|
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 4.9 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.
Acquisition of Chicago 20MHz
On August 7, 2002, U.S.
Cellular completed the acquisition of all of the equity interest in Chicago
20MHz, LLC (“Chicago 20MHz”), including the assets and certain
liabilities of Chicago 20MHz, from PrimeCo Wireless Communications LLC
(“PrimeCo”). Chicago 20MHz operates the PrimeCo wireless system in the
Chicago Major Trading Area (“MTA”). The purchase price was
approximately $607 million subject to certain working capital and other
adjustments. The financial statements include the assets and liabilities of
Chicago 20MHz and the results of operations since August 7, 2002. See U.S.
Cellular Operations – Acquisition of Chicago 20MHz.
RESULTS OF OPERATIONS
Nine Months Ended 9/30/02 Compared to Nine Months Ended 9/30/01
Operating Revenues
increased 14% ($273.2 million) during the first nine months of 2002
primarily as a result of a 17% increase in customer units served from internal
growth and acquisitions. U.S. Cellular’s operating revenues increased 13%
($187.6 million) as customer units served increased by 564,000 or 17%, since
September 30, 2001, to 3,943,000. The acquisition of Chicago 20MHz increased
customer units by 305,000 and revenues by $28.2 million. TDS Telecom operating
revenues increased 17% ($85.6 million) as equivalent access lines increased by
144,800, or 17%, since September 30, 2001, to 987,500 through internal growth
(117,000) and acquisitions (27,800). Growth in the competitive local exchange
operations increased revenue by $40.1 million, and the effect of acquisitions in
2002 and 2001 increased revenue by $32.7 million.
Operating Expenses
rose 18% ($281.6 million) in the first nine months of 2002 reflecting growth in
operations. U.S. Cellular’s operating expenses increased 16% ($188.8
million). The acquisition of Chicago 20MHz increased operating expenses by $33.6
million. TDS Telecom’s expenses increased 22% ($92.8 million).
Operating Income decreased 3% ($8.3 million) to $322.8
million in the first nine months of 2002 from $331.2 million in 2001. TDS
adopted Statement of Financial Accounting Standards
2
("SFAS") No. 142 effective January 1, 2002, and ceased the amortization of license costs and goodwill on that date. TDS also
determined that no impairment charge was required upon the completion of the initial impairment review required by SFAS No. 142. For
the nine months ended September 30, 2001, amortization of license costs and goodwill included in U.S. Cellular's and TDS Telecom's
depreciation and amortization captions totaled $27.1 million and $5.1 million, respectively. Excluding license cost and goodwill
amortization in 2001, operating income decreased 11% ($40.5 million). The decline in operating income reflects increased bad debts
expense as a result of the WorldCom and Global Crossing bankruptcies ($10.7 million), increased bad debts on customer receivables
($18.1 million), and a write-off of certain analog radio equipment ($15.0 million).
U.S. Cellular's operating income decreased 1% ($1.2 million) in the first nine months of 2002. Excluding license cost and goodwill
amortization in 2001, U.S. Cellular's operating income decreased 10% ($28.3 million) to $243.6 million in the first nine months of
2002 from $271.9 million in 2001 and its operating income margin, as a percentage of service revenues, decreased to 16.0% in 2002
from 19.9% in 2001. The decrease in U.S. Cellular's operating income was primarily due to increased bad debts ($18.1 million) and
the additional depreciation expense recorded to write-off certain analog radio equipment ($15.0 million). The Chicago 20MHz
acquisition contributed an operating loss of $5.3 million in 2002.
TDS Telecom’s
operating income decreased 8% ($7.1 million) in the first nine months of 2002.
Excluding license cost and goodwill amortization in 2001, TDS Telecom’s
operating income decreased 13% ($12.2 million) to $79.2 million in the first
nine months of 2002 from $91.4 million in 2001 and its operating margin declined
to 13.5% in 2002 from 18.2% 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 ($10.7 million) and increased operating losses from expanding the
competitive local exchange business ($17.3 million).
Investment and Other Income (Expense) totaled $(1,759.5) million in
2002 and $(596.8) million in 2001.
Dividend and interest
income increased $40.3 million to $52.4 million in the first nine 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 $6.8
million reduction in interest income. This year is the first year that TDS has
been a record holder on Deutsche Telekom’s annual dividend declaration
date.
(Loss) on marketable securities and other investments totaled $(1,846.6) million in the first nine months of 2002 and $(644.9)
million in the first nine 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 $308.1
million on the investment in Vodafone AirTouch plc American Depository Receipts ("ADRs").
TDS has notes receivable
from Airadigm Communications, Inc. and Kington Management Corporation
aggregating $100.6 million relating to the funding of Airadigm’s operations
and the purchase by Kington of certain of U.S. Cellular’s minority
interests in 2000. The values of the notes are directly related to the values of
certain assets and contractual rights of Airadigm and the value of the minority
cellular market interests. As a result of changes in business strategies and
other events, a review of the Airadigm business plan and a review of the fair
market value analysis of the cellular markets, including third party fair value
analysis, management concluded that the notes receivable are impaired.
Accordingly TDS established a valuation allowance to reduce the notes receivable
by $90.1 million in the third quarter of 2002.
3
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,
decreased $5.7 million to $32.1 million in the first nine 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. TDS no longer reports gains and losses from the
extinguishment of debt as an extraordinary item. U.S. Cellular reported the
conversion of liquid yield option notes (“LYONs”) for cash as
extraordinary losses in 2001. Losses on extinguishment of debt, net of minority
interest, totaling $5.7 million, or $0.10 per diluted share, reported as an
extraordinary loss in 2001, have been reclassified into other (expense), net and
minority interest.
Interest Expense
increased 19% ($14.6 million) in the first nine 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 ($28.5 million) offset by a decrease in average
short-term debt balances and related interest expense ($11.0 million), a $116.5
million reduction in medium-term notes ($6.3 million), and a reduction in LYONs
interest expense ($1.0 million). Interest expense in 2002 also includes $2.0
million related to variable prepaid forward contracts (“forward
contracts”) and $2.4 million related to the 30-year, 9% Series A Notes
issued by U.S. Cellular in conjunction with the acquisition of Chicago 20MHz.
See Note 6 - Derivatives and Note 8 - Long-term Debt, for an explanation of the
forward contracts.
Income Tax Expense
(Benefit) totaled $(588.3) million in 2002, a change of $455.0 million from
$(133.3) million in 2001. A tax benefit of $718.8 million was recognized in 2002
related to the other than temporary loss on marketable securities and other
investments. 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 (38.0)% in 2002 and (36.9)% in 2001. The effective tax rate excluding
the effects of loss on marketable securities and other investments was 43.6% in
2002 and 44.6% in 2001.
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 $29.8 million due to U.S. Cellular’s
loss on marketable securities and other investments in 2002.
|
Nine Months Ended
September 30,
--------------------
2002 2001 Change
-------- -------- --------
(Dollars in thousands)
Minority Share of (Income) Loss
U.S. Cellular
Minority Public Shareholders' $ 5,890 $(25,301) $ 31,191
Minority Shareholders' or Partners' (5,013) (6,161) 1,148
-------- -------- --------
877 (31,462) 32,339
Other (22) (93) 71
-------- -------- --------
$ 855 $(31,555) $ 32,410
======== ======== ========
| 4
Net Income (Loss)
Available to Common totaled $(958.6) million, or $(16.35) per diluted share,
in the first nine months of 2002, compared to $(260.3) million, or $(4.44) per
diluted share, in the first nine months of 2001. Net income (loss) available to
common includes significant losses from marketable securities and other
investments as well as certain other income and expense items affecting the
comparability of operating results. 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 $111.7 million, or $1.89 per diluted share
in 2002 compared to $152.4 million, or $2.59 per diluted share in 2001. The
decline is primarily due to additional operating losses from the developing CLEC
business, additional bad debt expense from WorldCom and Global Crossing
bankruptcies as well as an increase in bad debts on customer receivables, an
increase in depreciation expense relating to the write-off of certain analog
radio equipment and an increase in interest expense. A summary of net income
(loss) available to common and diluted earnings per share is shown below. |
Nine Months Ended
September 30,
-------------
2002 2001
----------- -----------
(Dollars in thousands,
except per share amounts)
Net Income (Loss) from:
Operations $ 111,681 $ 152,374
Deutsche Telekom dividend 27,659 --
Loss on marketable securities and
other investments (1,097,958) (385,223)
License and goodwill amortization -- (21,786)
Loss on conversion of LYONs -- (5,697)
----------- -----------
$ (958,618) $ (260,332)
=========== ===========
Diluted Earnings Per Share from:
Operations $ 1.89 $ 2.59
Deutsche Telekom dividend .47 --
Loss on marketable securities and
other investments (18.71) (6.56)
License and goodwill amortization -- (.37)
Loss on conversion of LYONs -- (.10)
----------- -----------
$ (16.35) $ (4.44)
=========== ===========
| 5
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 564,000, or 17%, since September 30, 2001, to 3,943,000. The Chicago 20MHz acquisition increased customer units by
305,000 in the third quarter of 2002. |
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Dollars in thousands)
Operating Revenue
Retail service $ 443,290 $ 360,689 $1,217,387 $1,044,876
Inbound roaming 74,243 77,790 190,910 209,144
Long-distance and other 43,707 40,839 115,209 110,419
---------- ---------- ---------- ----------
Service Revenue 561,240 479,318 1,523,506 1,364,439
Equipment Sales 36,331 21,706 80,195 51,643
---------- ---------- ---------- ----------
597,571 501,024 1,603,701 1,416,082
---------- ---------- ---------- ----------
Operating Expenses
System operations 136,367 119,160 362,426 320,596
Marketing and selling 100,877 74,363 264,032 213,667
Cost of equipment sold 51,595 31,721 118,550 93,737
General and administrative 141,161 105,817 363,066 321,663
Depreciation 93,355 61,520 228,289 174,437
Amortization 9,521 15,766 23,748 47,196
---------- ---------- ---------- ----------
532,876 408,347 1,360,111 1,171,296
---------- ---------- ---------- ----------
Operating Income 64,695 92,677 243,590 244,786
Add Amortization of goodwill
and license costs -- 9,126 -- 27,144
---------- ---------- ---------- ----------
Operating Income,
as adjusted $ 64,695 $ 101,803 $ 243,590 $ 271,930
========== ========== ========== ==========
| Operating revenue increased 13% ($187.6 million) and service revenues increased 12% ($159.1 million) in the first nine months of 2002
due primarily to the increase in customer units. The Chicago 20MHz acquisition increased operating revenues by $28.2 million and
total service revenues by $26.4 million. Total average monthly service revenue per customer increased slightly ($0.36) to $47.02 in
the first nine months of 2002 from $46.66 in 2001. Total average monthly service revenue per customer, excluding the Chicago 20MHz
customers, was $47.03 in 2002.
Retail service revenue (charges to U.S. Cellular's customers for local systems usage and usage of systems other than their local
systems) increased 17% ($172.5 million) in the first nine months of 2002 due primarily to the 17% customer growth. The Chicago 20MHz
acquisition added $25.3 million to retail service revenue. Average local minutes of use per retail customer increased to 280 in 2002
(274 excluding Chicago 20MHz) from 208 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, including the Chicago 20MHz customers, increased 5%
($1.84) to $37.57 in 2002 from $35.73 in 2001. Average monthly retail service revenue per customer excluding the Chicago 20MHz
customers was $37.45 in 2002.
Inbound roaming revenue (charges to customers of other systems who use U.S. Cellular's wireless systems when roaming) decreased 9%
($18.2 million) in the first nine 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 used. Management anticipates that the rate of
growth in inbound roaming minutes of use will be reduced due to
6
newer customers roaming less than existing customers, reflecting further penetration of the consumer market. In addition, as
wireless operators expand service in U.S. Cellular's markets, roaming partners could switch their business to these 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.
Operating expenses increased 16% ($188.8 million) during the first nine months of 2002. The Chicago 20MHz acquisition increased
operating expenses by $33.6 million. The remaining 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 13% ($41.8 million) and represented 24% of service revenues in 2002
and 2001, respectively. 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 ($19.4 million), an increase in the cost of
maintaining the network ($12.3 million), the acquisition of Chicago 20MHz ($5.4 million) and an increase in the costs associated with
customer roaming on other companies systems ($4.7 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 3,750 at September 30, 2002 from 2,804 at September 30, 2001.
Management anticipates that the integration of Chicago 20MHz into its operations will result in an increase in minutes of use by U.S.
Cellular's customers on its systems and a corresponding decrease in minutes of use by its customers on other systems. Such a shift
in minutes of use should reduce U.S. Cellular's per minute cost of usage in the future.
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 $365 in 2002
($363 excluding the effect of Chicago 20MHz) from $311 in 2001 primarily due to the increase in marketing and selling expenses. Gross
customer activations were 829,000 (809,000 excluding Chicago 20MHz) in 2002 compared to 823,000 in 2001.
Marketing and selling expenses increased 24% ($50.4 million) in the first nine 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 ($18.6 million), commissions and related payments to U.S. Cellular personnel and third party agents ($9.7 million),
increases in advertising costs related to certain pricing promotions implemented in the second quarter of 2002 ($7.2 million) and the
acquisition of Chicago 20MHz ($6.9 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.
Equipment sales revenue increased 55% ($28.6 million) in the first nine months of 2002 while cost of equipment sold increased 27%
($24.8 million). Chicago 20MHz contributed $1.8 million in equipment sales revenue and $3.8 million in cost of equipment sold. 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
7
pass along quantity discounts.
General and administrative expenses increased 13% ($41.4 million) and represented 24% of service revenues in 2002 and 2001. The
increase in administrative expenses reflects a $18.1 million increase in bad debt expense due to the downturn in the economy over the
past 15 months and an increase of $6.1 million in customer retention expenses. In addition, customer service-related expenses
increased as a result of the 17% growth in the customer base. Chicago 20MHz added $10.6 million to general and administrative
expenses. 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 31% ($53.9 million) in 2002 primarily due to the increase in average fixed assets since September 30,
2001 and $4.8 million of depreciation expense related to Chicago 20MHz. In addition, depreciation expense increased $15.0 million in
2002 to reflect the write-off of certain analog radio equipment based on fixed asset inventory reviews performed in 2002. 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, the commencement of the migration to a single digital platform and investments in billing and office systems.
Amortization expense decreased 50% ($23.4 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 $27.1 million in 2001. Chicago 20 MHz added an
additional $2.1 million to amortization expense.
Operating income decreased slightly ($1.2 million) to $243.6 million in the first nine months of 2002. Operating income, excluding
license costs and goodwill amortization in 2001, decreased 10% ($28.3 million) in the first nine months of 2002. Operating margin,
as a percent of service revenue, decreased to 16.0% in 2002 compared to 17.9% (19.9% excluding license cost and goodwill
amortization) in 2001. The Chicago 20MHz market had an operating loss of $5.3 million in August and September of 2002. The decrease
in operating income reflects increased marketing and selling expenses and depreciation offset somewhat by increases in revenue and
the reduction in license cost and goodwill amortization.
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.
Related to U.S. Cellular's acquisition and subsequent transition of the Chicago 20MHz operations, including the recent brand launch,
U.S. Cellular plans to incur additional expenses during the remainder of 2002 and in 2003 as it begins to compete in the Chicago
market. All expense categories will be affected by the launch of the Chicago market, and there is no assurance that the expenses
incurred will result in any increase in revenues over the launch period. As a result, U.S. Cellular's operating income and operating
margins may decrease during the remainder of 2002 and during 2003.
Management expects service revenues to continue to grow during the remainder of 2002 and in 2003; however, management anticipates
that average monthly service revenue per customer may decrease as retail service 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.
8
Competitors licensed to provide wireless services have initiated service in many of U.S. Cellular’s markets over the past several
years. U.S. Cellular expects other wireless operators to continue deployment of their network throughout all of its service areas
during 2002 and 2003. 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
15 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 competition in U.S. Cellular's markets and the maturation of the wireless industry.
Acquisition of Chicago 20MHz
On August 7, 2002, U.S. Cellular completed the acquisition of Chicago 20MHz, representing 13.2 million population equivalents (POPs),
for approximately $607 million subject to certain working capital and other adjustments. 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. See
"Liquidity - Financing of Acquisition of Chicago 20MHz."
The Chicago MTA is the fourth largest MTA in the United States. The markets that comprise the Chicago MTA 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% was not previously 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.
Chicago 20MHz owns licenses covering 18 Basic Trading Areas ("BTAs"), that comprise the Chicago MTA. 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 currently 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 305,000 customers, representing a penetration rate of approximately 2.3% 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. U.S. Cellular launched its "U.S. Cellular" brand in the Chicago 20MHz licensed area
in the fourth quarter of 2002.
At September 30, 2002, Chicago 20MHz had approximately 500 employees, none of whom is represented by labor unions.
Chicago 20MHz competes in the Chicago MTA directly against larger and more established wireless service providers, as it does in many
of its other markets. The other wireless carriers competing in all or part of the Chicago MTA include Cingular, Verizon Wireless,
AT&T Wireless, Sprint PCS, Nextel and T-Mobile. 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
9
regional competitor, and have 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, an operating loss of $26 million and a
net loss of $27 million.
For the portion of the third quarter subsequent to August 7, the date of acquisition, Chicago20MHz contributed $26.4 million of
service revenue, with an average revenue per customer of $46.83, $1.8 million of equipment sales revenue and $5.3 million of
operating loss to U.S. Cellular's operating results. Subsequent to the acquisition, Chicago 20MHz lost 15,000 net customers and
ended the quarter with 305,000 customers.
10
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 144,800, or 17%, since September 30, 2001 to 987,500.
TDS Telecom's incumbent local exchange carrier ("ILEC") subsidiaries served 714,400 equivalent access lines at September 30, 2002, a
6% (38,600 lines) increase over the 675,800 equivalent access lines at September 30, 2001. Acquisitions added 27,800 lines while
internal growth added 10,800 lines. Acquisitions include the effect of the two telephone acquisitions in 2002 and the acquisition of
Chorus Communications in September of 2001 and another small telephone company in October 2001.
TDS Telecom's competitive local exchange carrier ("CLEC") subsidiaries served 273,100 equivalent access lines at September 30, 2002,
a 64% (106,200 lines) increase over the 166,900 equivalent access lines at September 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.
Operating revenue increased 17% ($85.6 million) in the first nine 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 22% ($92.7 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 8% ($7.1 million) to $79.2 million in the first nine months of 2002. Operating income, excluding goodwill
amortization in 2001, decreased 13% ($12.2 million) in the first nine months of 2002. The decline in operating income resulted
primarily from losses incurred from the expansion of competitive local exchange operations ($8.5 million, excluding bad debts), the
increase in retail (residential and business) bad debts in CLEC operations ($6.3 million) and the write-off of uncollectible
receivables related to the bankruptcy filing of two long distance providers ($10.7 million) offset by improved local telephone
operations operating results.
11
|
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Dollars in thousands)
Local Telephone Operations
Operating Revenue
Local service $ 49,324 $ 45,251 $ 143,599 $ 132,003
Network access and long-distance 88,139 79,484 257,108 231,562
Miscellaneous 21,498 19,753 62,826 54,084
--------- --------- --------- ---------
158,961 144,488 463,533 417,649
--------- --------- --------- ---------
Operating Expenses
Operating expenses, excluding
depreciation and amortization 80,206 70,582 240,603 203,833
Depreciation and Amortization 32,907 33,496 97,409 98,468
--------- --------- --------- ---------
113,113 104,078 338,012 302,301
--------- --------- --------- ---------
Local Telephone Operating Income $ 45,848 $ 40,410 $ 125,521 $ 115,348
--------- --------- --------- ---------
Competitive Local Exchange Operations
Operating Revenue $ 45,998 $ 30,157 $ 125,514 $ 85,404
--------- --------- --------- ---------
Operating Expenses
Operating expenses excluding
Depreciation and amortization 52,906 40,284 150,512 102,920
Depreciation and Amortization 7,426 4,541 21,298 11,466
--------- --------- --------- ---------
60,332 44,825 171,810 114,386
--------- --------- --------- ---------
Competitive Local Exchange
Operating (Loss) $ (14,334) $ (14,668) $ (46,296) $ (28,982)
--------- --------- --------- ---------
Intercompany revenues (643) (660) (1,850) (1,456)
Intercompany expenses (643) (660) (1,850) (1,456)
--------- --------- --------- ---------
Operating Income 31,514 25,742 79,225 86,366
Add amortization and goodwill -- 1,693 -- 5,098
--------- --------- --------- ---------
Operating Income, as adjusted $ 31,514 $ 27,435 $ 79,225 $ 91,464
========= ========= ========= =========
|
Local Telephone Operations
Operating revenues increased 11% ($45.9 million) in 2002. Acquisitions increased revenues by $32.7
million. Revenues from reselling long distance service increased network access
and long distance revenues by $8.7 million in 2002. As of September 30, 2002,
TDS Telecom was providing long distance service to 189,200 customers compared to
112,300 customers at September 30, 2001. Data transmission service revenues,
which include Internet and DSL, increased by $5.4 million in 2002. Average
monthly revenue per equivalent access line increased 1% ($0.46) to $74.08 in
2002 from $73.62 in 2001.
Operating expenses
increased by 12% ($35.7 million) in 2002. Operating expenses, excluding
depreciation and amortization, increased by 18% ($36.8 million) in 2002.
Acquisitions increased cash operating expenses by $19.7 million in 2002. The
cost of providing long-distance service to an increased customer base increased
expenses by $6.0 million. Bad debt expense, net of NECA pool recoveries,
increased by $8.2 million in 2002 related to the bankruptcy filings of WorldCom
and Global Crossing. Depreciation and amortization decreased 1% ($1.1 million)
in 2002. Acquisitions increased depreciation expense by $6.7 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 $5.1 million in the first nine months of 2001.
Operating income,
increased 9% ($10.2 million) to $125.5 million in the first nine months of 2002.
Operating income, excluding goodwill amortization in 2001,
increased 4% ($5.1 million). Acquisitions contributed $6.3 million to this
increase. Excluding the write-off of receivables due from companies which
have filed bankruptcy during the first nine months of 2002, management
12
expects 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. Total long distance access minutes of use declined
by 2.1% during the first nine months of 2002 compared to the first nine months
of 2001. Minutes in the third quarter of 2002 as compared to the same period in
2001 were flat. 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.
Competitive Local Exchange Operations
Operating revenues
increased 47% ($40.1 million) in 2002 as equivalent access lines served
increased by 64% (106,200 lines) to 273,100 at September 30, 2002 from 166,900
at September 30, 2001.
Operating expenses
increased 50% ($57.4 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 a $2.5 million charge relating to the
WorldCom and Global Crossing bankruptcies in 2002 and an increase in retail bad
debts of $6.3 million.
Operating loss
increased $(17.3) million to $(46.3) million. TDS Telecom expects operating
losses to continue in its competitive local exchange business as it continues to
grow the customer base in each of its markets.
13
Three Months Ended September 30, 2002 Compared to Three
Months Ended September 30, 2001
Except as otherwise stated below, the changes in the three month period are due to reasons generally the
same as explained above for the nine month period.
Operating Revenues
increased 19% ($126.9 million) during the third quarter of 2002. U.S.
Cellular revenues increased 19% ($96.5 million) in 2002. The Chicago 20MHz
acquisition increased operating revenues by $28.2 million in the third quarter
of 2002. Retail service revenue increased 23% ($82.6 million) in the third
quarter of 2002, while inbound roaming revenue decreased 5% ($3.5 million).
Average monthly service revenue per customer was $49.31 in the third quarter of
2002 and $47.92 in 2001, primarily due to the increase in average retail service
per customer to $38.95 from $36.06. Average monthly service revenue per
customer, excluding the Chicago 20MHz acquisition, was $49.44 and retail service
revenue per customer was $38.64. TDS Telecom revenues increased 17% ($30.3
million) in the third quarter of 2002 due to the growth in ILEC operations
($14.5 million) and growth in CLEC operations ($15.8 million). Acquisitions
accounted for $11.5 million of the ILEC growth. Average monthly revenue per ILEC
access line decreased to $74.39 in the third quarter of 2002 from $75.12 in
2001.
Operating Expenses
rose 27% ($149.1 million) during the third quarter of 2002 for reasons generally
the same as the first nine months.
U.S. Cellular expenses increased 31% ($124.5 million). The Chicago 20MHz acquisition increased expenses by $33.6 million. System
operations expense increased 14% ($17.2 million). Marketing and selling expenses, including cost of equipment sold, increased 44%
($46.4 million). Cost per gross customer addition increased to $346 ($340 excluding Chicago 20MHz) in the third quarter of 2002 from
$285 in 2001. Gross customer activations increased to 336,000 (316,000 excluding Chicago 20MHz) in the third quarter of 2002 from
296,000 in 2001. General and Administrative expense increased 33% ($35.3 million). Depreciation expense increased 52% ($31.8
million) while amortization expense decreased 40% ($6.2 million). Depreciation expense increased $15.0 million in 2002 to reflect the
write-off of certain analog radio equipment based on fixed asset inventory reviews performed in 2002.
TDS Telecom expenses
increased 17% ($24.6 million) due to growth in ILEC operations ($9.0 million)
and in CLEC operations ($15.5 million) for reasons generally the same as the
first nine months. Acquisitions increased ILEC expenses by $9.0 million.
Operating Income
decreased 19% ($22.2 million) to $96.2 million in the third quarter of 2002.
Excluding license cost and goodwill amortization, operating income decreased 26%
($33.0 million) in the third quarter of 2002. U.S. Cellular’s operating
income decreased 30% ($28.0 million). The decrease in U.S. Cellular’s
operating income relates to the increase in bad debt expense, the additional
depreciation expense recorded to write-off certain analog radio equipment and
the results of Chicago 20MHz, offset somewhat by ceasing amortization on license
costs and goodwill. TDS Telecom’s operating income increased 22% ($5.8
million). The increase at TDS Telecom reflects improved ILEC operating results
and the effects of acquisitions.
Investment and Other Income (Loss) totaled $(72.0) million
in 2002 and $23.3 million in 2001.
(Loss) on marketable securities and other investments totaled $(90.1) million in the third quarter of 2002 as TDS established a
valuation allowance to reduce the value of notes receivable related to Airadigm Communications, Inc. and to the sales in 2000 of
certain minority interests. There was no gain or loss in the third quarter of 2001.
Interest Expense
increased 50% ($11.2 million) to $33.5 million in the third quarter 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 ($9.5 million) offset by a $51 million
reduction in medium-term notes
14
($1.2 million), a decrease
in average short-term debt balances and related interest expense ($0.6 million),
and a reduction in LYONs interest expense ($0.1 million). Interest expense in
2002 also includes $2.0 million related to the forward contracts and $2.4
million related to the 30-year, 9% Series A Notes issued by U.S. Cellular in
conjunction with the acquisition of Chicago 20MHz. See Note 6 - Derivatives and
Note 8 - Long-term Debt, for an explanation of the forward contracts.
Income Tax Expense
(Benefit) totaled a benefit of $(0.4) million in 2002, and an expense of
$50.5 million in 2001. The effective tax (benefit) rate was (2.6%) in 2002 and
44.6% in 2001. The effective tax rate excluding the effects of loss on
marketable securities and other investments was 43.2% in 2002 and 44.6% in 2001.
Minority Share of
(Income) Loss changed $6.8 million in the third quarter of 2002. U.S.
Cellular’s minority public shareholders’ share of income in 2002 was
reduced by $3.9 million due to the writedown of $34.2 million of notes
receivable in 2002.
|
Three Months Ended
September 30,
-------------------
2002 2001 Change
-------- -------- --------
(Dollars in thousands)
Minority Share of (Income) Loss
U.S. Cellular
Minority Public Shareholders' $ (2,164) $ (9,578) $ 7,414
Minority Shareholders' or Partners' (2,287) (1,634) (653)
-------- -------- --------
(4,451) (11,212) 6,761
Other 2 (51) 53
-------- -------- --------
$ (4,449) $(11,263) $ 6,814
======== ======== ========
| Net Income (Loss) Available to Common totaled $(19.6) million, or $(0.33) per diluted share, in the third quarter of 2002, compared
to $51.4 million, or $0.87 per diluted share, in the third quarter of 2001. Income from operations, excluding losses on marketable
securities and other investments, amortization of license costs and goodwill in 2001, and losses on conversions of LYONs, was $33.9
million, or $0.58 per diluted share in 2002 compared to $60.7 million, or $1.02 per diluted share in 2001. The decline is primarily
due to operating losses from the developing CLEC business, additional bad debt expense, and an increase in depreciation expense. A
summary of net income (loss) from continuing operations and diluted earnings per share from operations and gains (losses) is shown
below. |
Three Months Ended
September 30,
-------------------
2002 2001
-------- --------
(Dollars in thousands,
except per share amounts)
Net Income (Loss) from:
Operations $ 33,939 $ 60,690
Loss on marketable securities and
Other investments (53,555) --
License and goodwill amortization -- (7,858)
Loss on conversion of LYONs -- (1,448)
-------- --------
$(19,616) $ 51,384
======== ========
Diluted Earnings Per Share from:
Operations $ 0.58 $ 1.02
Losses on marketable securities and
Other investments (0.91) --
License and goodwill amortization -- (0.13)
Loss on conversion of LYONs -- (0.02)
-------- --------
$ (0.33) $ 0.87
======== ========
| 15
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. The Company elected to adopt SFAS No. 145 early, in the
second quarter of 2002, and as a result no longer reports gains and losses from
extinguishment of debt as an extraordinary item. Prior year losses on the
retirement of LYONs debt of $1.4 million and $5.7 million, net of tax and
minority interest for the three and nine months ended, respectively, previously
reported as an extraordinary item, have been reclassified to Other income
(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 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 will apply this new
standard on exit or disposal activities, if any, initiated after December 31,
2002.
16
FINANCIAL RESOURCES
Cash Flows From Operating Activities. U.S. Cellular and TDS Telecom are
generating substantial internal funds from operations. Cash flows from operating
activities totaled $624.5 million in the first nine months of 2002 compared to
$512.7 million in 2001.
Income from operations
excluding all noncash items and including the change in accrued taxes increased
$76.5 million to $643.2 million in the first nine months of 2002. Changes in
assets and liabilities from operations, excluding the change in accrued taxes,
required $18.7 million in 2002 and $54.1 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 $1,033.2 million in
the first nine months of 2002 and $299.3 million in 2001.
Cash expenditures for
capital additions required $565.7 million in 2002 and $521.5 million in 2001.
The primary purpose of TDS’s construction and expansion expenditures is to
provide for 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 $449.0 million in 2002
and $377.7 million in 2001 representing expenditures to construct cell sites, to
add digital radio channels, to replace retired assets, to improve business
systems, to change out analog equipment for digital equipment and to migrate to
a single digital equipment platform. TDS Telecom’s capital expenditures for
its local telephone operations totaled $81.0 million in 2002 and $64.4 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 $35.7 million in 2002 and $79.4 million in 2001 for
switching and other network facilities. Capital expenditures for the competitive
local exchange operations have decreased in 2002 due to the completion of
expansion construction in the Michigan and Illinois markets.
Cash used for acquisitions,
excluding cash acquired, totaled $528.6 million in 2002 and $338.9 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.
On August 7, 2002, U.S.
Cellular completed the acquisition of Chicago 20MHz. U.S. Cellular paid $430.4
million in cash, net of cash acquired, and issued $175 million of 9% Notes due
in 2032 to PrimeCo. U.S. Cellular financed the cash portion of the purchase
price by using its revolving lines of credit and a $105 million loan from TDS.
The purchase price is subject to certain working capital adjustments. The
Company also acquired two telephone companies ($77.2 million), three PCS
licenses ($18.0 million) and additional minority interest in majority owned
markets ($3.0 million) in 2002. In 2001, the Company acquired Chorus
Communications Group, Ltd. ($200.8 million), interests in sixteen PCS markets
($78.2 million), a majority interest in a cellular market ($56.2 million), an
interest in a small printing company ($3.5 million) and additional minority
interests in majority owned markets ($0.2 million). 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.
U.S.
Cellular received a cash refund of $47.6 million on its FCC deposits in 2002.
Cash totaling $570.0 million was received by TDS from the merger of Deutsche
Telekom and VoiceStream along with 131.5 million Deutsche Telekom AG ordinary
shares in 2001.
17
Cash Flows From
Financing Activities. Cash flows from financing activities provided $704.7
million in the first nine months of 2002 and required $250.8 million in 2001. In
2002, the Company received $680.4 million from forward contracts related to its
investments in Deutsche Telekom, Vodafone and VeriSign. A portion of the
proceeds from the Deutsche Telekom and VeriSign forward contracts were used by
TDS to pay down TDS’s short-term debt. The remaining cash from the Deutsche
Telekom forward contract is currently in cash and cash equivalents and will be
used to pay down long-term debt and for other corporate purposes. U.S. Cellular
used the proceeds from the Vodafone forward contract to pay down U.S.
Cellular’s short-term debt. Notes Payable balances increased $116.1 million
in 2002 and declined by $57.9 million in 2001. The proceeds received from the
VoiceStream/Deutsche Telekom merger were used to reduce notes payable in 2001.
TDS paid $51.0 million in the first nine months of 2002 and $65.5 million in
2001 to retire Medium-term Notes that were called at their principal face
amount. Dividends paid on Common and Preferred Shares, excluding dividends
reinvested, totaled $25.8 million in 2002 and $24.1 million in 2001.
No TDS or U.S. Cellular
common shares were repurchased in 2002. During the first nine months of 2001,
cash required for the repurchase of TDS common shares (324,600 shares for an
aggregate price of $30.3 million) and the settlement of late December 2000
repurchases totaled $39.4 million. During the first nine months of 2001, cash
required for the repurchase of U.S. Cellular common shares (322,600 shares for
an aggregate price of $15.8 million) and the settlement of late December 2000
repurchases totaled $25.8 million. In 2001, U.S. Cellular retired LYONs
securities with a carrying value of $49.4 million for cash totaling $30.1
million ($0.6 million was included in accounts payable at September 30, 2001)
and 550,000 U.S. Cellular Common Shares.
LIQUIDITY
Management believes that
internal cash flow, existing cash and cash equivalents, funds available from
line of credit arrangements and funds available from potential future
monetization of marketable securities 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. 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. 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 September 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.
18
TDS and its subsidiaries
had cash and cash equivalents totaling $436.8 million at September 30, 2002. The
large cash balance is due to the receipt of cash from the Deutsche Telekom
forward contracts at the end of the third quarter. TDS anticipates using the
cash to reduce outstanding debt and for general corporate purposes.
TDS and its subsidiaries
have $1,425 million of revolving credit facilities available for general
corporate purposes as well as an additional $87 million of bank lines of credit.
As of September 30, 2002, TDS and its subsidiaries had $380 million of
borrowings outstanding against the revolving credit facilities.
TDS had a $600 million
revolving credit facility for general corporate purposes at September 30, 2002,
all of which was unused. The credit facility expires in January 2007. 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 September 30, 2002 (for a rate of 2.11% based
on the LIBOR rate at September 30, 2002).
TDS also had $87 million of
additional bank lines of credit for general corporate purposes at September 30,
2002, all of which were unused. The lines of credit expire in less than one
year. These line of credit agreements provide for borrowings at negotiated rates
up to the prime rate (4.75% at September 30, 2002).
U.S. Cellular
had a $500 million bank revolving line of credit ("1997 Revolving Credit
Facility") for general corporate purposes at September 30, 2002, $120 million of
which was unused. The revolving credit facility expires in August 2004. This
line of credit provides for borrowings with interest at LIBOR plus a margin
percentage, based on U.S. Cellular's credit rating, which was 19.5 basis points
as of September 30, 2002 (for a rate of 2.01% based on the LIBOR rate at
September 30, 2002).
U.S. Cellular
also had a $325 million bank revolving line of credit ("2002 Revolving Credit
Facility") to be used for general corporate purposes at September 30, 2002, all
of which was unused. The 2002 Revolving Credit Facility expires in June 2007.
This line of credit provides for borrowings with interest at LIBOR plus a margin
percentage, based on U.S. Cellular's credit rating, which was 55 basis points as
of September 30, 2002 (for a rate of 2.36% based on the LIBOR rate at September
30, 2002).
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 September 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
issued $175 million of 9% Series A Notes due 2032 to PrimeCo in connection with
the purchase of Chicago 20MHz. Interest is payable quarterly. The notes are
callable by U.S. Cellular after five years at the principal amount plus accrued
but unpaid interest. 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. U.S. Cellular filed the registration statement on
August 29, 2002. This registration statement will be amended due to the purchase
of a portion of the Series A Notes as described in the following
paragraph.
In November
2002, U.S. Cellular sold $115 million of 8.75% Senior Notes due November
7,
19
2032. Interest
is payable quarterly. The notes are callable by U.S. Cellular after five years
at the principal amount plus accrued but unpaid interest. The net proceeds of
the notes are being used to purchase a portion of the 9% Series A Notes that
were issued to PrimeCo. The issuance of the $115 million notes was a takedown
from the $500 million shelf registration statement on Form S-3 filed in May of
2002. U.S. Cellular has also granted the underwriters an option, exercisable
until November 30, 2002, to purchase up to an additional $17.25 million of the
8.75% Senior Notes. The underwriters have exercised the option to acquire an
additional $15 million of the 8.75% Senior Notes.
U.S. Cellular's
capital additions budget for 2002 totals approximately $720-$740 million
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 a single digital platform - 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, during the period from 2002 through 2004. The estimated
capital additions in 2002 include $130-$145 million related to the conversion.
Approximately $50 million of the conversion expenditures were moved into 2002
from 2003 to enable U.S. Cellular to migrate some service areas to the new
platform sooner and to minimize U.S. Cellular's investment in infrastructure and
handsets related to the old platform. Customers in the areas converted to CDMA
in 2002 will be able to use U.S. Cellular's Chicago 20MHz network instead of
roaming in third-party networks, potentially reducing system operations expense.
At September 30, 2002, the remaining amount of the 2002 capital budget
approximated $271 - $291 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 $647.1 million for the twelve
months ended September 30, 2002, up 12% ($67.6 million) from the twelve months
ended September 30, 2001.
U.S. Cellular
expects to incur approximately $90 million in capital expenditures during the
first 12 months 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,
including opening new retail and agent locations. Included in U.S. Cellular's
2002 capital additions budget above is approximately $50 million of this $90
million related to the Chicago market.
TDS Telecom’s capital
additions budget for 2002 approximates $175-$195 million. The incumbent local
telephone companies are expected to spend approximately $125 - $135 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 $50-$60 million to build switching and other network facilities to
meet the needs of a growing customer base and to expand their markets. At
September 30, 2002, the remaining amount of the 2002 capital budget approximated
$44 - $54 million for local telephone companies and $14 - $24 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 $269.9 million for the twelve months
ended September 30, 2002, up 2% ($6.1 million) from the twelve months ended
September 30, 2001.
TDS reviews attractive
opportunities to acquire additional telecommunications companies and wireless
spectrum, which it believes will add value to the business.
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-based wireless service provider. Under the terms of the plan of
reorganization, TDS and an unrelated entity have provided 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
20
regulations, TDS and the
unrelated entity, or their respective designees, were permitted to acquire
certain PCS licenses for areas of Wisconsin and Iowa as well as other Airadigm
assets. In October 2002, TDS terminated its right to purchase licenses and
assets from Airadigm. TDS has the right to foreclose on certain assets of
Airadigm and cease its operations at any time. TDS is evaluating the
desirability of providing additional funding on a month to month basis. See
Application of Critical Accounting Policies, Valuation of Notes Receivable,
below, for more information on Airadigm.
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 ("Auction 35").
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.
On September 12, 2002, the
FCC issued a public notice (“WT Docket 02-276”) seeking comment on
whether it should consider refunding the remainder of the deposits as well as
permit the winning bidders in Auction 35 to dismiss some or all of their
applications. The FCC also sought comment on whether winning bidders who elected
to “opt-out” of certain applications should be barred from
participating in any subsequent reauction with respect to those licenses. The
pleading cycle in WT Docket 02-276 ended on October 21, 2002 and the FCC has
indicated its intention of issuing an order soon thereafter. The remaining
deposits are classified as a current asset at September 30, 2002. Subject to the
final outcome of such proceedings, or the earlier decision of the FCC in WT
Docket 02-276 and the election by the joint venture to opt-out of all of its
applications, the joint venture’s portion of the funding could range from
zero up to an aggregate of an additional $271.3 million. At this time, the joint
venture has made no decision as to whether it will exercise any opt-out rights,
even if the FCC were to grant such rights. 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
agreed to review this court ruling and oral arguments were heard on 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 could be required to pay to the FCC the
balance of the auction price for such licenses. The joint venture could 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 evaluates its alternatives as a result of any
Order issued in WT Docket 02-276 and develops its long-term business and
financing plans.
TDS and U.S. Cellular have
no current plans to repurchase their common shares. However, as market
conditions warrant, TDS and U.S. Cellular may continue the repurchase of their
common shares 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.
21
The U.S.
Cellular Board of Directors has authorized management to opportunistically
repurchase LYONs in private transactions. U.S. Cellular may also purchase a
limited amount of LYONs in open-market transactions from time to time. 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 maintains a portfolio
of available-for-sale marketable equity securities. The market value of these
investments aggregated $1,270.8 million at September 30, 2002. The Company has
forward contracts, which may be settled in shares of the respective marketable
equity security or in cash at the expiration of the forward contract, in
connection with $521.0 million of the Company’s portfolio. With respect to
the marketable securities not subject to forward contracts, TDS may 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 depending on market conditions and other
factors.
In October and November of
2002, the Company entered into forward contracts relating to Vodafone ADRs and
ordinary shares of Deutsche Telekom. The forward contracts are similar to the
other forward contracts that the Company has entered into. See – Market
Risk below and Note 6 Derivatives for the explanation of the similar forward
contracts. The table below summarizes certain facts surrounding the forward
contracts entered from October 1, 2002 through November 11, 2002.
|
Collar
---------------------
Downside Upside
Proceeds Limit Potential
Security Shares (000s) (Floor) (Ceiling)
---------- ---------- -------- ------- ---------
Vodafone 2,700,545 $ 41,182 $ 15.25 $ 20.92
Deutsche Telekom 30,000,000 332,133 $ 11.37 $ 13.64
--------
$373,315
========
MARKET RISK
TDS is subject to market
rate risks due to fluctuations in interest rates and market prices of marketable
equity securities. 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 September 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 $1,270.8 million at September 30, 2002 and $2,700.2
million at December 31, 2001. As of September 30, 2002, the net unrealized
holding loss, net of tax and minority interest, included in accumulated other
comprehensive loss totaled $167.7 million. In 2002, TDS recognized, in the
statement of operations, a loss of $1,044.4 million, net of tax and minority
interest, related to investments in marketable securities 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.
22
The Company has entered
into a number of variable prepaid forward contracts (“forward
contracts”) related to the marketable equity securities that it holds. See
Footnote 6 – Derivatives, for a description of the forward contracts. The
risk management objective of the forward contracts is to hedge the value of the
marketable equity securities to protect the value of the marketable equity
securities from losses due to decrease in the market prices of the securities
(“downside risk”) while retaining a share of gains from increases in
the market prices of such securities (“upside potential”). The forward
contracts may be settled in shares of the respective marketable equity security
or in cash upon expiration of the forward contract. If shares are delivered in
the settlement of the forward contract, the Company would incur a current tax
liability at the time of delivery for the difference between the tax basis of
the marketable equity securities and the maturity value of the forward
contracts. TDS may enter into further monetizations depending on market
conditions and other factors.
The following table
summarizes certain facts surrounding the contracted securities as of September 30, 2002.
|
Collar
--------------------
Downside Upside Loan Derivative
Proceeds Limit Potential Amount Asset
Security Shares (000s) (Floor) (Ceiling) (000s) (000s)
-------- ------ -------- ------- --------- ------- ---------
VeriSign 2,361,333 $ 18,927 8.82 11.46 $ 20,819 $ 6,942
Vodafone 10,245,370 159,856 15.60 23.29 159,856 35,961
Deutsche
Telekom 45,492,175 501,577 11.36 13.63 516,892 163,545
-------- -------- -------
$680,360 $697,567 $206,448
======== ======== ========
| The principal amount of the
forward contracts is accounted for as a loan. The collar portions of the forward
contracts are accounted for as derivative instruments. The collars could be
adjusted for any changes in dividends on the contracted shares.
The following analysis
presents the hypothetical change in the fair value of our marketable equity
securities and derivative instruments at September 30, 2002, assuming the same
hypothetical price fluctuations of plus and minus 10%, 20% and 30%. |
Valuation of investments September 30, Valuation of investments
assuming indicated decrease 2002 assuming indicated increase
--------------------------------- ----------------------------
($ in millions) -30% -20% -10% Fair Value +10% +20% +30%
- --------------- ---- ---- ---- ---------- ---- ---- ----
Marketable Equity
Securities $ 889.6 $ 1,016.7 $1,143.8 $ 1,270.8 $1,397.9 $1,524.9 $1,652.0
Derivative
Instruments (1) $ 309.6 $ 263.0 $ 216.3 $ 206.4 $ 122.3 $ 75.0 $ 27.4
(1) Represents change in the fair value of the derivative instruments assuming the indicated
increase or decrease in the underlying securities.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company prepares its
consolidated financial statement in accordance with accounting principles
generally accepted in the United States of America (“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
23
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.
Critical Accounting Estimates
Management believes the
following critical accounting estimates reflect its more significant judgments
and estimates used in the preparation of its consolidated financial statements.
Valuation of
Notes Receivable
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 two of U.S. Cellular's
minority interests in 2000. The value of the notes is directly related to the
future fair market value of the related interests. An independent third party
valuation of one of the wireless minority interests sold to Kington and a recent
transaction involving an unrelated party holding an interest in the same market
as the other wireless minority interest sold to Kington indicated a lower market
value for these wireless minority interests, and therefore a lower value of the
notes. Management concluded that the notes receivable were impaired and
established a valuation allowance against the notes. A loss of $34.2 million was
charged to the statement of operations in the third quarter of 2002 and was
included in the caption (Loss) on marketable securities and other investments.
Following this writedown, the carrying value of such notes receivable at
September 30, 2002 was $11.6 million. If or when the market values for the
related cellular interest will recover is unclear. There may continue to be
substantial variability in the future market values of these interests and risk
of decline in the value of the notes. Management will continue to review the
valuation on a periodic basis.
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-based wireless service provider. Under the terms of the plan of
reorganization, TDS and an unrelated entity have provided 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, were permitted to
acquire certain PCS licenses for areas of Wisconsin and Iowa as well as other
Airadigm assets. As of September 30, 2002, TDS had provided funding of $54.8
million to Airadigm that TDS has recorded as notes receivable and had
capitalized $1.1 million in other costs associated with Airadigm.
During the third quarter,
TDS reviewed the value of Airadigm’s current and contractual assets,
Airadigm’s business plan and the facts and circumstances surrounding the
investment and concluded that the note receivable was impaired and established a
valuation allowance for the amount of the loan. A loss of $55.9 million was
charged to the statement of operations in the third quarter of 2002 and was
included in the caption (Loss) on marketable securities and other investments.
Following this action, the carrying values of such notes receivable and other
capitalized costs at September 30, 2002 have been reduced to zero. In October
2002, TDS terminated its right to purchase licenses and assets from Airadigm.
TDS has the right to foreclose on certain assets of Airadigm and cease its
operations at any time. TDS is evaluating the desirability of providing
additional funding on a month to month basis.
Marketable Equity Securities
The Company holds a
substantial amount of marketable securities that are publicly traded and can
have volatile share prices. These investments are classified as
available-for-sale and are stated at fair value based on quoted market prices.
The marketable securities are marked to market each period with the unrealized
gain or loss in value of the securities reported as Other Comprehensive Income,
net of income taxes and minority interest, which is included in the
24
stockholders' equity section of the balance sheet.
The market values of
marketable securities may fall below the accounting cost basis of such
securities. Generally accepted accounting principles require management to
determine whether a decline in fair value below the accounting cost basis is
other than temporary. 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
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 and how much 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. In the first and second quarters of 2002,
based on a review of such factors, management determined that a decline in the
value of marketable equity securities relative to their respective accounting
cost basis was other than temporary and charged an aggregate $1,756.5 million
loss to the statement of operations ($1,044.4 net of tax and minority interest)
and reduced the accounting cost basis of such marketable equity securities by a
respective amount.
As of September 30, 2002,
the aggregate market value of the marketable equity securities totaled $1,270.8
million, the aggregate cost basis was $1,546.7 million, and the unrealized loss
included in accumulated other comprehensive income was $167.7 million (net of
tax and minority interest of $108.2 million.) At September 30, 2002, the Company
had forward contracts maturing in 2007 in connection with $521.0 million of the
Company’s marketable equity security portfolio, hedging the market price
risk with respect to the contracted securities. The downside risk is hedged at
or above the accounting cost basis thereby eliminating the other than temporary
risk on these contracted securities. With respect to the non-hedged marketable
equity securities at September 30, 2002, the unrealized loss included in
accumulated other comprehensive income was $97.0 million, net of tax and
minority interest of $62.0 million. At September 30, 2002, based on a review of
the factors described above, management concluded that unrealized loss in
accumulated other comprehensive income was not other than temporary and no
charge to the statement of operations was necessary. 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.
License Costs and Goodwill
As of September 30, 2002,
the Company reported $1,040.8 million of wireless license costs, net of
accumulated amortization and $1,089.5 million of goodwill, net of accumulated
amortization, 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. With the
implementation of SFAS No. 142, the Company 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.
The intangible asset
impairment test consists of comparing the fair value of the intangible asset to
the carrying amount of the intangible asset. If the carrying amount exceeds the
fair value, an
25
impairment loss is
recognized for the difference. The goodwill impairment test is a two-step
process. The first step compares the fair value of the reporting unit to its
carrying value. If the carrying amount exceeds the fair value, the second step
of the test is performed to measure the amount of impairment loss, if any. The
second step compares the implied fair value of reporting unit goodwill with the
carrying amount of that goodwill. If the carrying amount exceeds the implied
fair value, an impairment loss is recognized for that difference.
The fair value of an
intangible asset and reporting unit goodwill is the amount at which that asset
or reporting unit could be bought or sold in a current transaction between
willing parties. Therefore, quoted market prices in active markets are the best
evidence of fair value and should be used when available. If quoted market
prices are not available, the estimate of fair value shall be based on the best
information available, including prices for similar assets and the use of other
valuation techniques. Other valuation techniques include present value analysis,
multiples of earnings or revenue or a similar performance measure. The use of
these techniques involve management estimating future cash flows, selecting the
appropriate discount rate, and estimating other factors and inputs, and
generally result in a range of values. There can be no assurance that these
estimates incorporate all known and unknown risks, uncertainties and other
factors necessary to arrive at an estimated fair value.
Allocation of Chicago 20MHz Purchase Price
In connection with the
purchase of Chicago 20MHz, the Company allocated the total acquisition costs to
all tangible and intangible assets acquired and all liabilities assumed, with
the excess purchase price over the fair value of net assets acquired recorded to
goodwill. An independent appraiser provided a preliminary valuation of Chicago
20MHz’s assets. The following table summarizes the estimated fair values of
the Chicago 20MHz assets acquired and liabilities assumed at the date of
acquisition.
|
August 7, 2002
--------------------------------------------------------
(Dollars in
millions)
Current assets $ 31.6
Property, plant and equipment 239.3
Other assets 0.1
Customer list 43.4
Licenses 163.5
Goodwill 150.0
------------
Total assets acquired $ 627.9
------------
Current liabilities (19.0)
Non-current liabilities (1.6)
------------
Total liabilities acquired $ (20.6)
------------
Purchase price $ 607.3
============
| It is expected that the
allocation will need to be revised as the Company obtains additional information
relating to the valuation and finalizes the working capital and other adjustments.
Management is not currently aware of any matter that would require a material
adjustment to the purchase price.
Income Taxes
The preparation of the consolidated financial statements requires
the Company to
calculate its provision for income taxes. This process involves estimating the actual current
tax expense together with assessing temporary differences resulting from
differing treatment of items, such as depreciation expense, for tax and
accounting purposes. These temporary differences result in deferred tax assets
and liabilities, which are included within the consolidated balance sheet. The
Company must then assess the likelihood that deferred tax assets will be
recovered from future taxable income and to the extent management believes that
recovery is not likely, a valuation
allowance must be established. Management judgment is required in determining
the
26
provision for income taxes, deferred tax assets and liabilities and any
valuation allowance recorded against deferred tax assets. The temporary
differences that gave rise to the noncurrent deferred tax assets and liabilities
as of September 30, 2002 are as follows:
|
September 30,
2002
(dollars in
millions)
------------
Deferred Tax Asset
State net operating loss carryforwards $ 39.7
Notes receivable valuation 32.6
Other 5.6
----------
77.9
Less valuation allowance (31.0)
----------
Total Deferred Tax Asset 46.9
----------
Deferred Tax Liability
Marketable equity securities 552.2
Property, plant and equipment 259.2
Licenses 132.0
Other 62.4
----------
Total Deferred Tax Liability 1,005.8
----------
Net Deferred Income Tax Liability $ 958.9
==========
|
The valuation
allowance relates to state net operating loss carry forwards that are expected
to expire before they can be utilized.
The Company is routinely
subject to examination of its income tax returns by the Internal Revenue Service
("IRS") and other tax authorities. The Company periodically assesses the
likelihood of adjustments to its tax liabilities resulting from these
examinations to determine the adequacy of its provision for income taxes,
including related interest. Management judgment is required in assessing the
eventual outcome of these examinations. Changes to such assessments affect the
calculation of the Company's income tax expense.
The IRS has
completed audits of tax years through 1996. The Company expects to pay $59.6
million, including interest, to the IRS in the fourth quarter of 2002 related to
the most recent audit. The $56.9 million liability was included in Accrued taxes on the September 30, 2002 balance sheet and was
provided for in the income tax provisions in prior periods.
Initial Adoption of Accounting Policies
During 2002, TDS
began utilizing derivative financial instruments to reduce market risks due to
fluctuations in market prices of marketable equity securities. Prior to 2002 the
Company had no significant derivative financial instruments. The Company does
not hold or issue derivative financial instruments for trading purposes. The
Company recognizes all derivatives as either assets or liabilities in the
statement of financial condition and measures 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 designation 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.
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities," (as amended) establishes the accounting and
reporting standards for derivative instruments and hedging
activities.
27
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following
persons are partners of Sidley Austin Brown & Wood, the principal law firm of
TDS and its subsidiaries: Walter C.D. Carlson, a trustee and beneficiary of a
voting trust that controls TDS, the chairman of the board and member of the
board of directors of TDS and a director of U.S. Cellular, a subsidiary of TDS;
William S. DeCarlo, the Assistant General Counsel of TDS and an Assistant
Secretary of TDS and certain subsidiaries of TDS; and Stephen P. Fitzell, the
Assistant General Counsel and/or an Assistant Secretary of certain subsidiaries
of TDS. In addition, prior to August 1, 2002, another partner of Sidley Austin
Brown & Wood at the time, Michael G. Hron, was the General Counsel and an
Assistant Secretary of TDS, U.S. Cellular and TDS Telecom, and the Secretary or
an Assistant Secretary of certain other TDS subsidiaries.
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 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 writedown 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 writedown of the CLEC assets if
TDS is unable to successfully implement its plans in this business development.
- 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.
- 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.
28
- 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, access minutes of use trends, and mix of products and
services offered in ILEC and CLEC markets could have an adverse effect on such TDS business segments.
- Continued migration of customers from wireline to wireless services could have an adverse effect on TDS's wireline businesses.
- 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.
- The continuation of the economic downturn and continued bankruptcies in the telecommunications industry could result in higher bad
debts and slower business activity, which would have an adverse effect on TDS's businesses.
- War, conflicts, hostilities and/or terrorists attacks could have an adverse effect on TDS's businesses.
- Changes in our accounting policies, estimates or assumptions could have an adverse effect on our 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.
|
29
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
|
| | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | |
| September 30, | | September 30, | |
|
| |
| |
| 2002 | | 2001 | | 2002 | | 2001 | |
|
| |
| |
| |
| |
| (Dollars in thousands, except per share amounts) | |
| OPERATING REVENUES |
| U.S. Cellular | $ | 597,571 | | $ | 501,024 | | $ | 1,603,701 | | $ | 1,416,082 | |
| TDS Telecom | | 204,316 | | | 173,985 | | | 587,197 | | | 501,597 | |
| |
| |
| |
| |
| |
| | | 801,887 | | | 675,009 | | | 2,190,898 | | | 1,917,679 | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | | | | | |
| U.S. Cellular | | 532,876 | | | 408,347 | | | 1,360,111 | | | 1,171,296 | |
| TDS Telecom | | 172,802 | | | 148,243 | | | 507,972 | | | 415,231 | |
| |
| |
| |
| |
| |
| | | 705,678 | | | 556,590 | | | 1,868,083 | | | 1,586,527 | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
| OPERATING INCOME | | 96,209 | | | 118,419 | | | 322,815 | | | 331,152 | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
| INVESTMENT AND OTHER INCOME | | | | | | | | | | | | |
| Dividend and interest income | | 2,213 | | | 2,580 | | | 52,447 | | | 12,154 | |
| Investment income, net of amortization | | 13,337 | | | 20,657 | | | 32,144 | | | 37,832 | |
| (Loss) on marketable securities | | | | | | | | | | | | |
| and other investments | | (90,071 | ) | | — | | | (1,846,597 | ) | | (644,929 | ) |
| Other income (expense), net | | 2,509 | | | 93 | | | 2,474 | | | (1,835 | ) |
| |
| |
| |
| |
| |
| | | (72,012 | ) | | 23,330 | | | (1,759,532 | ) | | (596,778 | ) |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
| INCOME (LOSS) BEFORE INTEREST | | | | | | | | | | | | |
| AND INCOME TAXES | | 24,197 | | | 141,749 | | | (1,436,717 | ) | | (265,626 | ) |
| Interest expense | | 33,451 | | | 22,294 | | | 92,170 | | | 77,522 | |
| Minority interest in income of subsidiary trust | | 6,202 | | | 6,202 | | | 18,607 | | | 18,607 | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
| INCOME (LOSS) BEFORE INCOME TAXES | | | | | | | | | | | | |
| AND MINORITY INTEREST | | (15,456 | ) | | 113,253 | | | (1,547,494 | ) | | (361,755 | ) |
| Income tax expense (benefit) | | (394 | ) | | 50,494 | | | (588,344 | ) | | (133,323 | ) |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
| INCOME (LOSS) BEFORE | | | | | | | | | | | | |
| MINORITY INTEREST | | (15,062 | ) | | 62,759 | | | (959,150 | ) | | (228,432 | ) |
| Minority Share of (Income) Loss | | (4,449 | ) | | (11,263 | ) | | 855 | | | (31,555 | ) |
| |
| |
| |
| |
| |
| NET INCOME (LOSS) | | (19,511 | ) | | 51,496 | | | (958,295 | ) | | (259,987 | ) |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
| Preferred Dividend Requirement | | (105 | ) | | (112 | ) | | (323 | ) | | (345 | ) |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
| NET INCOME (LOSS) AVAILABLE | | | | | | | | | | | | |
| TO COMMON | $ | (19,616 | ) | $ | 51,384 | | $ | (958,618 | ) | $ | (260,332 | ) |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
| BASIC WEIGHTED AVERAGE COMMON | | | | | | | | | | | | |
| SHARES (000s) | | 58,660 | | | 58,711 | | | 58,633 | | | 58,694 | |
| | | | | | | | | | | | | |
| BASIC EARNINGS PER SHARE | $ | (0.33 | ) | $ | 0.88 | | $ | (16.35 | ) | $ | (4.44 | ) |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
| DILUTED WEIGHTED AVERAGE COMMON | | | | | | | | | | | | |
| SHARES (000s) | | 58,660 | | | 59,293 | | | 58,633 | | | 58,694 | |
| | | | | | | | | | | | | |
| DILUTED EARNINGS PER SHARE | $ | (0.33 | ) | $ | 0.87 | | $ | (16.35 | ) | $ | (4.44 | ) |
| |
| |
| |
| |
| |
| DIVIDENDS PER SHARE | | 0.145 | | | 0.135 | | | 0.435 | | | 0.405 | |
| |
| |
| |
| |
| |
| The accompanying notes to
consolidated financial statements are an integral part of these statements. |
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS
Unaudited
|
| Nine Months Ended
September 30,
| |
| 2002
| |
2001
| |
| (Dollars in thousands) | |
| CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES |
| Net loss | $ | (958,295 | ) | $ | (259,987 | ) |
| Add (Deduct) adjustments to reconcile net income (loss) | | | | | | |
| to net cash provided by operating activities | | | | | | |
| Depreciation and amortization | | 370,744 | | | 331,567 | |
| Deferred taxes | | (660,340 | ) | | (373,495 | ) |
| Investment income | | (32,124 | ) | | (38,848 | ) |
| Minority share of income | | (855 | ) | | 31,555 | |
| Loss on marketable securities and other investments | | 1,846,597 | | | 644,929 | |
| Noncash interest expense | | 7,326 | | | 7,933 | |
| Other noncash expense | | 12,557 | | | 21,709 | |
| Changes in assets and liabilities from operations | | | | | | |
| Change in accounts receivable | | (23,840 | ) | | (45,702 | ) |
| Change in materials and supplies | | 16,609 | | | 23,460 | |
| Change in accounts payable | | (3,971 | ) | | (28,147 | ) |
| Change in accrued taxes | | 57,626 | | | 201,407 | |
| Change in other assets and liabilities | | (7,516 | ) | | (3,663 | ) |
| |
| |
| |
| | | 624,518 | | | 512,718 | |
| |
| |
| |
| | | | | | | |
| CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES | | | | | | |
| Capital expenditures | | (565,679 | ) | | (521,461 | ) |
| Acquisitions, net of cash acquired | | (528,638 | ) | | (338,874 | ) |
| Refund of FCC deposit | | 47,566 | | | — | |
| Distributions from investments | | 25,519 | | | 11,337 | |
| Cash received in VoiceStream/Deutsche Telekom merger | | — | | | 570,035 | |
| Other investing activities | | (11,981 | ) | | (20,303 | ) |
| |
| |
| |
| | | (1,033,213 | ) | | (299,266 | ) |
| |
| |
| |
| | | | | | | |
| CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES | | | | | | |
| Issuance of long-term debt | | 2,395 | | | 4,055 | |
| Forward contracts | | 680,360 | | | — | |
| Repayments of long-term debt | | (13,946 | ) | | (13,642 | ) |
| Prepayment of medium-term notes | | (51,000 | ) | | (65,500 | ) |
| Change in notes payable | | 116,142 | | | (57,900 | ) |
| Dividends paid | | (25,837 | ) | | (24,123 | ) |
| Repurchase of TDS Common Shares | | — | | | (39,441 | ) |
| Repurchase of U.S. Cellular Common Shares | | — | | | (25,795 | ) |
| Repurchase and conversion of LYONs | | (70 | ) | | (30,149 | ) |
| Other financing activities | | (3,336 | ) | | 1,698 | |
| |
| |
| |
| | | 704,708 | | | (250,797 | ) |
| |
| |
| |
| | | | | | | |
| NET INCREASE (DECREASE) IN CASH AND | | | | | | |
| CASH EQUIVALENTS | | 296,013 | | | (37,345 | ) |
| CASH AND CASH EQUIVALENTS - | | | | | | |
| Beginning of period | | 140,744 | | | 99,019 | |
| |
| |
| |
| End of period | $ | 436,757 | | $ | 61,674 | |
| |
| |
| |
| The accompanying notes to
consolidated financial statements are an integral part of these statements. |
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
|
| (Unaudited)
September 30,
2002
|
|
December 31,
2001
| |
| (Dollars in thousands) | |
| CURRENT ASSETS |
| Cash and cash equivalents | $ | 436,757 | | $ | 140,744 | |
| Accounts receivable from customers and others, net | | 428,806 | | | 379,161 | |
| Deposits receivable from FCC | | 8,494 | | | 56,060 | |
| Materials and supplies, at average cost | | 57,559 | | | 71,370 | |
| Other current assets | | 36,412 | | | 27,021 | |
| |
| |
| |
| | | 968,028 | | | 674,356 | |
| |
| |
| |
| | | | | | | |
| INVESTMENTS | | | | | | |
| Marketable equity securities | | 1,270,805 | | | 2,700,230 | |
| Wireless license costs, net of accumulated amortization | | 1,040,840 | | | 858,791 | |
| Goodwill, net of accumulated amortization | | 1,089,490 | | | 870,801 | |
| Intangible assets, net of accumulated amortization | | 42,090 | | | — | |
| Investments in unconsolidated entities | | 236,712 | | | 233,678 | |
| Notes receivable | | 18,887 | | | 101,887 | |
| Other investments | | 15,320 | | | 15,079 | |
| |
| |
| |
| | | 3,714,144 | | | 4,780,466 | |
| |
| |
| |
| | | | | | | |
| PROPERTY, PLANT AND EQUIPMENT, NET | | | | | | |
| U.S. Cellular | | 1,968,259 | | | 1,527,805 | |
| TDS Telecom | | 1,039,859 | | | 1,016,634 | |
| |
| |
| |
| | | 3,008,118 | | | 2,544,439 | |
| |
| |
| |
| | | | | | | |
| OTHER ASSETS AND DEFERRED CHARGES | | | | | | |
| Derivative asset | | 206,448 | | | — | |
| Other deferred charges | | 87,400 | | | 80,313 | |
| |
| |
| |
| | | 293,848 | | | 80,313 | |
| |
| |
| |
| | | | | | | |
| TOTAL ASSETS | $ | 7,984,138 | | $ | 8,079,574 | |
| |
| |
| |
| The accompanying notes to
consolidated financial statements are an integral part of these statements. |
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
| (Unaudited)
September 30,
2002
|
|
December 31,
2001
| |
| (Dollars in thousands) | |
| CURRENT LIABILITIES |
| Current portion of long-term debt | $ | 19,508 | | $ | 67,461 | |
| Notes payable | | 381,442 | | | 265,300 | |
| Accounts payable | | 279,277 | | | 270,005 | |
| Advance billings and customer deposits | | 90,255 | | | 68,044 | |
| Accrued interest | | 19,456 | | | 24,264 | |
| Accrued taxes | | 72,572 | | | 14,263 | |
| Accrued compensation | | 46,919 | | | 56,973 | |
| Other current liabilities | | 44,721 | | | 49,906 | |
| |
| |
| |
| | | 954,150 | | | 816,216 | |
| |
| |
| |
| | | | | | | |
| DEFERRED LIABILITIES AND CREDITS | | 1,016,369 | | | 1,461,530 | |
| |
| |
| |
| | | | | | | |
| LONG-TERM DEBT, excluding current portion | | 2,379,926 | | | 1,507,764 | |
| |
| |
| |
| | | | | | | |
| MINORITY INTEREST in subsidiaries | | 485,164 | | | 467,698 | |
| |
| |
| |
| | | | | | | |
| COMPANY-OBLIGATED MANDATORILY REDEEMABLE | | | | | | |
| PREFERRED SECURITIES of Subsidiary Trusts | | | | | | |
| Holding Solely Company Subordinated Debentures (a) | | 300,000 | | | 300,000 | |
| |
| |
| |
| | | | | | | |
| PREFERRED SHARES | | 6,954 | | | 7,442 | |
| |
| |
| |
| | | | | | | |
| COMMON STOCKHOLDERS’ EQUITY | | | | | | |
| Common Shares, par value $.01 per share | | 559 | | | 557 | |
| Series A Common Shares, par value $.01 per share | | 66 | | | 68 | |
| Capital in excess of par value | | 1,829,837 | | | 1,826,840 | |
| Treasury Shares, at cost (3,806,000 shares and | | | | | | |
| 3,868,000 shares, respectively) | | (404,447 | ) | | (406,894 | ) |
| Accumulated other comprehensive income (loss) | | (50,780 | ) | | (352,120 | ) |
| Retained earnings | | 1,466,340 | | | 2,450,473 | |
| |
| |
| |
| | | 2,841,575 | | | 3,518,924 | |
| |
| |
| |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 7,984,138 | | $ | 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
consolidated 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 footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company’s latest
Annual Report on Form 10-K.
The
accompanying unaudited consolidated financial statements contain all adjustments
(consisting of only normal recurring items) necessary to present fairly the
financial position as of September 30, 2002 and December 31, 2001, and the
results of operations and cash flows for the nine months ended September 30,
2002 and 2001. The results of operations for the three and nine months ended
September 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 marketable equity
security market value risks. The Company does not hold or issue derivative
financial instruments for trading purposes. The Company recognizes all
derivatives as either assets or liabilities in the statement of financial
condition and measures 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 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. The Company elected to adopt SFAS
No. 145 early, in the second quarter of 2002, and as a result no longer reports
gains and losses from extinguishment of |
| |
|
|
debt
as an extraordinary item. Prior year losses on the retirement of LYONs debt of
$1.4 million and $5.7 million, net of tax and minority interest for the three
and nine months ended, respectively, previously reported as an extraordinary
item, have been reclassified to Other income (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 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
will apply this new standard on exit or disposal activities, if any, initiated
after December 31, 2002. |
| |
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. |
September 30, December 31,
2002 2001
----------- -----------
(Dollars in thousands)
Available-for-sale marketable equity securities
Aggregate fair value $ 1,270,805 $ 2,700,230
Accounting cost basis* 1,546,659 3,303,106
----------- -----------
Gross holding losses (275,854) (602,876)
Tax effect 108,019 236,331
----------- -----------
(167,835) (366,545)
Derivative accounting adjustments, net of tax 117,220 --
Minority share of unrealized holding losses (780) 14,028
Equity method unrealized gains 615 397
----------- -----------
Unrealized holding losses, net of tax $ (50,780) $ (352,120)
=========== ===========
| |
|
|
* The
accounting cost basis of the marketable equity securities was reduced by an
other than temporary loss of $1,756,526 recognized in the first nine 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. Included in U.S. Cellular’s goodwill is goodwill 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 nine months ended September 30, 2002 and 2001, were as follows. |
TDS Telecom
U.S -----------------------
(Dollars in thousands) Cellular ILEC CLEC Other(1) Total
----------- ----------- ----------- ----------- -----------
Beginning Balance July 1, 2002 $ 473,975 $ 374,253 $ 29,440 $ 34,538 $ 912,206
Net additions 155,566 20,356 -- 1,362 177,284
----------- ----------- ----------- ----------- -----------
Ending Balance September 30, 2002 $ 629,541 $ 394,609 $ 29,440 $ 35,900 $ 1,089,490
=========== =========== =========== =========== ===========
Beginning Balance July 1, 2001 $ 480,914 $ 207,085 $ 7,324 $ 35,075 $ 730,398
Net additions 662 146,740 22,229 -- 169,631
Amortization (3,753) (1,654) (57) (268) (5,732)
----------- ----------- ----------- ----------- -----------
Ending Balance September 30, 2001 $ 477,823 $ 352,171 $ 29,496 $ 34,807 $ 894,297
=========== =========== =========== =========== ===========
TDS Telecom
U.S -----------------------
(Dollars in thousands) Cellular ILEC CLEC Other(1) Total
----------- ----------- ----------- ----------- -----------
Beginning Balance January 1, 2002 $ 473,975 $ 332,848 $ 29,440 $ 34,538 $ 870,801
Net additions 155,566 61,761 -- 1,362 218,689
----------- ----------- ----------- ----------- -----------
Ending Balance September 30, 2002 $ 629,541 $ 394,609 $ 29,440 $ 35,900 $ 1,089,490
=========== =========== =========== =========== ===========
Beginning Balance January 1, 2001 $ 400,967 $ 210,320 $ 7,436 $ 35,612 $ 654,335
Net additions 86,871 146,831 22,229 -- 255,931
Amortization (10,015) (4,980) (169) (805) (15,969)
----------- ----------- ----------- ----------- -----------
Ending Balance September 30, 2001 $ 477,823 $ 352,171 $ 29,496 $ 34,807 $ 894,297
=========== =========== =========== =========== ===========
(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 September 30, 2002 and December
31, 2001.
Net income adjusted to exclude license and goodwill amortization expense, net of tax and minority interest, for the three and
nine months ended September 30, 2002 and 2001 is summarized below. |
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
Net Income (Loss) $ (19,511) $ 51,496 $(958,295) $(259,987)
Amortization, net of tax
and minority interest effect of:
License costs -- 3,609 -- 10,615
Goodwill -- 3,853 -- 10,061
Equity method goodwill -- 399 -- 1,110
--------- --------- --------- ---------
Adjusted Net Income (Loss) $ (19,511) $ 59,357 $(958,295) $(238,201)
========= ========= ========= =========
Basic earnings per share:
Net Income (Loss) $ (0.33) $ 0.88 $ (16.35) $ (4.44)
Amortization, net of tax
and minority interest -- 0.13 -- 0.37
--------- --------- --------- ---------
Adjusted Earnings per Share $ (0.33) $ 1.01 $ (16.35) $ (4.07)
========= ========= ========= =========
Diluted Earnings Per Share:
Net Income (Loss) $ (0.33) $ 0.87 $ (16.35) $ (4.44)
Amortization, net of tax
and minority interest -- 0.13 -- 0.37
---------- --------- --------- ---------
Adjusted Earnings per Share $ (0.33) $ 1.00 $ (16.35) $ (4.07)
========== ========= ========= =========
36
| |
|
|
TDS
maintains a portfolio of available-for-sale marketable equity securities. The
market value of these investments aggregated $1,270.8 million at September 30,
2002. During 2002, the Company entered into variable prepaid forward contracts
(“forward contracts”) in connection with $521.0 million (41%) of the
Company’s marketable equity securities portfolio.
The
risk management objective of the forward contracts is to hedge the value of the
marketable equity securities protecting the value of the marketable equity
securities from losses due to decreases in the market prices of the securities
(“downside risk”) while retaining a share of gains from increases in
the market prices of such securities (“upside potential”). The
downside risk is hedged at or above the accounting cost basis thereby
eliminating the other than temporary risk on these contracted securities. The
forward contracts may be settled in shares of the respective marketable equity
security or in cash upon expiration of the forward contract. If shares are
delivered in the settlement of the forward contract, the Company would have a
current tax liability at the time of delivery for the difference between the tax
basis of the marketable equity securities and the maturity value of the forward
contracts.
Under
the terms of the forward contracts, the Company will continue to own the
contracted shares and will receive dividends paid on such contracted shares, if
any. The forward contracts mature from May to August 2007 and, at the
Company’s option, may be settled in shares of the respective security or in
cash pursuant to formulas that “collar” the price of the shares. The
collars effectively limit the Company’s downside risk and upside potential
on the contracted shares. The collars could be adjusted for any changes in
dividends on the contracted shares. At the end of the forward contract, the
Company will deliver the number of shares of the contracted security determined
pursuant to the formula. If the Company elects to settle in cash it will be
required to pay an amount in cash equal to the fair market value of the number
of shares determined pursuant to the formula.
The following table summarizes certain facts surrounding the contracted securities as of September 30, 2002.
|
Collar (per Share)
--------------------
Downside Upside Loan Derivative
Proceeds Limit Potential Amount Asset
Security Shares (000s) (Floor) (Ceiling) (000s) (000s)
-------- ------ -------- ------- --------- ------- ---------
VeriSign 2,361,333 $ 18,927 8.82 11.46 $ 20,819 $ 6,942
Vodafone 10,245,370 159,856 15.60 23.29 159,856 35,961
Deutsche
Telekom 45,492,175 501,577 11.36 13.63 516,892 163,545
-------- -------- -------
$680,360 $697,567 $206,448
======== ======== ========
| |
|
|
The principal amount of the forward contracts is accounted for as a loan. The collar portions of the forward contracts are
accounted for as derivative instruments.
The forward contracts for the 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 derivative instruments is
determined using the Black-Scholes model.
The Deutsche Telekom and Vodafone forward contracts are designated as cash flow hedges, where changes in the forward contract's
fair value are recognized in accumulated other comprehensive income until they are recognized in earnings when the forward
contract is settled. If the delivery of the contracted shares 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 forward contracts are excluded in the measurement of hedge effectiveness for cash flow hedges.
The critical terms of the forward contracts are the same as the underlying forecasted transactions; therefore, changes in the
fair value of the 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
nine months ended September 30, 2002.
The VeriSign forward contract is designated as a fair value hedge, where effectiveness of the hedge is assessed based upon the
intrinsic value of the underlying options. The intrinsic value of the forward contract is defined as the difference between the
applicable option strike price and the market value of the contracted shares on the balance sheet date. 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.
Changes in the time value of the options aggregating $0.7 million for the nine months ended September 30, 2002, was included in
the statement of operations caption Other Income (Expense).
At September 30, 2002, the Company reported derivative assets aggregating $206.4 million because the share price was below the
floor for all the forward contracts. The derivative assets are reported in the Other Assets and Deferred Charges section of the
balance sheet. |
| |
7. |
|
U.S. Cellular 2002 Revolving Credit Facility |
| |
|
|
U.S. Cellular has a revolving credit facility to provide up to $325 million in financing ("2002 Revolving Credit Facility"),
which may be used for general corporate purposes. The 2002 Revolving Credit Facility, which expires in June 2007, permits
revolving loans on terms and conditions substantially similar to U.S. Cellular's existing $500 million 1997 Revolving Credit
Facility. 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 2.36% as of September 30, 2002). The continued availability of the line of credit facility requires U.S. Cellular to comply
with certain financial negative and affirmative covenants, maintain certain financial ratios and to represent certain matters at
the time of each borrowing. 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. |
| |
|
|
U.S. Cellular issued $175 million of 9% Series A Notes due 2032 to PrimeCo Wireless Communications LLC ("PrimeCo") in connection
with the acquisition of Chicago 20MHz on August 7, 2002. Interest is payable quarterly. The notes are callable by U.S. Cellular
after five years at the principal amount plus accrued but unpaid interest. 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. U.S. Cellular filed the registration statement on August 29, 2002.
During 2002, the Company entered into forward contracts in connection with 41% of the Company's marketable securities portfolio
and received $680.4 million in cash. The forward contracts mature from May to August 2007 and, at the Company's option, may be
settled in shares of the respective security or in cash. The Deutsche Telekom and Vodafone forward contracts require quarterly
interest payments at LIBOR plus 0.5% (for a rate of 2.29% based on the LIBOR rate at September 30, 2002). The VeriSign forward
contract is structured as a zero coupon obligation with an effective interest rate of 5.1% per year. The Company is not |
| |
|
|
required to make any payments under the VeriSign forward contract during the contract period. |
| |
9. |
|
Other Comprehensive Income (Loss) |
| |
|
|
The Company's Other Comprehensive Income (Loss) includes Net Income (Loss) and unrealized gains losses from marketable equity
securities that are classified as "available-for-sale" and unrealized gains and losses from derivative instruments. The
following tables summarize the Company's Other Comprehensive Income (Loss). |
Nine Months Ended
September 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 (1,429,504) (1,096,776)
Income tax effect 557,913 438,163
----------- -----------
(871,591) (658,613)
Equity method unrealized gains 218 397
Unrealized gain on derivatives instruments 117,220 --
Minority share of unrealized (gains) losses 11,090 15,396
----------- -----------
Net unrealized gains (losses) (743,063) (642,820)
----------- -----------
(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 301,340 (257,598)
----------- -----------
Balance, end of period $ (50,780) $ (435,942)
=========== ===========
Accumulated Unrealized Gain on Derivative Instruments
Balance, beginning of period $ -- $ --
Add (Deduct):
Unrealized gain on derivative instruments 117,220 --
----------- -----------
Balance, end of period $ 117,220 $ --
=========== ===========
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Comprehensive Income (Loss) (Dollars in thousands)
Net Income (Loss) $ (19,511) $ 51,496 $(958,295) $(259,987)
Net change in unrealized gains
(losses) on marketable equity
securities and
derivative instruments (30,370) (536,234) 301,340 (257,598)
--------- --------- --------- ---------
Comprehensive Income (Loss) $ (49,881) $(484,738) $(656,955) $(517,585)
========= ========= ========= =========
| |
|
|
The
amounts used in computing Earnings per Common Share and the effect on income and
the weighted average number of Common and Series A Common Shares of dilutive
potential common stock are as follows. |
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
Net Income (Loss) $ (19,511) $ 51,496 $(958,295) $(259,987)
Preferred Dividend Requirement (105) (112) (323) (345)
--------- --------- --------- ---------
Net income (loss) Available to Common
Used in Basic Earnings Per Share $ (19,616) $ 51,384 $(958,618) $(260,332)
========= ========= ========= =========
Weighted Average Number of
Common Shares Used in Basic
Earnings per Share 58,660 58,711 58,633 58,694
========= ========= ========= =========
Basic Earnings per Share $ (0.33) $ 0.88 $ (16.35) $ (4.44)
========= ========= ========= =========
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net Income (Loss) Available to
Common Used in Basic Earnings
(Loss) Per Share $ (19,616) $ 51,384 $(958,618) $(260,332)
Reduction in Preferred Dividends if
Preferred Shares Converted into
Common Shares -- 103 -- --
Minority Income Adjustment -- (143) -- --
--------- --------- --------- ---------
Net Income (Loss) Available to
Common Used in Diluted Earnings
(Loss) Per Share $ (19,616) $ 51,344 $(958,618) $(260,332)
========= ========= ========= =========
Weighted Average Number of
Common Shares Used in Basic
Earnings (Loss) Per Share 58,660 58,711 58,633 58,694
Effect of Dilutive Securities
Common Shares Outstanding if
Preferred Shares Converted -- 238 -- --
Stock Options -- 344 -- --
--------- --------- --------- ---------
Weighted Average Number of
Common Shares Used in Diluted
Earnings (Loss) Per Share 58,660 59,293 58,633 58,694
========= ========= ========= =========
Diluted Earnings Per Share $ (0.33) $ 0.87 $ (16.35) $ (4.44)
========= ========= ========= =========
| |
|
|
The minority interest adjustment reflects the additional minority share of U.S. Cellular's income computed as if all of U.S.
Cellular's issuable securities were outstanding. |
| |
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.
TDS has notes receivable from Airadigm and Kington Management Corporation aggregating |
40
| |
|
|
$100.6 million relating to the funding of Airadigm's operations and the purchase by Kington of certain of U.S. Cellular's
minority interests in 2000. The value of the notes are directly related to the value of certain assets and contractual rights of
Airadigm and the value of the minority cellular market interests. As a result of changes in management strategies and other
events, a review of the Airadigm business plan and a review of the fair market analysis of the cellular markets, including third
party fair value analysis, management concluded that the notes receivable are impaired and, accordingly recorded an impairment
charge of $90.1 million ($53.6 million, net of tax and minority interest) in the third quarter of 2002.
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 of the merger on May 31,
2001. |
| |
|
|
Net income (loss) available to common shareholders includes gains and losses from marketable securities and other investments for
the three and nine month periods ended September 30, 2002 and 2001. The following table summarizes the effective income tax
(benefit) rates in each of the periods from net income excluding gains and losses from marketable securities and other
investments; from gains and losses from marketable securities and other investments; and from net income. |
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- ---------------
2002 2001 2002 2001
------- ------ ----- -------
Effective Tax Rate From: (Dollars in thousands, except per share amounts)
Operations excluding
Losses on marketable securities and
Other investments 43.2% 44.6% 43.6% 44.6%
Losses on marketable securities and
Other investments (36.2%) -- (38.9%) (40.3%)
Net income (2.6%) 44.6% (38.0%) (36.9%)
| |
|
|
Cash expenditures for acquisitions aggregated $528.6 million for the nine months ended September 30, 2002.
On
August 7, 2002, U.S. Cellular completed the acquisition of all of the equity
interest in Chicago 20MHz, LLC (“Chicago 20MHz”), including the assets
and certain liabilities of Chicago 20MHz, 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). This transaction strengthens U.S. Cellular’s Midwest region, which
is its largest operating region. The Chicago area is the commercial hub of the
Midwest with positive demographics.
The
purchase price was approximately $607 million subject to certain working capital
and other adjustments. 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. The Company has included the Chicago 20MHz results of
operations in the statement of operations subsequent to the purchase date.
The following table summarizes the estimated fair values of the Chicago 20MHz assets |
| |
|
|
acquired and liabilities assumed at the date of acquisition. |
August 7, 2002
- --------------------------------------------------------------------------------
(Dollars in thousands)
Current assets $ 31,675
Property, plant and equipment 239,262
Other Assets 80
Customer list 43,400
Licenses 163,500
Goodwill 149,989
---------
Total assets acquired $ 627,906
---------
Current liabilities (19,063)
Non-current liabilities (1,593)
---------
Total liabilities acquired $ (20,656)
---------
Purchase price $ 607,250
Notes issued to PrimeCo (175,000)
Capitalized transaction costs 1,750
Chicago 20MHz cash at date of acquisition (3,581)
---------
Cash required, excluding cash at date of acquisition $ 430,419
=========
| |
|
|
An
independent appraiser completed a preliminary valuation of Chicago 20MHz’s
assets. The tangible fixed assets were valued at $239.3 million. The PCS
licenses were valued at $163.5 million. These licenses have an indefinite life
and are not being amortized. The customer list was assigned a value of $43.4
million. This intangible is being amortized based on a 30 month average customer
retention period using the declining balance method. Amortization expense was
$1.3 million for the three and nine month periods ended September 30, 2002, and
is expected to be $4.5 million for the remainder of 2002. Amortization expense
for the years 2003 – 2007 is expected to be $15.0 million, $9.1 million,
$5.5 million, $3.2 million and $1.9 million, respectively. Goodwill was assigned
a value of $150.0 million and is not being amortized for financial reporting
purposes. Goodwill is deductible for tax purposes and will be amortized over 15
years for tax purposes.
In
addition, the Company acquired two telephone companies, three additional PCS
licenses and additional minority interests in majority-owned markets during the
first nine months of 2002. In conjunction with these acquisitions, the following
assets were acquired and liabilities assumed. The goodwill acquired in these acquisitions is not deductible for tax purposes. |
Nine Months Ended
September 30,
2002
--------
(Dollars in
thousands)
Current assets, excluding cash acquired $ 6,454
Property, plant and equipment 25,544
Cellular licenses 18,010
Goodwill - U.S. Cellular 3,827
Goodwill - TDS Telecom 60,936
Other Assets 2,068
Current liabilities (5,474)
Long-term debt (9,767)
Deferred credits (1,752)
Other liabilities (1,627)
--------
Decrease in cash due to other acquisitions $ 98,219
========
| |
|
|
Assuming
the acquisitions accounted for as purchases during the period January 1, 2001,
to September 30, 2002, had taken place on January 1, 2001, unaudited pro forma
results of operations would have been as follows: |
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ---------- ------------
Operating revenues $ 818,460 $ 747,334 $ 2,316,988 $ 2,148,464
Net income (23,599) 39,623 (985,757) (296,230)
Earnings per share -
basic and diluted $ (0.40) $ 0.67 $ (16.82) $ (5.05)
| |
14. |
|
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.
The following table summarizes interest and income taxes paid. |
Nine Months Ended
September 30,
--------------------------
2002 2001
--------- -------
(Dollars in thousands)
Interest Paid $88,998 $82,260
Income Taxes Paid $15,861 $45,708
| |
15. |
|
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 September 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). |
| |
|
|
In November 2002, U.S. Cellular sold $115 million of 8.75% Senior Notes due November 7, 2032. The net proceeds of the notes are
being used to purchase a portion of the 9% Series A Notes that were issued to PrimeCo. The issuance of the $115 million notes
was a takedown from the $500 million shelf registration statement on Form S-3 filed in May of 2002. U.S. Cellular has also
granted the underwriters an option, exercisable until November 30, 2002, to purchase up to an additional $17.25 million of the
8.75% Senior Notes. The underwriters have exercised the option to acquire an additional $15 million of the 8.75% Senior Notes. |
| |
|
|
In October and November of 2002, the Company entered into forward contracts relating to Vodafone ADRs and ordinary shares of
Deutsche Telekom. The forward contracts are similar to the other forward contracts that the Company has entered into. See -
note 6 Derivatives for the explanation of the similar forward contracts. The table below summarizes certain facts
surrounding the forward contracts entered from October 1, 2002 through November 11, 2002. |
Collar
---------------------
Downside Upside
Proceeds Limit Potential
Security Shares (000s) (Floor) (Ceiling)
---------- ---------- -------- ------- ---------
Vodafone 2,700,545 $ 41,182 $ 15.25 $ 20.92
Deutsche Telekom 30,000,000 332,133 $ 11.37 $ 13.64
--------
$373,315
========
| |
17. |
|
Business Segment Information |
| |
|
|
Financial
data for the Company’s business segments for each of the three and
nine-month periods ended or at September 30, 2002 and 2001 are as follows: |
Three Months Ended or at
September 30, 2002 TDS Telecom
- ---------------------------- U.S. ----------------
(Dollars in thousands) Cellular ILEC CLEC All Other(1) Total
----------- ----------- ----------- ----------- -----------
Operating revenues $ 597,571 $ 158,961 $ 45,998 $ (643) $ 801,887
Operating cash flow(2) 167,571 78,755 (6,908) -- 239,418
Depreciation and amortization
expense(3) 102,876 32,907 7,426 -- 143,209
Operating income (loss) 64,695 45,848 (14,334) -- 96,209
Significant noncash items:
Investment income, net 12,965 125 -- 247 13,337
Gain (loss) on marketable
securities and other investments (34,209) -- -- (55,862) (90,071)
Marketable securities 131,767 -- -- 1,139,038 1,270,805
Investment in unconsolidated
entities 162,211 48,956 -- 25,545 236,712
Total assets 4,433,097 1,705,284 235,486 1,610,271 7,984,138
Capital expenditures $ 192,256 $ 36,484 $ 9,653 $ -- $ 238,393
Three Months Ended or at
September 30, 2001 TDS Telecom
- ---------------------------- U.S. ----------------
(Dollars in thousands) Cellular ILEC CLEC All Other(1) Total
----------- ----------- ----------- ----------- -----------
Operating revenues $ 501,024 $ 144,488 $ 30,157 $ (660) $ 675,009
Operating cash flow(2) 169,963 73,906 (10,127) -- 233,742
Depreciation and amortization
expense(3) 77,286 33,496 4,541 -- 115,323
Operating income (loss) 92,677 40,410 (14,668) -- 118,419
Significant noncash items:
Investment income, net 14,145 369 -- 6,143 20,657
Gain (loss) on marketable
securities and other investments -- -- -- -- --
Marketable securities 234,000 -- -- 2,221,097 2,455,097
Investment in unconsolidated
entities 149,850 25,307 -- 25,937 201,094
Total assets 3,596,746 1,477,135 193,848 2,349,281 7,617,010
Capital expenditures $ 125,589 $ 28,591 $ 23,303 $ -- $ 177,483
Nine Months Ended or at
September 30, 2002 TDS Telecom
- ---------------------------- U.S. ----------------
(Dollars in thousands) Cellular ILEC CLEC All Other(1) Total
----------- ----------- ----------- ----------- -----------
Operating revenues $ 1,603,701 $ 463,533 $ 125,514 $ (1,850) $ 2,190,898
Operating cash flow(2) 495,627 222,930 (24,998) -- 693,559
Depreciation and amortization
expense(3) 252,037 97,409 21,298 -- 370,744
Operating income (loss) 243,590 125,521 (46,296) -- 322,815
Significant noncash items:
Investment income, net 30,731 736 -- 677 32,144
Gain (loss) on marketable
securities and other investments (278,909) -- -- (1,567,688) (1,846,597)
Marketable securities 131,767 -- -- 1,139,038 1,270,805
Investment in unconsolidated
entities 162,211 48,956 -- 25,545 236,712
Total assets 4,433,097 1,705,284 235,486 1,610,271 7,984,138
Capital expenditures $ 449,030 $ 80,946 $ 35,703 $ -- $ 565,679
Nine Months Ended or at
September 30, 2001 TDS Telecom
- ---------------------------- U.S. ----------------
(Dollars in thousands) Cellular ILEC CLEC All Other(1) Total
----------- ----------- ----------- ----------- -----------
Operating revenues $ 1,416,082 $ 417,649 $ 85,404 $ (1,456) $ 1,917,679
Operating cash flow(2) 466,419 213,816 (17,516) -- 662,719
Depreciation and amortization
expense(3) 221,633 98,468 11,466 -- 331,567
Operating income (loss) 244,786 115,348 (28,982) -- 331,152
Significant noncash items:
Investment income, net 30,773 726 -- 6,333 37,832
Gain (loss) on marketable
securities and other investments -- -- -- (644,929) (644,929)
Marketable securities 234,000 -- -- 2,221,097 2,455,097
Investment in unconsolidated
entities 149,850 25,307 -- 25,937 201,094
Total assets 3,596,746 1,477,135 193,848 2,349,281 7,617,010
Capital expenditures $ 377,721 $ 64,369 $ 79,371 $ -- $ 521,461
| |
|
|
(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 September 30, 2001, includes license cost and goodwill amortization
expense of $9.1 million for U.S. Cellular, $1.6 million for the ILEC and $56,000 for the CLEC. Depreciation and amortization for
the nine months ended September 30, 2001, includes license cost and goodwill amortization expense of $27.1 million for U.S.
Cellular, $4.9 million for the ILEC and $169,000 for the CLEC. The three and nine months ended September 30, 2002 do not include
amortization of license costs or goodwill in accordance with SFAS No. 142. |
| |
|
|
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of a date within 90 days of the filing date of
this Quarterly Report on Form 10-Q, the principal executive officer and principal financial officer of TDS have concluded that TDS'
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) are
effective to ensure that the information required to be disclosed by TDS in reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
(b) Changes in internal controls. There were no significant changes in TDS' internal controls or in other factors that could
significantly affect those controls subsequent to the date of their most recent evaluation.
|
| 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 6. Exhibits and Reports on Form 8-K.
|
| |
|
|
Exhibit 10.1 – Guarantee dated as of July 29, 2002, by Telephone and Data Systems, Inc. in favor of Credit Suisse First
Boston International.
Exhibit 10.2 – Guarantee dated as of July 31, 2002, by Telephone and Data Systems, Inc. in favor of Credit Suisse First
Boston International.
Exhibit 10.3 – Guaranty dated as of August 19, 2002, by Telephone and Data Systems, Inc. in favor of Citibank, N.A.
Exhibit 10.4 – Guarantee dated as of August 22, 2002, by Telephone and Data Systems, Inc. in favor of Credit Suisse First
Boston International.
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.
|
| |
(b) |
|
Reports on Form 8-K filed during the quarter ended September 30, 2002:
|
| |
|
|
The Company filed a Current Report on Form 8-K, dated August 12, 2002, for the purpose of filing copies of the sworn certification
statements submitted by the CEO and CFO of the Company with the U.S. Securities and Exchange Commission. |
|
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
TELEPHONE AND DATA SYSTEMS, INC.
(Registrant)
|
| |
Date |
|
November 13, 2002 |
|
/s/ LeRoy T. Carlson, Jr. |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
LeRoy T. Carlson, Jr. |
|
| |
|
|
|
|
President and Chief Executive Officer |
|
| |
Date |
|
November 13, 2002 |
|
/s/ Sandra L. Helton |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
Sandra L. Helton, |
|
| |
|
|
|
|
Executive Vice President and |
|
| |
|
|
|
|
Chief Financial Officer |
|
| |
Date |
|
November 13, 2002 |
|
/s/ D. Michael Jack |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
D. Michael Jack, |
|
| |
|
|
|
|
Vice President and Controller |
|
| |
|
|
|
|
(Principal Accounting Officer) |
|
Signature page for the TDS 2002
Third Quarter Form 10-Q |
| Certification of Chief Executive Officer |
I, LeRoy T. Carlson, Jr., certify that:
|
| 1. |
I have reviewed this quarterly report of Form 10-Q of
Telephone and Data Systems, Inc.;
|
| 2. |
Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
|
| 3. |
Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
|
| 4. |
The registrant’s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) |
designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared; |
| b) |
evaluated the effectiveness of the registrant’s disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the “Evaluation Date”); and |
| c) |
presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
|
| 5. |
The registrant’s other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant’s auditors and the audit committee of
registrant’s board of directors (or persons performing the equivalent
function): |
| a) |
all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the registrant’s
auditors any material weaknesses in internal controls; and |
| b) |
any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal controls; and
|
| 6. |
The registrant’s other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
|
| Date: November 13, 2002 |
| |
/s/ LeRoy T. Carlson, Jr.
LeRoy T. Carlson, Jr.
President and Chief Executive Officer |
| Certification of Chief Financial Officer |
I, Sandra L. Helton, certify that:
|
| 1. |
I have reviewed this quarterly report of Form 10-Q of
Telephone and Data Systems, Inc.;
|
| 2. |
Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
|
| 3. |
Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
|
| 4. |
The registrant’s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) |
designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared; |
| b) |
evaluated the effectiveness of the registrant’s disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the “Evaluation Date”); and |
| c) |
presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
|
| 5. |
The registrant’s other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant’s auditors and the audit committee of
registrant’s board of directors (or persons performing the equivalent
function): |
| a) |
all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the registrant’s
auditors any material weaknesses in internal controls; and |
| b) |
any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal controls; and
|
| 6. |
The registrant’s other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
|
| Date: November 13, 2002 |
| |
/s/ Sandra L. Helton
Sandra L. Helton
Executive Vice President and
Chief Financial Officer |
