-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IIvP1lu/Zp+vIXL9FT2Cx6vgrlY5Sr6g81tKtumRULHrFfOE0IdRnldi+01HWFBs Ciahzxr7EsU9C15Wz/TXMA== 0001051512-01-000015.txt : 20010223 0001051512-01-000015.hdr.sgml : 20010223 ACCESSION NUMBER: 0001051512-01-000015 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20010215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELEPHONE & DATA SYSTEMS INC /DE/ CENTRAL INDEX KEY: 0001051512 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 362669023 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-14157 FILM NUMBER: 1547599 BUSINESS ADDRESS: STREET 1: 30 NORTH LASALLE STREET STREET 2: 8401 GREENWAY BLVD CITY: CHICAGO STATE: IL ZIP: 60602 BUSINESS PHONE: 3126301900 MAIL ADDRESS: STREET 1: 30 NORTH LASALLE STREET STREET 2: 8401 GREENWAY BLVD CITY: CHICAGO STATE: IL ZIP: 60602 10-Q/A 1 0001.txt FORM 10-Q AMENDMENT - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 ------------------------------------------------- OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------- ------------------------- Commission File Number 001-14157 - -------------------------------------------------------------------------------- TELEPHONE AND DATA SYSTEMS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-2669023 ------------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 30 North LaSalle Street, Chicago, Illinois 60602 --------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 630-1900 Not Applicable --------------------------------------------------------------------------- (Former address of principal executive offices) (Zip Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No ------- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 31, 2000 - ---------------------------------- ------------------------------------- Common Shares, $.01 par value 51,867,068 Shares Series A Common Shares, $.01 par value 6,912,099 Shares - -------------------------------------------------------------------------------- Explanatory Note Telephone and Data Systems, Inc. has restated its consolidated financial statements as a result of a reconsideration of the appropriate tax accounting treatment of the minority share of income or loss of consolidated companies and for the timing of deferred tax recognition for discontinued operations under FAS 109 (Accounting for Income Taxes). This amendment includes in Part I, the amended and restated condensed consolidated financial statements, related footnotes, and management's discussion and analysis of financial condition and results of operations for the three and nine months ended September 30, 2000 and 1999. Except for Part I; condensed consolidated financial statements and related footnotes, and management's discussion and analysis of financial condition and results of operations, and Exhibit 27, no other information included in the original report on Form 10-Q is amended by this amendment. TELEPHONE AND DATA SYSTEMS, INC. -------------------------------- 3rd QUARTER REPORT ON FORM 10-Q ------------------------------- INDEX ----- Page No. -------- Part I. Financial Information Management's Discussion and Analysis of Results of Operations and Financial Condition 2-15 Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 2000 and 1999 16 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2000 and 1999 17 Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 18-19 Notes to Consolidated Financial Statements 20-27 Part II. Other Information 28 Signatures 29 PART I. FINANCIAL INFORMATION ----------------------------- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS ------------------------------------------------------------- AND FINANCIAL CONDITION ----------------------- Telephone and Data Systems, Inc. ("TDS" or the "Company") is a diversified telecommunications company, which provides high-quality telecommunications services to 3.6 million wireless telephone and telephone customer units. TDS's business development strategy is to expand its existing operations through internal growth and acquisitions, and to explore and develop telecommunications businesses that management believes utilize TDS's expertise in customer-based telecommunications. The Company conducts substantially all of its wireless telephone operations through its 82.7%-owned subsidiary, United States Cellular Corporation ("U.S. Cellular") and its wireline telephone operations through its wholly owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom"). Merger of Aerial Communications, Inc. In September of 1999, the Board of Directors of TDS approved a plan of merger between Aerial Communications, Inc. ("Aerial"), its then over 80%-owned personal communications services company, and VoiceStream Wireless Corporation ("VoiceStream"). The merger closed on May 4, 2000. As a result of the merger, Aerial shareholders received 0.455 VoiceStream common shares for each share of Aerial stock they owned. TDS received 35,570,493 shares of VoiceStream common stock valued at $3.90 billion at closing. TDS recognized a gain of $2.13 billion, net of tax, on this transaction in 2000. TDS was released from its guarantees of Aerial's long-term debt at the closing of the merger. In addition, the net settlement of intercompany amounts due from/to Aerial was repaid to TDS at the closing of the merger. As a result of the board's approval of the plan, the consolidated financial statements of TDS and supplemental data have been adjusted to reflect the results of operations and net assets of the subsidiary as discontinued operations in accordance with generally accepted accounting principles. Financial statements for prior periods have been reclassified to conform to current year presentation. On July 24, 2000, Deutsche Telecom AG announced a proposed merger of VoiceStream with Deutsche Telecom. The proposed merger calls for the exchange of 3.2 shares of Deutsche Telecom and $30 for each share of VoiceStream owned, subject to adjustment under certain circumstances. In addition, VoiceStream stockholders may elect to receive all cash or all stock for their shares, subject to proration. The merger is subject to regulatory approvals and other conditions, including stockholder approval. VoiceStream stockholders holding over 50% of the voting power of the VoiceStream common stock, including TDS, have agreed to vote for the merger. Restatement Matters The Company's consolidated balance sheets as of September 30, 2000 and December 31, 1999, and the related consolidated statements of operations and cash flows for three and nine month periods ending September 30, 1999 and September 30, 2000 have been restated as a result of the reconsideration of the appropriate accounting treatment of minority share of income or loss of consolidated companies under FAS 109 (Accounting for Income Taxes). At the time FAS 109 was implemented in 1993, TDS concluded that the minority share of income or loss in consolidated subsidiaries should be treated as a temporary difference between tax and financial reporting. TDS has determined that minority interests should not be treated as temporary differences under FAS 109 and restated financial results for the year 1993 through September 30, 2000. Accordingly, TDS adjusted income tax expense and deferred tax assets or liabilities from 1993 through the third quarter of 2000. The cumulative effect of the restatement for the period from 1993 through September 30, 2000 was to increase income tax expense and reduce net income from continuing operations by $70.6 million. The restatement had no cumulative effect on discontinued operations for the same period. However, the restatement reduced income tax expense and increased the net income from discontinued operations by $51.6 million through the date of Aerial's merger with VoiceStream, and decreased the gain reported in conjunction with that transaction on May 4, 2000 by a corresponding amount. TDS also restated the deferred taxes and net income from discontinued operations for the third quarter of 1999 and the second quarter of 2000 to be consistent with FAS 109 (Accounting for Income Taxes) and EITF Issue No. 93-17 (Recognition of Deferred Tax Assets for a Parent Company's Excess Tax Basis in the Stock of a Subsidiary That Is Accounted for as a Discontinued Operation). The TDS financial reporting basis in the stock of Aerial exceeded the tax basis on the date TDS decided to merge Aerial. A tax liability for that excess should have been recognized as of the decision date. The restatement created a deferred tax liability of $30 million as of the September 17, 1999 decision date and increased 1999 income tax expense and decreased net income from discontinued operations by the same amount. The gain on the sale of discontinued operations, recognized May 4, 2000, was increased by a corresponding amount in the restatement. The summarized financial information illustrating the effect of the restatement on the Company's consolidated financial statements is as follows:
Period Ended Period Ended Year Ended Year Ended 9/30/00 9/30/00 1999 1999 Originally Reported As Restated Originally Reported As Restated ------------------- ------------ ------------------- ----------- (dollars in thousands, except per share amounts) Financial Position: Net Assets of Discontinued Operations $ - $ - $237,145 $258,793 Deferred liabilities and Credits 1,994,308 2,062,728 424,515 481,003 Retained Earnings $2,746,079 $2,677,659 $508,979 $474,139
Three Months Ended Three Months Ended Three Months Ended Three Months Ended 9/30/00 Originally 9/30/00 9/30/99 9/30/99 Reported As Restated Originally Reported As Restated ------------------ ------------------ ------------------- ------------------ (dollars in thousands, except per share amounts) Results of Operations: Income Tax Expense $68,034 $74,999 $40,889 $45,296 Income from Continuing Operations 75,105 68,140 52,936 48,529 Loss from operations of Aerial, net of tax - - (27,394) (56,252) Income (Loss) before on Extraordinary Item 72,458 65,493 25,542 (7,723) Extraordinary Item (20,460) (18,266) - - Net Income (Loss) 51,998 47,227 25,542 (7,723) Net Income (Loss) Available Common 51,879 47,107 25,226 (8,039) Basic Earnings Per Share: Continued Operations 1.26 1.14 .86 .78 Discontinued Operations Gain on Disposal of Aerial (.05) (.04) - - Loss on Operations of Aerial - - (.45) (.91) Net Income available to Common .87 .79 .41 (.13) Diluted Earnings Per Share: Continued Operations 1.24 1.13 .84 .77 Discontinued Operations Gain on Disposal of Aerial (.04) (.05) - - Loss on Operations of Aerial - - (.44) (.90) Net Income available to Common $ .86 $ .78 $ .40 $ (.13)
Nine Months Ended Nine Months Ended Nine Months Ended Nine Months Ended 9/30/00 Originally 9/30/00 9/30/99 Originally 9/30/99 Reported As Restated Reported As Restated -------- ----------- -------- ----------- (dollars in thousands, except per share amounts) Results of Operations: Income Tax Expense $122,758 $136,884 $210,475 $231,740 Income from Continuing Operations 139,220 125,094 302,675 281,410 Loss from operations of Aerial, net of tax - - (84,190) (111,492) Gain on disposal of Aerial, net of tax 2,147,435 2,125,787 - - Income (Loss) before Loss on Extraordinary Item 2,286,655 2,250,881 218,485 169,918 Extraordinary Item (26,566) (24,372) - - Net Income 2,260,089 2,226,509 218,485 169,918 Net Income (Loss) Available Common 2,259,704 2,226,124 217,482 168,915 Basic Earnings Per Share: Continued Operations 2.30 2.07 4.92 4.57 Discontinued Operations Gain on Disposal of Aerial 35.61 35.24 - - Loss on Operations of Aerial - - (1.38) (1.82) Net Income available to Common 37.47 36.91 3.54 2.75 Diluted Earnings Per Share: Continued Operations 2.26 2.03 4.82 4.51 Discontinued Operations Gain on Disposal of Aerial 35.14 34.83 - - Loss on Operations of Aerial - - (1.35) (1.79) Net Income available to Common $ 36.97 $ 36.46 $ 3.47 $ 2.72
RESULTS OF OPERATIONS - --------------------- Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30, - -------------------------------------------------------------------------------- 1999 - ---- Operating Revenues increased 11% ($160.0 million) during the first nine months of 2000 primarily as a result of a 16% increase in customer units served. U.S. Cellular's operating revenues increased 11% ($111.8 million) as customer units served increased by 437,000, or 18%, since September 30, 1999, to 2,890,000. TDS Telecom operating revenues increased 12% ($48.2 2 million) as total access lines increased by 69,400 or 11%, since September 30, 1999 to 696,400. Operating Expenses rose 11% ($122.4 million) in 2000 reflecting growth in operations. U.S. Cellular's operating expenses increased 10% ($81.3 million) and TDS Telecom's expenses increased 13% ($41.1 million). Operating Income increased 12% to $345.4 million in 2000 from $307.7 million in 1999. U.S. Cellular's operating income increased 14% to $250.6 million in 2000 from $220.1 million in 1999 and its operating income margin, as a percentage of service revenues, improved to 22.3% in 2000 from 21.5% in 1999. TDS Telecom's operating income increased 8% to $94.7 million in 2000 from $87.6 million in 1999 and its operating margin declined to 21.0% in 2000 from 21.8% in 1999. The slight decrease in TDS Telecom's operating margin was primarily the result of expanding CLEC activities. Investment and Other Income (Expense) totaled $7.4 million in 2000 and $300.4 million in 1999. Gain on Cellular and Other Investments totaled $25.6 million in 2000 and $345.9 million in 1999. The sale of non-strategic cellular interests and the settlement of a legal matter resulted in gains of $96.1 million in 2000. TDS reduced the carrying value of its paging investment by $70.5 million in 2000 to reflect the reduced valuations in the paging industry. TDS continues to hold a secured note receivable of $11.0 million with its paging investment. TDS recognized a $327.1 million gain in the second quarter of 1999 on the difference between its historical basis in its investment in AirTouch Communications, Inc. ("AirTouch") common shares and the value of Vodafone AirTouch plc American Depository Receipts and cash received in the merger of AirTouch and Vodafone Group plc. The remaining gains in 1999 resulted when the Company sold or traded certain non-strategic minority cellular interests and other investments. Minority Share of (Income) includes the minority public shareholders' share of U.S. Cellular's net income, the minority shareholders' or partners' share of U.S. Cellular's subsidiaries' net income or loss and other minority interests. The decrease in minority share of income primarily reflects the decrease in U.S. Cellular's net income due to a decrease in gains. Gains increased minority share of income by $8.7 million in 2000 and $30.6 million in 1999.
Nine Months Ended September 30, ------------------ 2000 1999 Change ---- ---- ------ (Dollars in thousands) Minority Share of (Income) U.S. Cellular Minority Public Shareholders' $ (35,707) $ (53,516) $ 17,809 Minority Shareholders' or Partners' (6,801) (6,156) (645) --------------- -------------- -------------- (42,508) (59,672) 17,164 Other (247) (510) 263 --------------- -------------- -------------- $ (42,755) $ (60,182) $ 17,427 =============== ============== ==============
Interest Expense decreased 6% ($4.3 million) in 2000 reflecting primarily lower average short-term debt balances. Income Tax Expense decreased 41% ($94.9 million) in 2000 due to the decline in gains, offset somewhat by improved operating results. Income From Continuing Operations totaled $125.1 million, or $2.03 per diluted share, in 2000, 3 compared to $281.4 million, or $4.51 per diluted share, in 1999. Income from continuing operations, excluding gains and losses, increased to $128.6 million, or $2.09 per diluted share in 2000 from $102.0 million, or $1.63 per diluted share in 1999. A summary of income from continuing operations and diluted earnings per share from operations and gains (losses) is shown below.
Nine Months Ended September 30, ----------------- 2000 1999 ---- ---- (Dollars in thousands, except per share amounts) Income from Continuing Operations Operations $ 128,565 $ 101,966 Gains (Losses) (3,471) 179,414 ---------------- ---------------- $ 125,094 $ 281,410 ================ ================ Diluted Earnings Per Share from Continuing Operations Operations $ 2.09 $ 1.63 Gains (Losses) (0.06) 2.88 ---------------- ---------------- $ 2.03 $ 4.51 ================ ================
Discontinued Operations. The gain on disposal of Aerial totaled $2.13 billion, or $34.83 per diluted share in 2000. Loss on operations of Aerial totaled $(111.5) million, or $(1.79) per diluted share in 1999. A loss from operations of Aerial of $(37.7) million in 2000, prior to the merger, was deferred and recognized as a reduction of the gain on disposal of Aerial. Extraordinary Item - loss on extinguishment of debt, is related to U.S. Cellular's repurchase and certain conversions of its Liquid Yield Option Notes (LYONs). A loss, net of taxes and minority interest, of $(24.4) million, or $(0.40) per diluted share, reflects the difference between the repurchase or conversion price and the carrying value. Net Income Available to Common totaled $2.23 billion, or $36.46 per diluted share, in 2000, compared to $168.9 million, or $2.72 per diluted share, in 1999. Net income available to common in 2000 includes significant gains from the disposal of Aerial. 4 U.S. CELLULAR OPERATIONS TDS provides wireless telephone service through United States Cellular Corporation ("U.S. Cellular"), an 82.7%-owned subsidiary. U.S. Cellular owns, manages and invests in cellular markets throughout the United States. Rapid growth in the customer base is a primary reason for the growth in U.S. Cellular's results of operations. The number of customer units served increased by 437,000, or 18%, since September 30, 1999, to 2,890,000.
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in thousands) Operating Revenue Local service $ 280,234 $ 241,667 $ 801,512 $ 689,672 Inbound roaming 78,124 91,713 226,579 241,790 Long-distance and other 38,271 26,760 97,887 92,395 ----------- ----------- ---------- ---------- Service Revenue 396,629 360,140 1,125,978 1,023,857 Equipment Sales 17,570 13,061 45,965 36,281 ----------- ----------- ---------- ----------- 414,199 373,201 1,171,943 1,060,138 ----------- ----------- ---------- ----------- Operating Expenses System operations 54,659 44,807 152,286 165,139 Marketing and selling 73,988 66,848 214,174 188,533 Cost of equipment sold 34,430 27,915 99,081 81,015 General and administrative 89,892 80,627 257,931 239,500 Depreciation 51,665 47,031 153,052 135,332 Amortization 15,037 10,413 44,783 30,493 ---------- ---------- ---------- ---------- 319,671 277,641 921,307 840,012 ---------- ---------- ---------- ---------- Operating Income $ 94,528 $ 95,560 $ 250,636 $ 220,126 ========== ========== ========== ==========
Operating revenue increased 11% ($111.8 million) in 2000 primarily related to the increase in customer units. Average monthly service revenue per customer decreased 7% ($3.53) to $45.53 in 2000 from $49.06 in 1999. The decline reflects primarily lower retail revenue per customer ($0.64), lower roaming revenue per customer ($2.42) and lower long-distance and other revenue per customer ($0.47). Local retail revenue increased 16% ($111.8 million) in 2000 due primarily to the 18% customer growth. Average local minutes of use per retail customer increased 30% to 151 in 2000 from 115 in 1999, while average local retail revenue per minute continued to decline in 2000. Competitive pressures and U.S. Cellular's use of incentive programs and rate plans to stimulate overall usage resulted in a lower average revenue per minute of use. Average monthly local retail revenue per customer declined 2% ($0.64) to $32.41 in 2000 from $33.04 in 1999. Inbound roaming revenue (charges to customers of other systems who use U.S. Cellular's cellular systems when roaming) decreased 6% ($15.2 million) in 2000. The decline in inbound roaming revenue was a result of an increase in roaming minutes of use offset by a decrease in roaming revenue per minute due to the downward trend in negotiated rates. Both the decrease in revenue per minute of use and the increase in minutes of use were significantly affected by certain pricing programs offered by other wireless companies. Wireless customers who sign up for these programs are given price incentives to roam in other markets, including U.S. Cellular's markets, thus driving an increase in U.S. Cellular's inbound roaming minutes of use. Management anticipates that the growth rate in inbound roaming minutes of use will be slower throughout the remainder of 2000 and in 2001 because these pricing programs are present in both periods of comparison. Additionally, as new wireless operators begin service in U.S. Cellular's markets, roaming partners could switch their business to these new operators, further slowing the growth in inbound roaming minutes of 5 use. It is also anticipated that average inbound roaming revenue per minute of use will continue to decline. Average monthly inbound roaming revenue per U.S. Cellular customer decreased 21% ($2.42) to $9.16 in 2000 compared to $11.58 in 1999. The decrease is attributable to a decrease in inbound roaming revenue compared to an increase in the U.S. Cellular customer base. Long-distance and other revenue increased 6% ($5.5 million) in 2000. Average monthly long-distance and other revenue per customer decreased 11% ($0.47) to $3.96 in 2000 compared to $4.43 in 1999. The decrease is attributable to the larger increase in the customer base than in long-distance and other revenue. Operating expenses increased 10% ($81.3 million) in 2000. The increase is primarily related to costs incurred to expand the customer base and increased depreciation and amortization expense, offset somewhat by a decrease in system operations expense. Costs to expand the customer base consist of marketing and selling expenses and the cost of equipment sold. Marketing and selling expenses increased 14% ($25.6 million) in 2000 while cost of equipment sold increased 22% ($18.1 million). These expenses, less equipment sales revenue, represent the cost to acquire a new customer. Equipment sales revenue increased 27% ($9.7 million) in 2000. Cost per gross customer addition decreased to $331 in 2000 from $343 in 1999. Gross customer activations increased to 807,000 in 2000 from 681,000 in 1999. The increase in marketing and selling expenses was primarily driven by increased commissions, which resulted from an increase in gross activations and increased advertising costs. The increase in equipment subsidies was primarily driven by the sale of more dual-mode phones, which on average generate greater equipment subsidies than the sale of analog phones. The increase in sales of dual-mode phones is related to the growth in number of U.S. Cellular's systems providing digital coverage, which enables U.S. Cellular to offer its customers more features, better clarity and increased roaming capabilities. As of September 30, 2000, 42% of U.S. Cellular's customers were on digital rate plans compared to 15% as of September 30, 1999. System operations expenses (costs to provide service) decreased 8% ($12.9 million) and consumed 13.5% of service revenues in 2000 and 16.1% in 1999. System operations expenses include customer usage expenses and maintenance, utility and cell site expenses. The decrease in system operations expense was primarily due to the $25.5 million decrease in net outbound roaming expenses reflecting a reduction in cost per minute of use related to the lower roaming prices in the industry. Maintenance, utility and cell site expenses increased 13% ($7.5 million) reflecting the increase in cell sites in service. General and administrative expenses increased 8% ($18.4 million) and consumed 22.9% of service revenues in 2000 and 23.4% in 1999. The overall increase in administrative expenses reflects the growing customer base and other expenses incurred related to the growth in U.S. Cellular's business. U.S. Cellular incurred additional costs in 2000 by providing dual-mode phone units to customers who migrated from analog to digital rate plans. Depreciation expense increased 13% ($17.7 million) in 2000 primarily due to the 12% increase in average fixed assets since September 30, 1999, and a reduction in the useful lives of certain assets beginning in 2000. Amortization expense increased 47% ($14.3 million) in 2000 primarily related to U.S. Cellular's new billing and information system. Beginning October 1, 1999, U.S. Cellular began amortizing the development costs of the new billing and information system. Annual amortization of these billing related costs is expected to be approximately $17 million. Operating income increased 14% ($30.5 million) to $250.6 million in 2000. The improvement was primarily driven by the substantial growth in customer units and revenue. Operating margin, as a percent of service revenue, improved to 22.3% in 2000 compared to 21.5% in 1999. 6 Management expects service revenues to continue to grow during the remainder of 2000 and in 2001; however, management anticipates that average monthly revenue per customer will decrease as local retail and inbound roaming revenue per minute of use decline and as U.S. Cellular further penetrates the consumer market. Management continues to believe seasonal trends exist in both service revenue, which tend to increase more slowly in the first and fourth quarters, and operating expenses which tend to be higher in the fourth quarter due to increased marketing activities and customer growth, which may cause operating income to vary from quarter to quarter. Additionally, competitors licensed to provide personal communications services ("PCS") services have initiated service in certain of U.S. Cellular's markets over the past four years. U.S. Cellular expects PCS operators to continue deployment of PCS in portions of all of its market clusters throughout 2000 and 2001. U.S. Cellular has increased its advertising to promote its brand and to distinguish its service from other wireless communications providers. U.S. Cellular's management continues to monitor other wireless communications providers' strategies to determine how this additional competition is affecting U.S. Cellular's results. Management anticipates that customer growth will be lower in the future, primarily as a result of the increase in the number of competitors in U.S. Cellular's markets. 7 TDS TELECOM OPERATIONS TDS operates its wireline telephone business through TDS Telecommunications Corporation ("TDS Telecom"), a wholly-owned subsidiary. Total access lines served by TDS Telecom increased by 69,400, or 11%, since September 30, 1999 to 696,400. TDS Telecom's 105 incumbent local exchange ("ILEC") subsidiaries served 598,400 access lines at September 30, 2000, a 5% (27,600 access lines) increase over the 570,800 access lines at September 30, 1999. TDS Telecom's competitive local exchange ("CLEC") subsidiaries served 98,000 access lines at September 30, 2000, an increase of 41,800 access lines from 56,200 access lines served at September 30, 1999. TDS Telecom plans to expand its CLEC operations into certain mid-sized cities, which are geographically proximate to existing TDS Telecom markets.
Three Months Ended Nine Months Ended September 30, September 30, ----------------- ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in thousands) Local Telephone Operations Operating Revenue Local service $ 42,447 $ 38,623 $ 124,660 $ 113,212 Network access and long-distance 71,545 65,732 212,673 199,905 Miscellaneous 18,681 19,142 53,912 52,206 ------------- ------------- ------------ ----------- 132,673 123,497 391,245 365,323 ------------- ------------- ------------ ----------- Operating Expenses Operating expenses 66,409 63,198 194,773 183,965 Depreciation and Amortization 30,512 29,394 92,478 87,761 ------------- ------------- ------------ ------------ 96,921 92,592 287,251 271,726 ------------- ------------- ------------ ------------ Local Telephone Operating Income $ 35,752 $ 30,905 $ 103,994 $ 93,597 ------------- ------------- ------------ ------------ Competitive Local Exchange Operations Operating Revenue $ 22,246 $ 14,423 $ 61,382 $ 38,741 ------------- ------------- ----------- ----------- Operating Expenses Operating expenses 24,279 14,355 64,181 40,474 Depreciation and Amortization 2,293 1,536 6,455 4,257 ------------ ------------ ----------- ----------- 26,572 15,891 70,636 44,731 ------------ ------------ ----------- ----------- Competitive Local Exchange Operating (Loss) $ (4,326) $ (1,468) $ (9,254) $ (5,990) ------------ ------------- ----------- ----------- Intercompany revenues (849) (482) (1,728) (1,354) Intercompany expenses (849) (482) (1,728) (1,354) ------------ ------------- ----------- ----------- Operating Income $ 31,426 $ 29,437 $ 94,740 $ 87,607 ============ ============= =========== ===========
Operating revenue increased 12% ($48.2 million) in 2000, reflecting primarily customer growth. Revenue from local telephone operations increased 7% ($25.9 million) in 2000. Average monthly revenue per access line increased 2% ($1.56) to $74.11 in 2000 from $72.55 in 1999. Local service revenue increased 10% ($11.4 million) during 2000. Internal access line growth increased revenues by $4.5 million while the sale of custom calling and advanced features increased revenues by $3.5 million. Rate increases added $2.2 million to revenues. Average monthly local service revenue per access line was $23.61 in 2000 and $22.48 in 1999. Network access and long-distance revenue increased 6% ($12.8 million) during 2000. Revenue generated from access minute growth due to increased network usage increased $5.1 million in 2000. Compensation from state and national revenue pools due to increased costs of providing network access added $2.3 million to revenues. Average monthly network access and long-distance revenue per access line was $40.29 in 2000 and $39.70 in 1999. Miscellaneous revenue increased 3% ($1.7 million) during 2000. Average monthly miscellaneous revenue per access line was $10.21 in 2000 and $10.37 in 1999. 8 Revenue from competitive local exchange operations increased 58% ($22.6 million) in 2000 as access lines served increased to 98,000 at September 30, 2000 from 56,200 at September 30, 1999. Operating expenses increased 13% ($41.1 million) during 2000. Expenses from local telephone operations increased by 6% ($15.5 million) in 2000. Cash operating expenses increased by 6% ($10.8 million) in 2000 while depreciation and amortization increased 5% ($4.7 million). Local telephone operating expenses are expected to increase due to inflation and the development and introduction of new revenue-producing programs. Competitive local exchange operating expenses increased 58% ($25.9 million) in 2000 due primarily to the costs incurred to grow the customer base and provide competitive local exchange services. Operating income increased 8% ($7.1 million) to $94.7 million in 2000 reflecting improved local telephone operations operating results. Operating income from local telephone operations increased 11% ($10.4 million) to $104.0 million. Operating loss from competitive local exchange operations increased 54% ($3.3 million) to $(9.3) million. Operating income from local telephone operations should remain fairly stable or increase slightly with expense increases due to inflation and additional revenue and expenses from new or expanded product offerings. Operating loss from competitive local exchange operations is expected to increase somewhat throughout 2000 due to costs associated with continued expansion into new markets. 9 Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999 Operating Revenues increased 11% ($57.6 million) during the third quarter of 2000 for reasons generally the same as the first nine months. U.S. Cellular revenues increased 11% ($41.0 million) in 2000. Local retail revenue increased 16% ($38.6 million) in 2000, while inbound roaming revenue decreased 15% ($13.6 million). Average monthly service revenue per customer was $46.54 in 2000 and $49.73 in 1999. TDS Telecom revenues increased 12% ($16.6 million) in the third quarter of 2000 due to the growth in ILEC operations ($9.2 million) and growth in CLEC operations ($7.8 million). Average monthly revenue per ILEC access line increased to $74.11 in 2000 from $72.58 in 1999. Operating Expenses rose 15% ($56.7 million) during the third quarter of 2000 for reasons generally the same as the first nine months. U.S. Cellular expenses increased 15% ($42.0 million). System operations expense increased 22% ($9.9 million) as a result of increases in minutes of use and the costs of maintaining 9% more cell sites than in 1999. Marketing and selling expenses, including cost of equipment sold, increased 14% ($13.7 million). Cost per gross customer addition decreased to $321 in 2000 from $358 in 1999. Gross customer activations increased to 283,000 in 2000 from 228,000 in 1999. General and Administrative expense increased 12% ($9.3 million). Depreciation and amortization expense increased 16% ($9.3 million). TDS Telecom expenses increased 14% ($14.6 million) due to growth in ILEC operations ($4.3 million) and in CLEC operations ($10.7 million) for reasons generally the same as the first nine months. Operating Income increased 1% ($1.0 million) to $126.0 million in the third quarter of 2000. U.S. Cellular's operating income decreased 1% ($1.0 million) reflecting increased costs associated with customer growth and higher depreciation and amortization expense. TDS Telecom's operating income increased 7% ($2.0 million) reflecting the improved results from ILEC activities offset somewhat by the anticipated impact of the development of the CLEC activities. Investment and Other Income totaled $48.1 million in 2000 and $200,000 in 1999. Gain on Cellular and Other Investments totaled $57.7 million in the third quarter of 2000 compared to $6.0 million in 1999. The sale of non-strategic cellular interests and the settlement of a legal matter resulted in gains of $78.2 million. TDS reduced the carrying value of its paging investment by $20.5 million in the third quarter of 2000 to reflect the reduced valuations in the paging industry. Investment Income, net decreased $4.7 million to $6.9 million. A $7.8 million one-time gain was reported by an equity-method investment increasing investment income in 1999. Minority Share of (Income) increased $5.7 million in 2000 primarily reflecting the increase in U.S. Cellular's net income due to an increase in gains. Gains recorded in the third quarter of 2000 increased minority income by $6.6 million compared to $800,000 in 1999.
Three Months Ended September 30, ------------- 2000 1999 Change ---- ---- ------ (Dollars in thousands) Minority Share of (Income) U.S. Cellular Minority Shareholders' Share $ (17,619) $ (11,068) $ (6,551) Minority Partners' Share (2,491) (3,077) 586 -------------- ------------- -------------- (20,110) (14,145) (5,965) Other 7 (282) 289 -------------- ------------- -------------- $ (20,103) $ (14,427) $ (5,676) ============== ============= ==============
Interest Expense decreased 2% ($471,000) to $24.7 million in the third quarter of 2000 for reasons 10 generally the same as the first nine months. Income Tax Expense increased to $75.0 million in the third quarter of 2000 from $45.3 million in 1999 due to the increase in gains. Income From Continuing Operations totaled $68.1 million, or $1.13 per diluted share, in the third quarter of 2000, compared to $48.5 million, or $0.77 per diluted share, in 1999. A summary of income from continuing operations and diluted earnings per share from operations and gains is shown below.
Three Months Ended September 30, ------------- 2000 1999 ---- ---- (Dollars in thousands, except per share amounts) Income from Continuing Operations Operations $ 47,712 $ 46,922 Gains 20,428 1,607 ------------- ------------- $ 68,140 $ 48,529 ============= ============= Diluted Earnings Per Share from Continuing Operations Operations $ 0.79 $ 0.74 Gains 0.34 0.03 ------------- ------------- $ 1.13 $ 0.77 ============= =============
Discontinued Operations. Loss on disposal of Aerial totaled $(2.6) million, or $(0.05) diluted earnings per share in the third quarter of 2000 as a result of income tax adjustments related to the transaction. Loss from operations of Aerial totaled $(56.3) million, or $(0.90) diluted earnings per share in the third quarter of 1999. Extraordinary Item - loss on extinguishment of debt, is related to U.S. Cellular's repurchase and certain conversions of its LYONs. A loss, net of taxes and minority interest, of $(18.3) million, or $(0.30) per diluted share, was recorded to reflect the difference between the repurchase or conversion price and the carrying value. Net Income (Loss) Available to Common totaled $47.1 million, or $0.78 per diluted share, in the third quarter of 2000, compared to $(8.0) million, or $(0.13) per diluted share, in 1999. 11 Revenue Recognition In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. On June 26, 2000, the SEC issued Staff Accounting Bulletin No. 101B "Second Amendment: Revenue Recognition in Financial Statements". SAB 101B allows companies to defer the reporting of a change in accounting principle, as required by SAB 101, until the fourth quarter of the current fiscal year. Management continues to analyze this bulletin and anticipates the impact to be immaterial. FINANCIAL RESOURCES AND LIQUIDITY Cash Flows From Continuing Operating Activities. The Company is generating substantial internal funds from the operations of U.S. Cellular and TDS Telecom. Cash flows from operating activities totaled $597.9 million in the first nine months of 2000 compared to $356.1 million in 1999. Income from continuing operations excluding all noncash items increased 15% ($62.3 million) to $474.6 million in the first nine months of 2000. The increase primarily reflects the 14% ($76.6 million) growth in aggregate operating cash flow (operating income plus depreciation and amortization). Changes in working capital and other assets and liabilities from operations provided $80.8 million in 2000 and required $56.2 million in 1999. Cash provided by the change in working capital and other assets and liabilities in 2000 primarily relates to an increase in accrued taxes. Cash required in 1999 primarily reflects an increase in accounts receivable.
Nine Months Ended September 30, ------------- 2000 1999 ---- ---- (Dollars in thousands) Income from continuing operations $ 125,094 $ 281,410 Noncash items included in Income from continuing operations 349,528 130,868 -------------- -------------- Income from continuing operations Excluding all noncash items 474,622 412,278 Proceeds from litigation settlement 42,457 -- Changes in working capital and other assets and liabilities from operations 80,827 (56,158) -------------- -------------- $ 597,906 $ 356,120 ============== ==============
Cash Flows From Continuing Investing Activities. TDS makes substantial investments each year to acquire, construct, operate and maintain modern high-quality communications networks and facilities as a basis for creating long-term value for shareowners. Cash flows from investing activities required $300.3 million in the first nine months of 2000 compared to $201.0 million in 1999 reflecting primarily capital expenditures. Capital expenditures required $301.7 million in 2000 and $311.5 million in 1999. Acquisitions, net of cash acquired, required $75.5 million in 2000 and $29.5 million in 1999. The Company acquired a telephone company, majority interest in two cellular markets and several minority cellular interests of U.S. Cellular majority held markets, increasing U.S. Cellular's ownership in these markets, in 2000. The sales of non-strategic cellular interests and other investments provided $73.0 million in 2000, and $120.0 million in 1999, reducing total cash flows required for investing activities in each period. 12 The primary purpose of TDS's construction and expansion strategy is to continually expand and improve the quality of its telecommunications networks in order to provide improved services to customers. U.S. Cellular capital expenditures totaled $206.6 million in 2000 and $232.8 million in 1999 representing the construction of cell sites, the development of office systems and the change out of analog radio equipment for digital radio equipment. TDS Telecom capital expenditures totaled $95.1 million in 2000 and $78.7 million in 1999 representing amounts spent on accommodating growth in existing ILEC markets and expansion of new and existing CLEC markets. Cash Flows From Continuing Financing Activities. Cash flows from financing activities required $309.6 million in the first nine months of 2000 and $70.4 million in 1999. During 2000, TDS and U.S. Cellular have expended significant amounts to repurchase common shares. TDS paid $281.6 million to repurchase 2.6 million TDS Common Shares pursuant to board of director authorizations. TDS has financed these repurchases primarily with short-term debt. U.S. Cellular paid $206.8 million to repurchase 3.1 million U.S. Cellular Common Shares pursuant to board of director authorizations. U.S. Cellular has financed these repurchases using existing cash balances and internal cash flow. U.S. Cellular also paid $64.8 million in cash, and will pay an additional $10.9 million in October 2000 to settle purchases from the end of September 2000, to repurchase $113.5 million face value of LYONs with a carrying value of $47.2 million. Additionally, U.S. Cellular satisfied the conversion of $82.8 million face value of LYONs, with a carrying value of $34.5 million, by issuing 785,000 U.S. Cellular common shares. Notes Payable balances increased by $271.0 million in 2000 and decreased by $43.7 million in 1999. Dividends paid on Common and Preferred Shares, excluding dividends reinvested, totaled $23.0 million in 2000 and $22.0 million in 1999. Cash Flows From Discontinued Operations. Cash outflows from discontinued operations totaled $6.6 million in 2000 and $49.7 million in 1999 reflecting primarily, in 1999, amounts borrowed from TDS to fund the operating activities of Aerial. LIQUIDITY TDS and its subsidiaries had cash and temporary investments totaling $96.2 million at September 30, 2000. TDS also had $587 million of bank lines of credit for general corporate purposes at September 30, 2000. Unused amounts of such lines totaled $316 million. These line of credit agreements provide for borrowings at negotiated rates up to the prime rate. In addition, U.S. Cellular had $500 million of bank lines of credit for general corporate purposes at September 30, 2000, all of which was unused. These line of credit agreements provide for borrowings at the London InterBank Offered Rate ("LIBOR") plus 19.5 basis points. TDS anticipates that the aggregate resources required for 2000 will include approximately $310 million for U.S. Cellular capital additions and $145 million for TDS Telecom capital additions. At September 30, 2000, the remaining amount of capital spending approximated $103 million for cellular additions and $50 million for telephone additions. In addition, the Company expects to continue to repurchase TDS and U.S. Cellular common shares as market conditions warrant and to opportunistically repurchase LYONs. The Company may also, from time to time, require resources to complete acquisitions. U.S. Cellular plans to finance its cellular construction program using primarily internally generated cash. U.S. Cellular's operating cash flow totaled $548.3 million for the twelve months ended September 30, 2000, up 15% ($73.1 million) from 1999. TDS Telecom plans to finance its construction program using primarily internally generated cash supplemented by long-term financing from federal government programs. TDS Telecom's operating cash flow totaled $251.9 million for the twelve months ended September 30, 2000, up 8% ($17.8 million) from 1999. In addition, TDS Telecom telephone subsidiaries had $111.9 million in unadvanced loan funds from federal government programs to finance the telephone construction activities as of September 30, 2000. 13 TDS and U.S. Cellular plan to continue the repurchase of their common shares, as market conditions warrant, on the open market or at negotiated prices in private transactions. The repurchase programs are intended to create value for the shareholders. The repurchases of common shares will be funded by internal cash flow, supplemented by short-term borrowings. The U.S. Cellular Board of Directors has authorized management to opportunistically repurchase LYONs in private transactions. U.S. Cellular may also purchase a limited amount of LYONs in open-market transactions from time to time. U.S. Cellular LYONs are convertible, at the option of their holders, at any time prior to maturity, redemption or purchase, into U.S. Cellular Common Shares at a conversion rate of 9.475 U.S. Cellular Common Shares per LYON. Upon conversion, U.S. Cellular has the option to deliver to holders either U.S. Cellular Common Shares or cash equal to the market value of the U.S. Cellular Common Shares into which the LYONs are convertible. TDS and U.S. Cellular continually review attractive opportunities for the acquisition of additional telecommunications companies as well as exchanges of markets that will complement its established markets. TDS and U.S. Cellular also review attractive opportunities for the acquisition of additional wireless spectrum. TDS expects to expend $52 million in the fourth quarter of 2000 to acquire 49% of Camden Telephone & Telegraph Co. Inc., in St. Mary's Georgia. U.S. Cellular expects to expend $56 million in the first quarter of 2001 for acquisitions pending as of September 30, 2000. On November 1, 2000 the United States Bankruptcy Court for the Western District of Wisconsin confirmed a plan of financial reorganization for Airadigm Communications, Inc., a Wisconsin based wireless services provider. Under the terms of the plan of reorganization, TDS and RW Acquisition Corp., an affiliate of TeleCorp PCS, have committed to provide funding to meet certain obligations of Airadigm. Airadigm continues to operate as an independent company providing wireless services. Pursuant to the plan of reorganization, under certain circumstances and subject to the FCC's rules and regulations, TDS and RW Acquisition Corp. or their respective designees, may each acquire certain personal communications services licenses for areas of Wisconsin and Iowa as well as other Airadigm assets. TDS's portion of the funding under the plan of reorganization could possibly aggregate approximately $175 million. Management believes that internal cash flows and funds available from cash and cash equivalents, lines of credit, and longer-term financing commitments provide sufficient financial flexibility. TDS and its subsidiaries have access to public and private capital markets to help meet its long-term financing needs. TDS and its subsidiaries anticipate accessing public and private capital markets to issue debt and equity securities only when and if capital requirements, financial market conditions and other factors warrant. MARKET RISK The Company is subject to market rate risks due to fluctuations in interest rates and equity markets. The majority of the Company's debt is in the form of long-term fixed-rate notes, debentures and trust securities with original maturities ranging up to 40 years. Accordingly, fluctuations in interest rates can lead to fluctuations in the fair value of such instruments. TDS has not entered into financial derivatives to reduce its exposure to interest rate risks. There have been no material changes to TDS's outstanding debt and trust securities instruments since December 31, 1999. 14 TDS owns a portfolio of marketable equity securities. The market value of these investments, principally VoiceStream Wireless Corporation common shares and Vodafone AirTouch plc American Depository Receipts amounted to $4.73 billion at September 30, 2000. A hypothetical 10% decrease in the share prices of these investments would result in a $473.2 million decline in the market value of the investments. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT This Management's Discussion and Analysis of Results of Operations and Financial Condition and other sections of this Quarterly Report contain statements that are not based on historical fact, including the words "believes", "anticipates", "intends", "expects", and similar words. These statements constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, but are not limited to: o changes in the overall economy, o changes in competition in the markets in which TDS operates, o advances in telecommunications technology, o changes in telecommunications regulatory environment, o pending and future litigation, o acquisitions/divestitures of properties and or licenses, and o changes in customer growth rates, penetration rates, churn rates, roaming rates and the mix of products and services offered in our markets. TDS undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Readers should evaluate any statements in light of these important factors. 15
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME --------------------------------- Unaudited --------- Three Months Ended Nine Months Ended September 30, September 30, -------------- ------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in thousands, except per share amounts) OPERATING REVENUES U.S. Cellular $ 414,199 $ 373,201 $ 1,171,943 $ 1,060,138 TDS Telecom 154,070 137,438 450,899 402,710 ------------ ----------- ------------ ------------ 568,269 510,639 1,622,842 1,462,848 ------------ ----------- ------------ ------------ OPERATING EXPENSES U.S. Cellular 319,671 277,641 921,307 840,012 TDS Telecom 122,644 108,001 356,159 315,103 ------------ ----------- ------------ ------------ 442,315 385,642 1,277,466 1,155,115 ------------ ----------- ------------ ------------ OPERATING INCOME 125,954 124,997 345,376 307,733 ------------ ----------- ------------ ------------ INVESTMENT AND OTHER INCOME Interest and dividend income 2,511 718 9,805 4,065 Investment income, net of amortization 6,932 11,585 16,142 18,878 Gain on cellular and other investments 57,743 6,046 25,594 345,938 Other (expense), net 1,003 (3,722) (1,431) (8,265) Minority share of (income) (20,103) (14,427) (42,755) (60,182) ------------ ----------- ------------ ------------ 48,086 200 7,355 300,434 ------------ ----------- ------------ ------------ INCOME BEFORE INTEREST AND INCOME TAXES 174,040 125,197 352,731 608,167 Interest expense 24,699 25,170 72,146 76,410 Minority interest in income of subsidiary trust 6,202 6,202 18,607 18,607 ------------ ----------- ------------ ------------ INCOME FROM CONTINUING OPERATIONS 143,139 93,825 261,978 513,150 BEFORE INCOME TAXES Income tax expense 74,999 45,296 136,884 231,740 ------------ ----------- ------------ ------------ INCOME FROM CONTINUING OPERATIONS 68,140 48,529 125,094 281,410 ------------ ----------- ------------ ------------ Discontinued Operations Loss from operations of Aerial, net of tax -- (56,252) -- (111,492) Gain on disposal of Aerial, net of tax (2,647) -- 2,125,787 -- ------------ ----------- ------------ ------------ (2,647) (56,252) 2,125,787 (111,492) ------------ ----------- ------------ ------------ INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 65,493 (7,723) 2,250,881 169,918 Extraordinary Item - loss on extinguishment of debt, net of tax (18,266) -- (24,372) -- ------------ ----------- ------------ ------------ NET INCOME (LOSS) $ 47,227 $ (7,723) $2,226,509 $ 169,918 Preferred Dividend Requirement (120) (316) (385) (1,003) ------------ ----------- ------------ ------------ NET INCOME (LOSS) AVAILABLE TO COMMON $ 47,107 $ (8,039) $2,226,124 $ 168,915 ============= =========== ============ ============ BASIC WEIGHTED AVERAGE COMMON SHARES (000s) 59,537 61,451 60,307 61,376 BASIC EARNINGS PER SHARE (Note 8) Income from continuing operations $ 1.14 $ 0.78 $ 2.07 $ 4.57 Net income available to common $ 0.79 $ (0.13) $ 36.91 $ 2.75 ========== =========== =========== =========== DILUTED EARNINGS PER SHARE (Note 8) Income from continuing operations $ 1.13 $ 0.77 $ 2.03 $ 4.51 Net income available to common $ 0.78 $ (0.13) $ 36.46 $ 2.72 ========== =========== =========== =========== DIVIDENDS PER SHARE $ .125 $ .115 $ .375 $ .345 ========== =========== =========== =========== The accompanying notes to financial statements are an integral part of these statements.
16
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Unaudited --------- Nine Months Ended September 30, ------------- 2000 1999 ---- ---- (Dollars in thousands) CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES Income from continuing operations $ 125,094 $ 281,410 Add (Deduct) adjustments to reconcile income from continuing operations to net cash provided by operating activities Depreciation and amortization 296,768 257,842 Deferred taxes 18,274 145,676 Investment income (25,762) (28,659) Minority share of income 42,755 60,182 (Gain) on cellular and other investments (25,594) (345,938) Noncash interest expense 13,358 13,315 Other noncash expense 29,729 28,450 Proceeds from litigation settlement 42,457 -- Change in accounts receivable (19,528) (51,010) Change in materials and supplies (3,313) (7,383) Change in accounts payable 5,282 (3,241) Change in accrued interest (12,699) (13,811) Change in accrued taxes 83,656 914 Change in other assets and liabilities 27,429 18,373 ------------ ------------ 597,906 356,120 ------------ ------------ CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES Capital expenditures (301,749) (311,493) Acquisitions, net of cash acquired (75,527) (29,527) Investments in and advances to investment entities and license costs (3,681) 724 Distributions from investments 14,625 19,225 Proceeds from investment sales 72,973 120,000 Increase in notes receivable (13,400) -- Other investing activities 6,504 51 ------------ ------------ (300,255) (201,020) ------------ ------------- CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES Long-term debt borrowings 1,752 8,868 Repayments of long-term debt (11,634) (17,012) Change in notes payable 271,000 (43,724) Dividends paid (22,989) (21,970) Repurchase of common shares (281,641) -- Repurchase of subsidiary common shares (206,782) -- Repurchase and conversion of LYONs (64,891) -- Other financing activities 5,619 3,410 ------------ ------------- (309,566) (70,428) ------------ ------------- CASH FLOWS FROM DISCONTINUED OPERATIONS (6,563) (49,680) ------------ ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS (18,478) 34,992 CASH AND CASH EQUIVALENTS - Beginning of period 111,010 45,139 ------------ ------------- End of period $ 92,532 $ 80,131 ============ ============= The accompanying notes to financial statements are an integral part of these statements.
17
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------ (Unaudited) September 30, December 31, 2000 1999 ---- ---- (Dollars in thousands) CURRENT ASSETS Cash and cash equivalents $ 92,532 $ 111,010 Temporary investments 3,681 4,983 Accounts receivable from customers and others 342,944 317,025 Materials and supplies, at average cost, and other current assets 86,744 74,990 ------------- -------------- 525,901 508,008 ------------- -------------- INVESTMENTS Marketable equity securities 4,731,812 843,280 Intangible Assets Cellular license acquisitions costs, net 1,140,775 1,156,175 Franchise costs and other costs, net 196,153 177,677 Investments in unconsolidated entities 245,534 272,601 Other investments 56,304 28,837 ------------- -------------- 6,370,578 2,478,570 ------------- -------------- PROPERTY, PLANT AND EQUIPMENT, NET U.S. Cellular 1,227,563 1,206,467 TDS Telecom 897,433 889,422 ------------- -------------- 2,124,996 2,095,889 ------------- -------------- OTHER ASSETS AND DEFERRED CHARGES 49,286 56,216 ------------- -------------- NET ASSETS OF DISCONTINUED OPERATIONS -- 258,793 ------------- -------------- TOTAL ASSETS $ 9,070,761 $ 5,397,476 ============= ============== The accompanying notes to financial statements are an integral part of these statements.
18
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ (Unaudited) September 30, December 31, -------------- ------------ 2000 1999 ---- ---- (Dollars in thousands) CURRENT LIABILITIES Current portion of long-term debt $ 15,134 $ 14,967 Notes payable 271,000 -- Accounts payable 243,612 206,937 Advance billings and customer deposits 53,770 43,965 Accrued interest 11,430 23,492 Accrued taxes 54,947 19,773 Accrued compensation 40,108 35,939 Other current liabilities 37,329 24,599 ----------------- ----------------- 727,330 369,672 ----------------- ----------------- DEFERRED LIABILITIES AND CREDITS 2,062,728 481,003 ----------------- ----------------- LONG-TERM DEBT, excluding current portion 1,220,142 1,279,877 ----------------- ----------------- MINORITY INTEREST in subsidiaries 450,900 509,658 ----------------- ----------------- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES of Subsidiary Trusts Holding Solely Company Subordinated Debentures (a) 300,000 300,000 ----------------- ----------------- PREFERRED SHARES 7,881 9,005 ----------------- ----------------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $.01 per share 554 554 Series A Common Shares, par value $.01 per share 70 70 Capital in excess of par value 1,811,355 1,897,402 Treasury Shares, at cost (3,674,472 shares and 1,237,207 shares, respectively) (376,812) (102,975) Accumulated other comprehensive income 188,954 179,071 Retained earnings 2,677,659 474,139 ----------------- ----------------- 4,301,780 2,448,261 ----------------- ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,070,761 $ 5,397,476 ================= ================= (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.
19 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of September 30, 2000 and December 31, 1999, and the results of operations and cash flows for the nine months ended September 30, 2000 and 1999. The results of operations for the nine months ended September 30, 2000 and 1999, are not necessarily indicative of the results to be expected for the full year. 1A. Restatement Matters The Company's consolidated balance sheets as of September 30, 2000 and December 31, 1999, and the related consolidated statements of operations and cash flows for three and nine month periods ending September 30, 1999 and September 30, 2000 have been restated as a result of the reconsideration of the appropriate accounting treatment of minority share of income or loss of consolidated companies under FAS 109 (Accounting for Income Taxes). At the time FAS 109 was implemented in 1993, TDS concluded that the minority share of income or loss in consolidated subsidiaries should be treated as a temporary difference between tax and financial reporting. TDS has determined that minority interests should not be treated as temporary differences under FAS 109 and restated financial results for the year 1993 through September 30, 2000. Accordingly, TDS adjusted income tax expense and deferred tax assets or liabilities from 1993 through the third quarter of 2000. The cumulative effect of the restatement for the period from 1993 through September 30, 2000 was to increase income tax expense and reduce net income from continuing operations by $70.6 million. The restatement had no cumulative effect on discontinued operations for the same period. However, the restatement reduced income tax expense and increased the net income from discontinued operations by $51.6 million through the date of Aerial's merger with VoiceStream, and decreased the gain reported in conjunction with that transaction on May 4, 2000 by a corresponding amount. TDS also restated the deferred taxes and net income from discontinued operations for the third quarter of 1999 and the second quarter of 2000 to be consistent with FAS 109 (Accounting for Income Taxes) and EITF Issue No. 93-17 (Recognition of Deferred Tax Assets for a Parent Company's Excess Tax Basis in the Stock of a Subsidiary That Is Accounted for as a Discontinued Operation). The TDS financial reporting basis in the stock of Aerial exceeded the tax basis on the date TDS decided to merge Aerial. A tax liability for that excess should have been recognized as of the decision date. The restatement created a deferred tax liability of $30 million as of the September 17, 1999 decision date and increased 1999 income tax expense and decreased net income from discontinued operations by the same amount. The gain on the sale of discontinued operations, recognized May 4, 2000, was increased by a corresponding amount in the restatement. The summarized financial information illustrating the effect of the restatement on the Company's consolidated financial statements is as follows:
Period Ended Period Ended Year Ended Year Ended 9/30/00 9/30/00 1999 1999 Originally Reported As Restated Originally Reported As Restated ------------------- ------------ ------------------- ----------- (dollars in thousands, except per share amounts) Financial Position: Net Assets of Discontinued Operations $ - $ - $237,145 $258,793 Deferred liabilities and Credits 1,994,308 2,062,728 424,515 481,003 Retained Earnings $2,746,079 $2,677,659 $508,979 $474,139
Three Months Ended Three Months Ended Three Months Ended Three Months Ended 9/30/00 Originally 9/30/00 9/30/99 9/30/99 Reported As Restated Originally Reported As Restated ------------------ ------------------ ------------------- ------------------ (dollars in thousands, except per share amounts) Results of Operations: Income Tax Expense $68,034 $74,999 $40,889 $45,296 Income from Continuing Operations 75,105 68,140 52,936 48,529 Loss from operations of Aerial, net of tax - - (27,394) (56,252) Income (Loss) before on Extraordinary Item 72,458 65,493 25,542 (7,723) Extraordinary Item (20,460) (18,266) - - Net Income (Loss) 51,998 47,227 25,542 (7,723) Net Income (Loss) Available Common 51,879 47,107 25,226 (8,039) Basic Earnings Per Share: Continued Operations 1.26 1.14 .86 .78 Discontinued Operations Gain on Disposal of Aerial (.05) (.04) - - Loss on Operations of Aerial - - (.45) (.91) Net Income available to Common .87 .79 .41 (.13) Diluted Earnings Per Share: Continued Operations 1.24 1.13 .84 .77 Discontinued Operations Gain on Disposal of Aerial (.04) (.05) - - Loss on Operations of Aerial - - (.44) (.90) Net Income available to Common $ .86 $ .78 $ .40 $ (.13)
Nine Months Ended Nine Months Ended Nine Months Ended Nine Months Ended 9/30/00 Originally 9/30/00 9/30/99 Originally 9/30/99 Reported As Restated Reported As Restated ------------------ ----------------- ------------------- ----------------- (dollars in thousands, except per share amounts) Results of Operations: Income Tax Expense $122,758 $136,884 $210,475 $231,740 Income from Continuing Operations 139,220 125,094 302,675 281,410 Loss from operations of Aerial, net of tax - - (84,190) (111,492) Gain on disposal of Aerial, net of tax 2,147,435 2,125,787 - - Income (Loss) before Loss on Extraordinary Item 2,286,655 2,250,881 218,485 169,918 Extraordinary Item (26,566) (24,372) - - Net Income 2,260,089 2,226,509 218,485 169,918 Net Income (Loss) Available Common 2,259,704 2,226,124 217,482 168,915 Basic Earnings Per Share: Continued Operations 2.30 2.07 4.92 4.57 Discontinued Operations Gain on Disposal of Aerial 35.61 35.24 - - Loss on Operations of Aerial - - (1.38) (1.82) Net Income available to Common 37.47 36.91 3.54 2.75 Diluted Earnings Per Share: Continued Operations 2.26 2.03 4.82 4.51 Discontinued Operations Gain on Disposal of Aerial 35.14 34.83 - - Loss on Operations of Aerial - - (1.35) (1.79) Net Income available to Common $ 36.97 $ 36.46 $ 3.47 $ 2.72
2. Discontinued Operations In September of 1999, the Board of Directors of TDS approved a plan of merger between Aerial Communications, Inc. ("Aerial"), its then over 80%-owned personal communications services company, and VoiceStream Wireless Corporation ("VoiceStream"). The merger closed on May 4, 2000. As a result of the merger, Aerial shareholders received 0.455 VoiceStream common shares for each share of Aerial stock they owned. TDS received 35,570,493 shares of VoiceStream common stock valued at $3.90 billion at closing. TDS recognized a gain of approximately $2.13 billion, net of $1.48 billion in taxes, on this transaction. TDS had a basis in Aerial of $287.8 million, including deferred losses of $75.9 million from September 17, 1999 to May 4, 2000. TDS was released from its guarantees of Aerial's long-term debt at the closing of the merger. In addition, the net settlement of intercompany amounts due from/to Aerial was repaid to TDS at the closing of the merger. As a result of the board's approval of the plan, the consolidated financial statements of TDS and supplemental data have been adjusted to reflect the results of operations and net assets of the subsidiary as discontinued operations in accordance with generally accepted accounting principles. Financial statements for prior periods have been reclassified to conform to current year presentation. On July 24, 2000, Deutsche Telecom AG announced a proposed merger of VoiceStream with Deutsche Telecom. The proposed merger calls for the exchange of 3.2 shares of Deutsche Telecom and $30 for each share of VoiceStream owned, subject to adjustment under certain circumstances. In addition, VoiceStream stockholders may elect to receive all cash or all stock for their shares, subject to proration. The merger is subject to regulatory approvals and other conditions, including stockholder approval. VoiceStream stockholders holding over 50% of the voting power of the VoiceStream common stock, including TDS, have agreed to vote for the merger. 20 Net assets of discontinued operations as of December 31, 1999, are as follows: Current Assets Cash and temporary investments $ 5,261 Accounts receivable 32,223 Inventory 8,336 Other current assets 5,565 Investments Broadband PCS license costs, net 303,913 Other Investments 3,263 Property, plant and equipment 619,913 Other assets and deferred charges 204 Current portion vendor credit agreement (103,765) Accounts payable (35,230) Accrued taxes (7,419) Accrued compensation (9,732) Other accrued expenses (4,676) Deferred income tax liability (119,989) Long-term debt (250,846) Minority interest in subsidiaries (226,348) Losses deferred after measurement date 38,120 ---------------- $ 258,793 ================
Summarized income statement information relating to discontinued operations, excluding any corporate charges and intercompany interest expense, is as follows: Three Months Ended Nine Months Ended September 30, September 30, -------------- ------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in thousands) Revenues $ -- $ 48,753 $ 94,463 $ 154,079 Expenses -- 89,578 164,148 292,085 ------------- ------------ ----------- ----------- Operating (Loss) -- (40,825) (69,685) (138,006) Minority share of loss -- -- 33,459 10,967 Other income -- (2,835) (29,533) (1) Interest expense -- (4,813) (8,605) (15,210) ------------- ------------ ----------- ----------- (Loss) Before Income Taxes -- (48,473) (74,364) (142,250) Income tax benefit -- (7,779) (36,624) (30,758) ------------- ------------ ----------- ----------- Net (Loss) -- (56,252) (37,740) (111,492) Losses deferred after measurement date -- -- 37,740 -- ------------- ------------ ----------- ----------- Net (Loss) From Discontinued Operations $ -- $ (56,252) $ -- $ (111,492) ============= ============ =========== ===========
21
Summarized cash flow statement information relating to discontinued operations is as follows: Nine Months Ended September 30, ------------- 2000 1999 ---- ---- (Dollars in thousands) Cash flows from operating activities $ (55,851) $ (25,683) Cash flows from financing activities 108,180 2,464 Cash flows from investing activities (17,325) (23,845) ---------------- ---------------- Cash provided (used) by discontinued operations 35,004 (47,064) (Increase) decrease in cash included in net assets of discontinued operations (41,567) (2,616) ---------------- ---------------- Cash flows from discontinued operations $ (6,563) $ (49,680) ================ ================
3. Marketable Equity Securities Marketable equity securities include the Company's investments in equity securities, primarily VoiceStream common shares and Vodafone AirTouch plc American Depository Receipts. These securities are classified as available-for-sale and stated at fair market value. Information regarding the Company's marketable equity securities is summarized below.
September 30, December 31, ------------- ------------ 2000 1999 ---- ---- (Dollars in thousands) Available-for-sale Equity Securities Aggregate Fair Value $ 4,731,812 $ 843,280 Adjusted Basis 4,417,331 517,870 ------------------ ---------------- Gross Unrealized Holding Gains 314,481 325,410 Tax Effect 125,000 130,616 ------------------ ---------------- Unrealized Holding Gains, net of tax 189,481 194,794 Minority Share of Unrealized Holding Gains 527 15,723 ------------------ ---------------- Net Unrealized Holding Gains $ 188,954 $ 179,071 ================== ================
4. Common Stockholders' Equity The TDS Board of Directors authorized the repurchase of up to 2.0 million TDS Common Shares in February 2000 and an additional 2.0 million shares in August 2000. As of September 30, 2000, TDS has repurchased 2,564,100 common shares under this program. 5. Gain on Cellular and Other Investments TDS recognized gains of $25.6 million in the first nine months of 2000. The sale of non-strategic cellular interests and the settlement of a legal matter resulted in gains of $96.1 million. TDS also reduced the carrying value of its paging investment by $70.5 million to reflect the reduced valuations in the paging industry. TDS recognized gains of $345.9 million in 1999. The Company recognized a $327.1 million gain on the difference between its historical basis in its investment in AirTouch Communications, Inc. ("AirTouch") common shares and the value of Vodafone AirTouch plc American Depository Receipts and cash received in the merger of AirTouch and Vodafone Group plc. The remaining gains reflect the sale of certain minority cellular interests and other investments for cash. 22 6. Other Comprehensive Income The Company's Comprehensive Income includes Net Income and Unrealized Gains from Marketable Equity Securities that are classified as "available-for-sale". The following table summarizes the Company's Comprehensive Income.
Nine Months Ended September 30, ------------- 2000 1999 ---- ---- (Dollars in thousands) Accumulated Other Comprehensive Income Balance, beginning of period $ 179,071 $ 75,609 -------------- -------------- Add: Net unrealized gains on securities (10,930) 313,631 Income tax effect 5,618 (125,533) -------------- -------------- (5,312) 188,098 Minority share of unrealized gains 15,195 (27,822) -------------- -------------- Net unrealized gains 9,883 160,276 -------------- -------------- Deduct: Recognized gains on securities -- 327,113 Income tax expense -- (130,845) -------------- -------------- -- 196,268 Minority share of recognized gain -- (29,655) -------------- -------------- Net recognized gains included in Net Income -- 166,613 -------------- -------------- Net change in unrealized gains included in Comprehensive Income 9,883 (6,337) -------------- -------------- Balance, end of period $ 188,954 $ 69,272 ============== ==============
Three Months Ended Nine Months Ended September 30, September 30, -------------- ------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in thousands) Comprehensive Income Net Income $ 47,227 $ (7,723) $ 2,226,509 $ 169,918 Net change in unrealized gains on securities (73,637) 62,625 9,883 (6,337) ---------------- --------------- --------------- ------------- $ (26,410) $ 54,902 $ 2,236,392 $ 163,581 ================ =============== =============== =============
7. Extraordinary Item - Loss on Extinguishment of Debt U.S. Cellular repurchased Liquid Yield Option Notes (LYONs) with a carrying value of $47.2 million for $75.8 million in the first nine months of 2000. A loss, net of taxes and minority interest, of $(18.3) million, or $(0.30) per diluted share in the third quarter and $(24.4) million, or $(0.40) per diluted share in the first nine months, was recorded to account for the difference between the purchase price and the carrying value. 23 8. Earnings Per Share The amounts used in computing Earnings per Common Share and the effect on income and the weighted average number of Common and Series A Common Shares of dilutive potential common stock are as follows:
Three Months Ended Nine Months Ended Basic Earnings Per Share September 30, September 30, -------------- ------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in thousands, except per share amounts) Income from Continuing Operations $ 68,140 $ 48,529 $ 125,094 $ 281,410 Less: Preferred Dividends (120) (316) (385) (1,003) ------------ ---------- ------------ ----------- Income Available to Common from Continued Operations Used in Basic Earnings Per Share 68,020 48,213 124,709 280,407 Discontinued Operations Gain on Disposal of Aerial (2,647) -- 2,125,787 -- Loss on Operations of Aerial -- (56,252) -- (111,492) Extraordinary Item (18,266) -- (24,372) -- ------------ ---------- ------------ ----------- Net Income Available to Common used in Basic Earnings Per Share $ 47,107 $ (8,039) $ 2,226,124 $ 168,915 ============= ========== ============= =========== Weighted Average Number of Common Shares Used in Basic Earnings Per Share 59,537 61,451 60,307 61,376 ============== ========== ============ =========== Basic Earnings Per Common Share Continuing Operations $ 1.14 $ 0.78 $ 2.07 $ 4.57 Discontinued Operations Gain on Disposal of Aerial (0.04) -- 35.24 -- Loss on Operations of Aerial -- (0.91) -- (1.82) Extraordinary Item (0.31) -- (0.40) -- ------------- ---------- ------------ ------------- $ 0.79 $ (0.13) $ 36.91 $ 2.75 ============= ========== ============= =============
24
Three Months Ended Nine Months Ended Diluted Earnings Per Share: September 30, September 30, -------------- ------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in thousands, except per share amounts) Income Available to Common from Continuing Operations Used in Basic Earnings Per Share $ 68,020 $ 48,213 $ 124,709 $ 280,407 Reduction in Preferred Dividends if Preferred Shares Converted into Common Shares 109 289 338 916 Minority Income Adjustment (221) (144) (857) (525) ------------- ----------- ------------ ----------- Income Available to Common from Continuing Operations Used in Diluted Earnings Per Share 67,908 48,358 124,190 280,798 Discontinued Operations Gain on Disposal of Aerial (2,647) -- 2,125,787 -- Loss on Operations of Aerial -- (56,252) -- (111,492) Extraordinary Item (18,266) -- (24,372) -- ------------- ----------- ----------- ---------- Net Income (Loss) Available to Common Used in Diluted Earnings Per Share $ 46,995 $ (7,894) $ 2,225,605 $ 169,306 ============== =========== ============ ========== Weighted Average Number of Common Shares Used in Basic Earnings Per Share 59,537 61,451 60,307 61,376 Effect of Dilutive Securities Common Shares Outstanding if Preferred Shares Converted 254 564 209 611 Stock Options 527 391 519 308 Common Shares Issuable 13 13 13 13 ------------- ----------- ------------ ---------- Weighted Average Number of Common Shares Used in Diluted Earnings Per Share 60,331 62,419 61,048 62,308 ============= =========== ============ ========== Diluted Earnings Per Common Share Continuing Operations $ 1.13 $ 0.77 $ 2.03 $ 4.51 Discontinued Operations Gain on Disposal of Aerial (0.05) -- 34.83 -- Loss on Operations of Aerial -- (0.90) -- (1.79) Extraordinary Item (0.30) -- (0.40) -- ------------- ----------- ------------ ------------ $ 0.78 $ (0.13) $ 36.46 $ 2.72 ============= =========== ============ ============ 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.
9. Supplemental Cash Flow Information Cash and cash equivalents include cash and those short-term, highly liquid investments with original maturities of three months or less. Those investments with original maturities of more than three months to twelve months are classified as temporary investments. Temporary investments are stated at cost, which approximates market. Those investments with original maturities of more than 12 months are classified with other investments and are stated at amortized cost. TDS acquired certain cellular licenses and interests during the first nine months of 2000 and 1999 and a telephone company in 2000. In conjunction with these acquisitions, the following assets were acquired and liabilities assumed and Common Shares issued. 25
Nine Months Ended September 30, ------------- 2000 1999 ---- ---- (Dollars in thousands) Property, plant and equipment $ 10,497 $ 4,248 Cellular licenses 18,761 19,879 Notes receivable - other (10,000) -- Equity method investment in cellular interests 67,034 (748) Franchise costs 22,744 1,034 Long-term debt (19,108) (987) Deferred credits (700) (254) Other assets and liabilities, Excluding cash and cash equivalents (12,589) 2,673 Decrease in Minority interest (1,112) 3,682 ------------ --------------- Decrease in cash due to acquisitions $ 75,527 $ 29,527 ============ =============== The following table summarizes interest and income taxes paid, and other noncash transactions.
Nine Months Ended September 30, ------------- 2000 1999 ---- ---- (Dollars in thousands) Interest Paid Continuing Operations $ 70,961 $ 76,423 Discontinued Operations 2,112 2,252 Income Taxes Paid (net of income tax refund received of $15,000 in 2000) 22,545 18,697 Common Shares issued by TDS for conversion of TDS Preferred Stock 418 3,800 Subsidiary common shares issued for conversion of long-term debt $ 34,466 $ --
26 10. Business Segment Information Financial data for the Company's business segments for each of the three and nine month periods ended or at September 30, 2000 and 1999 are as follows:
Three Months Ended Discontinued or at September 30, 2000 U.S. Cellular TDS Telecom All Other (1) Operations Total - ------------------------ ------------- ----------- ------------- ---------- ----- (Dollars in thousands) Operating revenues $ 414,199 $ 154,070 $ -- $ -- $ 568,269 Operating cash flow 161,230 64,231 -- -- 225,461 Depreciation and Amortization expense 66,702 32,805 -- -- 99,507 Operating income 94,528 31,426 -- -- 125,954 Marketable Equity Securities 410,140 124,271 4,197,401 -- 4,731,812 Total Assets 3,328,526 1,443,471 4,298,764 -- 9,070,761 Capital Expenditures $ 76,835 $ 49,523 $ -- $ -- $ 126,358 Three Months Ended Discontinued or at September 30, 1999 U.S. Cellular TDS Telecom All Other (1) Operations Total - ------------------------ ------------- ----------- ------------- ---------- ----- (Dollars in thousands) Operating revenues $ 373,201 $ 137,438 $ -- $ -- $ 510,639 Operating cash flow 153,004 60,367 -- -- 213,371 Depreciation and Amortization expense 57,444 30,930 -- -- 88,374 Operating income 95,560 29,437 -- -- 124,997 Marketable Equity Securities 504,182 144,955 -- -- 649,137 Total Assets 3,326,157 1,405,883 165,346 480,420 5,377,806 Capital Expenditures $ 70,962 $ 29,924 $ -- $ -- $ 100,886 Nine Months Ended Discontinued or at September 30, 2000 U.S. Cellular TDS Telecom All Other (1) Operations Total - ------------------------ ------------- ----------- ------------- ---------- ----- (Dollars in thousands) Operating revenues $1,171,943 $ 450,899 $ -- $ -- $ 1,622,842 Operating cash flow 448,471 193,673 -- -- 642,144 Depreciation and Amortization expense 197,835 98,933 -- -- 296,768 Operating income 250,636 94,740 -- -- 345,376 Marketable Equity Securities 410,140 124,271 4,197,401 -- 4,731,812 Total Assets 3,328,526 1,443,471 4,298,764 -- 9,070,761 Capital Expenditures $ 206,633 $ 95,116 $ -- $ -- $ 301,749 Nine Months Ended Discontinued or at September 30, 1999 U.S. Cellular TDS Telecom All Other (1) Operations Total - ------------------------ ------------- ----------- ------------- ---------- ----- (Dollars in thousands) Operating revenues $1,060,138 $ 402,710 $ -- $ -- $ 1,462,848 Operating cash flow 385,951 179,625 -- -- 565,576 Depreciation and Amortization expense 165,825 92,018 -- -- 257,843 Operating income 220,126 87,607 -- -- 307,733 Marketable Equity Securities 504,182 144,955 -- -- 649,137 Total Assets 3,326,157 1,405,883 165,346 480,420 5,377,806 Capital Expenditures $ 232,814 $ 78,679 $ -- $ -- $ 311,493 (1) Consists of the TDS Corporate operations and all other businesses not included in the U.S. Cellular or TDS Telecom segments.
27 PART II. OTHER INFORMATION Item 1. Legal Proceedings. - --------------------------- On April 11, 2000, two affiliates of U.S. Cellular, along with two unrelated wireless carriers, filed a declaratory judgment action in the United States District Court for the Northern District of Iowa against the Iowa Attorney General. This action was in response to the Attorney General's ongoing investigation of certain wireless industry practices involving wireless service agreements and related matters. The suit by U.S. Cellular and the other wireless carriers seeks to have certain state laws declared inapplicable to wireless service agreements and such practices. In response, the Iowa Attorney General filed suit in the Iowa State District Court for Polk County against U.S. Cellular, alleging violations of various state consumer credit and other consumer protection laws. The Attorney General is seeking injunctive relief, barring the enforcement of contracts in excess of four months, and related relief. The Attorney General is also seeking unspecified reimbursements for customers, statutory fines ($40,000 for certain violations and $5,000 for others, per violation) as well as fees and costs. This case was removed to the U.S. District Court for the Southern District of Iowa. On August 7, 2000 the U.S. District Court in the Southern District granted the Attorney General's motion to remand the case to state court. On September 15, 2000 the U.S. District Court in the Northern District dismissed U.S. Cellular's Complaint in its entirety. U.S. Cellular vigorously denies the allegations of the Iowa Attorney General in the case now remanded to state court and intends to vigorously contest this case. U.S. Cellular also intends to appeal the grant of the motion to dismiss the Northern District case. Item 6. Exhibits and Reports on Form 8-K. - ------------------------------------------ (a) Exhibit 11 - Computation of earnings per common share is included herein as footnote 8 to the financial statements. (b) Exhibit 12 - Statement regarding computation of ratios, previously filed. (c) Exhibit 27 - Financial Data Schedule (d) Reports on Form 8-K filed during the quarter ended September 30, 2000: None 28 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELEPHONE AND DATA SYSTEMS, INC. -------------------------------- (Registrant) Date February 15, 2001 /s/ Sandra L. Helton ------------------------------ -------------------------------- Sandra L. Helton, Executive Vice President-Finance (Chief Financial Officer) Date February 15, 2001 /s/ D. Michael Jack ------------------------------ -------------------------------- D. Michael Jack, Vice President and Controller (Principal Accounting Officer) Signature page for the amended TDS 2000 Third Quarter Form 10-Q/A EX-27 2 0002.txt FDS
5 This schedule contains summary financial information extracted from the consolidated financial statements of Telephone and Data Systems, Inc. as of September 30, 2000 and for the nine months ended, and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 92,532 4,731,812 352,227 9,283 45,513 525,901 3,614,321 1,489,325 9,070,761 727,330 1,220,142 0 7,881 624 4,301,156 9,070,761 0 1,622,842 0 1,277,466 (7,355) 0 90,753 261,978 136,884 125,094 2,125,787 (24,372) 0 2,226,509 36.91 36.46
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