SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2003 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission File Number 001-14157 |
TELEPHONE AND DATA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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36-2669023 |
(State or other jurisdiction of |
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(I.R.S. Employer Identification No.) |
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30 North LaSalle Street, Chicago, Illinois 60602 |
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(Address of principal executive offices) (Zip Code) |
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Registrants telephone number, including area code: (312) 630-1900 |
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Not Applicable |
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(Former address of principal executive offices) (Zip Code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý |
No o |
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class |
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Outstanding at April 30, 2003 |
Common Shares, $.01 par value |
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50,894,011 Shares |
Series A Common Shares, $.01 par value |
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6,614,956 Shares |
EXPLANATORY NOTE
Telephone and Data Systems, Inc. (TDS) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, which was originally filed with the Securities and Exchange Commission (the SEC) on May 14, 2003 (the Quarterly Report), to amend Item 1 Financial Statements, Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 3 Quantitative and Qualitative Disclosures About Market Risk contained in Part I Financial Information of the Quarterly Report and Item 6 Exhibits and Reports of Form 8-K contained in Part II Other Information of the Quarterly Report.
TDS is filing this amendment in response to a comment letter received from the Division of Corporation Finance of the Securities and Exchange Commission (the SEC). This report revises the disclosures related to TDSs adoption of Statement of Financial Accounting Standards (SFAS) No. 143 Accounting for Asset Retirement Obligations and restates the financial statements in response to such comments. The SEC also requested additional disclosures be included in future filings which have been incorporated into this amendment. Such additional disclosures include, but are not limited to, defining the calculation of certain statistics, defining equivalent access lines, deleting acronyms, including total dollars in narratives, revising the captions of the statement of operations, disclosing the composition of selling and marketing cost per gross customer activation and disclosing additional information on critical accounting policies and estimates.
In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by the TDS principal executive officer and principal financial officer are being filed with this Form 10-Q/A.
Except as expressly stated herein, this amendment does not update any of the disclosures contained in the original filing to reflect any events that occurred after the original filing date of May 14, 2003. The filing of this Form 10-Q/A shall not be deemed an admission that the original filing, when made, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.
TELEPHONE AND DATA SYSTEMS, INC.
1st QUARTER REPORT ON FORM 10-Q/A
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three
Months Ended |
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(As
Restated) |
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(As Restated) |
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(Dollars
in thousands, |
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OPERATING REVENUES |
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$ |
807,418 |
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$ |
665,197 |
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OPERATING EXPENSES |
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Cost of services and products (exclusive of Depreciation, amortization and accretion expense shown below) |
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262,398 |
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189,822 |
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Selling, general and administrative expense |
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336,501 |
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258,109 |
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Depreciation, amortization and accretion expense |
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151,227 |
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111,899 |
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Loss on assets held for sale |
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23,500 |
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773,626 |
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559,830 |
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OPERATING INCOME |
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33,792 |
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105,367 |
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INVESTMENT AND OTHER INCOME (EXPENSE) |
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Interest and dividend income |
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4,328 |
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2,067 |
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Investment income |
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12,750 |
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11,037 |
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Gain (loss) on marketable securities and other investments |
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(3,500 |
) |
(37,400 |
) |
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Interest expense |
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(43,357 |
) |
(29,624 |
) |
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Minority interest in income of subsidiary trust |
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(6,203 |
) |
(6,203 |
) |
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Other income (expense), net |
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1,159 |
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1,206 |
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(34,823 |
) |
(58,917 |
) |
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INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST |
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(1,031 |
) |
46,450 |
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Income tax expense |
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3,824 |
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22,412 |
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INCOME (LOSS) BEFORE MINORITY INTEREST |
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(4,855 |
) |
24,038 |
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Minority Share of Income |
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(157 |
) |
(10,028 |
) |
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INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES |
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(5,012 |
) |
14,010 |
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Cumulative effect of accounting changes, net of tax and minority interest |
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(11,789 |
) |
3,366 |
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NET INCOME (LOSS) |
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(16,801 |
) |
17,376 |
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Preferred Dividend Requirement |
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(104 |
) |
(112 |
) |
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NET INCOME (LOSS) AVAILABLE TO COMMON |
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$ |
(16,905 |
) |
$ |
17,264 |
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BASIC WEIGHTED AVERAGE SHARES OUTSTANDING (000s) |
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58,594 |
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58,600 |
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BASIC EARNINGS PER SHARE (Note 7) |
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Income (Loss) Before Cumulative Effect of Accounting Changes |
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$ |
(0.09 |
) |
$ |
0.23 |
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Cumulative Effect of Accounting Changes |
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(0.20 |
) |
0.06 |
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Net income (loss) available to common |
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(0.29 |
) |
0.29 |
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DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (000s) |
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58,594 |
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58,888 |
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DILUTED EARNINGS PER SHARE (Note 7) |
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Income (Loss) Before Cumulative Effect of Accounting Changes |
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$ |
(0.09 |
) |
$ |
0.23 |
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Cumulative Effect of Accounting Changes |
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(0.20 |
) |
0.06 |
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Net income (loss) available to common |
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(0.29 |
) |
0.29 |
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DIVIDENDS PER SHARE |
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$ |
.155 |
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$ |
.145 |
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The accompanying notes to financial statements are an integral part of these statements.
4
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
|
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Three
Months Ended |
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(As
Restated) |
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(As
Restated) |
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(Dollars in thousands) |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Income (loss) before cumulative effect of accounting change |
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$ |
(5,012 |
) |
$ |
14,010 |
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Add (Deduct) adjustments to reconcile income (loss) to net cash provided by operating activities |
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|
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Depreciation, amortization and accretion |
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151,227 |
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111,899 |
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Deferred taxes |
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2,113 |
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(5,572 |
) |
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Investment income |
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(12,750 |
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(11,037 |
) |
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Minority share of income |
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157 |
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10,028 |
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Loss on assets of operations held-for-sale |
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23,500 |
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(Gain) loss on marketable securities and other investments |
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3,500 |
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37,400 |
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Noncash interest expense |
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6,752 |
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2,293 |
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Other noncash expense |
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3,164 |
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4,055 |
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Changes in assets and liabilities |
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Change in accounts receivable |
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107,721 |
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23,071 |
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Change in materials and supplies |
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(21,865 |
) |
23,671 |
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Change in accounts payable |
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(48,761 |
) |
(37,826 |
) |
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Change in advanced billings and customer deposits |
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7,079 |
|
4,349 |
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Change in accrued taxes |
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7,047 |
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25,989 |
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Change in other assets and liabilities |
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(47,958 |
) |
(19,237 |
) |
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|
|
175,914 |
|
183,093 |
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|
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CASH FLOWS FROM INVESTING ACTIVITIES |
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|
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|
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Capital expenditures |
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(161,383 |
) |
(128,328 |
) |
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Acquisitions, net of cash acquired |
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|
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(17,050 |
) |
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Increase in notes receivable |
|
(7 |
) |
(1,653 |
) |
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Distributions from unconsolidated entities |
|
13,615 |
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4,139 |
|
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Investments in and advances to unconsolidated entities |
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(1,493 |
) |
(861 |
) |
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Other investing activities |
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(2,136 |
) |
(3,772 |
) |
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|
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(151,404 |
) |
(147,525 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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|
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Change in notes payable |
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72,000 |
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(31,000 |
) |
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Issuance of long-term debt |
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450 |
|
610 |
|
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Repayments of long-term debt |
|
(4,729 |
) |
(4,183 |
) |
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Prepayment of long-term notes |
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(40,680 |
) |
(51,000 |
) |
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Repurchase of TDS Common Shares |
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(24,587 |
) |
|
|
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Dividends paid |
|
(9,202 |
) |
(8,617 |
) |
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Other financing activities |
|
(784 |
) |
(1,287 |
) |
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|
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(7,532 |
) |
(95,477 |
) |
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|
|
|
|
|
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
16,978 |
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(59,909 |
) |
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CASH AND CASH EQUIVALENTS - |
|
|
|
|
|
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Beginning of period |
|
1,298,936 |
|
140,744 |
|
||
End of period |
|
$ |
1,315,914 |
|
$ |
80,835 |
|
The accompanying notes to financial statements are an integral part of these statements.
5
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
ASSETS
Unaudited
|
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(As
Restated) |
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December
31, |
|
||
|
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(Dollars in thousands) |
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||||
CURRENT ASSETS |
|
|
|
|
|
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Cash and cash equivalents |
|
$ |
1,315,914 |
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$ |
1,298,936 |
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Accounts receivable |
|
|
|
|
|
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Due from customers, less allowance of $ 25,615 and $24,627, respectively |
|
227,389 |
|
272,997 |
|
||
Other, principally connecting companies, less allowance of $11,109 and $15,848, respectively |
|
139,890 |
|
175,036 |
|
||
Federal income tax receivable |
|
|
|
40,000 |
|
||
Materials and supplies, at average cost |
|
92,892 |
|
72,441 |
|
||
Collateral investment pledged (Note 8) |
|
32,200 |
|
|
|
||
Other current assets |
|
99,127 |
|
88,602 |
|
||
|
|
1,907,412 |
|
1,948,012 |
|
||
|
|
|
|
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|
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INVESTMENTS |
|
|
|
|
|
||
Marketable equity securities |
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1,676,892 |
|
1,944,939 |
|
||
Marketable equity securities - loaned |
|
30,610 |
|
|
|
||
Wireless license costs |
|
979,760 |
|
1,038,556 |
|
||
Goodwill |
|
1,008,596 |
|
1,106,451 |
|
||
Customer lists, net of accumulated amortization of $11,055 and $6,567, respectively |
|
35,599 |
|
40,087 |
|
||
Investments in unconsolidated entities |
|
206,624 |
|
205,995 |
|
||
Notes receivable, less valuation allowance of $55,144 and $55,144, respectively |
|
6,568 |
|
7,287 |
|
||
Other investments |
|
15,183 |
|
14,914 |
|
||
|
|
3,959,832 |
|
4,358,229 |
|
||
|
|
|
|
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|
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PROPERTY, PLANT AND EQUIPMENT, NET |
|
|
|
|
|
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U.S. Cellular |
|
2,128,360 |
|
2,148,432 |
|
||
TDS Telecom |
|
1,056,056 |
|
1,047,811 |
|
||
|
|
3,184,416 |
|
3,196,243 |
|
||
|
|
|
|
|
|
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OTHER ASSETS AND DEFERRED CHARGES |
|
|
|
|
|
||
Derivative asset |
|
192,899 |
|
2,630 |
|
||
Other |
|
99,414 |
|
96,914 |
|
||
|
|
292,313 |
|
99,544 |
|
||
|
|
|
|
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ASSETS OF OPERATIONS HELD-FOR-SALE |
|
226,422 |
|
|
|
||
|
|
|
|
|
|
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TOTAL ASSETS |
|
$ |
9,570,395 |
|
$ |
9,602,028 |
|
The accompanying notes to financial statements are an integral part of these statements.
6
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS EQUITY
Unaudited
|
|
(As
Restated) |
|
December
31, |
|
||
|
|
(Dollars in thousands) |
|
||||
CURRENT LIABILITIES |
|
|
|
|
|
||
Current portion of long-term debt |
|
$ |
19,267 |
|
$ |
64,482 |
|
Notes payable |
|
533,792 |
|
461,792 |
|
||
Accounts payable |
|
310,679 |
|
361,758 |
|
||
Advance billings and customer deposits |
|
100,255 |
|
95,922 |
|
||
Accrued interest |
|
21,860 |
|
31,751 |
|
||
Accrued taxes |
|
40,488 |
|
34,413 |
|
||
Accrued compensation |
|
38,961 |
|
58,678 |
|
||
Collateral loan payable (Note 8) |
|
32,200 |
|
|
|
||
Other current liabilities |
|
51,311 |
|
58,370 |
|
||
|
|
1,148,813 |
|
1,167,166 |
|
||
|
|
|
|
|
|
||
DEFERRED LIABILITIES AND CREDITS |
|
|
|
|
|
||
Net deferred income tax liability |
|
1,163,866 |
|
1,170,505 |
|
||
Derivative liability |
|
10,948 |
|
61,160 |
|
||
Asset retirement obligations |
|
86,086 |
|
|
|
||
Other |
|
56,946 |
|
55,645 |
|
||
|
|
1,317,846 |
|
1,287,310 |
|
||
|
|
|
|
|
|
||
LONG-TERM DEBT |
|
|
|
|
|
||
Long-term debt, excluding current portion |
|
1,639,585 |
|
1,641,624 |
|
||
Prepaid forward contracts |
|
1,660,708 |
|
1,656,616 |
|
||
|
|
3,300,293 |
|
3,298,240 |
|
||
|
|
|
|
|
|
||
LIABILITIES OF OPERATIONS HELD-FOR-SALE |
|
9,823 |
|
|
|
||
|
|
|
|
|
|
||
MINORITY INTEREST IN SUBSIDIARIES |
|
487,721 |
|
489,735 |
|
||
|
|
|
|
|
|
||
COMPANY-OBLIGATED MANDATORILY REDEEMABLE |
|
|
|
|
|
||
Holding Solely Company Subordinated Debentures (a) |
|
300,000 |
|
300,000 |
|
||
|
|
|
|
|
|
||
PREFERRED SHARES |
|
6,804 |
|
6,954 |
|
||
|
|
|
|
|
|
||
COMMON STOCKHOLDERS EQUITY |
|
|
|
|
|
||
Common Shares, par value $.01 per share; authorized 100,000,000 shares; issued and outstanding 55,878,000 and 55,875,000 shares, respectively |
|
559 |
|
559 |
|
||
Series A Common Shares, par value $.01 per share; authorized 25,000,000 shares; issued and outstanding 6,609,000 and 6,602,000 shares; respectively |
|
66 |
|
66 |
|
||
Capital in excess of par value |
|
1,833,280 |
|
1,832,806 |
|
||
Treasury Shares, at cost, 4,542,000 and 3,799,000 shares, respectively |
|
(433,229 |
) |
(404,169 |
) |
||
Accumulated other comprehensive income |
|
192,765 |
|
191,704 |
|
||
Retained earnings |
|
1,405,654 |
|
1,431,657 |
|
||
|
|
2,999,095 |
|
3,052,623 |
|
||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
9,570,395 |
|
$ |
9,602,028 |
|
(a) The sole asset of TDS Capital I is $154.6 million principal amount of 8.5% subordinated debentures due 2037 from TDS. The sole asset of TDS Capital II is $154.6 million principal amount of 8.04% subordinated debentures due 2038 from TDS.
The accompanying notes to financial statements are an integral part of these statements.
7
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements included herein have been prepared by TDS, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although TDS 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 TDSs latest annual report on Form 10-K.
The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of March 31, 2003 and December 31, 2002, and the results of operations and cash flows for the three months ended March 31, 2003 and 2002. The results of operations for the three months ended March 31, 2003 and 2002, 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 the current period presentation.
U.S. Cellular and TDS adopted Statement of Financial Accounting Standard (SFAS) No. 143, Accounting for Asset Retirement Obligations, in January 2003. In the fourth quarter of 2003, U.S. Cellular revised the probability that its lease cell sites would require remediation resulting in TDS restating its financial statements for the three months ended March 31, 2003. See Note 15 Restatement of Financial Statements and Note 6 - Cumulative Effect of Accounting Changes.
U.S. Cellular made changes to its accounting policies which required TDS to restate certain items on its income statement for the first quarter of 2002. Other than the cumulative effect of the accounting change, none of the above changes had an impact on operating income, net income (loss) or earnings per share. See Note 6 - Cumulative Effect of Accounting Changes.
2. Summary of Significant Accounting Policies
Securities Lending
U.S. Cellular has entered into a securities lending agreement with an investment bank related to 1.7 million Vodafone American Depositary Receipts pursuant to which U.S. Cellular requires the investment bank to provide collateral not less than the value of the loaned securities, as adjusted for any changes in the value of the underlying loaned securities. U.S. Cellular accounts for securities lending agreements in accordance with Statement of Financial Accounting Standard (SFAS) No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. At the time securities are loaned, U.S. Cellular reclassifies the securities from Marketable Equity Securities to Marketable Equity Securities Loaned on the balance sheet. See Note 8 Marketable Equity Securities for more information on the securities lending agreement.
Assets and Liabilities of Operations Held-for-Sale
On March 10, 2003, U.S. Cellular announced that it had entered into a definitive agreement with AT&T Wireless Services, Inc. (AT&T Wireless) to exchange wireless properties. U.S. Cellular will receive 10 and 20 megahertz personal communications service licenses in 13 states, approximately $31 million in cash (excluding any working capital adjustment) and minority interests in six markets it currently controls. U.S. Cellular will transfer wireless assets and customers in 10 markets in Florida and Georgia to AT&T Wireless. The transaction is subject to regulatory approvals. The closing of the transfer of U.S. Cellular properties and the assignment to U.S. Cellular of most of the personal communications service licenses is expected to occur in the third quarter of 2003.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the balance sheet for March 31, 2003 reflects the assets and liabilities of the wireless properties to be transferred to AT&T Wireless as assets and liabilities of operations held-for-sale. The assets and liabilities
8
of the markets to be transferred have been presented separately in the asset and liability sections of the balance sheet. The revenues and expenses of these markets are included in operations. See Note 10 Assets and Liabilities of Operations Held-for-Sale for a summary of assets and liabilities of the markets to be disposed of.
Stock-Based Compensation
TDS accounts for stock options, stock appreciation rights (SARs) and employee stock purchase plans under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees as allowed by SFAS No. 123, Accounting for Stock-Based Compensation.
No compensation costs have been recognized for the stock option and employee stock purchase plans. Had compensation cost for all plans been determined consistent with SFAS No. 123, TDSs net income available to common and earnings per share would have been reduced to the following pro forma amounts.
|
|
Three
Months Ended |
|
||||
|
|
(As
Restated) |
|
2002 |
|
||
|
|
(Dollars in thousands, except per share amounts) |
|
||||
Net Income (loss) Available to Common |
|
|
|
|
|
||
As Reported |
|
$ |
(16,905 |
) |
$ |
17,264 |
|
Pro Forma Expense |
|
(1,808 |
) |
(2,592 |
) |
||
Pro Forma Net Income (loss) Available to Common |
|
$ |
(18,713 |
) |
$ |
14,672 |
|
|
|
|
|
|
|
||
Basic Earnings per Share from Net Income (loss) Available to Common |
|
|
|
|
|
||
As Reported |
|
$ |
(0.29 |
) |
$ |
0.29 |
|
Pro Forma Expense per Share |
|
(0.03 |
) |
(0.04 |
) |
||
Pro Forma Basic Earnings per Share |
|
$ |
(0.32 |
) |
$ |
0.25 |
|
|
|
|
|
|
|
||
Diluted Earnings per Share from Net Income (loss) Available to Common |
|
|
|
|
|
||
As Reported |
|
$ |
(0.29 |
) |
$ |
0.29 |
|
Pro Forma Expense per Share |
|
(0.03 |
) |
(0.04 |
) |
||
Pro Forma Diluted Earnings per Share |
|
$ |
(0.32 |
) |
$ |
0.25 |
|
3. Asset Retirement Obligation (As restated)
SFAS No. 143, Accounting for Asset Retirement Obligations, was issued in June 2001, and became effective for TDS 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 obligations are incurred. When the liability is initially recorded, the entity capitalizes the cost of the asset retirement obligation 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. Upon settlement of the obligation, any difference between the cost to retire the asset and the liability recorded is recognized in the statement of operations as a gain or loss.
U.S. Cellular is subject to asset retirement obligations associated primarily with its cell sites, retail sites and office locations. Legal obligations include obligations to remediate leased land on which U.S. Cellulars cell sites and switching offices are located. U.S. Cellular is also required to return lease retail store premises and office space to their pre-existing conditions.
U.S. Cellular determined that it had an obligation to remove long-lived assets in its cell sites, retail sites and office locations as described by SFAS 143, and recorded a $54.4 million liability upon adoption. TDS also recorded a charge for a non-cash cumulative change in accounting principle of $11.8 million representing accumulated accretion and depreciation through December 31, 2002. The U.S. Cellular asset retirement obligation increased by $1.8 million to $56.2 million as of March 31, 2003. The increase was due to additional liabilities incurred of $0.7 million and accretion of $1.1 million. See Note 15 Restatement of Financial Statements for a discussion of the periodic impact due to accretion and depreciation.
In accordance with the transition rules of SFAS No. 143, the following pro forma amounts show the
9
effect of the retroactive application of the change in accounting principle for the adoption of SFAS No. 143:
|
|
Three months ended March 31, |
|
||||
|
|
2003 |
|
2002 |
|
||
Actual |
|
|
|
|
|
||
Net income (loss) |
|
$ |
(16,801 |
) |
$ |
17,376 |
|
Basic earnings per share |
|
$ |
(0.29 |
) |
$ |
0.29 |
|
Diluted earnings per share |
|
$ |
(0.29 |
) |
$ |
0.29 |
|
|
|
|
|
|
|
||
Pro forma |
|
|
|
|
|
||
Net income (loss) |
|
$ |
(5,012 |
) |
$ |
7,540 |
|
Basic earnings per share |
|
$ |
(0.09 |
) |
$ |
0.13 |
|
Diluted earnings per share |
|
$ |
(0.09 |
) |
$ |
0.13 |
|
|
|
At December 31, |
|
At January 1, |
|
||
Pro forma |
|
|
|
|
|
||
Asset Retirement Obligation |
|
$ |
54,438 |
|
$ |
45,246 |
|
TDS Telecoms incumbent local telephone companies follow the provisions of SFAS No. 71, and therefore conform to the accounting principles as prescribed by the respective state public utility commissions and the Federal Communications Commission (FCC), and where applicable, accounting principles generally accepted in the United States of America. On December 20, 2002, the FCC notified carriers by Order that it will not adopt SFAS No. 143 since the FCC concluded that SFAS No. 143 conflicted with the FCCs current accounting rules that require incumbent local telephone companies to accrue for asset retirement obligations through prescribed depreciation rates. Pursuant to the FCCs order, and the provisions of SFAS No. 71, the incumbent local telephone companies continue to accrue asset retirement obligations as a component of depreciation expense pursuant to depreciation rates set forth by the respective state public utility commissions. At January 1, 2003, TDSs incumbent local telephone companies determined the amount of asset retirement obligations required to be recorded under the provisions of SFAS No. 143 was $29.9 million, and this asset retirement obligation was reclassified from accumulated depreciation to deferred liabilities and credits under the provisions of SFAS No. 143. After the effect of this reclassification, the incumbent local telephone companies have an amount of $25.4 million that remains in accumulated depreciation that represents asset retirement costs that have been accrued in accordance with depreciation rates promulgated by the respective state public utility commissions, which are in excess of asset retirement costs that are required to be accrued under the provisions of SFAS No. 143. The adoption of SFAS 143 by TDSs incumbent local telephone companies did not have an impact on TDSs statement of operations for the three months ended March 31, 2003.
TDS Telecoms competitive local telephone companies adopted SFAS No. 143 effective January 1, 2003. TDS Telecom has determined that its competitive local telephone companies do not have a material legal obligation to remove long-lived assets as described by SFAS 143, and accordingly, adoption of SFAS 143 did not have a material impact on TDS.
10
4. Income Taxes
Net income (loss) available to common shareholders includes losses from marketable securities and other investments and losses on assets held-for-sale for the three months ended March 31, 2003 and 2002. The following table summarizes the effective income tax expense (benefit) rates in each of the periods.
|
|
Three
Months Ended |
|
||
|
|
2003 |
|
2002 |
|
Effective Tax Rate From |
|
|
|
|
|
Operations excluding loss on marketable securities and other investments and loss on assets held-for-sale |
|
42.2 |
% |
44.3 |
% |
Loss on marketable securities and other investments and loss on assets held-for-sale |
|
(26.4 |
)% |
(39.5 |
)% |
Income (Loss) before cumulative effect of accounting change |
|
N/M |
|
48.3 |
% |
|
|
|
|
|
|
N/M - Not Meaningful
5. (Loss) on Marketable Securities and Other Investments
U.S. Cellular has reported losses on marketable securities and other investments of $3.5 million in 2003. A license cost impairment loss was recorded related to the investment in a non-operating market in Florida that will remain with U.S. Cellular after the AT&T Wireless exchange.
In 2002, management determined that decline in value of TDSs investment in VeriSign, Inc. relative to its accounting cost basis was other than temporary and recorded a $37.4 million loss on marketable securities and other investments.
6. Cumulative Effect of Accounting Changes (As restated)
Effective January 1, 2003, TDS adopted SFAS No.143, Accounting for Asset Retirement Obligations and recorded the initial liability for legal obligations associated with an asset retirement. The cumulative effect of the implementation of this accounting standard on periods prior to 2003 was recorded in the first quarter of 2003, decreasing net income by $11.8 million, net of tax and minority interest, or $0.20 per basic and diluted share.
Effective January 1, 2002, U.S. Cellular changed its method of accounting for commissions expenses related to customer activations and began deferring expense recognition of a portion of commissions expenses in the amount of activation fees revenue deferred. The cumulative effect of this accounting change on periods prior to 2002 was recorded in the first quarter of 2002 increasing net income by $3.4 million, net of tax and minority interest, or $.06 per basic and diluted share. The first quarter 2002 results have been restated for this accounting change and cumulative effect. The effect on the first quarter of 2002 was to reduce commissions expenses by $829,000 and therefore increase operating income by $829,000, increase income tax expense by $327,000, increase minority share of income by $89,000 and increase income before cumulative effect of accounting change by $413,000.
7. Earnings Per Share
Basic earnings per share is computed by dividing net income available to common by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using net income available to common and weighted average common shares adjusted to include the effect of potentially dilutive securities. Potentially dilutive securities include incremental shares issuable upon exercise of outstanding stock options and the potential conversion of preferred stock to common shares. The diluted loss per share calculation for the quarter ended March 31, 2003 excludes the effect of the potentially dilutive securities because their inclusion would be anti-dilutive.
11
The amounts used in computing earnings per share from operations and the effect on income and the weighted average number of Common and Series A Common Shares of dilutive potential common stock are as follows.
Basic Earnings per Share
|
|
Three
Months Ended |
|
||||
|
|
(As
Restated) |
|
2002 |
|
||
|
|
(Dollars in thousands) |
|
||||
Income (Loss) from Operations Before Cumulative Effect of Accounting Changes |
|
$ |
(5,012 |
) |
$ |
14,010 |
|
Less: Preferred Dividend requirement |
|
(104 |
) |
(112 |
) |
||
Income from Operations Available to Common |
|
(5,116 |
) |
13,898 |
|
||
Cumulative Effect of Accounting Changes |
|
(11,789 |
) |
3,366 |
|
||
Net Income Available to Common used in Basic Earnings per Share |
|
$ |
(16,905 |
) |
$ |
17,264 |
|
Diluted Earnings per Share
|
|
Three
Months Ended |
|
||||
|
|
(As
Restated) |
|
2002 |
|
||
|
|
(Dollars in thousands) |
|
||||
Income from Operations Available to Common used in Basic Earnings per Share |
|
$ |
(5,116 |
) |
$ |
13,898 |
|
Minority Income Adjustment (1) |
|
|
|
(78 |
) |
||
Income from Operations Available to Common |
|
(5,116 |
) |
13,820 |
|
||
Cumulative Effect of Accounting Changes |
|
(11,789 |
) |
3,366 |
|
||
Net Income Available to Common used in Diluted Earnings per Share |
|
$ |
(16,905 |
) |
$ |
17,186 |
|
(1) The minority income adjustment reflects the additional minority share of U.S. Cellulars income computed as if all of U.S. Cellulars issuable securities were outstanding.
|
|
Three
Months Ended |
|
||
|
|
2003 |
|
2002 |
|
|
|
(Shares in thousands) |
|
||
|
|
|
|
|
|
Weighted Average Number of Common Shares used in Basic Earnings per Share |
|
58,594 |
|
58,600 |
|
Effect of Dilutive Securities |
|
|
|
|
|
Stock Options (1) |
|
|
|
288 |
|
Weighted Average Number of Common Shares used in Diluted Earnings per Share |
|
58,594 |
|
58,888 |
|
(1) Stock options convertible into 1,801,802 Common Shares in 2003 were not included in computing Diluted Earnings per Share because their effects were antidilutive.
|
|
Three
Months Ended |
|
||||
|
|
(As
Restated) |
|
2002 |
|
||
Basic Earnings per Share |
|
|
|
|
|
||
Operations |
|
$ |
(0.09 |
) |
$ |
0.23 |
|
Cumulative Effect of Accounting Changes |
|
(0.20 |
) |
0.06 |
|
||
|
|
$ |
(0.29 |
) |
$ |
0.29 |
|
|
|
|
|
|
|
||
Diluted Earnings per Share |
|
|
|
|
|
||
Operations |
|
$ |
(0.09 |
) |
$ |
0.23 |
|
Cumulative Effect of Accounting Changes |
|
(0.20 |
) |
0.06 |
|
||
|
|
$ |
(0.29 |
) |
$ |
0.29 |
|
8. Marketable Equity Securities
TDS and its subsidiaries hold a substantial amount of marketable equity securities that are publicly traded and can have volatile share prices. TDS does not make direct investments in publicly traded companies and all of these interests were acquired as a result of sales, exchanges or reorganizations of other investments. The market values of the marketable securities may fall below the accounting cost basis of such securities. If management determines the decline in value of the marketable securities to be other
12
than temporary, the unrealized loss included in other comprehensive income is recognized and recorded as a loss in the Statement of Operations.
In the quarter ended March 31, 2002, management determined that the decline in the value of the VeriSign investment relative to its accounting cost basis was other than temporary and charged a $37.4 million loss to the statement of operations ($22.6 million, net of tax of $14.8 million) and reduced the accounting cost basis of the VeriSign investment by a corresponding amount. The loss was reported in the caption Gain (loss) on marketable securities and other investments in the Statements of Operations.
TDS and its subsidiaries have entered into a number of forward contracts related to the marketable equity securities that they hold. The risk management objective of the forward contracts is to hedge the value of the marketable equity securities from losses due to decreases in the market prices of the securities while retaining a share of gains from increases in the market prices of such securities. The downside risk is hedged at or above the accounting cost basis thereby eliminating the risk of an other than temporary loss being recorded on these contracted securities.
Information regarding TDSs marketable equity securities is summarized as follows.
|
|
March 31, |
|
December
31, |
|
||
|
|
(Dollars in thousands) |
|
||||
Marketable Equity Securities |
|
|
|
|
|
||
Deutsche Telekom AG - 131,461,861 Ordinary Shares |
|
$ |
1,448,710 |
|
$ |
1,689,285 |
|
Vodafone Group Plc 11,265,915 ADRs and 12,945,915 ADRs |
|
205,265 |
|
234,580 |
|
||
VeriSign, Inc. - 2,525,786 Common Shares |
|
22,075 |
|
20,257 |
|
||
Rural Cellular Corporation - 719,396 equivalent Common Shares |
|
647 |
|
611 |
|
||
Other |
|
195 |
|
206 |
|
||
|
|
1,676,892 |
|
1,944,939 |
|
||
Marketable Equity Securities Loaned Vodafone AirTouch plc 1,680,000 ADRs |
|
30,610 |
|
|
|
||
Aggregate Fair Value |
|
1,707,502 |
|
1,944,939 |
|
||
Accounting Cost Basis |
|
1,545,325 |
|
1,545,713 |
|
||
Gross Unrealized Holding Gains (Losses) |
|
162,177 |
|
399,226 |
|
||
Income Tax (Expense) Benefit |
|
(63,380 |
) |
(155,794 |
) |
||
Unrealized Holding Gains (Losses), net of tax |
|
98,797 |
|
243,432 |
|
||
Derivatives, net of tax |
|
95,641 |
|
(50,508 |
) |
||
Equity Method Unrealized Gains |
|
615 |
|
615 |
|
||
Minority Share of Unrealized Holding (Gains) Losses |
|
(2,288 |
) |
(1,835 |
) |
||
Accumulated Other Comprehensive Income |
|
$ |
192,765 |
|
$ |
191,704 |
|
U.S. Cellular has entered into a securities loan agreement with an investment bank related to 1,680,000 of its Vodafone American Depositary Receipts. Under the terms of the securities loan agreement, both U.S. Cellular and the investment bank have the right to terminate the loan at any time providing necessary time for share settlement (three business days). The investment bank is required to provide collateral that will be adjusted periodically to be not less than 100% of the fair market value of the loaned securities. U.S. Cellular earns a loan fee on the securities loaned.
Under SFAS No. 140, U.S. Cellular is required to account for the collateral as a secured borrowing. As a result, U.S. Cellular was required to record $32.2 million of Collateral investment pledged in current assets and a corresponding Collateral loan payable in current liabilities. The asset and liability will be offset upon the return of the loaned securities. Consequently, U.S. Cellular will not have to use cash flows from operations to extinguish the liability.
9. Goodwill and Customer Lists
TDS 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. Cellulars goodwill is goodwill related to various acquisitions structured to be tax-free. No deferred taxes have been provided on goodwill related to tax-free acquisitions.
13
The changes in the carrying amount of goodwill for the three months ended March 31, 2003 and 2002, were as follows. TDS Telecoms incumbent local exchange carrier is designated as ILEC and its competitive local exchange carrier is designated as CLEC in the table.
|
|
U.S. |
|
TDS Telecom |
|
|
|
|
|
|||||||
(Dollars in thousands) |
|
Cellular |
|
ILEC |
|
CLEC |
|
Other(1) |
|
Total |
|
|||||
Beginning Balance January 1, 2003 |
|
$ |
643,629 |
|
$ |
397,482 |
|
$ |
29,440 |
|
$ |
35,900 |
|
$ |
1,106,451 |
|
Allocation to Assets of Operations Held-for-Sale (2) |
|
(93,658 |
) |
|
|
|
|
|
|
(93,658 |
) |
|||||
Other |
|
(3,269 |
) |
(928 |
) |
|
|
|
|
(4,197 |
) |
|||||
Ending Balance March 31, 2003 |
|
$ |
546,702 |
|
$ |
396,554 |
|
$ |
29,440 |
|
$ |
35,900 |
|
$ |
1,008,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Beginning Balance January 1, 2002 |
|
$ |
473,975 |
|
$ |
332,848 |
|
$ |
29,440 |
|
$ |
34,538 |
|
$ |
870,801 |
|
Net additions |
|
|
|
56 |
|
|
|
|
|
56 |
|
|||||
Ending Balance March 31, 2002 |
|
$ |
473,975 |
|
$ |
332,904 |
|
$ |
29,440 |
|
$ |
34,538 |
|
$ |
870,857 |
|
(1)Other consists of goodwill related to an investment in a cellular market owned by an ILEC subsidiary.
(2)See Note 10 Assets of Operations Held-for-Sale for discussion of allocation.
The customer lists, intangible assets from the acquisition of wireless properties, are being amortized based on average customer retention periods using the declining balance method. Amortization expense was $4.5 million in the first quarter of 2003. There was no amortization of customer lists in the first quarter of 2002. The related amortization expense for the remainder of 2003 and for the years 2004-2007 is expected to be $11.1 million, $9.5 million, $5.8 million, $3.5 million and $2.1 million, respectively.
10. Assets and Liabilities of Operations Held-for-Sale
On March 10, 2003, U.S. Cellular announced that it had entered into a definitive agreement with AT&T Wireless to exchange wireless properties. U.S. Cellular will receive 10 and 20 megahertz personal communications service licenses in 13 states, representing 12.2 million incremental population equivalents contiguous to existing properties and 4.4 million population equivalents that overlap existing properties in the Midwest and the Northeast. U.S. Cellular will also receive approximately $31 million in cash (excluding any working capital adjustment) and minority interests in six markets it currently controls. U.S. Cellular will transfer wireless assets and approximately 141,000 customers in 10 markets, representing 1.5 million population equivalents, in Florida and Georgia to AT&T Wireless. The transaction is subject to regulatory approvals. The closing of the transfer of the U.S. Cellular properties and the assignments to U.S. Cellular of most of the personal communications service licenses is expected to occur in the third quarter of 2003. The assignment and development of certain licenses will be deferred by U.S. Cellular until later periods. The acquisition of licenses in the exchange will be accounted for as a purchase by U.S. Cellular and the transfer of the properties by U.S. Cellular will be accounted for as a sale. TDS will not report the transaction as discontinued operations as previously disclosed.
As a result of the agreement, the consolidated balance sheet of TDS as of March 31, 2003 reflects the wireless assets and liabilities to be transferred as assets and liabilities of operations held-for-sale in accordance with SFAS No. 144. The results of operations of the markets to be transferred continue to be included in results from operations.
U.S. Cellular allocated $93.7 million of goodwill to the operations held-for-sale in accordance with SFAS No. 142 Goodwill and Other Intangible Assets. Subsequent to the allocation, a $23.5 million loss was recorded and reported as a loss on assets held-forsale representing the difference between the book value of the markets to be transferred to AT&T Wireless and the fair value of the assets to be received in the transaction. The fair value of the assets to be received was determined using an independent valuation. TDS anticipates that it will record an additional charge to the income statement of approximately $12 million for taxes and will have a current tax liability of approximately $27 million related to the completion of the transaction, which is expected to close in the third quarter of 2003.
14
Summarized assets and liabilities relating to operations held-for-sale are as follows.
|
|
March 31, 2003 |
|
|
|
|
(Dollars in thousands) |
|
|
Current assets |
|
|
|
|
Cash and cash equivalents |
|
$ |
7 |
|
Accounts receivable |
|
13,032 |
|
|
Other current assets |
|
1,764 |
|
|
License costs |
|
55,147 |
|
|
Goodwill |
|
93,658 |
|
|
Property, plant and equipment, net |
|
85,801 |
|
|
Other assets |
|
513 |
|
|
Loss on assets held-for-sale |
|
(23,500 |
) |
|
Assets of Operations Held-for-Sale |
|
$ |
226,422 |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
Accounts payable |
|
$ |
6,484 |
|
Other current liabilities |
|
3,339 |
|
|
Liabilities of Operations Held-for-Sale |
|
$ |
9,823 |
|
11. Common Share Repurchase Program
The Board of Directors of TDS from time to time has authorized the repurchase of TDS Common Shares. In 2003, the Board of Directors authorized the repurchase of up to 3.0 million Common Shares through February 2006. TDS may use repurchased shares to fund acquisitions and for other corporate purposes. As of March 31, 2003, TDS has repurchased 750,300 Common Shares under this authorization for an aggregate of $29.4 million, representing an average per share price of $39.11, leaving 2,249,700 shares available for repurchase under the authorization. TDS paid cash of $24.6 million and $4.8 million for these Common Shares in the first and second quarters of 2003, respectively, related to repurchases made during the first quarter of 2003. Share repurchases may be made from time to time on the open market or private transactions, at prices approximating then existing market prices. TDS has repurchased and may from time to time in the future repurchase shares under a 10b5-1 plan, which allows TDS to repurchase its shares during a period in which the TDS may be in possession of material non-public information, provided that TDS entered into the plan at a time when it was not in possession of material non-public information. No shares were repurchased in 2002.
In April 2003, TDS repurchased an additional 479,100 TDS Common Shares for a total of $20.5 million, representing an average per share price of $42.84.
15
12. Accumulated Other Comprehensive Income (Loss)
The cumulative balance of unrealized gains (losses) on securities and derivative instruments and related income tax effects included in Accumulated other comprehensive income (loss) are as follows.
|
|
Three
Months Ended |
|
||||
|
|
2003 |
|
2002 |
|
||
|
|
(Dollars in thousands) |
|
||||
|
|
|
|
|
|
||
Balance, beginning of period |
|
$ |
191,704 |
|
$ |
(352,120 |
) |
|
|
|
|
|
|
||
Marketable Equity Securities |
|
|
|
|
|
||
|
|
|
|
|
|
||
Add (Deduct): |
|
|
|
|
|
||
Unrealized gains (losses) on securities |
|
(237,439 |
) |
(413,254 |
) |
||
Income tax (expense) benefit |
|
92,571 |
|
162,657 |
|
||
|
|
(144,868 |
) |
(250,597 |
) |
||
Equity method unrealized (gains) losses |
|
|
|
|
|
||
Minority share of unrealized (gains) losses |
|
(429 |
) |
8,626 |
|
||
Net unrealized gains (losses) |
|
(145,297 |
) |
(241,971 |
) |
||
|
|
|
|
|
|
||
Deduct (Add): |
|
|
|
|
|
||
Recognized (losses) on securities |
|
(388 |
) |
(37,400 |
) |
||
Income tax (expense) benefit |
|
157 |
|
14,754 |
|
||
|
|
(231 |
) |
(22,646 |
) |
||
Minority share of recognized losses |
|
22 |
|
|
|
||
Net recognized gains (losses) from Marketable Equity Securities included in Net Income |
|
(209 |
) |
(22,646 |
) |
||
|
|
(145,088 |
) |
(219,325 |
) |
||
Derivative Instruments |
|
|
|
|
|
||
|
|
|
|
|
|
||
Unrealized gains (losses) on derivative instruments |
|
239,677 |
|
|
|
||
Income tax (expense) benefit |
|
(93,528 |
) |
|
|
||
|
|
146,149 |
|
|
|
||
Net change in unrealized gains (losses) included in Comprehensive Income (Loss) |
|
1,061 |
|
(219,325 |
) |
||
Balance, end of period |
|
$ |
192,765 |
|
$ |
(571,445 |
) |
Accumulated Unrealized Gain (Loss) on Derivative Instruments |
|
|
|
|
|
||
|
|
|
|
|
|
||
Balance, beginning of period |
|
$ |
(50,508 |
) |
$ |
|
|
Add (Deduct): |
|
|
|
|
|
||
Unrealized gains (losses) on derivative instruments |
|
|
|
|
|
||
Cash flow hedges |
|
241,377 |
|
|
|
||
Fair value hedges |
|
(1,700 |
) |
|
|
||
|
|
239,677 |
|
|
|
||
Income tax (expense) benefit |
|
(93,528 |
) |
|
|
||
|
|
146,149 |
|
|
|
||
Balance, end of period |
|
$ |
95,641 |
|
$ |
|
|
|
|
Three
Months Ended |
|
||||
|
|
(As
Restated) |
|
(As
Restated) |
|
||
|
|
(Dollars in thousands) |
|
||||
Comprehensive Income (Loss) |
|
|
|
|
|
||
Net Income (loss) |
|
$ |
(16,801 |
) |
$ |
17,376 |
|
Net change in unrealized gains (losses) on securities and derivative instruments |
|
1,061 |
|
(219,325 |
) |
||
|
|
$ |
(15,740 |
) |
$ |
(201,949 |
) |
16
13. 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.
|
|
Three
Months Ended |
|
||||
|
|
2003 |
|
2002 |
|
||
|
|
(Dollars in thousands) |
|
||||
Interest Paid |
|
$ |
46,161 |
|
$ |
33,097 |
|
|
|
|
|
|
|
||
Income Taxes Paid |
|
$ |
(38,193 |
) |
$ |
6,457 |
|
14. Business Segment Information (As Restated)
Financial data for TDSs business segments for each of the three-month periods ended or at March 31, 2003 and 2002 are as follows. TDS Telecoms incumbent local exchange carrier is designated as ILEC in the table and its competitive local exchange carrier is designated as CLEC.
17
Three Months Ended or at |
|
U.S. Cellular |
|
TDS Telecom |
|
All Other(1) |
|
Total |
|
|||||||
ILEC |
|
CLEC |
||||||||||||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating revenues |
|
$ |
595,914 |
|
$ |
159,597 |
|
$ |
52,439 |
|
$ |
(532 |
) |
$ |
807,418 |
|
Cost of services and products |
|
202,730 |
|
38,145 |
|
21,783 |
|
(260 |
) |
262,398 |
|
|||||
Selling, general and administrative expense |
|
266,370 |
|
42,417 |
|
27,986 |
|
(272 |
) |
336,501 |
|
|||||
Operating income before depreciation, amortization, accretion and loss on assets |
|
126,814 |
|
79,035 |
|
2,670 |
|
|
|
208,519 |
|
|||||
Depreciation, amortization and accretion expense |
|
109,577 |
|
33,619 |
|
8,031 |
|
|
|
151,227 |
|
|||||
Loss on assets held for sale |
|
23,500 |
|
|
|
|
|
|
|
23,500 |
|
|||||
Operating income (loss) |
|
(6,263 |
) |
45,416 |
|
(5,361 |
) |
|
|
33,792 |
|
|||||
Significant noncash items: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Investment income, net |
|
12,378 |
|
169 |
|
|
|
203 |
|
12,750 |
|
|||||
Gain (loss) on marketable securities and other investments |
|
(3,500 |
) |
|
|
|
|
|
|
(3,500 |
) |
|||||
Marketable securities |
|
187,004 |
|
|
|
|
|
1,520,498 |
|
1,707,502 |
|
|||||
Investment in unconsolidated entities |
|
161,708 |
|
19,135 |
|
|
|
25,781 |
|
206,624 |
|
|||||
Total assets |
|
4,726,316 |
|
1,885,379 |
|
237,967 |
|
2,720,733 |
|
9,570,395 |
|
|||||
Capital expenditures |
|
$ |
140,926 |
|
$ |
15,412 |
|
$ |
3,705 |
|
$ |
1,340 |
|
$ |
161,383 |
|
Three
Months Ended or at |
|
U.S. Cellular |
|
TDS Telecom |
|
All Other(1) |
|
Total |
|
|||||||
ILEC |
|
CLEC |
||||||||||||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating revenues |
|
$ |
478,420 |
|
$ |
149,521 |
|
$ |
37,754 |
|
$ |
(498 |
) |
$ |
665,197 |
|
Cost of services and products |
|
138,288 |
|
31,697 |
|
20,085 |
|
(248 |
) |
189,822 |
|
|||||
Selling, general and administrative Expense |
|
187,704 |
|
44,852 |
|
25,803 |
|
(250 |
) |
258,109 |
|
|||||
Operating income (loss) before depreciation and amortization(2) (3) |
|
152,428 |
|
72,972 |
|
(8,134 |
) |
|
|
217,266 |
|
|||||
Depreciation and amortization expense |
|
72,752 |
|
32,455 |
|
6,692 |
|
|
|
111,899 |
|
|||||
Operating income (loss) |
|
79,676 |
|
40,517 |
|
(14,826 |
) |
|
|
105,367 |
|
|||||
Significant noncash items: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Investment income |
|
10,461 |
|
236 |
|
|
|
340 |
|
11,037 |
|
|||||
Gain (loss) on marketable securities and other investments |
|
|
|
|
|
|
|
(37,400 |
) |
(37,400 |
) |
|||||
Marketable securities |
|
190,815 |
|
|
|
|
|
2,095,989 |
|
2,286,804 |
|
|||||
Investment in unconsolidated entities |
|
164,802 |
|
48,556 |
|
|
|
25,071 |
|
238,429 |
|
|||||
Total assets |
|
3,704,314 |
|
1,457,029 |
|
214,566 |
|
2,242,402 |
|
7,618,311 |
|
|||||
Capital expenditures |
|
$ |
100,075 |
|
$ |
19,194 |
|
$ |
9,059 |
|
$ |
|
|
$ |
128,328 |
|
(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 income before depreciation and amortization and Operating income before depreciation and amortization and loss on assets held-for-sale are measures of profit and loss used by the chief operating decision maker to review the operating performance of each reportable business segment and is reported above in accordance with SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information.
(3) There was no loss on assets held for sale in the three months ended March 31, 2002.
18
|
|
Three
Months Ended |
|
||||
|
|
(As
Restated) |
|
2002 |
|
||
|
|
(Dollars in thousands) |
|
||||
|
|
|
|
|
|
||
Total operating income from reportable segments |
|
$ |
33,792 |
|
$ |
105,367 |
|
Investment and other income and expense |
|
(34,823 |
) |
(58,917 |
) |
||
Income before income taxes and minority interest |
|
$ |
(1,031 |
) |
$ |
46,450 |
|
15. Restatement of Financial Statements
TDS is restating its financial statements in response to a comment letter received from the SEC regarding its Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 that was originally filed on May 14, 2003. This restatement relates to the adoption of SFAS No. 143, as explained below.
TDS adopted Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003. An asset retirement obligation is the cost of closing facilities and removing assets, or performing other remediation to a property as required by contractual agreement. This accounting principle requires entities to record the estimated fair value of a legal liability for an asset retirement obligation in the period it is incurred. Adoption of this standard in the first quarter of 2003 required TDS to recognize estimated liabilities related to the future remediation of certain leased properties. Initially, U.S. Cellular used a zero probability in determining its liability for cell site remediation due to the absence of history of remediation. During the fourth quarter of 2003, based upon guidance received from the SEC that U.S. Cellulars limited history could not be relied upon to support a probability less than the default probability of 100%, U.S. Cellular revised the probability that its leased cell sites would require remediation. In its restatement, U.S. Cellular used the 100% probability in calculating the asset retirement obligation on the cell site leases.
As a result of this change, TDS has restated its first-quarter 2003 financial statements to reflect a liability for future remediation of $54.4 million and a charge of $11.8 million, net of taxes and minority interest, as a cumulative effect of an accounting change. This cumulative effect reflects accretion and depreciation that would have been charged to expense in prior years had SFAS No. 143 been effective for periods prior to January 1, 2003. This change also resulted in additional charges to income for depreciation and non-cash accretion expense in the three months ended March 31, 2003. There was no impact to the consolidated balance sheet as of December 31, 2002 or the results of operations or cash flows for the three months ended March 31, 2002. A summary of changes to the first three months of 2003 is included below.
19
|
|
Three Months Ended March 31, 2003 |
|
|||||||
(Dollars in thousands, except per share amounts) |
|
As
Originally |
|
Effects of |
|
As Restated |
|
|||
Statement of Operations: |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Operating Expenses |
|
|
|
|
|
|
|
|||
Depreciation, Amortization and Accretion |
|
|
|
|
|
|
|
|||
SFAS 143 reclassification of retail/office leases |
|
|
|
$ |
(1,321 |
) |
|
|
||
SFAS 143 depreciation for period |
|
|
|
349 |
|
|
|
|||
SFAS 143 accretion for period |
|
|
|
1,046 |
|
|
|
|||
Total |
|
$ |
151,153 |
|
74 |
|
$ |
151,227 |
|
|
|
|
|
|
|
|
|
|
|||
Operating Income |
|
|
|
|
|
|
|
|||
SFAS 143 reclassification of retail/office leases |
|
|
|
1,321 |
|
|
|
|||
SFAS 143 depreciation for period |
|
|
|
(349 |
) |
|
|
|||
SFAS 143 accretion for period |
|
|
|
(1,046 |
) |
|
|
|||
Total |
|
33,866 |
|
(74 |
) |
33,792 |
|
|||
|
|
|
|
|
|
|
|
|||
Income tax expense (benefit) |
|
3,855 |
|
(31 |
) |
3,824 |
|
|||
|
|
|
|
|
|
|
|
|||
Minority share of income |
|
(188 |
) |
31 |
|
(157 |
) |
|||
|
|
|
|
|
|
|
|
|||
Income (loss) before cumulative effect of accounting change |
|
(5,000 |
) |
(12 |
) |
(5,012 |
) |
|||
|
|
|
|
|
|
|
|
|||
Cumulative effect of accounting change |
|
|
|
(11,789 |
) |
(11,789 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net income (loss) |
|
$ |
(5,000 |
) |
$ |
(11,801 |
) |
$ |
(16,801 |
) |
|
|
|
|
|
|
|
|
|||
Basic earnings (loss) per share |
|
|
|
|
|
|
|
|||
Income (loss) before cumulative effect of accounting change |
|
$ |
(0.09 |
) |
$ |
|
|
$ |
(0.09 |
) |
Cumulative effect of accounting change |
|
$ |
|
|
$ |
(0.20 |
) |
$ |
(0.20 |
) |
Net income (loss) |
|
$ |
(0.09 |
) |
$ |
(0.20 |
) |
$ |
(0.29 |
) |
|
|
|
|
|
|
|
|
|||
Diluted earnings (loss) per share |
|
|
|
|
|
|
|
|||
Income (loss) before cumulative effect of accounting change |
|
$ |
(0.09 |
) |
$ |
|
|
$ |
(0.09 |
) |
Cumulative effect of accounting change |
|
$ |
|
|
$ |
(0.20 |
) |
$ |
(0.20 |
) |
Net income (loss) |
|
$ |
(0.09 |
) |
$ |
(0.20 |
) |
$ |
(0.29 |
) |
|
|
|
|
|
|
|
|
|||
Balance Sheet: |
|
|
|
|
|
|
|
|||
Other current assets |
|
$ |
99,125 |
|
$ |
2 |
|
$ |
99,127 |
|
Property, plant and equipment, net U.S. Cellular |
|
2,099,846 |
|
28,514 |
|
2,128,360 |
|
|||
Total Assets |
|
$ |
9,541,879 |
|
$ |
28,516 |
|
$ |
9,570,395 |
|
|
|
|
|
|
|
|
|
|||
Net deferred income tax liability |
|
$ |
1,173,562 |
|
$ |
(9,696 |
) |
$ |
1,163,866 |
|
Asset retirement obligation |
|
33,022 |
|
53,064 |
|
86,086 |
|
|||
Minority interest |
|
490,772 |
|
(3,051 |
) |
487,721 |
|
|||
Retained earnings |
|
1,417,455 |
|
(11,801 |
) |
1,405,654 |
|
|||
Total Liabilities and Stockholders Equity |
|
$ |
9,541,879 |
|
$ |
28,516 |
|
$ |
9,570,395 |
|
20
ITEM 2. MANAGEMENTS DISCUSSION
AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Telephone and Data Systems, Inc. (TDS) is a diversified telecommunications company providing high-quality telecommunications services to approximately 5.3 million wireless telephone and wireline telephone customers. TDS conducts substantially all of its wireless telephone operations through its 82.2%-owned subsidiary, United States Cellular Corporation (U.S. Cellular) and its incumbent local exchange carrier and competitive local exchange carrier wireline telephone operations through its wholly owned subsidiary, TDS Telecommunications Corporation (TDS Telecom).
The following discussion and analysis should be read in conjunction with TDSs interim consolidated financial statements and footnotes included herein, and with TDSs audited consolidated financial statements and footnotes and Managements Discussion and Analysis of Results of Operations and Financial Condition included in TDSs Annual Report on Form 10-K for the year ended December 31, 2002.
TDS is restating certain portions of its managements discussion and analysis of results of operations and financial condition in response to a comment letter received from the SEC regarding its Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 that was originally filed on May 14, 2003. This restatement relates to the adoption of SFAS No. 143, as explained below.
TDS adopted Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003. An asset retirement obligation is the cost of closing facilities and removing assets, or performing other remediation to a property as required by contractual agreement. This accounting principle requires entities to record the estimated fair value of a legal liability for an asset retirement obligation in the period it is incurred. Adoption of this standard in the first quarter of 2003 required TDS to recognize estimated liabilities related to the future remediation of certain leased properties. During the fourth quarter of 2003, TDS revised the probability that U.S. Cellulars leased cell sites would require remediation.
As a result of this change, TDS has restated its first-quarter 2003 financial statements to reflect a liability for future remediation of $54.4 million and a charge of $11.8 million, net of taxes and minority interest, as a cumulative effect of an accounting change. This cumulative effect reflects amounts that would have been charged to expense in prior years had SFAS No. 143 been effective for periods prior to January 1, 2003. This change also requires additional charges to income for depreciation and non-cash accretion expense in the first quarter of 2003. See Note 15 Restatement of Financial Statements.
TDS is also including additional disclosures such as, but not limited to, defining the calculation of certain statistics, defining equivalent access lines, deleting acronyms, including total dollars in narratives, disclosing the make-up of selling and marketing cost per gross customer activation and disclosing additional information on critical accounting policies and estimates.
Except as expressly stated herein, this amendment does not update any of the disclosures contained in the original filing to reflect any events that occurred after the original filing date of May 14, 2003.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Operating Revenues increased 21% ($142.2 million) to $807.4 million during the first three months of 2003 from $665.2 million in the first three months of 2002 primarily as a result of a 19% increase in customers served. U.S. Cellulars operating revenues increased 25% ($117.5 million) to $595.9 million in 2003 from $478.4 million in 2002 as customers served increased by 736,000, or 21%, since March 31, 2002, to 4,240,000. Acquisitions contributed 9% (320,000 customers) of U.S. Cellulars customer growth in the past twelve months. TDS Telecom operating revenues increased 13% ($24.7 million) to $211.5 million in 2003 from $186.8 million in 2002 as equivalent access lines increased by 115,200, or 13%, since March 31, 2002 to 1,017,700. Acquisitions contributed 3% (27,000 equivalent access lines) of TDS Telecoms equivalent access line growth in the past twelve months. An equivalent access line is derived by converting a high capacity data line to an estimated equivalent, in terms of capacity, number of switched access lines.
Operating Expenses rose 38% ($213.8million) to $773.6 million in 2003 from $559.8 million in 2002 reflecting
21
growth in operations. U.S. Cellulars operating expenses increased 51% ($203.5 million) to $602.2 million in 2003 from $398.7 million in 2002 primarily reflecting costs associated with providing service to an expanding customer base and additional expenses related to the Chicago market acquired in August 2002. Also included in U.S. Cellulars operating expenses is a $23.5 million loss on assets of operations held-for-sale. TDS Telecoms expenses increased 6% ($10.4 million) to $171.5 million in 2003 from $161.1 million in 2002 reflecting growth in operations offset somewhat by a reduction in bad debt expense.
Operating Income decreased 68% ($71.6 million) to $33.8 million in 2003 from $105.4 million in 2002. Operating margin decreased to 4.2% in 2003 from 15.8% in 2002 on a consolidated basis. U.S. Cellulars operating income decreased 108% ($86.0 million) to an operating loss of $6.3 million in 2003 from an operating income of $79.7 million in 2002 and its operating income margin, as a percentage of service revenues, decreased to (1.1)% in 2003 from 17.3% in 2002. TDS Telecoms operating income increased 56% ($14.4 million) to $40.1 million in 2003 from $25.7 million in 2002 and its operating margin rose to 18.9% in 2003 from 13.8% in 2002.
Investment and Other Income (Expense) primarily includes interest and dividend income, investment income, gain (loss) on marketable securities and other investments and interest expense. Investment and other income (expense) totaled $(34.8) million in 2003 and $(58.9) million in 2002.
Interest and Dividend Income increased to $4.3 million in 2003 from $2.1 million in 2002 primarily due to increased interest income earned on larger cash balances. TDS reported cash and cash equivalents of $1,315.9 million at March 31, 2003. The increase in cash is primarily from the cash received from the forward contracts during 2002.
Investment Income increased 16% ($1.7 million) to $12.7 million in the first three months of 2003 from $11.0 million in 2002. Investment income represents TDSs share of income in unconsolidated entities in which TDS has a minority interest and follows the equity method of accounting.
(Loss) on Marketable Securities and Other Investments totaled $3.5 million in 2003 and $37.4 million in 2002. A $3.5 million license cost impairment loss was recorded related to the investment in a non-operating market in Florida that will remain after the AT&T Wireless exchange.
TDS and its subsidiaries hold a substantial amount of marketable equity securities that are publicly traded and can have volatile share prices. TDS and its subsidiaries do not make direct investments in publicly traded companies and all of these interests were acquired as a result of sales, trades or reorganizations of other assets. TDS has not disposed of the investments because of their low tax cost basis would likely trigger a substantial taxable gain upon disposal. See Liquidity Marketable Equity Securities and Forward Contracts for a discussion on marketable equity securities.
In 2002, management determined that the decline in value of TDSs investment in VeriSign, Inc. relative to its accounting cost basis was other than temporary and charged a $37.4 million loss to the Statements of Operation. Later in 2002, TDS utilized derivative financial instruments to eliminate the risk of future other than temporary losses on the contracted securities. See Market Risk for a full discussion on the marketable equity securities and other than temporary losses.
Interest Expense increased 46% ($13.8 million) to $43.4 million in 2003 from $29.6 million in 2002. The increase in interest expense in 2003 was primarily due to amounts related to variable prepaid forward contracts ($10.3 million) and to the issuance of 30-year 8.75% Senior Notes ($2.8 million) by U.S. Cellular in November 2002.
Income Tax Expense decreased 83% ($18.6 million) to $3.8 million in 2003 from $22.4 million in 2002 primarily due to the lower pretax income and the tax effects of the loss on marketable securities and other investments and the loss on assets held-for-sale. Losses totaled $27.0 million ($16.3 million, net of tax of $7.2 million and minority interest of $3.5 million) in 2003. A loss of $37.4 million ($22.6 million, net of tax of $14.8 million) was recorded on marketable securities in 2002. The effective tax rate was not meaningful in 2003 and 48.3% in 2002. Excluding the tax on the losses, the effective tax rate was 42.2% in 2003 and 44.3% in 2002. For a discussion of TDSs effective tax rates in 2003 and 2002, see Note 4 Income Taxes.
U.S. Cellular recorded a loss of $23.5 million on assets held-for-sale for the difference between the book value of the markets to be given up to AT&T Wireless and the fair value of the assets to be received in the transaction. Because U.S. Cellulars tax basis in the assets to be transferred to AT&T Wireless is lower than its book basis, TDS anticipates that it will record an additional charge to the income statement of
22
approximately $12 million for taxes and will have a current tax liability of approximately $27 million related to the completion of the transaction, which is expected to close in the third quarter of 2003.
Minority Share of (Income) includes the minority public shareholders share of U.S. Cellulars net income, the minority shareholders or partners share of U.S. Cellulars subsidiaries net income or loss and other minority interests. U.S. Cellulars minority public shareholders share of income in 2003 was reduced by $3.5 million due to U.S. Cellulars loss on marketable securities and other investments and loss on assets held-for-sale.
|
|
Three
Months Ended |
|
|
|
|||||
|
|
(As
Restated) |
|
2002 |
|
Change |
|
|||
|
|
(Dollars in thousands) |
|
|||||||
Minority Share of (Income) Loss |
|
|
|
|
|
|
|
|||
U.S. Cellular |
|
|
|
|
|
|
|
|||
Minority Public Shareholders |
|
$ |
2,615 |
|
$ |
(7,887 |
) |
$ |
10,502 |
|
Minority Shareholders or Partners |
|
(2,775 |
) |
(2,115 |
) |
(660 |
) |
|||
|
|
(160 |
) |
(10,002 |
) |
9,842 |
|
|||
Other |
|
3 |
|
(26 |
) |
29 |
|
|||
|
|
$ |
(157 |
) |
$ |
(10,028 |
) |
$ |
9,871 |
|
Income (Loss) Before Cumulative Effect of Accounting Change totaled $(5.0) million, or $(0.09) per diluted share, in 2003 compared to $14.0 million, or $0.23 per diluted share, in 2002.
Cumulative Effect of Accounting Change. Effective January 1, 2003, TDS adopted SFAS No.143, Accounting for Asset Retirement Obligations and recorded the initial liability for legal obligations associated with an asset retirement. The cumulative effect of the implementation of this accounting standard on periods prior to 2003 was recorded in the first quarter of 2003, decreasing net income by $11.8 million, net of tax and minority interest, or $0.20 per basic and diluted share.
Effective January 1, 2002, U.S. Cellular changed its method of accounting for commissions expenses related to customer activations and began deferring expense recognition of a portion of commissions expenses in the amount of activation fees revenue deferred. The cumulative effect of this accounting change on periods prior to 2002 was recorded in 2002 and increased net income by $3.4 million, net of tax and minority interest, or $0.06 per diluted share.
Net Income (Loss) Available to Common totaled $(16.9) million, or $(0.29) per diluted share, in 2003, compared to $17.3 million, or $.29 per diluted share, in 2002.
23
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 cellular markets throughout the United States. Growth in the customer base and the acquisition of the Chicago market are the primary reasons for the growth in U.S. Cellulars revenues and expenses. The number of customers served increased by 736,000 or 21%, since March 31, 2002, to 4,240,000 due to customer additions from its marketing channels as well as the addition of customers from the Chicago acquisition.
On August 7, 2002, U.S. Cellular completed the acquisition of the assets and certain liabilities of Chicago , LLC now known as United States Cellular Operating Company of Chicago, LLC (USCOC of Chicago or the Chicago market) from PrimeCo Wireless Communications LLC (PrimeCo). USCOC of Chicago operates a wireless system in the Chicago major trading area. USCOC of Chicago is the holder of certain FCC licenses, including a 20 megahertz personal communication service license in the Chicago major trading area (excluding Kenosha County, Wisconsin) covering a total population of 13.2 million. The Chicago markets operations are included in consolidated operations for the first quarter of 2003 but not for the comparable quarter of 2002. The Chicago markets operations contributed to the increases in U.S. Cellulars operating revenues and expenses during 2003 compared to 2002.
|
|
Three
Months Ended |
|
||||
|
|
(As
Restated) |
|
2002 |
|
||
|
|
(Dollars in thousands) |
|
||||
Operating Revenues |
|
|
|
|
|
||
Retail service |
|
$ |
464,341 |
|
$ |
373,826 |
|
Inbound roaming |
|
54,606 |
|
54,330 |
|
||
Long-distance and other service revenues |
|
45,654 |
|
32,957 |
|
||
Service Revenues |
|
564,601 |
|
461,113 |
|
||
Equipment sales |
|
31,313 |
|
17,307 |
|
||
|
|
595,914 |
|
478,420 |
|
||
|
|
|
|
|
|
||
Operating Expenses |
|
|
|
|
|
||
System operations(exclusive of depreciation included below) |
|
137,965 |
|
107,921 |
|
||
Marketing and selling |
|
108,921 |
|
79,226 |
|
||
Cost of equipment sold |
|
64,765 |
|
30,367 |
|
||
General and administrative |
|
157,449 |
|
108,478 |
|
||
Depreciation |
|
94,900 |
|
65,977 |
|
||
Amortization and accretion |
|
14,677 |
|
6,775 |
|
||
Loss on assets held-for-sale |
|
23,500 |
|
|
|
||
|
|
602,177 |
|
398,744 |
|
||
|
|
|
|
|
|
||
Operating Income (loss) |
|
$ |
(6,263 |
) |
$ |
79,676 |
|
Operating revenues increased 25% ($117.5 million) to $595.9 million in 2003 from $478.4 million in 2002 primarily related to the 21% increase in customers. Average monthly service revenue per customer increased 2% ($0.91) to $45.05 in 2003 from $44.14 in 2002. The numerator of this calculation of average monthly revenues per customer for the three months ended March 2003 and 2002 consists of the revenue for the respective three month period divided by three. The denominator consists of the average number of customers. Average customers totaled 4,178,000 for the three months ended March 31, 2003 and 3,482,000 for the three months ended March 31, 2002.
Retail service revenues (charges to U.S. Cellulars customers for local system usage and usage of systems other than their local systems) increased 24% ($90.5 million) to $464.3 million in 2003 from $373.8 million in 2002 due primarily to the growth in customers. Average retail service revenue per minute continued to decline while the average local minutes of use per customer increased 59% to 377 in 2003 from 237 in 2002. Competitive pressures and U.S. Cellulars use of incentive programs and rate plans to stimulate overall usage, as well as the acquisition of the Chicago market, whose customers used more minutes per month than the U.S. Cellular average resulted in a lower average monthly retail service revenue per minute of use. Average monthly retail service revenue per customer increased 4% ($1.26) to $37.05 in 2003 from $35.79 in 2002.
Inbound roaming revenues (charges to other wireless carriers whose customers use U.S. Cellulars wireless systems when roaming) increased 1% ($0.3 million) to $54.6 million in 2003 from $54.3 million in 2002. The
24
increase in revenue related to inbound roaming on U.S. Cellulars systems primarily resulted from an increase in roaming minutes used, almost fully offset by the decrease in revenue per roaming minute of use. The increase in inbound roaming minutes of use was primarily driven by the overall growth in the number of customers throughout the wireless industry. Average inbound roaming revenue per minute of use is expected to continue to decline in the future, reflecting the general downward trend in negotiated rates.
Management anticipates that the rate of growth in inbound roaming minutes of use will continue to slow down due to newer customers roaming less than existing customers, reflecting further penetration of the consumer market. In addition, as new wireless operators begin service in U.S. Cellulars markets, roaming partners could switch their business to these new operators.
Long-distance and other revenue increased 39% ($12.7 million) to $45.7 million in 2003 from $33.0 million in 2002, primarily related to an increase in the volume of long-distance calls billed by U.S. Cellular from inbound roamers using U.S. Cellulars systems to make long-distance calls. This effect was partially offset by price reductions primarily related to long-distance charges on roaming minutes of use as well as U.S. Cellulars increasing use of pricing plans for its customers which include long-distance calling at no additional charge. The increase in long-distance and other revenue was also driven by the increase in amounts billed to U.S. Cellulars customers to offset certain regulatory charges, such as universal service funding and E-911 infrastructure costs, which are being passed through to customers.
Equipment sales revenues increased 81% ($14.0 million) to $31.3 million in 2003 from $17.3 million in 2002. 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 before applying any rebates. Previously, the agents purchased handsets from third parties. Selling handsets to agents enables U.S. Cellular to provide better control over handset quality, set roaming preferences and pass along quantity discounts. Management anticipates that U.S. Cellular will continue to sell handsets to agents in the future, and that it will continue to provide rebates to agents who provide handsets to new and current customers.
Equipment sales revenue is recognized upon delivery of the related products to the agents, net of any anticipated agent rebates. In most cases, the agents receive a rebate from U.S. Cellular at the time these agents sign up a new customer or retain a current customer.
Handset sales to agents, net of all rebates, increased equipment sales revenues by approximately $17.7 million during 2003. Excluding those revenues, equipment sales would have decreased $3.7 million, or 22%, from 2002. Gross customer activations, the primary driver of equipment sales revenues, increased 47% in 2003. The increase in gross customer activations in 2003 was driven by an increase in store traffic in U.S. Cellulars markets and the acquisition of the Chicago market, which added to U.S. Cellulars distribution network. The decrease in revenues is primarily attributable to lower revenue per handset in 2003, reflecting declining handset prices and the reduction in sales prices to end users as a result of increased competition.
Operating expenses increased 51% ($203.5 million) to $602.2 million in 2003 from $398.7 million in 2002. The increase is primarily related to costs incurred to serve and expand the growing customer base.
System operations expenses (excluding depreciation) increased 28% ($30.1 million) to $138.0 million in 2003 from $107.9 million in 2002. System operations expenses include charges from other telecommunications service providers for U.S. Cellulars customers use of their facilities, costs related to local interconnection to the landline network, charges for maintenance of the network, long-distance charges and outbound roaming expenses. The increase was due to an increase in the cost of minutes used on the systems ($13.9 million), an increase in the cost of maintaining the network ($11.8 million) and an increase in the costs associated with customers roaming on other companies systems ($4.3 million). Management expects system operations to increase over the next few years, driven by increases in the number of cell sites and increases in minutes of use on the U.S. Cellular system and on other systems when roaming. The number of cell sites increased to 3,987 in 2003 from 3,049 in 2002.
In 2003, system operations expenses increased due to the acquisition of the Chicago market. The increase in expenses in the Chicago market was partially offset by a reduction in expenses in other markets, primarily in the Midwest, when customers in those markets used the Chicago markets system. In 2002, U.S. Cellular paid roaming charges to third parties when its customers roamed in the Chicago market.
As the Chicago area has historically been U.S. Cellulars customers most popular roaming destination, management anticipates that the continued integration of the Chicago market into its operations will result in a further increase in minutes of use by U.S. Cellulars customers on its systems and a corresponding decrease in minutes of use by its customers on other systems, resulting in a lower overall increase in minutes of use by
25
U.S. Cellulars customers on other systems. Such a shift in minutes of use should reduce U.S. Cellulars per-minute cost of usage in the future, to the extent that U.S. Cellulars customers use U.S. Cellulars systems rather than other carriers networks.
Marketing and selling expenses increased 37% ($29.7 million) to $108.9 million in 2003 from $79.2 million in 2002. Marketing and selling expenses primarily consist of salaries, commissions and expenses of field sales and retail personnel and offices; agent commissions and related expenses; corporate marketing, merchandise management and telesales department salaries and expenses; advertising; and public relations expenses. The increase in 2003 was primarily due to the 47% increase in gross customer activations in 2003, which drove a $7.2 million increase in commissions and agent-related payments, and a $10.7 million increase in advertising costs, primarily related to the continued marketing of the U.S. Cellular brand in the Chicago market.
Cost of equipment sold increased 113% ($34.4 million) to $64.8 million in 2003 from $30.4 million in 2002. The increase in 2003 is primarily due to the $32.8 million in handset costs related to the sale of handsets to agents beginning in the second quarter of 2002. Excluding agent handset sales, cost of equipment sold increased by $1.6 million, or 5%, in 2003. This increase primarily reflects a 47% increase in gross customer activations, almost fully offset by reduced per unit handset prices.
Sales and marketing cost per gross customer activation decreased 1% to $358 in 2003 from $362 in 2002. The numerator of the sales and marketing cost per gross customer activation calculation is the sum of the statement of operations line items Marketing and selling expenses and Cost of equipment sold, less Equipment sales revenues (excluding agent rebates related to customer retention), incurred during a specific period. The denominator is the number of gross new customers activated on the U.S. Cellular network during such period, excluding renewals and upgrades.
Agent handset sales rebates related to the retention of current customers increased $7.9 million in 2003. Such handset rebate amounts paid to agents related to the renewal or upgrade of service contracts of existing U.S. Cellular customers are excluded from the numerator of the sales and marketing cost per gross customer activation calculation, as these costs are not related to the addition of new customers. Due to the exclusion of these agent handset rebates from the calculation, sales and marketing cost per gross customer activation is not calculable using financial information derived directly from the statement of operations. U.S. Cellulars definition of sales and marketing cost per gross customer activation may not be comparable to similarly titled measures that are reported by other companies. Below is a summary of sales and marketing cost per gross customer activation for each period:
|
|
Three
Months Ended |
|
||||
|
|
2003 |
|
2002 |
|
||
Components of cost (000s): |
|
|
|
|
|
||
Marketing and selling expenses |
|
$ |
108,921 |
|
$ |
79,226 |
|
Cost of equipment sold |
|
64,765 |
|
30,367 |
|
||
Less equipment sales revenues |
|
(31,313 |
) |
(17,307 |
) |
||
Less retention-related agent rebate reductions of equipment sales revenues |
|
(7,864 |
) |
|
|
||
Total costs |
|
$ |
134,509 |
|
$ |
92,286 |
|
Gross customer activations (000s) |
|
376 |
|
255 |
|
||
Sales and marketing cost per gross customer activation |
|
$ |
358 |
|
$ |
362 |
|
General and administrative expenses increased 45% ($49.0 million) to $157.4 million in 2003 from $108.4 million in 2002. These expenses include the costs of operating U.S. Cellulars customer care centers, the costs of serving and retaining customers and the majority of U.S. Cellulars corporate expenses. The increase in general and administrative expenses is primarily due to increases in billing-related expenses ($10.8 million), bad debt expenses ($9.1 million), customer retention expenses ($5.7 million) and various customer service-related expenses as a result of the 21% increase in the customer base. The increase in billing-related expenses is primarily related to maintenance of the Chicago market billing system and the ongoing conversion of such billing system to the system used in U.S. Cellulars other operations. The other factors above were also impacted by the acquisition of the Chicago market.
U.S. Cellular 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. A substantial portion of these
26
customer retention expenses are anticipated to be agent rebates, which are recorded as a reduction of equipment sales revenues.
Depreciation expense increased 44% ($28.9 million) to $94.9 million in 2003 from $66.0 million in 2002 primarily due to the 34% increase in average fixed assets since March 31, 2002. Amortization and accretion expense increased 117% ($7.9 million) to $14.7 million in 2003 from $6.8 million in 2002 primarily driven by the $4.3 million of amortization related to the customer list intangible assets acquired. Amortization and accretion expense includes $1.1 million of accretion related to the asset retirement obligation in 2003.
Loss on assets held-for-sale totaled $23.5 million in 2003. The loss was recorded on the difference between the book value of the markets to be transferred to AT&T Wireless and the fair value of the assets to be received in the transaction, as determined by an independent valuation. Subsequent to recording the loss, the recorded value of the assets U.S. Cellular expects to transfer to AT&T Wireless is equal to the fair value of the assets U.S. Cellular expects to receive from AT&T Wireless. This loss may require an adjustment at the time the transaction is completed if either the fair value of assets received or the recorded value of the assets transferred have changed.
Operating income (loss) decreased $86.0 million to a loss of $6.3 million in 2003 from income of $79.7 million in 2002. The decline in operating income reflects increased expenses from the acquisition and launch of the Chicago market; increased number of cell sites and fixed assets, equipment subsidies and network usage; and the loss on assets held for sale. U.S. Cellular expects most of the above factors to continue to have an effect on operating income for the next several quarters. Any changes in the above factors, as well as the effects of other drivers of U.S. Cellulars operating results, may cause operating income to fluctuate over the next several quarters.
Related to U.S. Cellulars acquisition and subsequent transition of the Chicago market, U.S. Cellular plans to incur additional expenses during the remainder of 2003 as it competes in the Chicago market. Additionally, U.S. Cellular plans to build out its network into other as yet unserved portions of its wireless licensed areas, and will begin marketing operations in those areas during 2003 and 2004. As a result, U.S. Cellulars operating income and operating margins may be below historical levels for the full years of during 2003 and 2004 compared to the full year of 2002.
Management expects service revenues to continue to grow during the remainder of 2003. However, management anticipates that average monthly revenue per customer may decrease as retail service revenue per minute of use and inbound roaming revenue per minute of use decline. Management believes U.S. Cellular operating results reflect seasonality in both service revenues, which tend to increase more slowly in the first and fourth quarters, and operating expenses which tend to be higher in the fourth quarter due to increased marketing activities and customer growth. This seasonality may cause operating income to vary from quarter to quarter. Management anticipates that the impact of such seasonality will decrease in the future, particularly as it relates to operating expense, as the proportion of full year customer activations derived from fourth quarter holiday sales is expected to decline.
Competitors licensed to provide wireless services have initiated service in substantially all of U.S. Cellulars markets over the past several years. U.S. Cellular expects other wireless operators to continue deployment of their networks throughout all of its service areas during the remainder of 2003 and in 2004. U.S. Cellulars management continues to monitor other wireless communications providers strategies to determine how this additional competition is affecting U.S. Cellulars results. The effects of additional wireless competition and the downturn in the nations economy have significantly slowed customer growth in certain of U.S. Cellulars markets. Management anticipates that overall customer growth may be slower in the future, primarily as a result of the increase in competition in U.S. Cellulars markets and the maturation of the wireless industry.
Acquisition of Wireless Markets
On March 10, 2003, U.S. Cellular announced that it had entered into a definitive agreement with AT&T Wireless to exchange wireless properties. U.S. Cellular will receive 10 and 20 megahertz personal communications service licenses in 13 states, representing 12.2 million incremental population equivalents contiguous to existing properties and 4.4 million population equivalents that overlap existing properties in the Midwest and the Northeast. U.S. Cellular will also receive approximately $31 million in cash (excluding any working capital adjustment) and minority interests in six markets it currently controls. U.S. Cellular will transfer wireless assets and approximately 141,000 customers in 10 markets, representing 1.5 million population equivalents, in Florida and Georgia to AT&T Wireless. The transaction is subject to regulatory approvals. The closing of the transfer of the U.S. Cellular properties and the assignments to U.S. Cellular of most of the
27
personal communications service licenses is expected to occur in the third quarter of 2003. The assignment and development of certain licenses will be deferred by U.S. Cellular until later periods. The acquisition of licenses in the exchange will be accounted for as a purchase by U.S. Cellular and the transfer of the properties by U.S. Cellular will be accounted for as a sale. TDS will not report the transaction as discontinued operations as previously disclosed.
As a result of the agreement, the consolidated balance sheet of TDS as of March 31, 2003 reflects the wireless assets and liabilities to be transferred as assets and liabilities of operations held-for-sale in accordance with SFAS No. 144. The results of operations of the markets to be transferred continue to be included in results from operations.
U.S. Cellular allocated $93.7 million of goodwill to the operations held-for-sale in accordance with SFAS No. 142 Goodwill and Other Intangible Assts. Subsequent to the allocation, a $23.5 million loss was recorded and reported as a loss on assets held-forsale for the difference between the book value of the markets to be given up to AT&T Wireless and the fair value of the assets to be received in the transaction. TDS anticipates that it will record an additional charge to the income statement of approximately $12 million for taxes and will have a current tax liability of approximately $27 million related to the completion of the transaction, which is expected to close in the third quarter of 2003.
28
TDS operates its wireline telephone operations through TDS Telecommunications Corporation (TDS Telecom), a wholly owned subsidiary. Total equivalent access lines served by TDS Telecom increased by 115,200 or 13%, since March 31, 2002 to 1,017,700. An equivalent access line is derived by converting a high capacity data line to an estimated equivalent, in terms of capacity, number of switched access lines.
TDS Telecoms incumbent local exchange carriers (ILEC) subsidiaries served 713,800 equivalent access lines at March 31, 2003, a 5% (32,800 equivalent access lines) increase from the 681,000 equivalent access lines at March 31, 2002. Acquisitions in 2002 added 27,000 equivalent access lines while internal growth added 5,800 equivalent access lines.
TDS Telecoms competitive local exchange carrier (CLEC) subsidiaries served 303,900 equivalent access lines at March 31, 2003, a 37% (82,400 equivalent access lines) increase from 221,500 equivalent access lines served at March 31, 2002.
Operating revenues increased 13% ($24.7 million) to $211.5 million in 2003 from $186.8 million in 2002. competitive local exchange operations, reflecting customer growth, contributed $14.7 million to the increase in operating revenues in 2003. Telephone companies acquired in 2002 contributed operating revenues of $5.2 million in 2003. In addition, the operations of relatively new services such as long distance resale, Internet service and digital subscriber line service increased operating revenues $3.0 million in 2003.
Operating expenses increased 6% ($10.3 million) to $171.4 million during 2003 from $161.1 million in 2002, reflecting primarily growth in access lines and growth in expenses related to the newer services and offset by a reduction in bad debt expense in 2003 as compared to 2002 due to the bankruptcies of certain long-distance carriers in 2002.
Operating income increased 56% ($14.4 million) to $40.1 million in 2003 from $25.7 million in 2002 reflecting improved operating results from competitive local exchange operations, the reduction of bad debt expense and the operating results of acquired incumbent local exchange companies.
|
|
Three
Months Ended |
|
||||
|
|
2003 |
|
2002 |
|
||
|
|
(Dollars in thousands) |
|
||||
Incumbent Local Exchange Operations |
|
|
|
|
|
||
Operating Revenues |
|
|
|
|
|
||
Local service |
|
$ |
49,051 |
|
$ |
46,843 |
|
Network access and long-distance |
|
89,652 |
|
83,084 |
|
||
Miscellaneous |
|
20,894 |
|
19,594 |
|
||
|
|
159,597 |
|
149,521 |
|
||
Operating Expenses |
|
|
|
|
|
||
Cost of services and products (exclusive of depreciation and amortization included below) |
|
38,145 |
|
31,697 |
|
||
Selling, general and administrative expense |
|
42,417 |
|
44,852 |
|
||
Depreciation and amortization |
|
33,619 |
|
32,455 |
|
||
|
|
114,181 |
|
109,004 |
|
||
Incumbent Local Exchange Operating Income |
|
$ |
45,416 |
|
$ |
40,517 |
|
|
|
|
|
|
|
||
Competitive Local Exchange Operations |
|
|
|
|
|
||
Operating Revenues |
|
$ |
52,439 |
|
$ |
37,754 |
|
|
|
|
|
|
|
||
Operating Expenses |
|
|
|
|
|
||
Cost of services and products (exclusive of depreciation and amortization included below) |
|
21,783 |
|
20,085 |
|
||
Selling, general and administrative expense |
|
27,986 |
|
25,803 |
|
||
Depreciation and amortization |
|
8,031 |
|
6,692 |
|
||
|
|
57,800 |
|
52,580 |
|
||
Competitive Local Exchange Operating (Loss) |
|
$ |
(5,361 |
) |
$ |
(14,826 |
) |
|
|
|
|
|
|
||
Intercompany revenue elimination |
|
(532 |
) |
(498 |
) |
||
Intercompany expense elimination |
|
(532 |
) |
(498 |
) |
||
|
|
|
|
|
|
||
Operating Income |
|
$ |
40,055 |
|
$ |
25,691 |
|
29
Local Telephone Operations
Operating revenues increased 7% ($10.1 million) to $159.6 million in 2003 from $149.5 million in 2002. Average monthly revenue per equivalent access line increased 2% ($1.33) to $74.68 in 2003 from $73.35 in 2002. The numerator of this calculation of average monthly revenues per equivalent access line for the three months ended March 31, 2003 and 2002 consists of the revenue for the respective period divided by three. The denominator consists of the average equivalent access lines. Average equivalent access lines totaled 712,400 for the three months ended March 31, 2003 and 679,400 for the three months ended March 31, 2002. Acquisitions increased operating revenues by $5.2 million in 2003. Revenues from Internet, DSL and other non-regulated lines of business increased miscellaneous revenues by $1.9 million in 2003. As of March 31, 2003, TDS Telecom ILEC operations were providing Internet service to 118,100 customers compared to 115,200 customers in 2002 and were providing DSL service to 12,800 customers compared to 3,300 customers in 2002. Revenues from reselling long distance service increased network access and long distance revenues by $1.0 million in 2003. As of March 31, 2003, TDS Telecom incumbent local exchange operations were providing long distance service to 202,100 customers compared to 146,100 customers in 2002.
Operating expenses increased by 5% ($5.2 million) to $114.2 million in 2003 from $109.0 million in 2002. Cost of service and products increased by 20% ($6.4 million) to $38.1 million in 2003 from $31.7 million in 2002. The cost of providing long-distance, Internet and DSL service to an increased customer base increased expenses by $3.1 million. Acquisitions increased cost of service and products by $1.7 million in 2003. Selling, general and administrative expenses decreased 5% ($2.4 million) to $42.4 million in 2003 from $44.8 million in 2002. Bad debt expense decreased by $3.9 million in 2003. Bad debt expense recorded in 2002 included $3.0 million related to the write-off of pre-petition accounts receivable due to the bankruptcy of Global Crossing. Acquisitions increased selling, general and administrative expenses by $1.5 million in 2003. Depreciation and amortization increased 4% ($1.2 million) to $33.6 million in 2003 from $32.4 million in 2002.
Operating income increased 12% ($4.9 million) to $45.4 million in 2003 from $40.5 million in 2002 primarily due to the reduction in bad debt expense and the partial recovery of amounts due from Global Crossing and the contribution of the acquired companies. Local telephone operating expenses are expected to increase due to inflation while additional revenues and expenses are expected from new or expanded product offerings.
Competitive Local Exchange Operations
TDS Telecoms competitive local exchange carrier strategy maintains a geographic focus and is designed to leverage TDS Telecoms existing management and infrastructure to complement TDS Telecoms incumbent local exchange carriers clustering strategy. TDS Telecom has followed a strategy of controlled entry into certain targeted mid-size communities, regionally proximate to existing TDS Telecom facilities and service areas, with facilities-based entry as a competitive local exchange carrier. TDS Telecom intends to be the leading alternative provider for customers wired telecommunications in its competitive local exchange carrier markets.
Operating revenues (revenue from the provision of local and long-distance telephone service and revenue from a long-distance provider) increased 39% ($14.7 million) to $52.4 million in 2003 from $37.7 million in 2002 as equivalent access lines served increased to 303,900 at March 31, 2003 from 221,500 at March 31, 2002. TDS Metrocom commercial customer revenues increased $4.6 million in 2003 while residential customer revenues increased $4.1 million. Operating revenue in 2003 also includes a one-time settlement, which increased access revenues by $1.8 million. Average monthly revenue per equivalent access line was $58.85 in 2003 and $61.01 in 2002. The numerator of this calculation of average monthly revenues per equivalent access line for the three months ended March 31, 2003 and 2002 consists of the revenue for the respective period divided three. The denominator consists of the average equivalent access lines. Average equivalent access lines totaled 297,000 for the three months ended March 31, 2003 and 206,300 for the three months ended March 31, 2002. The decline in average monthly revenue per equivalent access line is primarily related to FCC orders that have reduced the amount that can be charged to Internet service providers and long-distance carriers.
Operating expenses increased 10% ($5.2 million) to $57.8 million in 2003 from $52.6 million in 2002. Cost of service and products increased by 8% ($1.7 million) to $21.8 million in 2003 from $20.1 million in 2002. Selling, general and administrative expenses increased 8% ($2.2 million) to $28.0 million in 2003 from $25.8 million in 2002. Depreciation and amortization increased 20% ($1.3 million) to $8.0 million in 2003 from $6.7 million in 2002.
Operating loss decreased 64% ($9.4 million) to $5.4 million in 2003 from $14.8 million in 2002. The decline in competitive local exchange operating losses primarily reflects growth in revenues complemented by cost
30
constraint.
Cash Flows From Operating Activities. TDS generates substantial internal funds from the operations of U.S. Cellular and TDS Telecom. Cash flows from operating activities totaled $175.9 million in the first three months of 2003 compared to $183.1 million in 2002.
|
|
Three
Months Ended |
|
||||
|
|
2003 |
|
2002 |
|
||
|
|
(Dollars in thousands) |
|
||||
Cash flows from (used in) |
|
|
|
|
|
||
Operating activities |
|
$ |
175,914 |
|
$ |
183,093 |
|
Investing activities |
|
(151,404 |
) |
(147,525 |
) |
||
Financing activities |
|
(7,532 |
) |
(95,477 |
) |
||
Net increase (decrease) in cash and cash equivalents |
|
$ |
16,978 |
|
$ |
(59,909 |
) |
The following table is a summary of the components of cash flows operating activities.
|
|
Three
Months Ended |
|
||||
|
|
(As
Restated) |
|
2002 |
|
||
|
|
(Dollars in thousands) |
|
||||
Income (loss) before cumulative effect of accounting change |
|
$ |
(5,012 |
) |
$ |
14,010 |
|
Adjustments to reconcile income (loss) to net cash provided by operating activities |
|
177,663 |
|
149,067 |
|
||
|
|
172,651 |
|
163,077 |
|
||
Changes in assets and liabilities |
|
3,263 |
|
20,016 |
|
||
|
|