SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
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 June 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
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Commission File Number 001-14157
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TELEPHONE AND DATA SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-2669023
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
30 North LaSalle Street, Chicago, Illinois 60602
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 630-1900
Not Applicable
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(Former address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |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 July 31, 2000
----------------------------------- ------------------------------
Common Shares, $.01 par value 53,026,897 Shares
Series A Common Shares, $.01 par value 6,962,783 Shares
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
--------------------------------
2nd QUARTER REPORT ON FORM 10-Q
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INDEX
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Page No.
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Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-14
Consolidated Statements of Income -
Three Months and Six Months Ended
June 30, 2000 and 1999 15
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999 16
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 17-18
Notes to Consolidated Financial Statements 19-26
Part II. Other Information 27-28
Signatures 29
<PAGE>
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 3.5 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 82.4%-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.
The Board of Directors of TDS approved a plan of merger between Aerial
Communications, Inc. ("Aerial"), its over 80%-owned personal communications
services company, and VoiceStream Wireless Corporation ("VoiceStream") in
September of 1999. 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 $2.15
billion, net of tax, on this transaction. 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.
RESULTS OF OPERATIONS
---------------------
Six Months Ended 6/30/00 Compared to Six Months Ended 6/30/99
-------------------------------------------------------------
Operating Revenues increased 11% ($102.4 million) during the first six months of
2000 primarily as a result of a 17% increase in customer units served. U.S.
Cellular's operating revenues increased 10% ($70.8 million) as customer units
served increased by 443,000, or 19%, since June 30, 1999, to 2,807,000. TDS
Telecom operating revenues increased 12% ($31.6 million) as total access lines
increased by 69,500, or 11%, since June 30, 1999 to 682,200.
2
<PAGE>
Operating Expenses rose 9% ($65.7 million) in the first six months of 2000
reflecting growth in operations. U.S. Cellular's operating expenses increased 7%
($39.3 million) and TDS Telecom's expenses increased 13% ($26.4 million).
Operating Income increased 20% to $219.4 million in the first six months of 2000
from $182.7 million in 1999. U.S. Cellular's operating income increased 25% to
$156.1 million in the first six months of 2000 from $124.6 million in 1999 and
its operating income margin, as a percentage of service revenues, expanded to
21.4% in 2000 from 18.8% in 1999. TDS Telecom's operating income increased 9% to
$63.3 million in the first six months of 2000 from $58.2 million in 1999 and its
operating margin declined to 21.3% in 2000 from 21.9% in 1999. The slight
decrease in TDS Telecom's operating margin was primarily the result of expanded
CLEC activities.
Investment and Other Income (Expense) totaled $(40.7) million in 2000 and $300.2
million in 1999.
Gain (Loss) on Cellular and Other Investments totaled $(32.1) million in the
first six months of 2000 and $339.9 million in the first six months of 1999. TDS
reduced the carrying value of its paging investment by $50.0 million to $24.7
million, plus a secured note receivable outstanding of $11.0 million, in the
second quarter of 2000 to reflect the reduced valuations that the paging
industry is experiencing. The Company will continue to review the carrying value
considering the operations of the investment and the general conditions of the
paging industry. The sale of a minority cellular interest in the first quarter
of 2000 resulted in a gain of $17.9 million.
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
gains at U.S. Cellular. Gains recorded in 1999 increased minority share of
income by $29.9 million.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------
2000 1999 Change
---- ---- ------
(Dollars in thousands)
<S> <C> <C> <C>
Minority Share of (Income)
U.S. Cellular
Minority Public Shareholders' $(18,088) $(42,448) $ 24,360
Minority Shareholders' or Partners' (4,310) (3,079) (1,231)
--------- --------- ---------
(22,398) (45,527) 23,129
Other (254) (228) (26)
--------- --------- ---------
$(22,652) $(45,755) $ 23,103
========= ========= =========
</TABLE>
Interest Expense decreased 7% ($3.8 million) in the first six months of 2000.
The decline in interest expense is primarily due to reduced short-term debt
balances.
Income Tax Expense decreased 68% ($114.9 million) in 2000 primarily due to
decline in gains offset somewhat by improved operating results. The overall
effective tax rate on continuing
3
<PAGE>
operations was 46.0% in 2000 and 40.4% in 1999. The overall effective tax rate
on continuing operations, excluding gains and losses was 43.0% in 2000 and 44.9%
in 1999.
Net Income From Continuing Operations totaled $64.1 million, or $1.03 diluted
earnings per share, in the first six months of 2000, compared to $249.7 million,
or $3.99 diluted earnings per share, in the first six months of 1999. Improved
operating results in 2000 were more than offset by the reduction in gains. A
summary of net income available to common and diluted earnings per share from
continuing operations and gains (losses) on cellular and other investments is
shown below.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
2000 1999
---- ----
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Net Income from Continuing Operations
Operations $ 87,285 $ 60,169
Gains (Losses) (23,170) 189,570
---------- -----------
$ 64,115 $ 249,739
========== ===========
Diluted Earnings Per Share from
Continuing Operations
Operations $ 1.41 $ .94
Gains (Losses) (.38) 3.05
---------- -----------
$ 1.03 $ 3.99
========== ===========
</TABLE>
Discontinued Operations. The gain on disposal of Aerial totaled $2.15 billion,
or $35.02 diluted earnings per share in 2000. Loss on operations of Aerial
totaled $(56.8) million, or $(.91) diluted earnings per share in 1999. A loss on
operations of Aerial of $(37.7) million in the first half of 2000 was deferred
and recognized as a reduction in the gain on disposal of Aerial.
Extraordinary Item - loss on extinguishment of debt, net of tax, is related to a
private purchase by U.S. Cellular of $25.8 million face value of its Liquid
Yield Option Notes (LYONs) for $16.5 million. A net loss of $6.1 million, or
$(.10) per diluted earnings per share, was recorded to account for the
difference between the purchase price and the carrying value.
Net Income Available to Common totaled $2.21 billion, or $35.95 diluted earnings
per share, in the first six months of 2000, compared to $192.3 million, or $3.08
diluted earnings per share, in the first six months of 1999. Net income
available to common in 2000 includes significant gains from the disposal of
Aerial.
4
<PAGE>
U.S. CELLULAR OPERATIONS
TDS provides wireless telephone service through United States Cellular
Corporation ("U.S. Cellular"), an 82.4%-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 443,000, or 19%, since June 30, 1999, to 2,807,000.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenue
Local service $273,738 $234,494 $521,278 $448,005
Inbound roaming 75,204 79,114 148,455 150,077
Long-distance and other 34,447 34,915 59,616 65,635
-------- -------- -------- --------
Service Revenue 383,389 348,523 729,349 663,717
Equipment Sales 14,268 12,429 28,395 23,220
-------- -------- -------- --------
397,657 360,952 757,744 686,937
-------- -------- -------- --------
Operating Expenses
System operations 50,443 61,641 97,627 120,332
Marketing and selling 70,728 63,380 140,186 121,685
Cost of equipment sold 30,054 27,659 64,651 53,100
General and administrative 86,352 79,354 168,039 158,873
Depreciation 50,218 46,685 101,387 88,301
Amortization 14,907 9,781 29,746 20,080
-------- -------- -------- --------
302,702 288,500 601,636 562,371
-------- -------- -------- --------
Operating Income $ 94,955 $ 72,452 $156,108 $124,566
======== ======== ======== ========
</TABLE>
Operating revenue increased 10% ($70.8 million) in the first six months of 2000
primarily related to the increase in customer units. However, total average
monthly service revenue per customer decreased 8% ($3.74) to $44.97 in the first
six months of 2000 from $48.71 in 1999. The decline reflects lower retail
revenue per customer ($.74), lower roaming revenue per customer ($1.86) and the
reduction in long-distance charges primarily on roaming minutes of use ($1.14).
Local retail revenue increased 16% ($73.3 million) in the first six months of
2000 due primarily to the 19% customer growth. Average local minutes of use per
retail customer increased 27% to 142 in 2000 from 112 in 1999, while average
local retail revenue per minute continued to decline in 2000. Competitive
pressures and U.S. Cellular's use of pricing and other incentive programs in
order to stimulate overall usage resulted in a lower average revenue per minute
of use. Average monthly local retail revenue per customer declined 2% ($.74) to
$32.14 in 2000 from $32.88 in 1999.
Inbound roaming revenue (charges to customers of other systems who use U.S.
Cellular's cellular systems when roaming) decreased 1% ($1.6 million) in the
first six months of 2000. The decline in inbound roaming revenue in 2000 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 due to these pricing programs
being present in both periods of comparison. Additionally, as new wireless
operators begin service in U.S. Cellular markets, roaming partners could switch
their business to these new operators, further slowing the growth in inbound
5
<PAGE>
roaming minutes of 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 17% ($1.86) to $9.15 in
2000 compared to $11.01 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 decreased 9% ($6.0 million) in the first six
months of 2000. While the volume of long-distance calls has increased,
long-distance revenue declined due to price reductions primarily related to
long-distance charges on roaming minutes of use. These reductions, similar to
the price reductions on roaming airtime charges, are a continuation of the
industry trend toward reduced per minute prices. The price reductions also
reduced the growth in the outbound roaming expense component of system
operations expense by approximately the same amount, resulting in no material
effect on U.S. Cellular's operating cash flow or operating income. Average
monthly long-distance and other revenue per customer decreased 24% ($1.14) to
$3.68 in 2000 compared to $4.82 in 1999.
Operating expenses increased 7% ($39.3 million) during the first six months of
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 15% ($18.5
million) in the first six months of 2000 while cost of equipment sold increased
22% ($11.6 million). These expenses, less equipment sales revenue, represent the
cost to acquire a new customer. Equipment sales revenue increased 22% ($5.2
million) in the first six months of 2000. Cost per gross customer addition
increased to $337 in 2000 from $335 in 1999. Gross customer activations
increased to 524,000 in 2000 from 453,000 in 1999. The increase in marketing and
selling expenses was primarily driven by increased commissions and advertising
expenses, which resulted from an increase in gross activations. 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 June 30, 2000, 35% of U.S. Cellular's customers were
on digital rate plans compared to 11% as of June 30, 1999.
System operations expenses (costs to provide service) decreased 19% ($22.7
million) and consumed 13.4% of service revenues in 2000 and 18.1% 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 $30.9 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. The decrease was partially offset by the effect of
increases in local and roaming minutes of use.
General and administrative expenses increased 6% ($9.2 million) and consumed
23.0% of service revenues in 2000 and 23.9% 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. This increase was
partially offset by decreases in consulting expenses and nonincome taxes.
Depreciation expense increased 15% ($13.1 million) in 2000 primarily due to the
12% increase in average fixed assets since June 30, 1999, and a reduction in the
useful lives of certain assets beginning in 2000. Amortization expense increased
48% ($9.7 million) in 2000 primarily related to
6
<PAGE>
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 25% ($31.5 million) to $156.1 million in the first
six months of 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 21.4% in 2000 compared to 18.8% in 1999.
Management expects service revenues to continue to grow during the remainder of
2000; however, management anticipates that average monthly revenue per customer
will decrease in 2000 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 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 since 1997 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
<PAGE>
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 69,500, or 11%, since June 30, 1999 to
682,200. TDS Telecom's 105 incumbent local exchange ("ILEC") subsidiaries served
594,500 access lines at June 30, 2000, a 5% increase over the 564,200 access
lines at June 30, 1999. TDS Telecom's competitive local exchange ("CLEC")
subsidiaries served 87,700 access lines at June 30, 2000 compared to 48,500
access lines at June 30, 1999. TDS Telecom plans to expand its CLEC operations
into certain mid-sized cities, which are geographically proximate to existing
TDS Telecom markets.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Local Telephone Operations
Operating Revenue
Local service $ 42,102 $ 38,200 $ 82,213 $ 74,589
Network access and long-distance 71,872 67,876 141,128 134,173
Miscellaneous 18,227 17,463 35,231 33,064
--------- --------- --------- ---------
132,201 123,539 258,572 241,826
--------- --------- --------- ---------
Operating Expenses
Operating expenses 66,329 61,209 128,364 120,767
Depreciation and Amortization 31,206 29,095 61,966 58,367
--------- --------- --------- ---------
97,535 90,304 190,330 179,134
--------- --------- --------- ---------
Local Telephone Operating Income $ 34,666 $ 33,235 $ 68,242 $ 62,692
--------- --------- --------- ---------
Competitive Local Exchange Operations
Operating Revenue $ 20,922 $ 13,215 $ 39,136 $ 24,318
--------- --------- --------- ---------
Operating Expenses
Operating expenses 20,934 13,798 39,902 26,120
Depreciation and Amortization 2,202 1,436 4,162 2,720
--------- --------- --------- ---------
23,136 15,234 44,064 28,840
--------- --------- --------- ---------
Competitive Local Exchange
Operating (Loss) $ (2,214) $ (2,019) $ (4,928) $ (4,522)
--------- --------- --------- ---------
Intercompany revenues (464) (447) (879) (872)
Intercompany expenses (464) (447) (879) (872)
--------- --------- --------- ---------
Operating Income $ 32,452 $ 31,216 $ 63,314 $ 58,170
========= ========= ========= =========
</TABLE>
Operating revenue increased 12% ($31.6 million) in the first six months of 2000,
reflecting primarily customer growth. Revenue from local telephone operations
increased 7% ($16.7 million) in the first six months of 2000. Average monthly
revenue per access line increased 2% ($1.53) to $74.06 in the first six months
of 2000 from $72.53 in the first six months of 1999. Local service revenue
increased 10% ($7.6 million) during 2000. Internal access line growth increased
revenues by $3.3 million while the sale of custom calling and advanced features
increased revenues by $2.6 million. Rate increases added $1.1 million to
revenues. Average monthly local service revenue per access line was $23.55 in
2000 and $22.37 in 1999. Network access and long-distance revenue increased 5%
($7.0 million) during 2000. Revenue generated from access minute growth due to
increased network usage increased $3.8 million in 2000. Compensation from state
and national revenue pools due to increased costs of providing network access
added $1.4 million to revenues. Average monthly network access and long-distance
revenue per access line was $40.42 in 2000 and $40.24 in 1999. Miscellaneous
revenue increased 7% ($2.2 million) during 2000. Average monthly miscellaneous
revenue per access line was $10.09 in 2000 and $9.92 in 1999.
8
<PAGE>
Revenue from competitive local exchange operations increased 61% ($14.8 million)
in the first six months of 2000 as access lines served increased to 87,700 at
June 30, 2000 from 48,500 at June 30, 1999.
Operating expenses increased 13% ($26.4 million) during 2000. Expenses from
local telephone operations increased by 6% ($11.2 million) in the first six
months of 2000. Local telephone expenses as a percent of local telephone
revenues were 73.6% in the first six months of 2000 and 74.1% in 1999. Cash
operating expenses increased by 6% ($7.6 million) in 2000 while depreciation and
amortization increased 6% ($3.6 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 53% ($15.2 million) in the first six months of 2000 due primarily to
the costs incurred to grow the customer base and provide competitive local
exchange services.
Operating income increased 9% ($5.1 million) to $63.3 million in the first six
months of 2000 reflecting improved local telephone operations operating results.
Operating income from local telephone operations increased 9% ($5.5 million) to
$68.2 million. Operating loss from competitive local exchange operations
increased 9% ($406,000) to $(4.9) 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 income from
competitive local exchange operations is expected to decline somewhat throughout
2000 due to costs associated with continued expansion into new markets.
9
<PAGE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Operating Revenues increased 11% ($53.1 million) during the second quarter of
2000 for reasons generally the same as the first six months. U.S. Cellular
revenues increased 10% ($36.7 million) in 2000. Local retail revenue increased
17% ($39.2 million) in the second quarter of 2000, while inbound roaming revenue
decreased 5% ($3.9 million). Average monthly service revenue per customer was
$46.37 in the second quarter of 2000 and $50.18 in 1999. TDS Telecom revenues
increased 12% ($16.4 million) in the second quarter of 2000 due to the growth in
ILEC operations ($8.7 million) and growth in CLEC operations ($7.7 million).
Average monthly revenue per ILEC access line increased to $74.88 in the second
quarter of 2000 from $73.52 in 1999.
Operating Expenses rose 7% ($29.3 million) during the second quarter of 2000 for
reasons generally the same as the first six months. U.S. Cellular expenses
increased 5% ($14.2 million). System operations expense decreased 18% ($11.2
million). Marketing and selling expenses, including cost of equipment sold,
increased 11% ($9.7 million). Cost per gross customer addition decreased to $335
in the second quarter of 2000 from $351 in 1999. Gross customer activations
increased to 258,000 in the second quarter of 2000 from 224,000 in 1999. General
and Administrative expense increased 9% ($7.0 million). Depreciation and
amortization expense increased 15% ($8.7 million). TDS Telecom expenses
increased 14% ($15.1 million) due to growth in ILEC operations ($7.2 million)
and in CLEC operations ($7.9 million) for reasons generally the same as the
first six months.
Operating Income increased 23% ($23.7 million) to $127.4 million in the second
quarter of 2000. U.S. Cellular's operating income increased 31% ($22.5 million)
reflecting continued growth in customers and revenues. TDS Telecom's operating
income increased 4% ($1.2 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 $(50.1) million in 2000 and $289.7 million
in 1999. Gain (Loss) on Cellular and Other Investments totaled $(50.0) million
in the second quarter of 2000 compared to $328.3 million in 1999. TDS reduced
the carrying value of its paging investment by $50.0 million to $24.7 million,
plus a secured note receivable outstanding of $11.0 million, in the second
quarter of 2000 to reflect the reduced valuations that the paging industry is
experiencing. The Company recorded a $327.1 million gain related to the merger
of AirTouch and Vodafone Group plc in 1999. Investment Income increased $6.9
million to $7.6 million primarily due to improvements in the aggregate operating
results of minority-owned cellular interests.
Minority Share of (Income) decreased $26.4 million in the second quarter of 2000
primarily due to the decrease in gains at U.S. Cellular. Gains recorded in the
second quarter of 1999 increased minority income by $29.9 million.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------
2000 1999 Change
---- ---- ------
(Dollars in thousands)
<S> <C> <C> <C>
Minority Share of (Income)
U.S. Cellular
Minority Shareholders' Share $ (9,052) $ (37,150) $ 28,098
Minority Partners' Share (3,295) (1,596) (1,699)
---------- ---------- ----------
(12,347) (38,746) 26,399
Other (60) (48) (12)
---------- ---------- ----------
$ (12,407) $ (38,794) $ 26,387
========== ========== ==========
</TABLE>
Interest Expense decreased 4% ($1.1 million) to $24.6 million in the second
quarter of 2000 for
10
<PAGE>
reasons generally the same as the first six months.
Income Tax Expense decreased to $21.8 million in the second quarter of 2000 from
$144.8 million in 1999 primarily due to the large gains recorded in 1999. The
overall effective tax rate on continuing operations was 46.8% in the second
quarter of 2000 and 40.1% in 1999. The overall effective tax rate on continuing
operations, excluding gains was 43.0% in 2000 and 45.8% in 1999.
Net Income From Continuing Operations totaled $24.8 million, or $.40 diluted
earnings per share, in the second quarter of 2000, compared to $216.7 million,
or $3.47 diluted earnings per share, in the second quarter of 1999. The improved
operating results in 2000 were overshadowed by the reduction in gains. A summary
of net income from continuing operations and diluted earnings per share from
operations and gains (losses) is shown below.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------
2000 1999
---- ----
(Dollars in thousands, except per
share amounts)
<S> <C> <C>
Net Income from Continuing Operations
Operations $ 55,024 $ 34,156
Gains (Losses) (30,260) 182,549
----------- ----------
$ 24,764 $ 216,705
=========== ==========
Diluted Earnings Per Share from
Continuing Operations
Operations $ .90 $ .54
Gains (Losses) (.50) 2.93
----------- ----------
$ .40 $ 3.47
=========== ==========
</TABLE>
Discontinued Operations. The gain on disposal of Aerial totaled $2.15 billion,
or $35.25 diluted earnings per share in the second quarter of 2000. Loss on
operations of Aerial totaled $(34.2) million, or $(.55) diluted earnings per
share in the second quarter of 1999. A loss on operations of Aerial of $(12.6)
million in the second quarter of 2000 was deferred and recognized as a reduction
in the gain on disposal of Aerial.
Extraordinary Item - loss on extinguishment of debt, net of tax, is related to a
private purchase by U.S. Cellular of $25.8 million face value of its Liquid
Yield Option Notes (LYONs) for $16.5 million. A net loss of $6.1 million, or
$(.10) per diluted earnings per share, was recorded to account for the
difference between the purchase price and the carrying value.
Net Income Available to Common totaled $2.17 billion, or $35.55 diluted earnings
per share, in the second quarter of 2000, compared to $182.2 million, or $2.92
diluted earnings per share, in the second quarter of 1999. Net income available
to common in 2000 includes significant gains from the disposal of Aerial.
11
<PAGE>
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 $367.3 million in the first six
months of 2000 compared to $198.4 million in 1999.
Net income from continuing operations excluding all noncash items increased 29%
($72.3 million) to $323.4 million in the first six months of 2000. The increase
primarily reflects the 18% ($64.5 million) growth in aggregate operating cash
flow (operating income plus depreciation and amortization). Changes in assets
and liabilities from operations provided $43.9 million in 2000 and required
$52.7 million in 1999. Cash provided by the change in assets and liabilities in
2000 primarily relates to an increase in accrued taxes and a decrease in
materials and supplies, and accounts receivable, offset somewhat by a decrease
in accounts payable. Cash required in 1999 primarily reflects an increase in
accounts receivable and a decrease in accounts payable.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Net Income from continuing operations $ 64,115 $ 249,739
Noncash items included in Net Income
from continuing operations 259,281 1,349
---------- ----------
Net Income from continuing operations
Excluding all noncash items 323,396 251,088
Changes in assets and liabilities
from operations 43,863 (52,670)
---------- ----------
$ 367,259 $ 198,418
========== ==========
</TABLE>
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
$225.8 million in the first six months of 2000 compared to $148.6 million in
1999 reflecting primarily capital expenditures. Capital expenditures required
$175.4 million in 2000 and $210.6 million in 1999. Acquisitions, net of cash
acquired, required $73.2 million in 2000 and $8.1 million in 1999. TDS acquired
a telephone company, a majority interest in one cellular market and several
minority cellular interests in the first six months of 2000. The sales of
non-strategic cellular interests and other investments provided $22.5 million in
2000, and $57.6 million in 1999, reducing total cash flows required for
investing activities in each period.
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 $129.8 million in 2000 and $161.9 million in
12
<PAGE>
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 $45.6 million in 2000 and
$48.8 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 $192.4 million in the first six months of 2000 and provided
$24.9 million in 1999. During the first six months of 2000, TDS paid $143.0
million to repurchase TDS Common Shares and U.S. Cellular paid $135.8 million to
repurchase U.S. Cellular Common Shares. The Company increased Notes Payable
balances by $122.0 million in 2000 and $42.4 million in 1999. Dividends paid on
Common and Preferred Shares, excluding dividends reinvested, totaled $15.5
million in 2000 and $14.6 million in 1999.
In February 2000, the TDS Board of Directors authorized the repurchase of up to
2.0 million TDS Common Shares. As of June 30, 2000, the Company has repurchased
1,262,700 common shares under this program. The U.S. Cellular Board of Directors
authorized the repurchase of 1.4 million U.S. Cellular Common Shares in March
2000 and an additional 1.4 million shares in May 2000. A total of 1,735,400
common shares were repurchased under these two programs as of June 30, 2000. An
additional 327,600 U.S. Cellular Common Shares were purchased in the first six
months of 2000 pursuant to a previously authorized program to repurchase a
limited amount of shares on a quarterly basis, primarily for use in employee
benefit plans.
Cash Flows From Discontinued Operations. Cash outflows from discontinued
operations totaled $5.0 million in 2000 compared to $40.5 million in 1999
reflecting primarily amounts borrowed from TDS to fund the operating activities
of Aerial.
LIQUIDITY
TDS anticipates that the aggregate resources required for 2000 will include
approximately $330 million for U.S. Cellular capital additions and $140 million
for TDS Telecom capital additions.
TDS and its subsidiaries had cash and temporary investments totaling $60.1
million at June 30, 2000. TDS also had $587 million of bank lines of credit for
general corporate purposes at June 30, 2000. Unused amounts of such lines
totaled $465 million. These line of credit agreements provide for borrowings at
negotiated rates up to the prime rate.
U.S. Cellular plans to finance its cellular construction program using primarily
internally generated cash. U.S. Cellular's operating cash flow totaled $540.1
million for the twelve months ended June 30, 2000, up 24% ($103.3 million) from
1999. In addition, U.S. Cellular had $500 million of bank lines of credit for
general corporate purposes at June 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.
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.
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.
TDS Telecom plans to finance its construction program using primarily internally
generated cash
13
<PAGE>
supplemented by long-term financing from federal government programs. TDS
Telecom's operating cash flow totaled $248.1 million for the twelve months ended
June 30, 2000, up 10% ($22.4 million) from 1999. In addition, TDS Telecom
telephone subsidiaries had $112.1 million in unadvanced loan funds from federal
government programs to finance the telephone construction activities as of June
30, 2000.
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.
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 $4.86 billion at
June 30, 2000. A hypothetical 10% decrease in the share prices of these
investments would result in a $486.3 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:
- general economic and business conditions, both nationally and in the regions
in which TDS operates,
- technology changes,
- competition,
- changes in business strategy or development plans,
- changes in governmental regulation,
- availability of future financing, and
- changes in growth in cellular customers, penetration rates, churn rates and
roaming rates.
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.
14
<PAGE>
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Unaudited
---------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
U.S. Cellular $ 397,657 $ 360,952 $ 757,744 $ 686,937
TDS Telecom 152,659 136,307 296,829 265,272
----------- ---------- ----------- -----------
550,316 497,259 1,054,573 952,209
----------- ---------- ----------- -----------
OPERATING EXPENSES
U.S. Cellular 302,702 288,500 601,636 562,371
TDS Telecom 120,207 105,091 233,515 207,102
----------- ---------- ----------- -----------
422,909 393,591 835,151 769,473
----------- ---------- ----------- -----------
OPERATING INCOME 127,407 103,668 219,422 182,736
----------- ---------- ----------- -----------
INVESTMENT AND OTHER INCOME
Interest and dividend income 4,824 1,645 7,294 3,347
Investment income, net of amortization 7,551 650 9,210 7,293
Gain (Loss) on cellular and other investments (50,000) 328,341 (32,149) 339,892
Other (expense), net (23) (2,154) (2,434) (4,543)
Minority share of (income) (12,407) (38,794) (22,652) (45,755)
----------- ---------- ----------- -----------
(50,055) 289,688 (40,731) 300,234
----------- ---------- ----------- -----------
INCOME BEFORE INTEREST AND INCOME TAXES 77,352 393,356 178,691 482,970
Interest expense 24,618 25,677 47,447 51,240
Minority interest in income of subsidiary trust 6,202 6,202 12,405 12,405
----------- ---------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 46,532 361,477 118,839 419,325
Income tax expense 21,768 144,772 54,724 169,586
----------- ---------- ----------- -----------
NET INCOME FROM CONTINUING OPERATIONS 24,764 216,705 64,115 249,739
----------- ---------- ----------- -----------
Discontinued Operations
Loss from operations of Aerial, net of tax -- (34,162) -- (56,796)
Gain on disposal of Aerial, net of tax 2,150,082 -- 2,150,082 --
----------- ---------- ----------- -----------
2,150,082 (34,162) 2,150,082 (56,796)
----------- ---------- ----------- -----------
NET INCOME BEFORE EXTRAORDINARY ITEM 2,174,846 182,543 2,214,197 192,943
Extraordinary Item - loss on extinguishment of debt,
net of tax (6,106) -- (6,106) --
----------- ---------- ----------- -----------
NET INCOME $2,168,740 $182,543 $2,208,091 $ 192,943
----------- ---------- ----------- -----------
Preferred Dividend Requirement (131) (337) (266) (687)
----------- ---------- ----------- -----------
NET INCOME AVAILABLE TO COMMON $2,168,609 $ 182,206 $2,207,825 $ 192,256
----------- ---------- ----------- -----------
BASIC WEIGHTED AVERAGE COMMON SHARES (000s) 60,306 61,399 60,692 61,339
BASIC EARNINGS PER SHARE (Note 8)
Net income from continuing operations $ 0.41 $ 3.52 $ 1.05 $ 4.06
Net income available to common $ 35.96 $ 2.97 $ 36.38 $ 3.13
=========== ========== =========== ===========
DILUTED EARNINGS PER SHARE (Note 8)
Net income from continuing operations $ 0.40 $ 3.47 $ 1.03 $ 3.99
Net income available to common $ 35.55 $ 2.92 $ 35.95 $ 3.08
=========== ========== =========== ===========
DIVIDENDS PER SHARE $ .125 $ .115 $ .25 $ .23
=========== ========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
---------
Six Months Ended
June 30,
------------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
Net income from continuing operations $ 64,115 $ 249,739
Add (Deduct) adjustments to reconcile net income from
continuing operations to net cash provided
by operating activities
Depreciation and amortization 197,261 169,468
Deferred taxes (4,199) 115,495
Investment income (15,797) (13,966)
Minority share of income 22,652 45,755
(Gain) Loss on cellular and other investments 32,149 (339,892)
Noncash interest expense 9,083 8,829
Other noncash expense 18,132 15,660
Change in accounts receivable 6,343 (27,988)
Change in materials and supplies 10,840 (5,812)
Change in accounts payable (15,208) (27,375)
Change in accrued taxes 28,244 5,685
Change in other assets and liabilities 13,644 2,820
----------- -----------
367,259 198,418
----------- -----------
CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES
Capital expenditures (175,391) (210,607)
Acquisitions, net of cash acquired (73,184) (8,131)
Investments in and advances to investment
entities and license costs (959) 413
Distributions from investments 10,516 13,437
Proceeds from investment sales 22,500 57,614
Other investing activities (9,271) (1,316)
----------- -----------
(225,789) (148,590)
----------- -----------
CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES
Long-term debt borrowings 1,657 2,469
Repayments of long-term debt (24,390) (8,316)
Change in notes payable 121,991 42,351
Dividends paid (15,464) (14,585)
Repurchase of common shares (143,000) --
Purchase of subsidiary common stock (135,793) --
Other financing activities 2,599 2,937
----------- -----------
(192,400) 24,856
----------- -----------
CASH FLOWS FROM DISCONTINUED OPERATIONS (4,953) (40,464)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (55,883) 34,220
CASH AND CASH EQUIVALENTS -
Beginning of period 111,010 45,139
----------- -----------
End of period $ 55,127 $ 79,359
=========== ===========
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Unaudited)
June 30, 2000 December 31, 1999
------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 55,127 $ 111,010
Temporary investments 4,969 4,983
Accounts receivable from customers and others 324,099 317,025
Materials and supplies, at average cost,
and other current assets 68,772 74,990
------------ ------------
452,967 508,008
------------ ------------
INVESTMENTS
Marketable equity securities 4,863,011 843,280
Intangible Assets
Cellular license acquisitions costs, net 1,145,502 1,156,175
Franchise costs and other costs, net 197,700 177,677
Investments in unconsolidated entities 285,035 272,601
Other investments 27,255 28,837
------------ ------------
6,518,503 2,478,570
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET
U.S. Cellular 1,221,535 1,206,467
TDS Telecom 879,755 889,422
------------ ------------
2,101,290 2,095,889
------------ ------------
OTHER ASSETS AND DEFERRED CHARGES 50,545 56,216
------------ ------------
NET ASSETS OF DISCONTINUED OPERATIONS -- 237,145
------------ ------------
TOTAL ASSETS $ 9,123,305 $ 5,375,828
============ ============
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
June 30, 2000 December 31, 1999
------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 15,128 $ 14,967
Notes payable 121,991 --
Accounts payable 182,681 206,937
Advance billings and customer deposits 48,859 43,965
Accrued interest 23,788 23,492
Accrued taxes 31,500 19,773
Accrued compensation 35,211 35,939
Other current liabilities 34,603 24,599
------------- -------------
493,761 369,672
------------- -------------
DEFERRED LIABILITIES AND CREDITS 2,006,184 424,515
------------- -------------
LONG-TERM DEBT, excluding current portion 1,286,413 1,279,877
------------- -------------
MINORITY INTERST in subsidiaries 457,484 509,658
------------- -------------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES of Subsidiary Trusts
Holding Solely Company Subordinated Debentures (a) 300,000 300,000
------------- -------------
PREFERRED SHARES 8,210 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 1,838,050 1,897,402
Treasury Shares, at cost
(2,422,180 shares and 1,237,207 shares, respectively) (231,618) (102,975)
Accumulated other comprehensive income 262,591 179,071
Retained earnings 2,701,606 508,979
------------- -------------
4,571,253 2,483,101
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,123,305 $ 5,375,828
============= =============
</TABLE>
[FN]
(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.
</FN>
18
<PAGE>
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 June 30, 2000 and December 31,
1999, and the results of operations and cash flows for the six months
ended June 30, 2000 and 1999. The results of operations for the six months
ended June 30, 2000 and 1999, are not necessarily indicative of the
results to be expected for the full year.
2. Discontinued Operations
The Board of Directors of TDS approved a plan of merger between Aerial
Communications, Inc. ("Aerial"), its over 80%-owned personal
communications services company, and VoiceStream Wireless Corporation
("VoiceStream") in September of 1999. 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 $2.15 billion, net of
$1.51 billion in taxes, on this transaction. TDS had a basis in Aerial of
$236.1 million, including deferred losses of $81.9 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.
19
<PAGE>
Net assets of discontinued operations as of December 31, 1999, are as follows:
<TABLE>
<S> <C>
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 (147,696)
Long-term debt (250,846)
Minority interest in subsidiaries (226,348)
Losses deferred after measurement date 44,179
------------
$ 237,145
============
</TABLE>
Summarized income statement information relating to discontinued operations,
excluding any corporate charges and intercompany interest expense, is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $ 26,934 $ 54,785 $ 94,463 $ 105,326
Expenses 42,676 102,132 164,148 202,507
------------ ------------ ------------ ------------
Operating (Loss) (15,742) (47,347) (69,685) (97,181)
Minority share of loss 21,804 865 33,459 10,967
Other income (34,788) 1,243 (29,533) 2,834
Interest expense (2,275) (5,389) (8,605) (10,397)
------------ ------------ ------------ ------------
(Loss) Before Income Taxes (31,001) (50,628) (74,364) (93,777)
Income tax benefit 18,373 16,466 36,624 36,981
------------ ------------ ------------ ------------
Net (Loss) (12,628) (34,162) (37,740) (56,796)
Losses deferred after measurement date 12,628 -- 37,740 --
------------ ------------ ------------ ------------
Net (Loss) From Discontinued
Operations $ -- $ (34,162) $ -- $ (56,796)
============ ============ ============ ============
</TABLE>
20
<PAGE>
Summarized cash flow statement information relating to discontinued operations
is as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities $ (54,241) $ (29,110)
Cash flows from financing activities 108,180 1,605
Cash flows from investing activities (17,325) (13,457)
------------ -----------
Cash provided (used) by discontinued operations 36,614 (40,962)
(Increase) decrease in cash included in net
assets of discontinued operations (41,567) 498
------------ -----------
Cash flows from discontinued operations $ (4,953) $ (40,464)
============ ===========
</TABLE>
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.
<TABLE>
<CAPTION>
June 30, December 31,
-------- ------------
2000 1999
---- ----
(Dollars in thousands)
Available-for-sale Equity Securities
<S> <C> <C>
Aggregate Fair Value $ 4,863,011 $ 843,280
Adjusted Basis 4,417,331 517,870
----------- ----------
Gross Unrealized Holding Gains 445,680 325,410
Tax Effect 177,312 130,616
----------- ----------
Unrealized Holding Gains, net of tax 268,368 194,794
Minority Share of Unrealized Holding Gains 5,777 15,723
----------- ----------
Net Unrealized Holding Gains $ 262,591 $ 179,071
=========== ==========
</TABLE>
4. Common Stockholders' Equity
In February 2000, the TDS Board of Directors authorized the repurchase of
up to 2.0 million TDS Common Shares. As of June 30, 2000, TDS has
repurchased 1,262,700 common shares under this program.
5. Gain (Loss) on Cellular and Other Investments
TDS reduced the carrying value of its paging investment by $50.0 million
to $24.7 million, plus a secured note receivable outstanding of $11.0
million, in the second quarter of 2000 to reflect the reduced valuations
that the paging industry is experiencing. The sale of a minority cellular
interest in the first quarter of 2000 resulted in a gain of $17.9 million.
The Company 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
reflect the sale of certain minority cellular interests and other
investments for cash.
21
<PAGE>
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.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Accumulated Other Comprehensive Income
Balance, beginning of period $ 179,071 $ 75,609
----------- -----------
Add:
Net unrealized gains on securities 120,269 190,984
Income tax effect (46,695) (76,187)
----------- -----------
73,574 114,797
Minority share of unrealized gains 9,946 (17,146)
----------- -----------
Net unrealized gains 83,520 97,651
----------- -----------
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 83,520 (68,962)
-----------
-----------
Balance, end of period $ 262,591 $ 6,647
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Comprehensive Income
Net Income $2,168,740 $ 182,543 $2,208,091 $ 192,943
Net change in unrealized gains
on securities 58,631 (134,788) 83,520 (68,962)
----------- ---------- ----------- ----------
$2,227,371 $ 47,755 $2,291,611 $ 123,981
=========== ========== =========== ==========
</TABLE>
7. Extraordinary Item - Loss on Extinguishment of Debt
U.S. Cellular purchased $25.8 million face value of its Liquid Yield Option
Notes (LYONs) for $16.5 million in a private transaction. A net loss of
$6.1 million, or $(.10) per diluted earnings per share, was recorded to
account for the difference between the purchase price and the carrying
value.
22
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net Income from Continuing Operations $ 24,764 $ 216,705 $ 64,115 $ 249,739
Less: Preferred Dividends (131) (337) (266) (687)
----------- ----------- ----------- -----------
Net Income Available to Common from Continued
Operations Used in Basic Earnings Per Share 24,633 216,368 63,849 249,052
Discontinued Operations
Gain on Disposal of Aerial 2,150,082 -- 2,150,082 --
Loss on Operations of Aerial -- (34,162) -- (56,796)
Extraordinary Item (6,106) -- (6,106) --
----------- ----------- ----------- -----------
Net Income Available to Common used in
Basic Earnings Per Share $2,168,609 $ 182,206 $2,207,825 $ 192,256
=========== =========== =========== ===========
Weighted Average Number of Common Shares
Used in Basic Earnings Per Share 60,306 61,399 60,692 61,339
=========== =========== =========== ===========
Basic Earnings Per Common Share
Continuing Operations $ 0.41 $ 3.52 $ 1.05 $ 4.06
Discontinued Operations
Gain on Disposal of Aerial 35.65 -- 35.43 --
Loss on Operations of Aerial -- (0.55) -- (0.93)
Extraordinary Item (0.10) -- (0.10) --
----------- ----------- ----------- -----------
$ 35.96 $ 2.97 $ 36.38 $ 3.13
=========== =========== =========== ===========
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net Income Available to Common from Continuing
Operations Used in Basic Earnings Per Share $ 24,633 $ 216,368 $ 63,849 $ 249,052
Reduction in Preferred Dividends if Preferred
Shares Converted into Common Shares 63 307 130 627
Minority Income Adjustment (229) (541) (460) (1,137)
----------- ----------- ----------- -----------
Net Income Available to Common from Continuing
Operations Used in Diluted Earnings Per Share 24,467 216,134 63,519 248,542
Discontinued Operations
Gain on Disposal of Aerial 2,150,082 -- 2,150,082 --
Loss on Operations of Aerial -- (34,162) -- (56,796)
Extraordinary Item (6,106) -- (6,106) --
----------- ----------- ----------- -----------
Net Income (Loss) Available to Common Used
in Diluted Earnings Per Share $2,168,443 $ 181,972 $2,207,495 $ 191,746
=========== =========== =========== ===========
Weighted Average Number of Common Shares
Used in Basic Earnings Per Share 60,306 61,399 60,692 61,339
Effect of Dilutive Securities
Common Shares Outstanding if Preferred
Shares Converted 182 614 189 635
Stock Options 501 339 516 266
Common Shares Issuable 13 13 13 13
----------- ----------- ----------- -----------
Weighted Average Number of Common Shares
Used in Diluted Earnings Per Share 61,002 62,365 61,410 62,253
=========== =========== =========== ===========
Diluted Earnings Per Common Share
Continuing Operations $ 0.40 $ 3.47 $ 1.03 $ 3.99
Discontinued Operations
Gain on Disposal of Aerial 35.25 -- 35.02 --
Loss on Operations of Aerial -- (0.55) -- (0.91)
Extraordinary Item (0.10) -- (0.10) --
----------- ----------- ----------- -----------
$ 35.55 $ 2.92 $ 35.95 $ 3.08
=========== =========== =========== ===========
</TABLE>
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 six
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.
24
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Property, plant and equipment $ 10,497 $ --
Cellular licenses 4,740 5,464
Notes receivable - other (10,000) --
Equity method investment in cellular interests 65,727 --
Franchise costs 22,744 --
Long-term debt (19,108) --
Deferred credits (700) --
Other assets and liabilities,
excluding cash and cash equivalents 952 --
Decrease in Minority interest (1,668) 2,667
Common Shares issued -- --
------------ ----------
Decrease in cash due to acquisitions $ 73,184 $ 8,131
============ ==========
</TABLE>
The following table summarizes interest and income taxes paid, and other noncash
transactions.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Interest Paid
Continuing Operations $ 37,793 $ 42,081
Discontinued Operations 2,112 1,320
Income Taxes Paid (net of income tax refund
received of $15,000 in 2000) 18,071 7,353
Common shares issued by TDS for
conversion of TDS Preferred Stock $ 418 $ 2,811
</TABLE>
25
<PAGE>
10. Business Segment Information
Financial data for the Company's business segments for each of the three
and six month periods ended or at June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Discontinued
or at June 30, 2000 U.S. Cellular TDS Telecom All Other (1) Operations Total
------------------- ------------- ----------- ------------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 397,657 $ 152,659 $ -- $ -- $ 550,316
Operating cash flow 160,080 65,860 -- -- 225,940
Depreciation and
amortization expense 65,125 33,408 -- -- 98,533
Operating income 94,955 32,452 -- -- 127,407
Marketable Equity Securities 459,764 140,014 4,263,233 -- 4,863,011
Total Assets 3,279,294 1,453,808 4,390,203 -- 9,123,305
Capital Expenditures $ 69,968 $ 29,515 $ -- $ -- $ 99,483
Three Months Ended Discontinued
or at June 30, 1999 U.S. Cellular TDS Telecom All Other (1) Operations Total
------------------- ------------- ----------- ------------- ---------- -----
(Dollars in thousands)
Operating revenues $ 360,952 $ 136,307 $ -- $ -- $ 497,259
Operating cash flow 128,918 61,747 -- -- 190,665
Depreciation and
amortization expense 56,466 30,531 -- -- 86,997
Operating income 72,452 31,216 -- -- 103,668
Marketable Equity Securities 411,085 113,499 -- -- 524,584
Total Assets 3,219,523 1,385,411 175,702 526,587 5,307,223
Capital Expenditures $ 77,164 $ 27,200 $ -- $ -- $ 104,364
Six Months Ended Discontinued
or at June 30, 2000 U.S. Cellular TDS Telecom All Other (1) Operations Total
------------------- ------------- ----------- ------------- ---------- -----
(Dollars in thousands)
Operating revenues $ 757,744 $ 296,829 $ -- $ -- $1,054,573
Operating cash flow 287,241 129,442 -- -- 416,683
Depreciation and
amortization expense 131,133 66,128 -- -- 197,261
Operating income 156,108 63,314 -- -- 219,422
Marketable Equity Securities 459,764 140,014 4,263,233 -- 4,863,011
Total Assets 3,279,294 1,453,808 4,390,203 -- 9,123,305
Capital Expenditures $ 129,799 $ 45,592 $ -- $ -- $ 175,391
Six Months Ended Discontinued
or at June 30, 1999 U.S. Cellular TDS Telecom All Other (1) Operations Total
------------------- ------------- ----------- ------------- ---------- -----
(Dollars in thousands)
Operating revenues $ 686,937 $ 265,272 $ -- $ -- $ 952,209
Operating cash flow 232,947 119,258 -- -- 352,205
Depreciation and
amortization expense 108,381 61,088 -- -- 169,469
Operating income 124,566 58,170 -- -- 182,736
Marketable Equity Securities 411,085 113,499 -- -- 524,584
Total Assets 3,219,523 1,385,411 175,702 526,587 5,307,223
Capital Expenditures $ 161,852 $ 48,755 $ -- $ -- $ 210,607
</TABLE>
[FN]
(1) Consists of the TDS Corporate operations and all other businesses not
included in the U.S. Cellular or TDS Telecom segments.
</FN>
26
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
-------------------------------------------------------------
At the Annual Meeting of Shareholders of TDS, held on May 19, 2000, the
following number of votes were cast for the matters indicated:
1. a. For the election of three Class I Directors of the Company by the
Series A Holders:
Broker
Nominee For Withhold Non-vote
----- --- -------- --------
James Barr III 67,920,127 987 -0-
Sandra L. Helton 67,921,087 27 -0-
George W. Off 67,921,087 27 -0-
b. For the election of one Class I Director of the Company by the Common
Holders:
Broker
Nominee For Withhold Non-vote
------- --- -------- --------
Martin L. Solomon 47,842,311 628,877 -0-
2. Proposal to Ratify the Selection of Arthur Andersen LLP as Independent Public
Accountants for 2000:
Broker
For Withhold Abstain Non-vote
--- -------- ------- --------
116,311,142 30,427 50,733 -0-
3. Shareholder Proposal:
Broker
For Withhold Abstain Non-vote
--- -------- ------- --------
15,910,870 87,111,979 3,037,801 10,331,652
27
<PAGE>
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.
(c) Exhibit 27 - Financial Data Schedule
(d) Reports on Form 8-K filed during the quarter ended June 30, 2000:
The Company filed a Current Report on Form 8-K, dated May 4, 2000, for the
purpose of filing a news release and proforma balance. The news release, dated
May 4, 2000, announced the completion of the Aerial/VoiceStream merger. The
proforma balance sheet was included to show the effect of the exchange of TDS's
interest in Aerial for 35,570,493 common shares of VoiceStream. The Current
Report was filed on May 19, 2000.
28
<PAGE>
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 August 11, 2000 /s/ Sandra L. Helton
------------------------------- -------------------------
Sandra L. Helton,
Executive Vice President-Finance
(Chief Financial Officer)
Date August 11, 2000 /s/ D. Michael Jack
------------------------------- ------------------------
D. Michael Jack,
Vice President and Controller
(Principal Accounting Officer)
Signature page for the TDS 2000 Second Quarter Form 10-Q
