposure to
movement in the Vodafone stock price through the use of caps and floors. The
collars limit U.S. Cellular’s downside risk to an average of $15.60 per
share and limit the upside potential to an average of $23.68 per share. These
contracts are accounted for as cash flow hedges. At the expiration of the
contracts, U.S. Cellular may settle the contracts by delivering cash or Vodafone
ADRs.
The following analysis
presents the hypothetical change in the fair value of our marketable equity
securities and derivative instruments at June 30, 2002, assuming the same
hypothetical price fluctuations of plus and minus 10%, 20% and 30%. |
Valuation of investments assuming June 30,
($ in thousands) indicating decrease 2002
-30% -20% -10% Fair Value
Marketable Equity
Securities $1,043,339 $1,192,387 $1,341,436 $1,490,484
Derivative
Instruments $ 53,103 $ 40,330 $ 27,454 $ 17,826
Valuation of investments assuming
($ in thousands) indicating increase
+10% +20% +30%
Marketable Equity
Securities $1,639,532 $1,788,581 $1,937,629
Derivative
Instruments $ 1,475 $ (11,708) $ (25,120)
| In July and through August
12th of 2002, TDS entered into variable prepaid forward contracts with multiple
parties relating to 20,028,673 Deutsche Telekom AG ordinary
shares or approximately 15% of the shares owned by TDS. Each contract provides a collar to the stock price for five years and,
taken together, the contracts will allow TDS to borrow approximately $230 million
against the stock. The collars limit TDS’s exposure to movement in the
Deutsche Telekom stock price through the use of put options and call options.
The collars limit TDS’s downside risk to an average of $11.57 per share and
limit the upside potential to an average of $13.88 per share. During the period
of the contracts, TDS will continue to receive dividends paid by Deutsche
Telekom on such contracted shares. These contracts will be
accounted for as cash flow hedges. At the expiration of the contracts, TDS may
settle the contracts by delivering cash or Deutsche Telekom shares. TDS may
enter into further contracts depending on market conditions and other
factors.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The Company prepares its
consolidated financial statement in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”). The
Company’s significant accounting policies are discussed in detail in Note 1
to the consolidated financial statements included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2001.
The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Management bases its
estimates on historical experience and on various other assumptions and
information that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities. Actual results may differ from estimates under
different assumptions or conditions.
21
Management
believes the following critical accounting policies reflect its more significant
judgments and estimates used in the preparation of its consolidated financial
statements.
The Company makes estimates
and assumptions in the determination of revenue. Unbilled revenues, resulting
from wireless service provided from the billing cycle date to the end of each
month and from other wireless carriers’ customers using U.S.
Cellular’s wireless systems for the last half of each month, are estimated
and recorded. Certain activation and reconnection fees are recognized over
average customer service periods. Although the Company does not expect any
significant changes to average customer service periods, a material increase in
churn rates associated with the customer base could affect future operating
results.
TDS’s telephone
subsidiaries participate in revenue pools with other telephone companies for
interstate revenue and for certain intrastate revenue. Such pools are funded by
toll revenue and/or access charges within state jurisdictions and by access
charges in the interstate market. Revenues earned through the various pooling
processes are initially recorded based on TDS Telecom’s estimates and
improved estimates are made in subsequent periods as more data becomes
available.
In evaluating the
collectibility of its trade receivables, the Company assesses a number of
factors including a specific customer’s ability to meet its financial
obligations to the Company, as well as general factors, such as the length of
time the receivables are past due and historical collection experience. Based on
these assessments, the Company records both specific and general reserves for
bad debt to reduce the related receivables to the amount the Company ultimately
expects to collect from customers. If circumstances related to specific
customers change or economic conditions worsen such that the Company’s past
collection experience is no longer relevant, the Company’s estimate of the
recoverability of its trade receivables could be further reduced from the levels
provided for in the consolidated financial statements.
U.S. Cellular holds notes
receivable aggregating $45.8 million from Kington Management Corporation
(“Kington”) that are due in June 2005. These notes relate to the
purchase by Kington of certain of U.S. Cellular’s minority interests in
2000. The value of the notes cannot increase, but may decrease, and is directly
related to the future fair market value of the related interests. There may be
substantial variability in the future market values of these interests and risk
of decline in the value of the notes. Management continues to review the valuation on a periodic basis.
The calculation of
depreciation and amortization expense is based on the estimated economic useful
lives of the underlying property, plant and equipment and intangible assets.
U.S. Cellular is currently updating its fixed asset accounting systems. This
process, completion of which is expected by year-end 2002, will include taking
an inventory of major fixed asset categories, which may result in
book-to-physical adjustments. Although the Company believes it is unlikely that
any significant changes to the useful lives of its tangible or definite-lived
intangible assets will occur in the near term, rapid changes in technology, the
discontinuance of accounting under SFAS No. 71 by the Company’s wireline
subsidiaries, or changes in market conditions could result in revisions to such
estimates that could materially affect the carrying value of these assets and
the Company’s future consolidated operating results.
The Company holds a
substantial amount of marketable securities that are publicly traded and can
have volatile share prices. The marketable securities are marked to market each
period with the change in value of the securities reported as Other
Comprehensive Income, net of income taxes and minority interest, which is
included in the stockholders’ equity section of the balance sheet. If
management determined that the decline in value of the marketable securities was
“other than temporary,” the unrealized loss included in other
comprehensive income would be recognized and recorded as a loss in the statement
of operations. Factors that management
22
reviews in determining an other than
temporary decline include whether there has been a significant change in the
financial condition, operational structure or near-term prospects of the issuer;
how long the security has been below historical cost; and whether TDS has the
intent and ability to retain its investment in the issuer’s securities to
allow the market value to return to historical cost levels. TDS is in the same
industry classification as the issuers of its marketable securities enhancing
the Company’s ability to evaluate the effects of any changes in
industry-specific factors which may affect the determination of whether a
decline in market values of its marketable securities is other than temporary.
There can be no assurance that upon review of such factors at a later date a
material loss will not be recognized in the statement of operations. See
“Market Risk” for further discussions.
In the first half of 2002,
management determined that the decline in value of its investment in marketable
securities relative to their accounting cost basis was other than temporary. A
loss on the securities of $1,756.5 million was recorded in the statement of
operations, reducing net income and earnings per diluted share by $1,044.4
million and $17.81, respectively.
TDS utilizes derivative
financial instruments to reduce market rate risks. The Company does not hold or
issue derivative financial instruments for trading purposes. In June 1998, the
Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No.133 (“SFAS No. 133”),
“Accounting for Derivative Instruments and Hedging Activities,” which
was amended in June 2000 by SFAS No. 138. SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments and hedging
activities. They require that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. Changes in fair value of those instruments will be
reported in earnings or other comprehensive income depending on the use of the
derivative and whether it qualifies for hedge accounting. The accounting for
gains and losses associated with changes in the fair value of the derivative and
the effect on the consolidated financial statements will depend on its hedge
designations and whether the hedge is highly effective in achieving offsetting
changes in the fair value of the hedged item or cash flows of the asset or
liability hedged.
TDS has substantial
investments in long-lived assets. The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. The Company evaluates the asset for
possible impairment based on an estimate of related undiscounted cash flows over
the remaining asset life. If impairment is identified, a loss is recognized for
the difference between the fair values of the asset (less cost to sell) and the
carrying value of the asset.
TDS has substantial amounts
of intangible assets, primarily wireless license costs and goodwill as a result
of the acquisitions of wireless licenses and markets, and the acquisition of
operating telephone companies. TDS adopted SFAS No. 142, “Goodwill and
Other Intangible Assets,” on January 1, 2002, and no longer amortizes
wireless license costs or goodwill. With the implementation of SFAS No. 142, TDS
assessed its recorded balances of cellular license costs and goodwill for
potential impairment. The Company completed its initial impairment assessments
in the first quarter of 2002. No impairment charge was necessary upon the
completion of the initial impairment review. After the initial impairment
review, wireless licenses and goodwill must be reviewed for impairment annually,
or more frequently if events or changes in circumstances indicate that the asset
might be impaired. There can be no assurance that upon review at a later date
material impairment charges will not be required.
Deferred tax assets are
reduced by a valuation allowance when, in management’s opinion, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. TDS considers future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance. If
management determined that TDS would be
23
able to realize the deferred tax asset
in excess of its net recorded amount, an adjustment to deferred tax assets would
increase income. Likewise, if management determined that TDS would not be able
to realize the net deferred tax asset amount, an adjustment to deferred tax
assets would reduce income.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Walter C. D. Carlson, a
director and non-executive Chairman of the Board of the board of directors of
TDS and a director of U.S. Cellular, Michael G. Hron, the General Counsel and an
Assistant Secretary of TDS, U.S. Cellular and TDS Telecom, and Secretary or an
Assistant Secretary of certain other TDS subsidiaries; William S. DeCarlo, the
Assistant General Counsel of TDS and an Assistant Secretary of TDS and certain
TDS subsidiaries; and Stephen P. Fitzell, the Assistant General Counsel and an
Assistant Secretary of U.S. Cellular and TDS Telecom and an Assistant Secretary
of certain other TDS subsidiaries, are partners of Sidley Austin Brown &
Wood, the principal law firm of TDS and its subsidiaries. Mr. Hron retired as a partner of Sidley Austin Brown &
Wood as of July 31, 2002. Walter C. D. Carlson
is a trustee and beneficiary of the voting trust which controls TDS.
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
the following:
-
Increases in the level of competition in the markets in which TDS operates
could adversely affect TDS’s revenues or increase its costs to
compete.
-
Advances or changes in telecommunications technology could render certain
technologies used by TDS obsolete. Competitors may have a lower fixed
investment per customer because of technology changes.
-
Changes in telecommunications regulatory environment could adversely affect
TDS’s financial condition or results of operations or could prevent
TDS businesses which depend on access to competitors facilities from obtaining
such access on reasonable terms.
-
Changes in the supply or demand of the market for wireless licenses or
telephone companies, increased competition, adverse developments in the
TDS’s businesses or the industries in which TDS is involved and/or other
factors could result in an impairment of the value of TDS’s license
costs, goodwill and/or physical assets, which may require TDS to record a write
down in the value of such assets.
-
Competition, construction delays, customer churn and other challenges in
executing TDS’s expansion and development of its CLEC business
could result in higher than planned losses, additional financing requirements
and/or the write down of the CLEC assets if TDS is unable to
successfully implement its plans in this business undertaking.
-
Continued depressed market values, continued declines thereof or other events
evidencing an impairment in the value of TDS’s investments in
available-for-sale marketable equity securities that are other than temporary
may require TDS to write down the value of such securities.
24
-
Settlements, judgments, restraints on its current or future manner of doing
business and/or legal costs resulting from pending or future litigation
that is Company specific or that apply to the industry in general could have an
adverse effect on TDS’s financial condition, results of operations
or ability to do business.
-
Costs, integration problems or other factors associated with
acquisitions/divestitures of properties and/or licenses could have an
adverse effect on TDS’s financial condition or results of operations.
-
Changes in prices, the number of wireless customers, average revenue per
unit, penetration rates, churn rates, roaming rates and the mix of
products and services offered in wireless markets could have an adverse effect
on TDS’s wireless business operations.
-
Changes in roaming partners, rates, and the ability to provide voice and data
services on other carriers networks could have an adverse effect on
TDS’s wireless business operations.
-
Changes in competitive factors with national carriers could result in product
and cost disadvantages could have an adverse effect on TDS’s
wireless business operations.
-
Changes in prices, in the number of ILEC and CLEC customers, churn
rates and mix of products and services offered in ILEC and CLEC markets
could have an adverse effect on such TDS business segments.
-
Continued uncertainty of access to capital for telecommunications companies,
further deterioration in the capital markets, other changes in market
conditions or other factors could limit or restrict the availability of
financing on terms and prices acceptable to TDS, which could require TDS
to reduce its construction, development and acquisition programs.
-
Changes in TDS’s credit ratings could limit or restrict the availability
of financing on terms and prices acceptable to TDS, which could require
TDS to reduce its construction, development and acquisition programs.
-
Changes in circumstances or other events, relating to the acquisition of
Chicago 20MHz, including integration costs or problems or other factors
associated with such acquisition could have an adverse effect on TDS’s
financial condition or results of operations.
-
Changes in general economic and business conditions, both nationally and in
the regions in which TDS operates, could have an adverse effect on
TDS’s businesses.
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.
25
|
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Unaudited
---------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
U.S. Cellular $ 527,710 $ 475,289 $ 1,006,130 $ 915,058
TDS Telecom 196,104 167,012 382,881 327,612
----------- ----------- ----------- -----------
723,814 642,301 1,389,011 1,242,670
----------- ----------- ----------- -----------
OPERATING EXPENSES
U.S. Cellular 427,661 381,663 827,235 762,949
TDS Telecom 174,085 138,395 335,170 266,988
----------- ----------- ----------- -----------
601,746 520,058 1,162,405 1,029,937
----------- ----------- ----------- -----------
OPERATING INCOME 122,068 122,243 226,606 212,733
----------- ----------- ----------- -----------
INVESTMENT AND OTHER INCOME
Interest and dividend income 48,167 4,052 50,234 9,574
Investment income, net of amortization 7,762 10,210 18,807 17,175
(Loss) on marketable securities and other investments (1,719,126) (644,929) (1,756,526) (644,929)
Other (expense), net (1,232) (287) (35) (1,928)
----------- ----------- ----------- -----------
(1,664,429) (630,954) (1,687,520) (620,108)
----------- ----------- ----------- -----------
LOSS BEFORE INTEREST AND INCOME TAXES (1,542,361) (508,711) (1,460,914) (407,375)
Interest expense 29,096 26,270 58,719 55,228
Minority interest in income of subsidiary trust 6,202 6,202 12,405 12,405
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (1,577,659) (541,183) (1,532,038) (475,008)
Income tax benefit (610,035) (214,430) (587,950) (183,817)
----------- ----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST (967,624) (326,753) (944,088) (291,191)
Minority Share of (Income) Loss 15,243 (12,964) 5,304 (20,292)
----------- ----------- ----------- -----------
NET LOSS (952,381) (339,717) (938,784) (311,483)
----------- ----------- ----------- -----------
Preferred Dividend Requirement (106) (115) (218) (233)
----------- ----------- ----------- -----------
NET LOSS AVAILABLE TO COMMON $ (952,487) $ (339,832) $ (939,002) $ (311,716)
----------- ----------- ----------- -----------
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES (000s) 58,639 58,653 58,619 58,685
BASIC EARNINGS PER SHARE
Net loss available to common $ (16.24) $ (5.79) $ (16.02) $ (5.31)
============ =========== =========== ===========
DILUTED EARNINGS PER SHARE
Net loss available to common $ (16.24) $ (5.79) $ (16.02) $ (5.31)
============ =========== =========== ===========
DIVIDENDS PER SHARE $ .145 $ .135 $ .29 $ .27
============ =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements.
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
---------
Six Months Ended
June 30,
----------------------
2002 2001
--------- ---------
(Dollars in thousands)
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
Net loss $ (938,784) $(311,483)
Add (Deduct) adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation and amortization 227,535 216,245
Deferred taxes (633,859) (397,872)
Investment income (18,789) (17,983)
Minority share of income (5,304) 20,292
Loss on marketable securities and other investments 1,756,526 644,929
Noncash interest expense 4,718 5,484
Other noncash expense 8,964 15,061
Changes in assets and liabilities from operations
Change in accounts receivable (19,594) (4,724)
Change in materials and supplies 26,939 14,089
Change in accounts payable (27,242) (35,491)
Change in accrued taxes 32,420 180,476
Change in other assets and liabilities (2,236) 10,599
---------- ---------
411,294 339,622
---------- ---------
CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES
Capital expenditures (327,286) (343,978)
Acquisitions, net of cash acquired (73,722) (98,450)
Refund of FCC Deposits 47,565 --
Distributions from investments 6,217 7,540
Cash received in VoiceStream/Deutsche Telekom merger -- 570,035
Other investing activities (12,406) (9,521)
---------- ---------
(359,632) 125,626
---------- ---------
CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES
Issuance of long-term debt 1,005 340
Prepaid forward contracts 178,845 --
Repayments of long-term debt (8,418) (7,892)
Prepayment of medium-term notes (51,000) --
Change in notes payable (248,400) (403,000)
Dividends paid (17,227) (16,085)
Repurchase of TDS Common Shares -- (19,448)
Repurchase of U.S. Cellular Common Shares -- (10,993)
Repurchase and conversion of LYONs (70) (17,221)
Other financing activities (2,587) (1,699)
---------- ---------
(147,852) (475,998)
---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (96,190) (10,750)
CASH AND CASH EQUIVALENTS -
Beginning of period 140,744 99,019
---------- ---------
End of period $ 44,554 $ 88,269
========== =========
The accompanying notes to financial statements are an integral part of these statements.
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Unaudited)
June 30, December 31,
2002 2001
-------- ----------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 44,554 $ 140,744
Accounts receivable from customers and others 400,074 379,161
Deposits receivable from FCC 8,494 56,060
Materials and supplies, at average cost 45,502 71,370
Other current assets 33,633 27,021
---------- ----------
532,257 674,356
---------- ----------
INVESTMENTS
Marketable equity securities 1,490,484 2,700,230
Wireless license costs, net of accumulated amortization 877,195 858,791
Goodwill, net of accumulated amortization 912,206 870,801
Investments in unconsolidated entities 245,057 233,678
Notes Receivable 107,711 101,887
Other investments 15,226 15,079
---------- ----------
3,647,879 4,780,466
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET
U.S. Cellular 1,637,741 1,527,805
TDS Telecom 1,027,229 1,016,634
---------- ----------
2,664,970 2,544,439
---------- ----------
OTHER ASSETS AND DEFERRED CHARGES 106,576 80,313
---------- ----------
TOTAL ASSETS $6,951,682 $8,079,574
========== ==========
The accompanying notes to financial statements are an integral part of these statements.
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
June 30, December 31,
2002 2001
----------- ------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of long-term debt $ 20,540 $ 67,461
Notes payable 16,900 265,300
Accounts payable 244,918 270,005
Advance billings and customer deposits 78,984 68,044
Accrued interest 29,207 24,264
Accrued taxes 45,762 14,263
Accrued compensation 44,372 56,973
Other current liabilities 46,082 49,906
----------- -----------
526,765 816,216
----------- -----------
DEFERRED LIABILITIES AND CREDITS 1,055,312 1,461,530
----------- -----------
LONG-TERM DEBT, excluding current portion 1,685,906 1,507,764
----------- -----------
MINORITY INTEREST in subsidiaries 477,582 467,698
----------- -----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES of Subsidiary Trusts
Holding Solely Company Subordinated Debentures (a) 300,000 300,000
----------- -----------
PREFERRED SHARES 6,984 7,442
----------- -----------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $.01 per share 558 557
Series A Common Shares, par value $.01 per share 66 68
Capital in excess of par value 1,829,344 1,826,840
Treasury Shares, at cost (3,817,000 shares and
3,868,000 shares, respectively) (404,887) (406,894)
Accumulated other comprehensive income (20,410) (352,120)
Retained earnings 1,494,462 2,450,473
----------- -----------
2,899,133 3,518,924
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,951,682 $ 8,079,574
=========== ===========
(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.
| TELEPHONE AND
DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS |
| |
|
|
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 note 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 June 30, 2002 and December 31, 2001, and the results of
operations and cash flows for the six months ended June 30, 2002 and 2001. The
results of operations for the three and six months ended June 30, 2002 and 2001,
are not necessarily indicative of the results to be expected for the full year.
Certain
amounts reported in prior years have been reclassified to conform to current
period presentation. These reclassifications had no impact on previously
reported operating revenue, net income and stockholders’ equity. |
| |
2. |
|
Significant Accounting Policy - Derivative Instruments |
| |
|
|
The
Company utilizes derivative financial instruments to reduce market rate risks.
The Company does not hold or issue derivative financial instruments for trading
purposes. In June 1998, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards No. 133
(“SFAS No. 133”), “Accounting for Derivative Instruments and
Hedging Activities,” which was amended in June 2000 by SFAS No. 138. SFAS
133, as amended, establishes accounting and reporting standards for derivative
instruments and hedging activities. They require that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Changes in fair value of
those instruments will be reported in earnings or other comprehensive income
depending on the use of the derivative and whether it qualifies for hedge
accounting. The accounting for gains and losses associated with changes in the
fair value of the derivative and the effect on the consolidated financial
statements will depend on its hedge designations and whether the hedge is
anticipated to be effective in achieving offsetting changes in the fair value of
the hedged item or cash flows of the asset or liability hedged. |
| |
3. |
|
Recent Accounting Pronouncements |
| |
|
|
SFAS
No. 143, “Accounting for Asset Retirement Obligations” was issued in
June 2001, and will become effective for the Company beginning January 1, 2003.
SFAS No. 143 requires entities to record the fair value of a liability for legal
obligations associated with an asset retirement in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the |
| |
|
|
capitalized cost is depreciated over the useful life of the related
asset. The Company is currently reviewing the requirements of this new standard
and has not yet determined the impact, if any, on the Company’s financial
position or results of operations.
SFAS
No. 145 “Rescission of SFAS No. 4, 44, and 64 and Technical
Corrections” was issued in April 2002, and is effective for fiscal years
beginning after May 15, 2002 with early application encouraged. The provisions
of SFAS No. 145 preclude gains and losses on the extinguishment of debt from
being classified as extraordinary unless the criteria outlined in APB No. 30
“Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions” are met. The Company has elected to adopt SFAS No.
145 early and as a result will no longer report the retirement of LYONs debt as
extraordinary. Prior year LYONs losses on debt retirements of $1.3 million and
$4.2 million, net of tax and minority interest for the three and six months
ended, respectively, previously recorded as extraordinary items, have been
reclassified as Other (expense), net in the Company’s statement of
operations, to conform with SFAS No. 145.
SFAS
No. 146 “Accounting for Costs Associated with Exit or Disposal
Activities” was issued in June 2002 and will become effective for exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 nullifies
Emerging Issues Task Force Issue No. 94-3 “Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity.”
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred and states that
an entity’s commitment to an exit plan, by itself, does not create a
present obligation that meets the definition of a liability. SFAS No. 146 also
establishes that fair value is the objective for initial measurement of the
liability. The Company is currently reviewing the requirements of this new
standard and has not yet determined the impact, if any, on the Company’s
financial position or results of operations. |
| |
4. |
|
Marketable Equity Securities |
| |
|
|
Marketable
equity securities include the Company’s investments in equity securities,
primarily Deutsche Telekom AG ordinary shares, Vodafone AirTouch plc American
Depository Receipts, Rural Cellular Corporation preferred and common shares and
Verisign, Inc. 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. |
June 30, December 31,
2002 2001
----------- -----------
(Dollars in thousands)
Available-for-sale marketable equity securities
Aggregate fair value $ 1,490,484 $ 2,700,230
Accounting cost basis* 1,546,404 3,303,106
----------- -----------
Gross holding losses (55,920) (602,876)
Tax effect 22,119 236,331
----------- -----------
Unrealized holding losses, net of tax $ (33,801) $ (366,545)
=========== ===========
| *The accounting cost basis
of the marketable equity securities was reduced by the other than temporary loss
of $1,756,526 recognized in the first six months of 2002. |
| |
5. |
|
Investment in Goodwill |
| |
|
|
The
Company has substantial amounts of goodwill as a result of the acquisition of
wireless licenses and markets, and the acquisition of operating telephone
companies. U.S. Cellular’s goodwill is related to various acquisitions
structured to be tax-free. No deferred taxes have been provided on this
goodwill. The Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 142 “Goodwill and Other Intangible Assets” on
January 1, 2002, and no longer amortizes license costs and goodwill. Pursuant to
SFAS No. 142, the Company assessed its recorded balances of cellular license
costs and goodwill for potential impairment in the first quarter of 2002. No
impairment charge was required as of January 1, 2002. The changes in the
carrying amount of goodwill for the three and six months ended June 30, 2002 and
2001, were as follows. |
TDS Telecom
--------------------
(Dollars in thousands) US Cellular ILEC CLEC Other(1) Total
--------- --------- --------- --------- ---------
Beginning Balance April 1, 2002 $ 473,975 $ 332,904 $ 29,440 $ 34,538 $ 870,857
Net additions -- 41,349 -- -- 41,349
--------- --------- --------- --------- ---------
Ending Balance June 30, 2002 $ 473,975 $ 374,253 $ 29,440 $ 34,538 $ 912,206
========= ========= ========= ========= =========
Beginning Balance April 1, 2001 $ 450,553 $ 208,717 $ 7,380 $ 35,343 $ 701,993
Net additions 33,854 29 -- -- 33,883
Amortization (3,493) (1,661) (56) (268) (5,478)
--------- --------- --------- --------- ---------
Ending Balance June 30, 2001 $ 480,914 $ 207,085 $ 7,324 $ 35,075 $ 730,398
========= ========= ========= ========= =========
TDS Telecom
--------------------
(Dollars in thousands) US Cellular ILEC CLEC Other(1) Total
--------- --------- --------- --------- ---------
Beginning Balance January 1, 2002 $ 473,975 $ 332,848 $ 29,440 $ 34,538 $ 870,801
Net additions -- 41,405 -- -- 41,405
--------- --------- --------- --------- ---------
Ending Balance June 30, 2002 $ 473,975 $ 374,253 $ 29,440 $ 34,538 $ 912,206
========= ========= ========= ========= =========
Beginning Balance January 1, 2001 $ 400,967 $ 210,320 $ 7,436 $ 35,612 $ 654,335
Net additions 86,209 91 -- -- 86,300
Amortization (6,262) (3,326) (112) (537) (10,237)
--------- --------- --------- --------- ---------
Ending Balance June 30, 2001 $ 480,914 $ 207,085 $ 7,324 $ 35,075 $ 730,398
========= ========= ========= ========= =========
| |
|
|
(1)Other
consists of goodwill related to an investment in a cellular market owned by an
ILEC subsidiary.
The Company's
investment in unconsolidated entities also included goodwill of $66.6 million at June 30, 2002 and December 31, 2001. |
| |
|
|
Net income adjusted to exclude license and goodwill
amortization expense, net of tax, recorded in the three and six months ended June
30, 2002 and 2001 is summarized below.
|
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
(Dollars in thousands, except per share amounts)
Net Loss $(952,381) $(339,717) $(938,784) $(311,483)
Amortization, net of tax
and minority interest effect of:
License costs -- 1,868 -- 7,006
Goodwill -- 5,053 -- 6,208
Goodwill for equity
Method investments -- 380 -- 711
--------- --------- --------- ---------
Adjusted Net Income $(952,381) $(332,416) $(938,784) $(297,558)
========= ========= ========= =========
Basic earnings per share:
Net Loss $ (16.24) $ (5.79) $(16.02) $ (5.31)
Amortization, net of tax
and minority interest -- .12 -- .24
--------- --------- --------- ---------
Adjusted Earnings per Share $ (16.24) $ (5.67) $(16.02) $ (5.07)
========= ========= ========= =========
Diluted Earnings Per Share:
Net Loss $(16.24) $ (5.79) $ (16.02) $ (5.31)
Amortization, net of tax
and minority interest -- .12 -- .24
--------- --------- --------- --------
Adjusted Earnings per Share $ (16.24) $ (5.67) $ (16.02) $ (5.07)
========= ========= ========= ========
| |
6. |
|
Variable Prepaid Forward |
| |
|
|
Forward
contracts for forecasted transactions and hedged items are designated as cash
flow or fair value hedges and recorded as assets or liabilities on the balance
sheet at their fair value. The fair value of the financial instruments is
generally determined by using the Black-Scholes model. For contracts designated
as cash flow hedges, changes in the contract’s fair value are recognized in
accumulated other comprehensive income until they are recognized in earnings at
the time the forecasted transaction occurs. If the forecasted transaction does
not occur, or it becomes probable that it will not occur, the gain or loss on
the related cash flow hedge is recognized in earnings at that time. No
components of the contracts are excluded in the measurement of hedge
effectiveness for cash flow hedges. The critical terms of the variable prepaid
forward contracts are the same as the underlying forecasted transactions;
therefore, changes in the fair value of the variable prepaid forward contracts
are anticipated to be effective in offsetting changes in the expected cash flows
from the forecasted transactions. No gains or losses related to ineffectiveness
of cash flow hedges were recognized in earnings for the six months ended June
30, 2002.
For
contracts designated as fair value hedges, effectiveness is assessed based upon
the intrinsic value of the underlying options. Changes in the intrinsic value of
the options are expected to be perfectly effective at offsetting changes in the
fair value of the hedged item. Changes in the time value of the options are
excluded from the effectiveness assessment and are recognized in earnings each
period. A loss of $0.4 million that related to ineffectiveness of the fair value
hedge was recognized in earnings for the six months ended June 30, 2002. |
| |
|
|
The unrealized gain on all variable prepaid forward contracts totaling $12.4
million, net of taxes, was included as a separate component of accumulated other
comprehensive income in 2002.
In
May 2002, TDS entered into a prepaid forward contract to sell up to 2,361,333
VeriSign shares for aggregate proceeds of $18.9 million. The contract matures in
May 2007 and, at TDS’s option, can be settled by TDS delivering its
VeriSign shares or cash. The principal amount of the contract at maturity is
$20,819,165. There are no payments of interest during the contract period. The
effective interest rate on the contract is 5.1%.
The
contract “collars” or limits TDS’s exposure to movements in the
price of the VeriSign shares. TDS will account for the collar as a fair value
hedge because the transaction was a net written option. The net premium received
on the collar totaled $2.7 million. The gain or loss on a derivative designated
and qualifying as a fair value hedge is reported in current earnings along with
the offsetting loss or gain on the hedged item. This gain or loss will be
reported as a component of “Investment and Other Income (Expense)” in
the Consolidated Statement of Operations.
U.S.
Cellular entered into prepaid forward contracts with four financial institutions
to sell Vodafone stock totaling 10,245,370 ADRs for aggregate proceeds of $159.9
million. The contracts mature in May 2007 and, at U.S. Cellular’s option,
may be settled in stock or cash. There was no net premium received on these
contracts because they were zero cost collars. The contracts payable bear
interest (payable quarterly) at LIBOR plus 0.5%. The contracts
“collar” or limit U.S. Cellular’s exposure to movements in the
price of Vodafone ADRs. U.S. Cellular will account for these collars as cash
flow hedges.
At
June 30, 2002, the Company recorded derivative assets aggregating $17.8 million
because the share price was below the floor for all the contracts. The risk
associated with these transactions is the cost of replacing the agreements, at
current market rates, in the event of default by the counterparties. Management
believes the risk of incurring such losses is remote. The derivative assets are
reported in the balance sheet caption “Other Assets and Deferred
Charges.” |
| |
7. |
|
U.S. Cellular 2002 Revolving Credit Faciltiy |
| |
|
|
U.S. Cellular has obtained a five-year credit facility, amended in July 2002 to provide up to $325 million
in financing (“2002 Revolving Credit Facility”), which may be used to finance the purchase of PrimeCo and
for other purposes. U.S. Cellular’s 2002 Revolving Credit Facility permits revolving loans on terms and
conditions substantially similar to U.S. Cellular’s existing $500 million 1997 Revolving Credit Facility,
except for the interest rate and certain additional provisions. The terms of the 2002 Revolving Credit
Facility provide for borrowings with interest at LIBOR plus a margin percentage based on U.S. Cellular’s
credit rating. Based on its current credit rating, the margin percentage is 55 basis points (for a rate of
2.39% as of June 30, 2002). Also, U.S. Cellular needs to comply with certain financial covenants. The
covenants include limitations on the ratios of funded debt to capitalization, earnings before interest,
taxes depreciation and amortization (“EBITDA”) to interest expense, and funded debt to EBITDA. The 2002
Revolving Credit Facility places other requirements on U.S. Cellular, including the sale or placement of at
least $175 million of debt securities on terms reasonably satisfactory to the lenders.
|
| |
8. |
|
Common Stockholders' Equity |
| |
|
|
The TDS Board of Directors authorized the repurchase of up to 4.0 million TDS Common
Shares in 2000. As of June 30, 2002, TDS has repurchased 2,991,000 common
shares. The Company repurchased 110,000 shares in the first six months of 2001.
No shares have been repurchased in 2002. |
| |
9. |
|
Other Comprehensive Income (Loss) |
| |
|
|
The
Company’s Comprehensive Income (Loss) includes Net Income and Unrealized
Gains (Losses) from Marketable Equity Securities that are classified as
“available-for-sale” and derivative instruments. The following tables
summarize the Company’s Comprehensive Income (Loss). |
Six Months Ended
June 30,
-------------------------
2002 2001
----------- -----------
(Dollars in thousands)
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period $ (352,120) $ (178,344)
----------- -----------
Add (Deduct):
Net unrealized gains (losses) on
marketable equity securities (1,209,570) (214,708)
Unrealized gain on derivatives instruments 17,826 --
Income tax effect 466,630 93,917
----------- -----------
(725,114) (120,791)
Equity method unrealized gains 218 --
Minority share of unrealized (gains) losses 12,203 14,205
----------- -----------
Net unrealized gains (losses) (712,693) (106,586)
----------- -----------
Deduct (Add):
Recognized loss (1,756,526) (644,929)
Income tax effect 686,223 259,707
Minority share of loss 25,900 --
----------- -----------
(1,044,403) (385,222)
----------- -----------
Net change in unrealized gains (losses) included
In comprehensive income 331,710 278,636
----------- -----------
Balance, end of period $ (20,410) $ 100,292
=========== ===========
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2002 2001 2002 2001
------------------------------------------
Comprehensive Income (Loss) (Dollars in thousands)
Net (Loss) $(952,381) $(339,717) $(938,784) $(311,483)
Net change in unrealized gains
(losses) on marketable equity
securities and
derivative instruments 551,035 504,994 331,710 278,636
--------- --------- --------- ---------
Comprehensive Income (Loss) $(401,346) $ 165,277 $(607,074) $ (32,847)
========= ========= ========= =========
| |
|
|
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. Basic and diluted earnings per share are the same for
the three and six months ended June 30, 2002 and 2001 because of the net loss. |
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2002 2001 2002 2001
(Dollars in thousands, except per share amounts)
Net loss $(952,381) $(339,717) $(938,784) $(311,483)
Less: Preferred Dividends (106) (115) (218) (233)
--------- --------- --------- ---------
Net loss Available to Common Used
Basic and Diluted Earnings per Share $(952,487) $(339,832) $(939,002) $(311,716)
========= ========= ========= =========
Weighted Average Number of
Common Shares Used in Basic and
Diluted Earnings per Share 58,639 58,653 58,619 58,685
========= ========= ========= =========
Basic and Diluted Earnings per
Common Share $ (16.24) $ (5.79) $ (16.02) $ (5.31)
========= ========= ========= =========
| |
11. |
|
Loss on Marketable Securities and Other Investments |
| |
|
|
(Loss)
on marketable securities and other investments in 2002 reflects an “other
than temporary ” investment loss of $1,756.5 million ($1,044.4 million, net
of tax and minority interest) on the Company’s marketable securities. The
adjusted cost basis of the Company’s marketable securities was written down
to market value upon determining that the unrealized losses on the securities
were other than temporary.
In
May 2001, the Company realized a loss of $644.9 million ($385.2 million, net of
tax) as a result of the merger between VoiceStream Wireless Corporation and
Deutsche Telekom AG. The loss was due to the decline in the market price of
VoiceStream common stock between the time that the Company acquired the stock on
May 4, 2000 and the closing date on May 31, 2001. |
| |
12. |
|
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.
TDS
acquired a telephone company and three PCS licenses during the first six months
of 2002, and a cellular market and interests in six PCS licenses in 2001. In
conjunction with these acquisitions, the following assets were acquired and
liabilities assumed. |
Six Months Ended
June 30,
----------------------
2002 2001
-------- --------
(Dollars in thousands)
Property, plant and equipment $ 18,958 $ 2,570
Cellular licenses 18,010 95,880
Goodwill 40,750 --
Long-term debt (9,178) --
Deferred credits (17) --
Other assets and liabilities, excluding cash
and cash equivalents 5,199 --
-------- --------
Decrease in cash due to acquisitions $ 73,722 $ 98,450
======== ========
The following table summarizes interest and income taxes paid.
Six Months Ended
June 30,
------------------------
2002 2001
------ -----
(Dollars in thousands)
Interest Paid $48,487 $49,424
Income Taxes Paid $12,980 $38,298
| |
13. |
|
Discontinued Operations |
| |
|
|
On
May 4, 2000, Aerial Communications Inc., TDS’s then 80%-owned personal
communication services company, merged with VoiceStream Wireless. In 2001, the
Company established a $24.1 million liability for adjustments to estimates used
during the closing in the calculation of income and other tax liabilities.
Certain liabilities associated with this settlement remain on the balance sheet
as of June 30, 2002 and are included in accounts payable ($6.0 million), other
current liabilities ($11.6 million) and deferred liabilities and credits ($6.4
million). |
| |
|
|
Acquisition of Chicago 20 MHz:
On
August 7, 2002, U.S. Cellular completed the acquisition of all of the equity
interest in Chicago 20 MHz, LLC (“Chicago 20 MHz”), including the
assets and certain liabilities of Chicago 20 MHz, from PrimeCo Wireless
Communications LLC (“PrimeCo”). Chicago 20MHz operates the PrimeCo
wireless system in the Chicago Major Trading Area (“MTA”). Chicago
20MHz is the holder of certain FCC licenses, including a 20 megahertz PCS
|
| |
|
|
license in the Chicago MTA (excluding Kenosha County, Wis.) covering 13.2
million population equivalents (POPs). The purchase price was approximately $610
million subject to certain working capital and other adjustments at closing.
U.S. Cellular financed the purchase using its revolving lines of credit, $175
million in 30 year notes purchased by PrimeCo and a $105 million loan from TDS
In May, U.S. Cellular raised approximately $160 million in cash when it entered
into variable prepaid forward contracts related to its Vodafone ADRs; the
proceeds from these contracts were initially used to pay down balances
outstanding under the U.S. Cellular revolving credit facility.
Monetization of Marketable Securities
In
July and through August 12th of 2002, TDS entered into variable prepaid forward contracts
with multiple parties relating to 20,028,673 Deutsche Telekom AG
ordinary shares or approximately 15% of the shares owned by TDS. Each contract provides a collar to the stock price for five
years and, taken together, the contracts will allow TDS to borrow approximately
$230 million against the stock. The collars limit TDS’s exposure to
movement in the Deutsche Telekom stock price through the use of put options and
call options. The collars limit TDS’s downside risk to an average of $11.57
per share and limit the upside potential to an average of $13.88 per share.
During the period of the contracts, TDS will continue to receive dividends paid
by Deutsche Telekom on such contracted shares. These contracts
will be accounted for as cash flow hedges. At the expiration of the contracts,
TDS may settle the contracts by delivering cash or Deutsche Telekom shares. TDS
may enter into further contracts depending on market conditions and other
factors. |
| |
15. |
|
Business Segment Information |
| |
|
|
Financial data for the Company's business segments for each of the six-month periods ended or at June 30, 2002 and 2001 are as
follows: |
Three Months Ended or at
June 30, 2002 TDS Telecom
- ----------------------- -----------------
(Dollars in thousands) U.S. Cellular ILEC CLEC All Other(1) Total
--------- ------- ------ ----------- -------
Operating revenues 527,710 155,051 41,763 (710) 723,814
Operating cash flow(2) 176,458 71,203 (9,957) -- 237,704
Depreciation and amortization
Expense(3) 76,409 32,047 7,180 -- 115,636
Operating income (loss) 100,049 39,156 (17,137) -- 122,068
Significant noncash items:
Investment income, net 7,298 375 -- 89 7,762
Gain (loss) on marketable
Securities and other investments -- -- -- (1,719,126) (1,719,126)
Marketable securities 140,235 -- -- 1,350,249 1,490,484
Total assets 3,716,253 1,506,816 221,656 1,506,957 6,951,682
Investment in unconsolidated
Entities 170,929 48,931 -- 25,197 245,057
Capital expenditures 156,699 25,268 16,991 -- 198,958
Three Months Ended or at
June 30, 2001 TDS Telecom
- ----------------------- -----------------
(Dollars in thousands) U.S. Cellular ILEC CLEC All Other(1) Total
--------- ------- ------ ----------- -------
Operating revenues 475,289 138,716 28,632 (336) 642,301
Operating cash flow(2) 166,634 69,729 (4,813) -- 231,550
Depreciation and amortization
Expense(3) 73,008 32,572 3,727 -- 109,307
Operating income (loss) 93,626 37,157 (8,540) -- 122,243
Significant noncash items:
Investment income, net 9,923 211 -- 76 10,210
Gain (loss) on marketable
Securities and other investments -- -- -- (644,929) (644,929)
Marketable securities 246,609 -- -- 3,090,557 3,337,166
Total assets 3,446,185 1,256,828 174,083 3,213,699 8,090,795
Investment in unconsolidated
entities 152,879 24,900 -- 19,510 197,289
Capital expenditures 131,722 22,932 37,980 -- 192,634
Six Months Ended or at
June 30, 2002 TDS Telecom
- ----------------------- -----------------
(Dollars in thousands) U.S. Cellular ILEC CLEC All Other(1) Total
--------- ------- ------ ----------- -------
Operating revenues 1,006,130 304,572 79,516 (1,207) 1,398,011
Operating cash flow(2) 328,056 144,175 (18,090) -- 454,141
Depreciation and amortization
expense(3) 149,161 64,502 13,872 -- 227,535
Operating income (loss) 178,895 79,673 (31,962) -- 226,606
Significant noncash items:
Investment income, net 17,766 611 -- 430 18,807
Gain (loss) on marketable
securities and other investments -- -- -- (1,756,526) (1,756,526)
Marketable securities 140,235 -- -- 1,350,249 1,490,484
Total assets 3,716,253 1,506,816 221,656 1,506,957 6,951,682
Investment in unconsolidated
entities 170,929 48,931 -- 25,197 245,057
Capital expenditures 256,773 44,462 26,051 -- 327,286
Six Months Ended or at
June 30, 2001 TDS Telecom
- ----------------------- -----------------
(Dollars in thousands) U.S. Cellular ILEC CLEC All Other(1) Total
--------- ------- ------ ----------- -------
Operating revenues 915,058 273,161 55,247 (796) 1,242,670
Operating cash flow(2) 296,456 139,910 (7,389) -- 428,977
Depreciation and amortization
expense(3) 144,347 64,972 6,925 -- 216,244
Operating income (loss) 152,109 74,938 (14,314) -- 212,733
Significant noncash items:
Investment income, net 16,628 357 -- 190 17,175
Gain (loss) on marketable
securities and other investments -- -- -- (644,929) (644,929)
Marketable securities 246,609 -- -- 3,090,557 3,337,166
Total assets 3,446,185 1,256,828 174,083 3,213,699 8,090,795
Investment in unconsolidated
Entities 152,879 24,900 -- 19,510 197,289
Capital expenditures 252,132 35,778 56,068 -- 343,978
|
(1) Consists of the TDS Corporate operations, TDS Telecom intercompany
eliminations, TDS Corporate and TDS Telecom marketable equity securities and all
other businesses not included in the U.S. Cellular or TDS Telecom segments.
(2) Operating cash flow is operating income plus depreciation and amortization.
(3)Depreciation and amortization for the three months ended June 30, 2001,
includes license cost and goodwill amortization expense of $8.8 million for U.S.
Cellular, $1.6 million for the ILEC and $56,000 for the CLEC. Depreciation and
amortization for the six months ended June 30, 2001, includes license cost and
goodwill amortization expense of $18.0 million for U.S. Cellular, $3.3 million
for the ILEC and $112,000 for the CLEC. The three and six months ended June 30,
2002 do not include amortization of license costs or goodwill in accordance with
SFAS No. 142. |
| PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
TDS is involved in a number
of legal proceedings before the FCC and various state and federal courts.
Management does not believe that any such proceeding should have a material
adverse impact on the financial position or results of operations of TDS.
Item 4. Submission of Matters to a Vote of Security-Holders.
At the Annual Meeting of
Shareholders of TDS, held on May 23, 2002, the following number of votes were
cast for the matters indicated: |
1. a. For the election of three Class III Directors of the Company by the holders
of Series A Common and Preferred Shares:
Broker
Nominee For Withhold Non-vote
------- --- -------- --------
LeRoy T. Carlson 66,088,908 -0- -0-
Walter C.D. Carlson 66,088,908 -0- -0-
Dr. Letitia G.C. Carlson 66,088,908 -0- -0-
b. For the election of one Class III Director of the Company by the Common Holders:
Broker
Nominee For Withhold Non-vote
------- --- -------- --------
Herbert S. Wander 45,554,645 747,457 -0-
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Item 6. Exhibits and Reports on Form 8-K.
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Exhibit
4.1 - Revolving Credit Agreement dated as of June 26, 2002 among United States
Cellular Corporation, the lenders named therein, Toronto Dominion (Texas), Inc.,
Wachovia Bank, N.A., Citibank, N.A. and LaSalle Bank N.A., is hereby
incorporated by reference to Exhibit 4.1 to the Form 10-Q for the quarter ended
June 30, 2002 of United States Cellular Corporation.
Exhibit
4.2 – Notice of Increase in Total Commitment under the Revolving Credit
Agreement dated as of June 26, 2002, is hereby incorporated by reference to
Exhibit 4.2 to the Form 10-Q for the quarter ended June 30, 2002 of United
States Cellular Corporation.
Exhibit
4.3 – First Supplemental Indenture of United States Cellular Corporation
dated August 7, 2002 relating to its 9% Series A Notes due 2032, is hereby
incorporated by reference to Exhibit 4.3 to the Form 10-Q for the quarter ended
June 30, 2002 of United States Cellular Corporation. |
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Exhibit
4.4 – Note Purchase Agreement between United States Cellular Corporation
and PrimeCo Wireless Communications LLC, is hereby incorporated by reference to
Exhibit 4.4 to the Form 10-Q for the quarter ended June 30, 2002 of United
States Cellular Corporation.
Exhibit
4.5 – Registration Rights Agreement between United States Cellular
Corporation and PrimeCo Wireless Communications LLC, is hereby incorporated by
reference to Exhibit 4.5 to the Form 10-Q for the quarter ended June 30, 2002 of
United States Cellular Corporation.
Exhibit
4.6 – Note Purchase Agreement between United States Cellular Corporation
and Telephone and Data Systems, Inc., is hereby incorporated by reference to
Exhibit 4.6 to the Form 10-Q for the quarter ended June 30, 2002 of United
States Cellular Corporation.
Exhibit
4.7 – Subordination Agreement dated as of June 26, 2002 among Telephone and
Data Systems, Inc., United States Cellular Corporation and Toronto Dominion
(Texas), Inc. is hereby incorporated by reference to Exhibit 4.7 to the Form
10-Q for the quarter ended June 30, 2002 of United States Cellular Corporation.
Exhibit 4.8 - Second Supplemental Indenture dated May 31, 2002, by and between
Telephone and Data Systems, Inc. and BNY Midwest Trust Company.
Exhibit
10.1 – Amended and Restated CDMA Master Supply Agreement between United
States Cellular Corporation and Nortel Networks Inc., is hereby incorporated by
reference to Exhibit 10.1 to the Form 10-Q for the quarter ended June 30, 2002
of United States Cellular Corporation.
Exhibit 11 – Computation of earnings per common share is included herein as
footnote 10 to the financial statements.
Exhibit 12 - Statement regarding computation of ratios.
Exhibit 99.1 - Chief Executive Officer certification pursuant
to Section 1350 of Chapter 63 of Title 18 of the United States Code.
Exhibit 99.2 - Chief Financial Officer certification pursuant to Section
1350 of Chapter 63 of Title 18 of the United States Code.
Exhibit
99.3 – Press release dated August 7, 2002, announcing the completion of the
purchase of all of the equity interests in Chicago 20MHz from PrimeCo. |
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(b) |
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Reports on Form 8-K filed during the quarter ended June 30, 2002:
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The
Company filed a Current Report on Form 8-K, dated May 23, 2002, for the purpose
of announcing the dismissal of Arthur Andersen LLP as TDS’s independent
auditors and the engagement of PricewaterhouseCoopers LLP as its new independent
auditors.
The
Company filed a Current Report on Form 8-K, dated June 12, 2002, for the purpose
of announcing that it was recognizing an other than temporary investment loss on
its marketable securities. |
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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)
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Date |
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August 12, 2002 |
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/s/ LeRoy T. Carlson, Jr. |
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LeRoy T. Carlson, Jr. |
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President and Chief Executive Officer |
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Date |
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August 12, 2002 |
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/s/ Sandra L. Helton |
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Sandra L. Helton, |
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Executive Vice President and |
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Chief Financial Officer |
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Date |
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August 12, 2002 |
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/s/ D. Michael Jack |
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D. Michael Jack, |
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Vice President and Controller |
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(Principal Accounting Officer) |
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Signature page for the TDS 2002
Second Quarter Form 10-Q |
