--------------------------------------------------------------------------------
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 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
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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
--------------------------------------------------------------------------------
<PAGE>
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
<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 3.6 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 $2.15
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.
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
<PAGE>
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.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
2000 1999 Change
---- ---- ------
(Dollars in thousands)
<S> <C> <C> <C>
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
=============== ============== ==============
</TABLE>
Interest Expense decreased 6% ($4.3 million) in 2000 reflecting primarily lower
average short-term debt balances.
Income Tax Expense decreased 42% ($87.7 million) in 2000. The effective income
tax rate was 46.9% in 2000 and 41.0% in 1999. The effective income tax rate,
excluding gains, was 43.0% in 2000 and 43.8% in 1999.
Income From Continuing Operations totaled $139.2 million, or $2.26 per diluted
share, in 2000,
3
<PAGE>
compared to $302.7 million, or $4.82 per diluted share, in 1999. Income from
continuing operations, excluding gains and losses, increased to $139.7 million,
or $2.27 per diluted share in 2000 from $111.2 million, or $1.75 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.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
2000 1999
---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C>
Income from Continuing Operations
Operations $ 139,708 $ 111,186
Gains (Losses) (488) 191,489
---------------- ----------------
$ 139,220 $ 302,675
================ ================
Diluted Earnings Per Share from
Continuing Operations
Operations $ 2.27 $ 1.75
Gains (Losses) (.01) 3.07
---------------- ----------------
$ 2.26 $ 4.82
================ ================
</TABLE>
Discontinued Operations. The gain on disposal of Aerial totaled $2.15 billion,
or $35.14 per diluted share in 2000. Loss on operations of Aerial totaled
$(84.2) million, or $(1.35) 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 $(26.6) million, or
$(0.43) per diluted share, reflects the difference between the repurchase or
conversion price and the carrying value.
Net Income Available to Common totaled $2.26 billion, or $36.97 per diluted
share, in 2000, compared to $217.5 million, or $3.47 per diluted share, in 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 82.7%-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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<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 69,400, 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
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
============ ============= =========== ===========
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------
2000 1999 Change
---- ---- ------
(Dollars in thousands)
<S> <C> <C> <C>
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)
============== ============= ==============
</TABLE>
Interest Expense decreased 2% ($471,000) to $24.7 million in the third quarter
of 2000 for reasons
10
<PAGE>
generally the same as the first nine months.
Income Tax Expense increased to $68.0 million in the third quarter of 2000 from
$40.9 million in 1999. The effective income tax rate was 47.5% in the third
quarter of 2000 and 43.6% in 1999. The effective income tax rate, excluding
gains, was 43.0% in 2000 and 42.4% in 1999.
Income From Continuing Operations totaled $75.1 million, or $1.24 per diluted
share, in the third quarter of 2000, compared to $52.9 million, or $.84 per
diluted share, in 1999. A summary of income from continuing operations and
diluted earnings per share from operations and gains is shown below.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------
2000 1999
---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C>
Income from Continuing Operations
Operations $ 52,423 $ 51,017
Gains 22,682 1,919
------------- -------------
$ 75,105 $ 52,936
============= =============
Diluted Earnings Per Share from
Continuing Operations
Operations $ .86 $ .81
Gains .38 .03
------------- -------------
$ 1.24 $ .84
============= =============
</TABLE>
Discontinued Operations. Loss on disposal of Aerial totaled $(2.6) million, or
$(.04) 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 $(27.4) million, or $(.44) 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 $(20.5) million, or $(.34) per diluted share, was
recorded to reflect the difference between the repurchase or conversion price
and the carrying value.
Net Income Available to Common totaled $51.9 million, or $.86 per diluted share,
in the third quarter of 2000, compared to $25.2 million, or $.40 per diluted
share, in 1999.
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 $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.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Income from continuing operations $ 139,220 $ 302,675
Noncash items included in Income
from continuing operations 335,402 109,603
-------------- --------------
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
============== ==============
</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
$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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
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 68,034 40,889 122,758 210,475
------------ ----------- ------------ ------------
INCOME FROM CONTINUING OPERATIONS 75,105 52,936 139,220 302,675
------------ ----------- ------------ ------------
Discontinued Operations
Loss from operations of Aerial, net of tax -- (27,394) -- (84,190)
Gain on disposal of Aerial, net of tax (2,647) -- 2,147,435 --
------------ ----------- ------------ ------------
(2,647) (27,394) 2,147,435 (84,190)
------------ ----------- ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 72,458 25,542 2,286,655 218,485
Extraordinary Item - loss on extinguishment of debt,
net of tax (20,460) -- (26,566) --
------------ ----------- ------------ ------------
NET INCOME $ 51,998 $ 25,542 $ 2,260,089 $ 218,485
Preferred Dividend Requirement (119) (316) (385) (1,003)
------------ ----------- ------------ ------------
NET INCOME AVAILABLE TO COMMON $ 51,879 $ 25,226 $ 2,259,704 $ 217,482
============= =========== ============ =============
BASIC WEIGHTED AVERAGE COMMON SHARES (000s) 59,537 61,451 60,307 61,376
BASIC EARNINGS PER SHARE (Note 8)
Income from continuing operations $ 1.26 $ 0.86 $ 2.30 $ 4.92
Net income available to common $ .87 $ 0.41 $ 37.47 $ 3.54
========== =========== ========== ===========
DILUTED EARNINGS PER SHARE (Note 8)
Income from continuing operations $ 1.24 $ 0.84 $ 2.26 $ 4.82
Net income available to common $ .86 $ 0.40 $ 36.97 $ 3.47
========== =========== ========== ===========
DIVIDENDS PER SHARE $ .125 $ .115 $ .375 $ .345
========== =========== ========== ===========
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 STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
---------
Nine Months Ended
September 30,
-------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
Income from continuing operations $ 139,220 $ 302,675
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 4,148 124,411
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.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Unaudited)
September 30, December 31,
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
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 -- 237,145
------------- --------------
TOTAL ASSETS $ 9,070,761 $ 5,375,828
============= ==============
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
September 30, December 31,
-------------- ------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
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 1,994,308 424,515
----------------- -----------------
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 2,746,079 508,979
----------------- -----------------
4,370,200 2,483,101
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,070,761 $ 5,375,828
================= =================
(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.
</TABLE>
19
<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 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.
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 $2.15 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.
20
<PAGE>
<TABLE>
Net assets of discontinued operations as of December 31, 1999, are as follows:
<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>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
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 -- (21,079) (36,624) (58,060)
------------- ------------ ----------- -----------
Net (Loss) -- (27,394) (37,740) (84,190)
Losses deferred after measurement date -- -- 37,740 --
------------- ------------ ----------- -----------
Net (Loss) From Discontinued
Operations $ -- $ (27,394) $ -- $ (84,190)
============= ============ =========== ===========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Summarized cash flow statement information relating to discontinued operations is as follows:
Nine Months Ended
September 30,
-------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
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)
================ ================
</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>
September 30, December 31,
------------- ------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
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
================== ================
</TABLE>
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
<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>
Nine Months Ended
September 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 (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
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Comprehensive Income
Net Income $ 51,998 $ 25,542 $ 2,260,089 $ 218,485
Net change in unrealized gains
on securities (73,637) 62,625 9,883 (6,337)
---------------- --------------- --------------- -------------
$ (21,639) $ 88,167 $ 2,269,972 $ 212,148
================ =============== =============== =============
</TABLE>
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 $(20.5) million, or $(0.34)
per diluted share in the third quarter and $(26.6) million, or $(0.43) per
diluted share in the first nine months, was recorded to account for the
difference between the purchase price and the carrying value.
23
<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 Nine Months Ended
Basic Earnings Per Share September 30, September 30,
-------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Income from Continuing Operations $ 75,105 $ 52,936 $ 139,220 $ 302,675
Less: Preferred Dividends (119) (316) (385) (1,003)
------------ ---------- ------------ -----------
Income Available to Common from Continued
Operations Used in Basic Earnings Per Share 74,986 52,620 138,835 301,672
Discontinued Operations
Gain on Disposal of Aerial (2,647) -- 2,147,435 --
Loss on Operations of Aerial -- (27,394) -- (84,190)
Extraordinary Item (20,460) -- (26,566) --
------------ ---------- ------------ -----------
Net Income Available to Common used in
Basic Earnings Per Share $ 51,879 $ 25,226 $ 2,259,704 $ 217,482
============= ========== ============= ===========
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 $ 1.26 $ 0.86 $ 2.30 $ 4.92
Discontinued Operations
Gain on Disposal of Aerial (0.05) -- 35.61 --
Loss on Operations of Aerial -- (0.45) -- (1.38)
Extraordinary Item (0.34) -- (0.44) --
------------- ---------- ------------ -------------
$ 0.87 $ 0.41 $ 37.47 $ 3.54
============= ========== ============= =============
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
Income Available to Common from Continuing
Operations Used in Basic Earnings Per Share $ 74,986 $ 52,620 $ 138,835 $ 301,672
Reduction in Preferred Dividends if Preferred
Shares Converted into Common Shares 109 289 338 916
Minority Income Adjustment (221) (621) (857) (1,954)
------------- ----------- ------------ -----------
Income Available to Common from Continuing
Operations Used in Diluted Earnings Per Share 74,874 52,288 138,316 300,634
Discontinued Operations
Gain on Disposal of Aerial (2,647) -- 2,147,435 --
Loss on Operations of Aerial -- (27,394) -- (84,190)
Extraordinary Item (20,460) -- (26,566) --
------------- ----------- ----------- ----------
Net Income (Loss) Available to Common Used
in Diluted Earnings Per Share $ 51,767 $ 24,894 $ 2,259,185 $ 216,444
============== =========== ============ ==========
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 254 564 263 611
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 61,102 62,308
============= =========== ============ ==========
Diluted Earnings Per Common Share
Continuing Operations $ 1.24 $ 0.84 $ 2.26 $ 4.82
Discontinued Operations
Gain on Disposal of Aerial (0.04) -- 35.14 --
Loss on Operations of Aerial -- (0.44) -- (1.35)
Extraordinary Item (0.34) -- (0.43) --
------------- ----------- ------------ ------------
$ 0.86 $ 0.40 $ 36.97 $ 3.47
============= =========== ============ ============
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.
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
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.
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
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 $ --
</TABLE>
26
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended Discontinued
or at September 30, 2000 U.S. Cellular TDS Telecom All Other (1) Operations Total
------------------------ ------------- ----------- ------------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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 1,405,883 165,346 458,772 5,356,158
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 1,405,883 165,346 458,772 5,356,158
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.
</TABLE>
27
<PAGE>
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.
(c) Exhibit 27 - Financial Data Schedule
(d) Reports on Form 8-K filed during the quarter ended September 30,
2000: None
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 November 13, 2000 /s/ Sandra L. Helton
------------------------------ --------------------------------
Sandra L. Helton,
Executive Vice President-Finance
(Chief Financial Officer)
Date November 13, 2000 /s/ D. Michael Jack
------------------------------ --------------------------------
D. Michael Jack,
Vice President and Controller
(Principal Accounting Officer)
Signature page for the TDS 2000 Third Quarter Form 10-Q
