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 September 30, 2003 |
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OR |
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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 |
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TELEPHONE AND DATA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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36-2669023 |
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(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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Registrant’s 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) |
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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 issuer’s classes of common stock, as of the latest practicable date.
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Class |
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Outstanding at September 30, 2003 |
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Common Shares, $.01 par value |
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51,002,334 Shares |
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Series A Common Shares, $.01 par value |
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6,438,113 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 September 30, 2003, which was originally filed with the Securities and Exchange Commission (the “SEC”) on November 12, 2003 (the “Quarterly Report”), to amend Item 1 “Financial Statements,” Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 4 “Controls and Procedures” 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 TDS’s 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.
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 November 12, 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.
3rd QUARTER REPORT ON FORM 10-Q/A
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
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Three
Months Ended |
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Nine
Months Ended |
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2003 |
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2002 |
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2003 |
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2002 |
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(As Restated) |
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(As Restated) |
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(As Restated) |
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(As Restated) |
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(Dollars in thousands, except per share amounts) |
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OPERATING REVENUES |
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$ |
874,754 |
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$ |
784,102 |
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$ |
2,533,459 |
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$ |
2,169,742 |
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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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270,829 |
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245,504 |
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796,415 |
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644,934 |
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Selling, general and administrative expense |
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327,080 |
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301,179 |
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1,011,156 |
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831,195 |
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Depreciation, amortization and accretion expense |
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144,238 |
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143,209 |
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440,367 |
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370,744 |
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(Gain) Loss on assets held for sale |
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(1,442 |
) |
— |
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25,558 |
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— |
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740,705 |
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689,892 |
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2,273,496 |
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1,846,873 |
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OPERATING INCOME |
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134,049 |
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94,210 |
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259,963 |
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322,869 |
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INVESTMENT AND OTHER INCOME (EXPENSE) |
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Interest and dividend income |
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4,426 |
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2,213 |
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14,823 |
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52,447 |
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Investment income |
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11,644 |
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13,335 |
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37,911 |
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32,124 |
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(Loss) on marketable securities and other investments |
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— |
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(90,071 |
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(8,500 |
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(1,846,597 |
) |
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Interest expense |
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(41,604 |
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(33,451 |
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(128,957 |
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(92,170 |
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Minority interest in income of subsidiary trust |
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(4,273 |
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(6,202 |
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(16,678 |
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(18,607 |
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Other (expense), net |
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(8,550 |
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2,511 |
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(14,488 |
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2,494 |
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(38,357 |
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(111,665 |
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(115,889 |
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(1,870,309 |
) |
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INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST |
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95,692 |
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(17,455 |
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144,074 |
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(1,547,440 |
) |
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Income tax expense (benefit) |
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49,541 |
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(1,205 |
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76,988 |
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(588,323 |
) |
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INCOME (LOSS) BEFORE MINORITY INTEREST |
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46,151 |
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(16,250 |
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67,086 |
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(959,117 |
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Minority Share of (Income) Loss |
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(11,537 |
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(4,238 |
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(17,988 |
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849 |
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INCOME (LOSS) FROM CONTINUING OPERATIONS |
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34,614 |
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(20,488 |
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49,098 |
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(958,268 |
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Discontinued Operations, net of tax |
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(1,609 |
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— |
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(1,609 |
) |
— |
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INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES |
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33,005 |
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(20,488 |
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47,489 |
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(958,268 |
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Cumulative effect of accounting changes, net of tax and minority interest |
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— |
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— |
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(11,789 |
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3,366 |
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NET INCOME (LOSS) |
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33,005 |
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(20,488 |
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35,700 |
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(954,902 |
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Preferred Dividend Requirement |
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104 |
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105 |
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312 |
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323 |
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NET INCOME (LOSS) AVAILABLE TO COMMON |
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$ |
32,901 |
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$ |
(20,593 |
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$ |
35,388 |
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$ |
(955,225 |
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BASIC WEIGHTED AVERAGE SHARES OUTSTANDING (000s) |
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57,420 |
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58,660 |
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57,829 |
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58,633 |
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BASIC EARNINGS PER SHARE (Note 8) |
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Income (Loss) from Continuing Operations |
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$ |
0.60 |
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$ |
(0.35 |
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$ |
0.84 |
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$ |
(16.35 |
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Discontinued Operations |
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(0.03 |
) |
— |
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(0.03 |
) |
— |
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Cumulative Effect of Accounting Changes |
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— |
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— |
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(0.20 |
) |
0.06 |
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Net income (loss) available to common |
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$ |
0.57 |
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$ |
(0.35 |
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$ |
0.61 |
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$ |
(16.29 |
) |
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DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (000s) |
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57,793 |
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58,660 |
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57,924 |
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58,633 |
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DILUTED EARNINGS PER SHARE (Note 8) |
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Income (Loss) from Continuing Operations |
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$ |
0.60 |
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$ |
(0.35 |
) |
$ |
0.84 |
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$ |
(16.35 |
) |
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Discontinued Operations |
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(0.03 |
) |
— |
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(0.03 |
) |
— |
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Cumulative Effect of Accounting Changes |
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— |
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— |
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(0.20 |
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0.06 |
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Net income (loss) available to common |
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$ |
0.57 |
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$ |
(0.35 |
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$ |
0.61 |
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$ |
(16.29 |
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DIVIDENDS PER SHARE |
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$ |
0.155 |
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$ |
0.145 |
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$ |
0.465 |
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$ |
0.435 |
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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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Nine
Months Ended |
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2003 |
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2002 |
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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) from continuing operations |
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$ |
49,098 |
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$ |
(958,268 |
) |
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Add (Deduct) adjustments to reconcile income (loss) to net cash provided by operating activities |
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Depreciation, amortization and accretion |
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440,367 |
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370,744 |
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Deferred taxes |
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58,460 |
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(660,318 |
) |
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Investment income |
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(37,911 |
) |
(32,124 |
) |
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Minority share of income (loss) |
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17,988 |
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(849 |
) |
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Loss on assets of operations held for sale |
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25,558 |
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— |
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(Gain) loss on marketable securities and other investments |
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8,500 |
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1,846,597 |
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Noncash interest expense |
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19,868 |
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7,326 |
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Other noncash expense |
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27,236 |
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12,557 |
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Changes in assets and liabilities |
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Change in accounts receivable |
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76,360 |
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(23,840 |
) |
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Change in materials and supplies |
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15,373 |
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16,609 |
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Change in accounts payable |
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(105,287 |
) |
(1,035 |
) |
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Change in advanced billings and customer deposits |
|
15,212 |
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15,726 |
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Change in accrued taxes |
|
31,119 |
|
57,626 |
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Change in other assets and liabilities |
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(27,000 |
) |
(26,233 |
) |
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614,941 |
|
624,518 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Capital expenditures |
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(537,525 |
) |
(565,679 |
) |
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Acquisitions, net of cash acquired |
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(1,251 |
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(528,638 |
) |
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Proceeds from exchange transaction |
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33,958 |
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— |
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Increase in notes receivable |
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(7 |
) |
(2,581 |
) |
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Refund of FCC deposit |
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— |
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47,566 |
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Distributions from unconsolidated entities |
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21,685 |
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25,519 |
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Investments in and advances to unconsolidated entities |
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(1,031 |
) |
829 |
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Other investing activities |
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(1,977 |
) |
(10,229 |
) |
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(486,148 |
) |
(1,033,213 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Change in notes payable |
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9,576 |
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116,142 |
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Issuance of long-term debt |
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900 |
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2,395 |
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Proceeds from forward contracts |
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— |
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680,360 |
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Repayment of Trust Originated Preferred Securities |
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(300,000 |
) |
— |
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Prepayment of long-term notes |
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(70,500 |
) |
(51,000 |
) |
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Repayments of long-term debt |
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(55,250 |
) |
(13,946 |
) |
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Repurchase of TDS Common Shares |
|
(56,522 |
) |
— |
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Dividends paid |
|
(27,186 |
) |
(25,837 |
) |
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Other financing activities |
|
5,392 |
|
(3,406 |
) |
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(493,590 |
) |
704,708 |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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(364,797 |
) |
296,013 |
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CASH AND CASH EQUIVALENTS - |
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Beginning of period |
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1,298,936 |
|
140,744 |
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End of period |
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$ |
934,139 |
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$ |
436,757 |
|
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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|
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September 30, |
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December 31, |
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(As Restated) |
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(Dollars in thousands) |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
934,139 |
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$ |
1,298,936 |
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Accounts receivable |
|
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Due from customers, less allowance of $23,572 and $24,627, respectively |
|
256,982 |
|
272,997 |
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Other, principally connecting companies, less allowance of $11,477 and $15,848, respectively |
|
143,290 |
|
175,036 |
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Federal income tax receivable |
|
— |
|
40,000 |
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Materials and supplies, at average cost |
|
57,259 |
|
72,441 |
|
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Other current assets |
|
80,569 |
|
88,602 |
|
||
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|
|
1,472,239 |
|
1,948,012 |
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INVESTMENTS |
|
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|
|
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Marketable equity securities |
|
2,207,544 |
|
1,944,939 |
|
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|
Wireless license costs |
|
1,111,780 |
|
1,038,556 |
|
||
|
Wireless license rights |
|
47,158 |
|
— |
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||
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Goodwill |
|
1,007,461 |
|
1,106,451 |
|
||
|
Customer lists, net of accumulated amortization of $19,453 and $6,567, respectively |
|
27,201 |
|
40,087 |
|
||
|
Investments in unconsolidated entities |
|
222,529 |
|
205,995 |
|
||
|
Notes receivable, less valuation allowance of $55,144 and $55,144, respectively |
|
6,476 |
|
7,287 |
|
||
|
Other investments |
|
15,374 |
|
14,914 |
|
||
|
|
|
4,645,523 |
|
4,358,229 |
|
||
|
|
|
|
|
|
|
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|
PROPERTY, PLANT AND EQUIPMENT, NET |
|
|
|
|
|
||
|
U.S. Cellular |
|
2,229,829 |
|
2,148,432 |
|
||
|
TDS Telecom |
|
1,050,029 |
|
1,047,811 |
|
||
|
|
|
3,279,858 |
|
3,196,243 |
|
||
|
|
|
|
|
|
|
||
|
OTHER ASSETS AND DEFERRED CHARGES |
|
|
|
|
|
||
|
Derivative asset |
|
— |
|
2,630 |
|
||
|
Other |
|
88,405 |
|
96,914 |
|
||
|
|
|
88,405 |
|
99,544 |
|
||
|
|
|
|
|
|
|
||
|
TOTAL ASSETS |
|
$ |
9,486,025 |
|
$ |
9,602,028 |
|
The accompanying notes to financial statements are an integral part of these statements.
6
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Unaudited
|
|
|
September 30, |
|
December 31, |
|
||
|
|
|
(As Restated) |
|
|
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
CURRENT LIABILITIES |
|
|
|
|
|
||
|
Current portion of long-term debt |
|
$ |
19,210 |
|
$ |
64,482 |
|
|
Notes payable |
|
471,368 |
|
461,792 |
|
||
|
Accounts payable |
|
250,763 |
|
361,758 |
|
||
|
Advance billings and customer deposits |
|
108,469 |
|
95,922 |
|
||
|
Accrued interest |
|
20,866 |
|
31,751 |
|
||
|
Accrued taxes |
|
49,354 |
|
34,413 |
|
||
|
Accrued compensation |
|
56,820 |
|
58,678 |
|
||
|
Other current liabilities |
|
52,429 |
|
58,370 |
|
||
|
|
|
1,029,279 |
|
1,167,166 |
|
||
|
|
|
|
|
|
|
||
|
DEFERRED LIABILITIES AND CREDITS |
|
|
|
|
|
||
|
Net deferred income tax liability |
|
1,259,149 |
|
1,170,505 |
|
||
|
Derivative liability |
|
222,685 |
|
61,160 |
|
||
|
Asset retirement obligations |
|
93,103 |
|
— |
|
||
|
Other |
|
62,811 |
|
55,645 |
|
||
|
|
|
1,637,748 |
|
1,287,310 |
|
||
|
|
|
|
|
|
|
||
|
LONG-TERM DEBT |
|
|
|
|
|
||
|
Long-term debt, excluding current portion |
|
1,565,187 |
|
1,641,624 |
|
||
|
Prepaid forward contracts |
|
1,668,656 |
|
1,656,616 |
|
||
|
|
|
3,233,843 |
|
3,298,240 |
|
||
|
|
|
|
|
|
|
||
|
MINORITY INTEREST IN SUBSIDIARIES |
|
508,153 |
|
489,735 |
|
||
|
|
|
|
|
|
|
||
|
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES of Subsidiary Trust Holding Solely Company Subordinated Debentures |
|
— |
|
300,000 |
|
||
|
|
|
|
|
|
|
||
|
PREFERRED SHARES |
|
6,554 |
|
6,954 |
|
||
|
|
|
|
|
|
|
||
|
COMMON STOCKHOLDERS’ EQUITY |
|
|
|
|
|
||
|
Common Shares, par value $.01 per share; authorized 100,000,000 shares; issued and outstanding 56,138,000 and 55,875,000 shares, respectively |
|
561 |
|
559 |
|
||
|
Series A Common Shares, par value $.01 per share; authorized 25,000,000; issued and outstanding 6,438,000 and 6,602,000 shares, respectively |
|
64 |
|
66 |
|
||
|
Capital in excess of par value |
|
1,836,384 |
|
1,832,806 |
|
||
|
Treasury Shares, at cost, 5,136,000 and 3,799,000 shares, respectively |
|
(459,023 |
) |
(404,169 |
) |
||
|
Accumulated other comprehensive income |
|
252,290 |
|
191,704 |
|
||
|
Retained earnings |
|
1,440,172 |
|
1,431,657 |
|
||
|
|
|
3,070,448 |
|
3,052,623 |
|
||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
9,486,025 |
|
$ |
9,602,028 |
|
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 TDS’s latest annual report on Form 10-K.
The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of September 30, 2003 and December 31, 2002, the results of operations for the three and nine months ended September 30, 2003 and 2002 and the cash flows for the nine months ended September 30, 2003 and 2002. The results of operations for the three and nine months ended September 30, 2003, are not necessarily indicative of the results to be expected for the full year.
Certain amounts reported in prior periods have been reclassified to conform to the current period presentation. The allocation of certain costs between cost of services and selling, general and administrative expenses for the competitive local exchange operations has been revised for the three and nine months ended September 30, 2003 and 2002. Total expenses have not changed.
U.S. Cellular and TDS adopted Statement of Financial Accounting Standards (“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 and nine months ended September 30, 2003. See Note 19 – Restatement of Financial Statements and Note 7 - Cumulative Effect of Accounting Changes.
U.S. Cellular, an 82.2%-owned subsidiary of TDS, made changes to its accounting policies which required TDS to restate certain items on its statement of operations for the three and nine months ended September 30, 2002. See Note 6 – “Effects of 2002 Accounting Changes” for the impact on operating income, net income (loss) and earnings per share.
2. Summary of Significant Accounting Policies
Assets and Liabilities of Operations Held for Sale
TDS accounts for the disposal of long-lived assets in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. When long-lived assets meet the held for sale criteria set forth in SFAS No. 144, the balance sheet will reflect the assets and liabilities of the properties to be disposed of as assets and liabilities of operations held for sale. The assets and liabilities of operations held for sale will be presented separately in the asset and liability sections of the balance sheet. The revenues and expenses of the properties to be disposed of will be included in operations until the transaction is completed. See Note 11 - Acquisitions and Divestitures – Completed for the discussion of the sale and exchange of long-lived assets.
Stock-Based Compensation
TDS accounts for stock options 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.”
8
No compensation costs have been recognized for the stock option and employee stock purchase plans. Had compensation costs for all plans been expensed and the value determined consistent with SFAS No. 123, TDS’s net income (loss) available to common and earnings per share would have been the following pro forma amounts.
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
|
|
(As Restated) |
|
|
|
(As Restated) |
|
|
|
||||
|
|
|
(Dollars in thousands, except per share amounts) |
|
||||||||||
|
Net Income (Loss) Available to Common |
|
|
|
|
|
|
|
|
|
||||
|
As Reported |
|
$ |
32,901 |
|
$ |
(20,593 |
) |
$ |
35,388 |
|
$ |
(955,225 |
) |
|
Pro Forma Expense |
|
(4,601 |
) |
(2,864 |
) |
(8,992 |
) |
(8,591 |
) |
||||
|
Pro Forma Net Income (Loss) Available to Common |
|
$ |
28,300 |
|
$ |
(23,457 |
) |
$ |
26,396 |
|
$ |
(963,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic Earnings (Loss)Per Share |
|
|
|
|
|
|
|
|
|
||||
|
As Reported |
|
$ |
0.57 |
|
$ |
(0.35 |
) |
$ |
0.61 |
|
$ |
(16.29 |
) |
|
Pro Forma Expense Per Share |
|
(0.08 |
) |
(0.05 |
) |
(0.16 |
) |
(0.15 |
) |
||||
|
Pro Forma Basic Earnings (Loss) Per Share |
|
$ |
0.49 |
|
$ |
(0.40 |
) |
$ |
0.45 |
|
$ |
(16.44 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted Earnings (Loss) Per Share |
|
|
|
|
|
|
|
|
|
||||
|
As Reported |
|
$ |
0.57 |
|
$ |
(0.35 |
) |
$ |
0.61 |
|
$ |
(16.29 |
) |
|
Pro Forma Expense Per Share |
|
(0.08 |
) |
(0.05 |
) |
(0.16 |
) |
(0.15 |
) |
||||
|
Pro Forma Diluted Earnings (Loss) Per Share |
|
$ |
0.49 |
|
$ |
(0.40 |
) |
$ |
0.45 |
|
$ |
(16.44 |
) |
Recent Accounting Pronouncements
FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” was issued in January 2003, and is effective for all variable interests in variable interest entities created after January 31, 2003, and is effective October 1, 2003 for variable interests in variable interest entities created before February 1, 2003. This Interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. TDS has reviewed the provisions of FIN 46 and has determined that it will, as of the effective date of FIN 46, include in consolidated results the operations of an entity that it currently accounts for using the equity method of accounting. This change, pursuant to the adoption of FIN 46, is not anticipated to have a material impact on TDS’s future financial position or results of operations.
SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” was issued in April 2003, and is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” TDS adopted the provisions of this Standard to contracts entered into or modified after June 30, 2003 and to hedging relationships designated after June 30, 2003. There was no effect on TDS’s financial position or results of operations.
SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” was issued in May 2003, and for TDS is effective for financial instruments entered into or modified after May 31, 2003, and otherwise beginning July 1, 2003. SFAS No. 150 requires freestanding financial instruments within its scope to be recorded as a liability in the financial statements. Freestanding financial instruments include mandatorily redeemable financial instruments, obligations to repurchase issuer’s equity shares and certain obligations to issue a variable number of issuer’s shares. As of September 30, 2003, TDS had no freestanding financial instruments within the scope of SFAS No. 150 and therefore, that portion of this Statement did not have any effect on TDS’s financial position or results of operations.
TDS had two subsidiary trusts, TDS Capital I and TDS Capital II that would have been considered freestanding financial instruments under SFAS 150 and variable interest entities pursuant to FIN 46. TDS Capital I had outstanding 6,000,000 8.5% Company-Obligated Mandatorily Redeemable Preferred Securities. The sole asset of TDS Capital I was $154.6 million principal amount of TDS’s 8.5% Subordinated Debentures due December 31, 2037. TDS Capital II had outstanding 6,000,000 8.04% Company-Obligated Mandatorily Redeemable Preferred Securities. The sole asset of TDS
9
Capital II was $154.6 million principal amount of TDS’s 8.04% Subordinated Debentures due March 31, 2038.
On September 2, 2003, the subsidiary trusts, TDS Capital I and TDS Capital II redeemed all of their outstanding Trust Originated Preferred Securities (“TOPrSSM”). The redemption price of both the 8.5% and 8.04% TOPrS was equal to 100% of the principal amount, or $25.00 per security, plus accrued and unpaid distributions.
In addition, under SFAS No. 150, certain minority interests in consolidated entities with finite lives may meet the standard’s definition of a mandatorily redeemable financial instrument and thus require reclassification as liabilities and remeasurement at the estimated amount of cash that would be due and payable to settle such minority interests under the applicable entity’s organization agreement assuming an orderly liquidation of the finite-lived entity, net of estimated liquidation costs (the “settlement value”). TDS’s consolidated financial statements include such minority interests that meet the standard’s definition of mandatorily redeemable financial instruments. These mandatorily redeemable minority interests represent interests held by third parties in consolidated partnerships and limited liability companies (“LLCs”), where the terms of the underlying partnership or LLC agreement provide for a defined termination date at which time the assets of the subsidiary are to be sold, the liabilities are to be extinguished and the remaining net proceeds are to be distributed to the minority interest holders and TDS in accordance with the respective partnership and LLC agreements. The termination dates of TDS’s mandatorily redeemable minority interests range from 2042 to 2100.
On November 7, 2003, the FASB issued FASB Staff Position (“FSP”) No. FAS 150-3, Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, ‘Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity’. The FSP indefinitely deferred the classification and measurement provisions of SFAS No. 150 related to the mandatorily redeemable minority interests associated with finite-lived subsidiaries, but retained the related disclosure provisions. The settlement value of TDS’s mandatorily redeemable minority interests is estimated to be $83.5 million at September 30, 2003. This represents the estimated amount of cash that would be due and payable to settle minority interests assuming an orderly liquidation of the finite-lived consolidated partnerships and LLCs on September 30, 2003, net of estimated liquidation costs. This amount is being disclosed pursuant the requirements of FSP FAS150-3; TDS has no current plans or intentions to liquidate any of the related partnerships or LLCs prior to their scheduled termination dates. The corresponding carrying value of the minority interests in finite-lived consolidated partnerships and LLCs at September 30, 2003 is $32.3 million, and is included in the balance sheet caption Minority Interest in Subsidiaries. The excess of the aggregate settlement value over the aggregate carrying value of the mandatorily redeemable minority interests of $51.2 million is primarily due to the unrecognized appreciation of the minority interest holders’ share of the underlying net assets in the consolidated partnerships and LLCs. Neither the minority interest holders’ share, nor TDS’s share, of the appreciation of the underlying net assets of these subsidiaries is reflected in the consolidated financial statements under U.S. GAAP. The estimate of settlement value was based on certain factors and assumptions. Change in those factors and assumptions could result in a materially larger or smaller settlement amount.
The FASB plans to reconsider certain implementation issues and perhaps the classification or measurement guidance for mandatorily redeemable minority interests during the deferral period. The outcome of their deliberations cannot be determined at this point. Accordingly, it is possible that the FASB could require the recognition and measurement of our mandatorily redeemable minority interests at their settlement value at a later date.
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
10
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. Cellular’s 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 has 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 increase by $7.5 million to $61.9 million as of September 30, 2003. The increase was due to additional liabilities incurred of $4.2 million and accretion of $3.3 million. See Note 19 – 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 effect of the retroactive application of the change in accounting principle for the adoption of SFAS No. 143:
|
|
|
Three
months ended |
|
Nine
months ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
Actual |
|
|
|
|
|
|
|
|
|
||||
|
Net income (loss) |
|
$ |
33,005 |
|
$ |
(20,488 |
) |
$ |
35,700 |
|
$ |
(954,902 |
) |
|
Basic earnings per share |
|
$ |
0.57 |
|
$ |
(0.35 |
) |
$ |
0.61 |
|
$ |
(16.29 |
) |
|
Diluted earnings per share |
|
$ |
0.57 |
|
$ |
(0.35 |
) |
$ |
0.61 |
|
$ |
(16.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Pro forma |
|
|
|
|
|
|
|
|
|
||||
|
Net income (loss) |
|
$ |
33,005 |
|
$ |
(21,099 |
) |
$ |
47,489 |
|
$ |
(965,950 |
) |
|
Basic earnings per share |
|
$ |
0.57 |
|
$ |
(0.36 |
) |
$ |
0.81 |
|
$ |
(16.47 |
) |
|
Diluted earnings per share |
|
$ |
0.57 |
|
$ |
(0.36 |
) |
$ |
0.81 |
|
$ |
(16.47 |
) |
|
|
|
At
December 31, |
|
At
January 1, |
|
||
|
Pro forma |
|
|
|
|
|
||
|
Asset Retirement Obligation |
|
$ |
54,438 |
|
$ |
45,246 |
|
TDS Telecom’s incumbent local telephone companies follow the provisions of SFAS No. 71, and therefore conform to the regulatory 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 FCC’s current accounting rules that require incumbent local telephone companies to accrue for asset retirement obligations through prescribed depreciation rates. Pursuant to the FCC’s 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, upon implementation of SFAS No. 143, TDS Telecom determined the amount of the incumbent local telephone companies asset retirement obligations required to be recorded 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. The asset retirement obligation under SFAS No. 143 has increased to $31.2 million at September 30, 2003. After the effect of this reclassification, the incumbent local telephone companies have an amount of $25.4 million as of January 1, 2003 ($27.7 million as of September 30, 2003) 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 accounting guidelines of the state public utility commission and the FCC provide that such costs of removal be recorded as accumulated depreciation. These costs of removal are recorded based upon the
11
guidelines of the incumbent local telephone companies’ regulators and are not an asset retirement obligation as defined by SFAS No. 143. The adoption of SFAS No. 143 by TDS Telecom’s incumbent local telephone companies did not have a material effect on TDS’s financial position or results of operations.
TDS Telecom’s competitive local telephone companies adopted SFAS No. 143 effective January 1, 2003. TDS Telecom 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 the competitive local telephone companies.
4. Income Taxes
Income (loss) from continuing operations includes losses from marketable securities and other investments and losses on assets held for sale for the three and nine months ended September 30, 2003 and 2002. The following table summarizes the effective income tax expense (benefit) rates in each of the periods.
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
|
|
|
As Restated |
|
As Restated |
|
As Restated |
|
As Restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate From |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations excluding loss on marketable securities and other investments and loss on assets held for sale |
|
42.2 |
% |
43.3 |
% |
42.4 |
% |
43.6 |
% |
|
Loss on marketable securities and other investments and loss on assets held for sale(1) |
|
N/M |
|
(36.2 |
)% |
(4.1 |
)% |
(38.9 |
)% |
|
Income (Loss) from continuing operations |
|
51.8 |
% |
(6.9 |
)% |
53.4 |
% |
(38.0 |
)% |
(1) The effective tax rate related to the provision for Loss on marketable securities and other investments and loss on assets held for sale is not meaningful. Because TDS’s tax basis in the assets transferred to AT&T Wireless was lower than its book basis it was necessary for TDS to record a tax provision of $9.8 million at the time of this transfer in the third quarter of 2003. TDS had previously disclosed that it had anticipated that this amount would be approximately $12 million.
5. (Losses) on Marketable Securities and Other Investments
U.S. Cellular recorded a license cost impairment loss of $3.5 million in the first quarter of 2003 related to the investment in a non-operating market in Florida that remained with U.S. Cellular upon completion of the exchange with AT&T Wireless. See Note 11 Acquisitions and Divestitures – Completed for further information regarding the exchange transaction with AT&T Wireless.
TDS also recorded an impairment loss of $5.0 million in the second quarter of 2003 on a cellular market investment held by TDS Telecom in conjunction with its annual license cost and goodwill impairment testing.
The loss on marketable securities and other investments in 2002 includes an “other than temporary” investment loss of $1,756.5 million ($1,044.4 million, net of $686.2 million of income taxes and $25.9 million of minority interest) on TDS’s marketable securities. The adjusted cost basis of TDS’s marketable securities was written down to market value upon determining that the unrealized losses on the securities were other than temporary.
TDS had notes receivable from Airadigm and Kington Management Corporation aggregating $100.6 million relating to the funding of Airadigm’s operations and the purchase by Kington of certain of U.S. Cellular’s minority interests in 2000. The value of the notes were directly related to the value of certain assets and contractual rights of Airadigm and the value of the minority cellular market interests. As a result of changes in management strategies and other events, a review of the Airadigm business plan and a review of the fair market analysis of the cellular markets, including third party fair value analysis, management concluded that the notes receivable were impaired and, accordingly recorded an impairment charge of $90.1 million ($53.6 million, net of tax of $32.6 million and minority interest of $3.9 million) in the third quarter of 2002.
12
6. Effects of 2002 Accounting Changes
U.S. Cellular made certain changes to its accounting policies in the fourth quarter of 2002 which required TDS and U.S. Cellular to restate certain items on its income statement for the three and nine month periods ending September 30, 2002. The impact of these changes in accounting policies on the prior periods is presented below.
|
|
|
Three
Months Ended |
|
|||||||
|
|
|
As |
|
Changes |
|
As |
|
|||
|
|
|
(Dollars in thousands, except per share amounts) |
|
|||||||
|
Effects of 2002 Accounting Changes |
|
|
|
|
|
|
|
|||
|
Operating Revenues |
|
|
|
|
|
|
|
|||
|
Changes related to EITF 01-09 reclassification (1) |
|
$ |
|
|
$ |
(14,850 |
) |
$ |
|
|
|
Changes related to EITF 01-09 accrual (1) |
|
|
|
(2,935 |
) |
|
|
|||
|
|
|
801,887 |
|
(17,785 |
) |
784,102 |
|
|||
|
Operating Expenses |
|
|
|
|
|
|
|
|||
|
Changes related to EITF 01-09 reclassification (1) |
|
|
|
(14,850 |
) |
|
|
|||
|
Changes related to SAB 101(2) |
|
|
|
(936 |
) |
|
|
|||
|
|
|
705,678 |
|
(15,786 |
) |
689,892 |
|
|||
|
Operating Income |
|
96,209 |
|
(1,999 |
) |
94,210 |
|
|||
|
Net (Loss) |
|
$ |
(19,511 |
) |
$ |
(977 |
) |
$ |
(20,488 |
) |
|
|
|
|
|
|
|
|
|
|||
|
Earnings Per Share — Net (Loss) |
|
|
|
|
|
|
|
|||
|
Basic |
|
$ |
(0.33 |
) |
$ |
(0.02 |
) |
$ |
(0.35 |
) |
|
Diluted |
|
$ |
(0.33 |
) |
$ |
(0.02 |
) |
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
Nine
Months Ended |
|
|||||||
|
|
|
As |
|
Changes |
|
As |
|
|||
|
|
|
(Dollars in thousands, except per share amounts) |
|
|||||||
|
Effects of 2002 Accounting Changes |
|
|
|
|
|
|
|
|||
|
Operating Revenues |
|
|
|
|
|
|
|
|||
|
Changes related to EITF 01-09 reclassification (1) |
|
$ |
|
|
$ |
(18,221 |
) |
$ |
|
|
|
Changes related to EITF 01-09 accrual (1) |
|
|
|
(2,935 |
) |
|
|
|||
|
|
|
2,190,898 |
|
(21,156 |
) |
2,169,742 |
|
|||
|
Operating Expenses |
|
|
|
|
|
|
|
|||
|
Changes related to EITF 01-09 reclassification (1) |
|
|
|
(18,221 |
) |
|
|
|||
|
Changes related to SAB 101(2) |
|
|
|
(2,989 |
) |
|
|
|||
|
|
|
1,868,083 |
|
(21,210 |
) |
1,846,873 |
|
|||
|
Operating Income |
|
322,815 |
|
54 |
|
322,869 |
|
|||
|
Income (Loss) before Cumulative Effect of Accounting Change |
|
(958,295 |
) |
27 |
|
(958,268 |
) |
|||
|
Cumulative Effect of Accounting Change (2) |
|
— |
|
3,366 |
|
3,366 |
|
|||
|
Net Income (Loss) |
|
$ |
(958,295 |
) |
$ |
3,393 |
|
$ |
(954,902 |
) |
|
|
|
|
|
|
|
|
|
|||
|
Earnings Per Share – Cumulative Effect of Accounting Change |
|
|
|
|
|
|
|
|||
|
Basic |
|
$ |
— |
|
$ |
0.06 |
|
$ |
0.06 |
|
|
Diluted |
|
$ |
— |
|
$ |
0.06 |
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|||
|
Earnings Per Share – Net (Loss) |
|
|
|
|
|
|
|
|||
|
Basic |
|
$ |
(16.35 |
) |
$ |
0.06 |
|
$ |
(16.29 |
) |
|
Diluted |
|
$ |
(16.35 |
) |
$ |
0.06 |
|
$ |
(16.29 |
) |
(1) U.S. Cellular changed its accounting for certain rebate transactions pursuant to Emerging Issues Task Force Statement (“EITF”) No. 01-09 in the fourth quarter of 2002. Under EITF No. 01-09, all rebates paid to agents who participate in qualifying new activation and retention transactions are recorded as a reduction of equipment sales revenues. Previously, U.S. Cellular had recorded new activation rebates as marketing and selling expense and retention rebates as general and administrative expense. Further, these rebates are now recorded at the time handsets are sold by U.S. Cellular to these agents. Previously, U.S. Cellular recorded these transactions at the time the handsets were delivered by agents to U.S. Cellular’s customers.
(2) U.S. Cellular changed its accounting policy related to certain transactions pursuant to Staff Accounting Bulletin (“SAB”) No. 101 during the fourth quarter of 2002. U.S. Cellular had adopted SAB No. 101 as of January 1, 2000, and began deferring
13
certain customer activation fees as of that date. As permitted by SAB No. 101, as of January 1, 2002, U.S. Cellular began deferring commission expenses equal to the amount of activation fees deferred. In conjunction with this change, TDS recorded a $3.4 million addition to net income as of January 1, 2002, related to commission expenses which would have been deferred in prior years had U.S. Cellular adopted its new policy at the time it adopted SAB No. 101.
7. 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 commission expenses related to customer activations and began deferring expense recognition of a portion of commission expenses equal to the amount of activation fees revenue deferred. U.S. Cellular believes this change is a preferable method of accounting for such costs primarily due to the fact that the new method of accounting provides for better matching of revenue from customer activations to direct incremental costs associated with these activations within each reporting period. The cumulative effect of this accounting change on periods prior to 2002 was recorded in 2002 increasing net income by $3.4 million, net of tax and minority interest, or $0.06 per diluted share.
8. 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.
14
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.
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
||||||||
|
Basic Earnings per Share |
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
|
|
As Restated |
|
As Restated |
|
As Restated |
|
As Restated |
|
||||
|
|
|
(Dollars in thousands) |
|
||||||||||
|
Income (Loss) from Continuing Operations |
|
$ |
34,614 |
|
$ |
(20,488 |
) |
$ |
49,098 |
|
$ |
(958,268 |
) |
|
Less: Preferred Dividend requirement |
|
104 |
|
105 |
|
312 |
|
323 |
|
||||
|
Income (Loss) from Continuing Operations Available to Common |
|
34,510 |
|
(20,593 |
) |
48,786 |
|
(958,591 |
) |
||||
|
Discontinued Operations |
|
(1,609 |
) |
— |
|
(1,609 |
) |
— |
|
||||
|
Cumulative Effect of Accounting Changes |
|
— |
|
— |
|
(11,789 |
) |
3,366 |
|
||||
|
Net Income (Loss) Available to Common used in Basic Earnings per Share |
|
$ |
32,901 |
|
$ |
(20,593 |
) |
$ |
35,388 |
|
$ |
(955,225 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
||||||||
|
Diluted Earnings per Share |
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
|
|
As Restated |
|
As Restated |
|
As Restated |
|
As Restated |
|
||||
|
|
|
(Dollars in thousands) |
|
||||||||||
|
Income (Loss) from Continuing Operations Available to Common used in Basic Earnings per Share |
|
$ |
34,510 |
|
$ |
(20,593 |
) |
$ |
48,786 |
|
$ |
(958,591 |
) |
|
Reduction in preferred dividends if Preferred Shares Converted into Common Shares |
|
50 |
|
— |
|
— |
|
— |
|
||||
|
Minority Income Adjustment (1) |
|
(210 |
) |
— |
|
(218 |
) |
— |
|
||||
|
Income (Loss) from Continuing Operations Available to Common |
|
34,350 |
|
(20,593 |
) |
48,568 |
|
(958,591 |
) |
||||
|
Discontinued Operations |
|
(1,609 |
) |
— |
|
(1,609 |
) |
— |
|
||||
|
Cumulative Effect of Accounting Changes |
|
— |
|
— |
|
(11,789 |
) |
3,366 |
|
||||
|
Net Income (Loss) Available to Common used in Diluted Earnings per Share |
|
$ |
32,741 |
|
$ |
(20,593 |
) |
$ |
35,170 |
|
$ |
(955,225 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|||||||||||||
|
(1) The minority income adjustment reflects the additional minority share of U.S. Cellular’s income computed as if all of U.S. Cellular’s issuable securities were outstanding. |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
|
|
(Shares in thousands) |
|
||||||||||
|
Weighted Average Number of Common Shares used in Basic Earnings per Share |
|
57,420 |
|
58,660 |
|
57,829 |
|
58,633 |
|
||||
|
Effect of Dilutive Securities |
|
|
|
|
|
|
|
|
|
||||
|
Stock Options (2) |
|
227 |
|
— |
|
95 |
|
— |
|
||||
|
Common shares outstanding if Preferred Shares Converted |
|
146 |
|
— |
|
— |
|
— |
|
||||
|
Weighted Average Number of Common Shares used in Diluted Earnings per Share |
|
57,793 |
|
58,660 |
|
57,924 |
|
58,633 |
|
||||
(2) Stock options and preferred shares convertible into 1,580,385 and 1,587,226 Common Shares in three and nine months ended September 30, 2002, respectively, were not included in computing Diluted Earnings per Share because their effects were antidilutive. Stock options and preferred shares convertible into 1,365,197 and 1,672,044 Common Shares in the three and nine months ended September 30, 2003, respectively, were not included in computing Diluted Earnings per Share because their effects were antidilutive.
15
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
Basic Earnings (Loss) per Share |
|
|
|
|
|
|
|
|
|
||||
|
Continuing Operations |
|
$ |
0.60 |
|
$ |
(0.35 |
) |
$ |
0.84 |
|
$ |
(16.35 |
) |
|
Discontinued Operations |
|
(0.03 |
) |
— |
|
(0.03 |
) |
— |
|
||||
|
Cumulative Effect of Accounting Changes |
|
— |
|
— |
|
(0.20 |
) |
0.06 |
|
||||
|
|
|
$ |
0.57 |
|
$ |
(0.35 |
) |
$ |
0.61 |
|
$ |
(16.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted Earnings (Loss) per Share |
|
|
|
|
|
|
|
|
|
||||
|
Continuing Operations |
|
$ |
0.60 |
|
$ |
(0.35 |
) |
$ |
0.84 |
|
$ |
(16.35 |
) |
|
Discontinued Operations |
|
(0.03 |
) |
— |
|
(0.03 |
) |
— |
|
||||
|
Cumulative Effect of Accounting Changes |
|
— |
|
— |
|
(0.20 |
) |
0.06 |
|
||||
|
|
|
$ |
0.57 |
|
$ |
(0.35 |
) |
$ |
0.61 |
|
$ |
(16.29 |
) |
9. 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 than temporary”, the unrealized loss included in other comprehensive income is recognized and recorded as a loss in the Statement of Operations.
During the nine months ended September 30, 2002, management determined that the decline in the value of the marketable securities relative to its accounting cost basis was other than temporary and charged a $1,756.5 million loss to the Statement of Operations ($1,044.4 million, net of tax of $686.2 million, and minority interest of $25.9 million) and reduced the accounting cost basis of the marketable securities by a corresponding amount. The loss was reported in the caption “Gain (loss) on marketable securities and other investments” in the Statement of Operations.
TDS and subsidiaries have entered into a number of forward contracts in 2002 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 risk of an other than temporary loss being recorded on these contracted securities.
Information regarding TDS’s marketable equity securities and the components of accumulated other comprehensive income are summarized as follows.
|
|
|
September 30, |
|
December 31, |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Marketable Equity Securities – Fair Value |
|
|
|
|
|
||
|
Deutsche Telekom AG - 131,461,861 ordinary shares |
|
$ |
1,906,197 |
|
$ |
1,689,285 |
|
|
Vodafone Group Plc – 12,945,915 ADRs |
|
262,155 |
|
234,580 |
|
||
|
VeriSign, Inc. – 2,361,333 and 2,525,786 common shares |
|
31,784 |
|
20,257 |
|
||
|
Rural Cellular Corporation - 719,396 equivalent common shares |
|
7,194 |
|
611 |
|
||
|
Other |
|
214 |
|
206 |
|
||
|
Aggregate Fair Value |
|
2,207,544 |
|
1,944,939 |
|
||
|
Accounting Cost Basis |
|
1,543,934 |
|
1,545,713 |
|
||
|
Gross Unrealized Holding Gains |
|
663,610 |
|
399,226 |
|
||
|
Income Tax (Expense) |
|
(259,140 |
) |
(155,794 |
) |
||
|
Unrealized Holding Gains, net of tax |
|
404,470 |
|
243,432 |
|
||
|
Derivatives, net of tax |
|
(148,713 |
) |
(50,508 |
) |
||
|
Equity Method Unrealized Gains |
|
126 |
|
615 |
|
||
|
Minority Share of Unrealized Holding (Gains) |
|
(3,593 |
) |
(1,835 |
) |
||
|
Accumulated Other Comprehensive Income |
|
$ |
252,290 |
|
$ |
191,704 |
|
16
10. Goodwill and Customer Lists
TDS has recorded goodwill as a result of the acquisition of wireless licenses and markets, and the acquisition of operating telephone companies. Included in U.S. Cellular’s goodwill is goodwill related to various acquisitions structured to be tax-free. No deferred taxes have been provided on goodwill related to tax-free acquisitions.
The changes in the carrying amount of goodwill for the nine months ended September 30, 2003 and 2002, were as follows. TDS Telecom’s 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 |
|
|
Divestiture |
|
(93,658 |
) |
— |
|
— |
|
— |
|
(93,658 |
) |
|||||
|
Impairment loss(2) |
|
— |
|
— |
|
— |
|
(5,000 |
) |
(5,000 |
) |
|||||
|
Other |
|
(191 |
) |
(141 |
) |
— |
|
— |
|
(332 |
) |
|||||
|
Ending Balance September 30, 2003 |
|
$ |
549,780 |
|
$ |
397,341 |
|
$ |
29,440 |
|
$ |
30,900 |
|
$ |
1,007,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Beginning Balance January 1, 2002 |
|
$ |
473,975 |
|
$ |
332,848 |
|
$ |
29,440 |
|
$ |
34,538 |
|
$ |
870,801 |
|
|
Acquisitions |
|
155,566 |
|
60,936 |
|
— |
|
— |
|
216,502 |
|
|||||
|
Other |
|
— |
|
825 |
|
— |
|
1,362 |
|
2,187 |
|
|||||
|
Ending Balance September 30, 2002 |
|
$ |
629,541 |
|
$ |
394,609 |
|
$ |
29,440 |
|
$ |
35,900 |
|
$ |
1,089,490 |
|
(1)Other consists of goodwill related to an investment in a cellular market owned by an incumbent local exchange carrier subsidiary.
(2)See Note 5 – (Losses) on Marketable Securities and Other Investments for discussion of the impairment loss.
TDS’s customer lists represent intangible assets from the acquisition of wireless properties and are being amortized based on average customer retention periods using the declining balance method. Amortization expense was $3.9 million and $12.9 million for the three and nine months ended September 30, 2003, respectively. Amortization expense was $1.3 million for both the three and nine months ended September 30, 2002. The related amortization expense for the remainder of 2003 and for the years 2004-2007 is expected to be $2.8 million, $9.5 million, $5.8 million, $3.5 million and $2.1 million, respectively.
11. Acquisitions and Divestitures - Completed
On March 10, 2003, U.S. Cellular announced that it had entered into a definitive agreement with AT&T Wireless to exchange wireless properties. When this transaction is fully consummated, U.S. Cellular will receive 10 and 20 megahertz personal communication service licenses in 13 states contiguous to and that overlap existing properties in the Midwest and the Northeast; approximately $34.0 million in cash and minority interests in six markets it currently controls. On August 1, 2003, U.S. Cellular completed the transfer of wireless assets and customers in 10 markets in Florida and Georgia to AT&T Wireless and the assignments to U.S. Cellular from AT&T Wireless of a portion of the personal communication service licenses. The assignment and development of certain licenses has been deferred by U.S. Cellular for a period of up to five years from the closing date, in accordance with the agreement. U.S. Cellular will take possession of the licenses in staggered closings over that five-year period to comply with service requirements of the Federal Communications Commission. On the initial closing date, U.S. Cellular also received the cash and the minority interests. The acquisition of the licenses in the exchange was accounted for as a purchase by U.S. Cellular and the transfer of the properties by U.S. Cellular to AT&T Wireless was accounted for as a sale.
The 14 licenses that have been transferred to U.S. Cellular as of September 30, 2003, with a fair value totaling $131.5 million, are included in Wireless license costs on the balance sheet. The 22 licenses that have not yet been assigned to U.S. Cellular, with a fair value totaling $47.2 million, are included in Wireless license rights on the balance sheet. All asset values related to the properties acquired or pending, including license values, were determined using an independent valuation.
Prior to the close of the AT&T Wireless exchange, TDS reflected the assets and liabilities to be transferred to AT&T Wireless as assets and liabilities of operations held for sale in accordance with
17
SFAS No. 144. The results of operations of the markets transferred to AT&T Wireless were included in results of operations through July 31, 2003.
Also prior to the close of the AT&T Wireless exchange, U.S. Cellular allocated $93.7 million of goodwill related to the properties transferred to AT&T Wireless to the operations held for sale in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets.” A total loss of $25.6 million (including a $1.4 million reduction recorded in the third quarter) was recorded as a “Loss on assets held for sale” (included in operating expenses) representing the difference between the book value of the markets transferred to AT&T Wireless and the fair value of the assets received or to be received in the transaction.
TDS recorded an additional charge to the Statement of Operations of approximately $10 million for income taxes in the three months ended September 30, 2003 and has a current tax liability of approximately $3.5 million related to state income taxes on the completion of the transaction. As a result of the Jobs and Growth Tax Relief Reconciliation Act of 2003, enacted in May of 2003, TDS anticipates that it will claim additional federal tax depreciation deductions in 2003. Such additional depreciation deductions are expected to result in a federal net operating loss for TDS for 2003; accordingly, TDS anticipates that there will be no current federal tax liability in 2003 attributable to the exchange of assets with AT&T Wireless.
U.S. Cellular and AT&T Wireless have entered into a Transition Services Agreement in order to ensure a smooth transition of the exchanged markets to AT&T Wireless. U.S. Cellular will provide transitional services including information services, customer service, engineering, finance, and marketing. The services will be provided for a period of up to one year after the closing date. U.S. Cellular will be paid a monthly fee to offset its costs for services it provides to AT&T Wireless; these fees are primarily recorded as a reduction of general and administrative expenses in the consolidated statement of operations. In the third quarter of 2003, U.S. Cellular billed AT&T Wireless $2.8 million for these services.
12. Long-Term Debt
TDS repurchased $5.0 million of 10% Medium-Term Notes in the second quarter of 2003 at 115.75% of par value. The loss on retirement of debt totaled $787,500 and was reported in the caption Other (expense), net in the Statement of Operations.
TDS redeemed $65.5 million of Series B Medium-Term Notes in the third quarter of 2003 at par. There was no gain or loss on the retirement of these notes. TDS wrote off, to Other (expense), net in the Statement of Operations, deferred expenses related to the Medium-Term Notes totaling $0.4 million that were previously included in Other Assets and Deferred Charges on the balance sheet.
On September 2, 2003 TDS’s subsidiary trusts, TDS Capital l and TDS Capital II redeemed all of their outstanding Trust Originated Preferred Securities (“TOPrSSM”). The redemption price of both the 8.5% and 8.04% TOPrS was equal to 100% of the principal amount, or $25.00 per security, plus accrued and unpaid distributions. The outstanding amount of the 8.5% TOPrS redeemed was $150 million. The outstanding amount of the 8.04% TOPrS redeemed was $150 million. The accrued distributions that were paid upon redemption totaled $4.4 million. TDS wrote off, to Other (expense), net in the Statement of Operations, deferred expenses related to the TOPrS totaling $8.7 million that were previously included in Other Assets and Deferred Charges on the balance sheet.
13. 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 September 30, 2003, TDS has repurchased 1.4 million Common Shares under this authorization for an aggregate of $56.5 million, representing an average per share price of $40.99, including commissions, leaving 1.6 million shares available for repurchase under the authorization. Share repurchases may be made from time to time on the open market or at negotiated prices in private transactions. No shares were repurchased in 2002.
18
14. 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.
|
|
|
Nine
Months Ended |
|
||||
|
|
|
2003 |
|
2002 |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
|
|
|
|
|
|
||
|
Balance, beginning of period |
|
$ |
191,704 |
|
$ |
(352,120 |
) |
|
|
|
|
|
|
|
||
|
Marketable Equity Securities |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Add (Deduct): |
|
|
|
|
|
||
|
Unrealized gains (losses) on marketable equity securities |
|
264,215 |
|
(1,429,504 |
) |
||
|
Income tax (expense) benefit |
|
(103,285 |
) |
557,913 |
|
||
|
|
|
160,930 |
|
(871,591 |
) |
||
|
Equity method unrealized gains (losses) |
|
(489 |
) |
218 |
|
||
|
Minority share of unrealized (gains) losses |
|
(2,724 |
) |
14,900 |
|
||
|
Net unrealized gains (losses) |
|
157,717 |
|
(856,473 |
) |
||
|
|
|
|
|
|
|
||
|
Deduct (Add): |
|
|
|
|
|
||
|
Recognized (losses) on marketable equity securities |
|
(168 |
) |
(1,756,526 |
) |
||
|
Income tax benefit |
|
62 |
|
686,223 |
|
||
|
|
|
(106 |
) |
(1,070,303 |
) |
||
|
Minority share of recognized losses |
|
21 |
|
25,900 |
|
||
|
Net recognized (losses) from Marketable Equity Securities included in Net Income |
|
(85 |
) |
(1,044,403 |
) |
||
|
|
|
157,802 |
|
187,930 |
|
||
|
Derivative Instruments |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Unrealized gains (losses) on derivative instruments |
|
(160,639 |
) |
193,093 |
|
||
|
Income tax (expense) benefit |
|
62,433 |
|
(75,874 |
) |
||
|
|
|
(98,206 |
) |
117,219 |
|
||
|
Minority Share of unrealized (gains) losses |
|
990 |
|
(3,809 |
) |
||
|
|
|
(97,216 |
) |
113,410 |
|
||
|
Net change in unrealized gains (losses) included in Comprehensive Income (Loss) |
|
60,586 |
|
301,340 |
|
||
|
Balance, end of period |
|
$ |
252,290 |
|
$ |
(50,780 |
) |
|
|
|
|
|
|
|
||
|
Accumulated Unrealized Gain (Loss) on Derivative Instruments |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Balance, beginning of period |
|
$ |
(49,584 |
) |
$ |
— |
|
|
Add (Deduct): |
|
|
|
|
|
||
|
Unrealized gains (losses) on derivative instruments |
|
(160,639 |
) |
193,093 |
|
||
|
Income (tax) benefit |
|
62,433 |
|
(75,874 |
) |
||
|
Minority share of unrealized (gains) losses |
|
990 |
|
(3,809 |
) |
||
|
|
|
(97,216 |
) |
113,410 |
|
||
|
Balance, end of period |
|
$ |
(146,800 |
) |
$ |
113,410 |
|
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
|
|
(Dollars in thousands) |
|
||||||||||
|
Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
||||
|
Net Income (loss) |
|
$ |
33,005 |
|
$ |
(20,488 |
) |
$ |
35,700 |
|
$ |
(954,902 |
) |
|
Net change in unrealized gains (losses) on marketable equity securities and derivative instruments |
|
(8,616 |
) |
(30,370 |
) |
60,586 |
|
301,340 |
|
||||
|
|
|
$ |
24,389 |
|
$ |
(50,858 |
) |
$ |
96,286 |
|
$ |
(653,562 |
) |
19
15. 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 by TDS.
|
|
|
Nine
Months Ended |
|
||||
|
|
|
2003 |
|
2002 |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Interest Paid |
|
$ |
123,411 |
|
$ |
88,998 |
|
|
|
|
|
|
|
|
||
|
Income Taxes Paid (Refunded) |
|
$ |
(46,584 |
) |
$ |
15,861 |
|
16. Business Segment Information (As Restated)
Financial data for TDS’s business segments for each of the three-month and nine-month periods ended or at September 30, 2003 and 2002 are as follows. TDS Telecom’s incumbent local exchange carrier is designated as “ILEC” and its competitive local exchange carrier is designated as “CLEC” in the table.
|
Three Months Ended or at |
|
|
|
TDS Telecom |
|
|
|
|
|
|||||||
|
(Dollars in thousands) |
|
U.S. Cellular |
|
ILEC |
|
CLEC |
|
All Other(1) |
|
Total |
|
|||||
|
Operating revenues |
|
$ |
657,343 |
|
$ |
164,650 |
|
$ |
53,468 |
|
$ |
(707 |
) |
$ |
874,754 |
|
|
Cost of services and products |
|
207,107 |
|
41,240 |
|
22,734 |
|
(252 |
) |
270,829 |
|
|||||
|
Selling, general and administrative expense |
|
252,483 |
|
44,571 |
|
30,481 |
|
(455 |
) |
327,080 |
|
|||||
|
Operating income before depreciation, amortization and accretion and loss on assets held for sale(2) |
|
197,753 |
|
78,839 |
|
253 |
|
— |
|
276,845 |
|
|||||
|
Depreciation, amortization and accretion |
|
103,634 |
|
32,059 |
|
8,545 |
|
— |
|
144,238 |
|
|||||
|
Loss on assets held for sale |
|
(1,442 |
) |
— |
|
— |
|
— |
|
(1,442 |
) |
|||||
|
Operating income (loss) |
|
95,561 |
|
46,780 |
|
(8,292 |
) |
— |
|
134,049 |
|
|||||
|
Significant noncash items: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Investment income |
|
11,301 |
|
149 |
|
— |
|
194 |
|
11,644 |
|
|||||
|
Marketable securities |
|
211,178 |
|
— |
|
— |
|
1,996,366 |
|
2,207,544 |
|
|||||
|
Investment in unconsolidated entities |
|
178,417 |
|
19,218 |
|
— |
|
24,894 |
|
222,529 |
|
|||||
|
Total assets |
|
4,772,072 |
|
1,786,873 |
|
233,751 |
|
2,693,329 |
|
9,486,025 |
|
|||||
|
Capital expenditures |
|
$ |
135,111 |
|
$ |
32,007 |
|
$ |
7,999 |
|
$ |
1,485 |
|
$ |
176,602 |
|
|
Three Months Ended or at |
|
|
|
TDS Telecom |
|
|
|
|
|
|||||||
|
(Dollars in thousands) |
|
U.S. Cellular |
|
ILEC |
|
CLEC |
|
All Other(1) |
|
Total |
|
|||||
|
Operating revenues |
|
$ |
579,786 |
|
$ |
158,961 |
|
$ |
45,998 |
|
$ |
(643 |
) |
$ |
784,102 |
|
|
Cost of services and products |
|
187,962 |
|
37,097 |
|
20,706 |
|
(261 |
) |
245,504 |
|
|||||
|
Selling, general and administrative Expense |
|
226,251 |
|
43,109 |
|
32,201 |
|
(382 |
) |
301,179 |
|
|||||
|
Operating income (loss) before depreciation and amortization(2) (3) |
|
165,573 |
|
78,755 |
|
(6,909 |
) |
— |
|
237,419 |
|
|||||
|
Depreciation and amortization |
|
102,876 |
|
32,907 |
|
7,426 |
|
— |
|
143,209 |
|
|||||
|
Operating income (loss) |
|
62,697 |
|
45,848 |
|
(14,335 |
) |
— |
|
94,210 |
|
|||||
|
Significant noncash items: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Investment income |
|
12,963 |
|
125 |
|
— |
|
247 |
|
13,335 |
|
|||||
|
Gain (loss) on marketable securities and other investments |
|
(34,210 |
) |
— |
|
— |
|
(55,861 |
) |
(90,071 |
) |
|||||
|
Marketable securities |
|
131,767 |
|
— |
|
— |
|
1,139,038 |
|
1,270,805 |
|
|||||
|
Investment in unconsolidated entities |
|
162,211 |
|
48,956 |
|
— |
|
25,545 |
|
236,712 |
|
|||||
|
Total assets |
|
4,443,558 |
|
1,705,284 |
|
235,486 |
|
1,610,271 |
|
7,994,599 |
|
|||||
|
Capital expenditures |
|
$ |
192,256 |
|
$ |
36,484 |
|
$ |
9,653 |
|
$ |
— |
|
$ |
238,393 |
|
20
|
Nine Months Ended or at |
|
|
|
TDS Telecom |
|
|
|
|
|
|||||||
|
(Dollars in thousands) |
|
U.S. Cellular |
|
ILEC |
|
CLEC |
|
All Other(1) |
|
Total |
|
|||||
|
Operating revenues |
|
$ |
1,893,067 |
|
$ |
484,052 |
|
$ |
158,386 |
|
$ |
(2,046 |
) |
$ |
2,533,459 |
|
|
Cost of services and products |
|
614,231 |
|
119,219 |
|
63,737 |
|
(772 |
) |
796,415 |
|
|||||
|
Selling, general and administrative expense |
|
793,039 |
|
131,604 |
|
87,787 |
|
(1,274 |
) |
1,011,156 |
|
|||||
|
Operating income before depreciation, amortization, and accretion and loss on assets held for sale(2) |
|
485,797 |
|
233,229 |
|
6,862 |
|
— |
|
725,888 |
|
|||||
|
Depreciation, amortization and accretion |
|
317,905 |
|
97,799 |
|
24,663 |
|
— |
|
440,367 |
|
|||||
|
Loss on assets held for sale |
|
25,558 |
|
— |
|
— |
|
— |
|
25,558 |
|
|||||
|
Operating income (loss) |
|
142,334 |
|
135,430 |
|
(17,801 |
) |
— |
|
259,963 |
|
|||||
|
Significant noncash items: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Investment income |
|
37,163 |
|
488 |
|
— |
|
260 |
|
37,911 |
|
|||||
|
Gain (loss) on marketable securities and other investments |
|
(3,500 |
) |
— |
|
— |
|
(5,000 |
) |
(8,500 |
) |
|||||
|
Marketable securities |
|
211,178 |
|
— |
|
— |
|
1,996,366 |
|
2,207,544 |
|
|||||
|
Investment in unconsolidated entities |
|
178,417 |
|
19,218 |
|
— |
|
24,894 |
|
222,529 |
|
|||||
|
Total assets |
|
4,772,072 |
|
1,786,873 |
|
233,751 |
|
2,693,329 |
|
9,486,025 |
|
|||||
|
Capital expenditures |
|
$ |
439,113 |
|
$ |
76,707 |
|
$ |
17,208 |
|
$ |
4,497 |
|
$ |
537,525 |
|
|
Nine Months Ended or at |
|
|
|
TDS Telecom |
|
|
|
|
|
|||||||
|
(Dollars in thousands) |
|
U.S. Cellular |
|
ILEC |
|
CLEC |
|
All Other(1) |
|
Total |
|
|||||
|
Operating revenues |
|
$ |
1,582,545 | |||||||||||||