EXHIBIT 13
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SELECTED CONSOLIDATED FINANCIAL DATA
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Year Ended or at December 31, 2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Operating Revenues $2,588,542 $ 2,326,856 $2,122,346 $1,803,639 $1,430,748
Operating Income 436,155 420,066 370,393 270,487 229,686
Gain (Loss) on Marketable Securities and
Other Investments (548,305) 15,716 345,938 262,698 41,438
Net Income (Loss) Available to Common from
Continuing Operations
From Operations 167,653 154,249 110,765 58,607 74,734
From Gains (Losses) (336,359) (9,226) 179,414 124,964 14,705
------------------------------------------------------------------------
$ (168,706) $ 145,023 $ 290,179 $ 183,571 $ 89,439
Basic Weighted Average Shares Outstanding (000's) 58,661 59,922 61,436 60,982 60,211
Basic Earnings per Share
from Continuing Operations $ (2.87) $ 2.42 $ 4.72 $ 3.01 $ 1.49
Diluted Earnings per Share from
Continuing Operations
From Operations 2.86 2.54 1.78 .97 1.24
From Gains (Losses) (5.73) (.15) 2.87 2.02 .24
------------------------------------------------------------------------
$ (2.87) $ 2.39 $ 4.65 $ 2.99 $ 1.48
Pretax Profit (Loss) on Revenues (6.6)% 14.9% 28.6% 21.8% 15.5%
Effective Income Tax (Benefit) Rate (26.1)% 43.1% 41.3% 40.9% 43.2%
Dividends per Common and Series A
Common Share $ .54 $ .50 $ .46 $ .44 $ .42
Cash and Cash Equivalents $ 140,744 $ 99,019 $ 111,010 $ 45,139 $ 45,996
Working Capital (141,860) (457,311) 138,336 (192,179) (448,958)
Property, Plant and Equipment, net 2,558,031 2,186,025 2,095,889 2,020,092 1,892,556
Total Assets 8,046,792 8,634,609 5,397,476 5,091,554 4,580,881
Notes Payable 265,300 499,000 -- 170,889 527,587
Long-term Debt (including current portion) 1,575,225 1,188,626 1,294,844 1,291,032 1,082,594
Common Stockholders' Equity 3,518,924 3,936,067 2,448,261 2,253,195 1,969,557
Capital Expenditures $ 700,150 $ 456,019 $ 399,631 $ 463,543 $ 488,833
Current Ratio .8 .5 1.4 .7 .4
Common Equity per Share $ 60.08 $ 67.07 $ 40.04 $ 36.83 $ 32.50
Return on Average Common Equity (4.5)% 4.5% 12.3% 8.7% 4.5%
------------------------------------------------------------------------
1
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND FINANCIAL
CONDITION
--------------------------------------------------------------------------------
Telephone and Data Systems, Inc. ("TDS" or the "Company") is a diversified
telecommunications company that provided high-quality telecommunications
services to approximately 4.3 million wireless telephone and wireline telephone
customer units in 34 states at December 31, 2001. TDS conducts substantially
all of its wireless telephone operations through its 82.2%-owned subsidiary,
United States Cellular Corporation ("U.S. Cellular") and its wireline telephone
operations through its wholly-owned subsidiary, TDS Telecommunications
Corporation ("TDS Telecom").
The following discussion and analysis should be read in conjunction with TDS's
consolidated financial statements and the accompanying notes.
RESULTS OF OPERATIONS
OPERATING REVENUES increased 11% ($261.7 million) during 2001 and 10% ($204.5
million) during 2000 reflecting primarily the 14% and 17% growth in customer
units in 2001 and 2000, respectively. U.S. Cellular revenues increased $178.2
million in 2001 and $140.2 million in 2000 on 13% and 18% increases in customer
units, respectively. TDS Telecom revenues increased $83.5 million in 2001 and
$64.3 million in 2000 as access lines increased by 19% and 12%, respectively.
The increase in access lines is primarily related to the growth in the
competitive local exchange operations and acquisitions.
OPERATING EXPENSES rose 13% ($245.6 million) in 2001 and 9% ($154.8
million) in 2000. U.S. Cellular operating expenses increased $153.3 million
during 2001 and $103.7 million during 2000 due primarily to the costs associated
with providing service to an expanding customer base and additional depreciation
and amortization expense. TDS Telecom operating expenses increased $92.3 million
during 2001 and $51.1 million during 2000 due to the expansion of the
competitive local exchange business and growth in local telephone operation.
OPERATING INCOME increased 4% ($16.1 million) in 2001 and 13% ($49.7
million) in 2000. U.S. Cellular's operating income increased 9% ($24.9
million) in 2001 and 14% ($36.5 million) in 2000, reflecting the increase in
customers and revenues. TDS Telecom's operating income declined 7% ($8.8
million) in 2001 and increased 12% ($13.2 million) in 2000. The decrease in
TDS Telecom's operating income in 2001 reflects increased operating losses
from the competitive local exchange business due to continued expansion of
the business.
Year Ended December 31, 2001 2000 1999
-----------------------------------------------------------------------
(Dollars in thousands)
Operating Income
U.S. Cellular $317,212 $292,313 $255,842
TDS Telecom
ILEC 161,916 142,708 124,093
CLEC (42,973) (14,955) (9,542)
---------------------------------------
118,943 127,753 114,551
---------------------------------------
Operating Income $436,155 $420,066 $370,393
=======================================
INVESTMENT AND OTHER INCOME (EXPENSE) primarily includes gains and (losses)
on marketable securities and other investments, interest and dividend income and
investment income.
GAIN (LOSS) ON MARKETABLE SECURITIES AND OTHER INVESTMENTS totaled
$(548.3) million in 2001, $15.7 million in 2000 and $345.9 million in 1999.
The Company held marketable securities of certain companies that were
involved in merger transactions in 2001 and 1999 generating significant gains
and losses. TDS recognized a gain or loss on the difference between the
historical basis in its investments and the value of the shares and cash
received from the mergers. In 2001, TDS realized a loss of $644.9 million as
a result of the merger between VoiceStream Wireless Corporation
("VoiceStream") and Deutsche Telekom AG. Partially offsetting the loss in
2001 was a gain of $96.1 million recorded as a result of the merger between
2
Illuminet Holdings, Inc. and VeriSign Inc. In 1999, TDS recognized a $327.1
million gain as a result of the AirTouch Communications, Inc. merger with
Vodafone Group plc.
TDS received $0.5 million as a final bankruptcy settlement in 2001 after
recording an $80.4 million write-off of its investment in a paging entity that
filed for bankruptcy protection in 2000. The sale of non-strategic cellular
interests and the settlement of a legal matter resulted in gains of $96.1
million in 2000. The sale of other non-strategic minority cellular interests and
other investments generated gains totaling $18.8 million in 1999.
INVESTMENT INCOME, TDS's share of income in unconsolidated entities in
which it has a minority interest, totaled $50.6 million in 2001, $38.7 million
in 2000 and $31.3 million in 1999. TDS follows the equity method of accounting,
which recognizes TDS's proportionate share of the income and losses accruing to
it under the terms of its partnership or shareholder agreements, where TDS's
ownership interest equals or exceeds 20% for corporations and 3% for
partnerships. Investment income in 2000 included $8.0 million of equity losses
on a paging investment while no such equity losses are included in 2001.
Improved operating results of certain minority cellular interests in 2001 and
2000 also increased investment income.
AMORTIZATION OF COSTS RELATED TO MINORITY INVESTMENTS totaled $1.3 million
in 2001, $10.3 million in 2000 and $12.9 million in 1999. The decrease in
amortization costs in 2001 is related primarily to the write-off of the paging
investment in 2000. Amortization of costs related to the paging investment
totaled $7.7 million in 2000 and $10.3 million in 1999.
INTEREST EXPENSE increased 3% ($3.2 million) in 2001 and 1% ($575,000) in
2000. The increase in interest expense was related primarily to an increase in
short-term debt, prior to the sale of $500 million of 7.6% Series A Notes in
December 2001, offset somewhat by lower interest rates. Long-term interest
expense declined by $6.3 million due to the reduction in U.S. Cellular Liquid
Yield Option Notes ("XXXXx") debt.
INCOME TAX EXPENSE (BENEFIT) was a benefit of $44.9 million in 2001 and an
expense of $149.5 million in 2000 and $251.0 million in 1999. The period to
period change reflects primarily the changes in pretax income. The Company
reported a loss from continuing operations before income taxes and minority
interest in 2001. The income tax benefit recorded on such loss resulted in an
income tax benefit rate of 26.1% in 2001. The effective tax rate was 43.1% in
2000 and 41.3% in 1999. Income from continuing operations before income taxes
and minority interest includes gains and losses from marketable securities and
other investments. The effective income tax rate excluding such gains and losses
was 44.4%, 40.4% and 44.3% for the years ended December 31, 2001, 2000 and 1999,
respectively.
MINORITY SHARE OF INCOME includes primarily the minority public
shareholders' share of U.S. Cellular's net income, the minority shareholders' or
partners' share of certain U.S. Cellular subsidiaries' net income or loss and
other minority interests. U.S. Cellular's minority public share of income
includes minority share of gains of $9.0 million in 2000 and $30.6 million in
1999. There was no minority share of gains in 2001.
Year Ended December 31, 2001 2000 1999
--------------------------------------------------------------------
(Dollars in thousands)
Minority Share of Income
U.S. Cellular
Minority Public
Shareholders $(32,403) $(41,929) $(57,411)
Subsidiaries'
Minority Interests (10,146) (7,629) (7,148)
---------------------------------------
(42,549) (49,558) (64,559)
Other Subsidiaries 1,393 (1,867) (558)
---------------------------------------
$(41,156) $(51,425) $(65,117)
====================================================================
INCOME (LOSS) FROM CONTINUING OPERATIONS and DILUTED EARNINGS PER SHARE FROM
CONTINUING OPERATIONS were significantly affected by gains and losses from
marketable securities and other investments. Income and diluted earnings per
share from continuing operations and from gains and losses are shown in the
following table.
Year Ended December 31, 2001 2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
INCOME FROM CONTINUING
OPERATIONS
Operations $ 168,111 $ 154,753 $ 111,912
Gains (Losses) (336,359) (9,226) 179,414
--------------------------------------
$(168,248) $ 145,527 $ 291,326
======================================
DILUTED EARNINGS PER SHARE
FROM CONTINUING OPERATIONS
Operations $ 2.86 $ 2.54 $ 1.78
Gains (Losses) (5.73) (0.15) 2.87
--------------------------------------
$ (2.87) $ 2.39 $ 4.65
======================================
3
DISCONTINUED OPERATIONS. The merger of Aerial Communications, Inc. ("Aerial")
with VoiceStream was completed on May 4, 2000. TDS recognized a gain of $2,125.8
million, net of tax, or $35.06 diluted earnings per share on this transaction.
The gain was reduced by $24.1 million, or $0.41 per share, in 2001 to reflect
adjustments to estimates used during the closing in the calculation of income
and other tax liabilities. In 1999, the loss on operations of Aerial, net of
tax, reduced net income by $111.5 million, or $1.78 per share.
EXTRAORDINARY ITEM - LOSS ON DEBT EXTINGUISHMENT, NET OF MINORITY INTEREST,
is related to U.S. Cellular's retirement of XXXXx. U.S. Cellular retired XXXXx
with an aggregate carrying value of $25.4 million and $63.6 million during 2001
and 2000, respectively, for cash totaling $32.0 million and $99.4 million,
respectively. A loss, net of minority interest, of $5.7 million, or $0.10 loss
per share, in 2001, and $30.5 million, or $0.51 loss per share, in 2000,
reflects the difference between the purchase price and the carrying value.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX AND MINORITY INTEREST
reflects the implementation of Staff Accounting Bulletin 101 ("SAB 101"),
"Revenue Recognition in Financial Statements" in 2000. U.S. Cellular defers
recognition of wireless activation and reconnection fees to the accounting
period when wireless service is provided to the customer. Under the prior method
of accounting, wireless activation fees were recognized at the time the customer
signed a wireless contract for service. The cumulative effect of this accounting
change reduced net income in 2000 by $3.8 million, or $0.06 per share.
WIRELESS TELEPHONE OPERATIONS
TDS provides wireless telephone service through United States Cellular
Corporation ("U.S. Cellular"), an 82.2%-owned subsidiary. U.S. Cellular owns,
manages and invests in wireless markets throughout the United States. Growth in
the customer base is the primary reason for the increase in U.S. Cellular's
results of operations in 2001 and 2000. The number of customer units increased
13% to 3,461,000 at December 31, 2001 and increased 18% to 3,061,000 at December
31, 2000. U.S. Cellular added 354,000 net new customer units from its marketing
efforts and 46,000 customer units from acquisitions in 2001. In 2000, 483,000
net new customer units were added from marketing efforts while
acquisition/divestiture activity reduced customer units by 24,000.
Year Ended December 31, 2001 2000 1999
-----------------------------------------------------------------------------------
(Dollars in thousands)
Operating Revenues
Retail service $1,408,253 $1,227,590 $1,089,249
Inbound roaming 272,361 292,437 318,659
Long-distance and other 145,771 133,895 117,752
------------------------------------------
Service Revenues 1,826,385 1,653,922 1,525,660
Equipment sales 68,445 62,718 50,769
------------------------------------------
1,894,830 1,716,640 1,576,429
------------------------------------------
Operating Expenses
System operations 421,114 350,507 368,070
Marketing and selling 297,239 303,721 272,729
Cost of equipment sold 124,028 139,654 124,058
General and administrative 434,579 364,747 325,758
Depreciation and amortization 300,658 265,698 229,972
------------------------------------------
1,577,618 1,424,327 1,320,587
------------------------------------------
Operating Income $ 317,212 $ 292,313 $ 255,842
===================================================================================
Consolidated Markets:
Markets 142 139 139
Market penetration 13.48% 12.29% 10.47%
Cell sites in service 2,925 2,501 2,300
Average monthly service
revenue per customer unit $ 46.28 $ 49.21 $ 53.71
Churn rate per month 1.9% 2.0% 2.1%
Cost per gross customer
addition $ 322 $ 330 $ 346
Employees 5,150 5,250 4,800
===================================================================================
4
OPERATING REVENUES increased 10% ($178.2 million) in 2001 and 9% ($140.2
million) in 2000. The revenue increases were driven by the 13% and 18% growth in
customer units in 2001 and 2000, respectively. Lower revenue per customer, due
to competitive pricing pressures, incentive plans and consumer market
penetration, has partially offset the revenue growth from the increase in the
customer base. Average monthly service revenue per customer was $46.28 in 2001,
$49.21 in 2000 and $53.71 in 1999. Management anticipates that average monthly
service revenue per customer will continue to decrease as retail service and
inbound roaming revenue per minute of use decline.
RETAIL SERVICE REVENUES (charges to U.S. Cellular's customers for local
system usage and usage of systems other than their local systems) increased 15%
($180.7 million) in 2001 and 13% ($138.3 million) in 2000 due primarily to the
growth in customers. Average monthly retail service revenue per customer was
$35.68 in 2001, $36.52 in 2000 and $38.35 in 1999. Local minutes of use averaged
216 per month in 2001, 157 per month in 2000 and 115 per month in 1999, while
average retail service revenue per minute continued to decline. Competitive
pressures and U.S. Cellular's use of incentive programs and rate plans to
stimulate overall usage resulted in the lower average monthly retail service
revenue per minute of use. The decrease in average monthly retail service
revenue per customer primarily reflects the increasing level of competition for
wireless services and the continued penetration of the consumer market.
INBOUND ROAMING REVENUES (charges to other wireless service providers whose
customers use U.S. Cellular's systems when roaming) decreased 7% ($20.1 million)
in 2001 and 8% ($26.2 million) in 2000. Lower negotiated roaming rates have
offset increased minutes of use, resulting in decreased roaming revenues in both
years. Average monthly inbound roaming revenue per U.S. Cellular customer was
$6.90 in 2001, $8.70 in 2000 and $11.22 in 1999. In 2001, the increase in
minutes of use was in proportion to the growth in the number of customers
throughout the wireless industry. In 2000, the increase in minutes of use was
affected by certain pricing programs offered by other wireless companies that
began in the second half of 1999. 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 increase in inbound roaming minutes of use
will be proportionate to the growth in the number of customers throughout the
wireless industry in 2002. However, as other wireless operators begin or expand
service in U.S. Cellular markets, roaming partners could switch their business
to these operators, further slowing the growth in U.S. Cellular's inbound
roaming minutes of use. Average inbound roaming revenue per minute of use is
expected to continue to decline in the future, reflecting the general downward
trend in negotiated rates.
LONG-DISTANCE AND OTHER SERVICE REVENUES increased 9% ($11.9 million) in
2001 and 14% ($16.1 million) in 2000. Average monthly long-distance and other
revenue per customer was $3.70 in 2001, $3.99 in 2000 and $4.15 in 1999.
OPERATING EXPENSES increased 11% ($153.3 million) in 2001 and 8% ($103.7
million) in 2000. Operating expenses as a percent of service revenue were 86.4%
in 2001, 86.1% in 2000 and 86.6% in 1999. The overall increase in operating
expenses was due primarily to the increase in general and administrative
expenses ($69.8 million in 2001 and $39.0 million in 2000) and additional
depreciation and amortization on the increased investment in cell sites and
equipment ($35.0 million in 2001 and $35.7 million in 2000). The costs of
providing service to the expanding customer base increased $70.6 million in 2001
and decreased $17.6 million in 2000. The costs of expanding the customer base
decreased by $22.1 million in 2001 and increased $46.6 million in 2000.
General and administrative expenses (costs of local business offices and
corporate expenses) as a percent of service revenues were 23.8% in 2001, 22.1%
in 2000 and 21.4% in 1999. The overall increases in administrative expenses
include the effects of an increase in expenses required to serve the growing
customer base and other expenses incurred related to the growth in U.S.
Cellular's business. Driven by additional costs incurred related to its customer
care centers, which centralized certain customer service functions,
administrative employee-related expenses increased $27.8 million in 2001 and
$6.3 million in 2000. Costs to retain customers and to provide digital phone
units to customers who migrated from analog to digital rate plans increased
expenses by $9.8 million in 2001 and $27.1 million in 2000.
5
Costs of providing service (system operations expenses) as a percent of
service revenues were 23.1% in 2001, 21.2% in 2000 and 24.1% in 1999. Systems
operations expenses include customer usage expenses (charges from other service
providers for wireline connection, toll and roaming costs incurred by customers'
use of systems other than their local systems), and maintenance, utility and
cell site expenses. The increase in systems operations expense in 2001 was
primarily due to a $38.8 million increase in the costs associated with customers
roaming on other companies' systems, a $19.6 million increase in the cost of
maintaining the network and a $12.2 million increase related to the increased
volume of minutes used on the systems. In 2000, systems operations expense
decreased primarily due to the $39.3 million decrease in outbound roaming
expenses reflecting a reduction in cost per minute of use related to the lower
roaming prices in the industry. The decrease in 2000 was partially offset by the
increased cost of local and roaming minutes used of $15.2 million and the
increased cost of maintaining the network of $7.6 million.
Costs to expand the customer base consist of marketing and selling expenses
and the cost of equipment sold. These expenses less equipment sales revenue
represent the cost to add a new customer. The cost to add a new customer was
$322 in 2001, $330 in 2000 and $346 in 1999. Gross customer activations
(excluding acquisitions) declined 5% in 2001 to 1,095,000 and rose 15% in 2000
to 1,154,000 from 1,000,000 in 1999. The decrease in cost per gross customer
activation in 2001 and 2000 was primarily due to reductions in equipment
subsidies provided by U.S. Cellular to its customers. A decrease in advertising
expenses in 2000 also contributed to the lower cost per gross customer
activation.
Depreciation and amortization expense as a percent of service revenues was
16.5% in 2001, 16.1% in 2000 and 15.1% in 1999. Depreciation expense increased
15% ($31.4 million) in 2001 and 11% ($21.1 million) in 2000, reflecting
increases in average fixed asset balances of 20% and 13%, respectively.
Increased fixed asset balances in both years resulted from the addition of new
cell sites built to improve coverage and capacity and from upgrades to provide
digital service. Amortization expense increased 6% ($3.5 million) in 2001 and
32% ($14.6 million) in 2000. The development costs related to U.S. Cellular's
new billing and information system, totaling $118 million, are being amortized
over a seven-year period beginning in the fourth quarter of 1999 resulting in
the increase in amortization expense in 2000.
OPERATING INCOME increased 9% ($24.9 million) to $317.2 million in 2001
from $292.3 million in 2000 and increased 14% ($36.5 million) in 2000 from
$255.8 million in 1999. The improvement was primarily driven by the substantial
growth in customer units and revenue. Operating margin, as a percent of service
revenue, was 17.4% in 2001, 17.7% in 2000 and 16.8% in 1999.
Management expects service revenues to continue to grow during 2002;
however, management anticipates that average monthly revenue per customer will
continue to decrease as retail service and inbound roaming revenue per minute of
use decline.
Management believes U.S. Cellular's operating results reflect seasonality
in both service revenues, which tend to increase more slowly in the first and
fourth quarters, and operating expenses, which tend to be higher in the fourth
quarter due to increased marketing activities and customer growth. This
seasonality may cause operating income to vary from quarter to quarter.
Competitors licensed to provide PCS services have initiated service in
certain U.S. Cellular markets over the past several years. U.S. Cellular expects
PCS operators to continue deployment of PCS in all its market clusters during
2002. 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. The effects of additional
wireless competition have slowed customer growth in certain of U.S. Cellular's
markets. Coupled with the recent downturn in the nation's economy, the effect of
increased competition has caused U.S. Cellular customer growth in these markets
to be slower than management had targeted for in 2001. Management anticipates
that customer growth will be slower in the future, primarily as a result of the
increase in the number of competitors in its markets and the maturation of the
wireless industry.
6
WIRELINE TELEPHONE OPERATIONS
TDS operates its wireline telephone business through TDS Telecommunications
Corporation ("TDS Telecom"), a wholly-owned subsidiary. TDS Telecom served
847,900 access lines at the end of 2001, an increase of 134,600 lines over 2000.
At the end of 2000, TDS Telecom served 713,300 lines, an increase of 75,700
lines over 1999. TDS Telecom provides service through local telephone
operations, or Incumbent Local Exchange Carrier ("ILEC") companies, and through
Competitive Local Exchange Carrier ("CLEC") companies.
TDS Telecom's local telephone companies served 650,700 access lines at the
end of 2001 compared to 601,200 at the end of 2000 and 571,700 at the end of
1999. Local telephone operations have grown through acquisitions and internal
growth. Acquisitions added 43,400 lines in 2001 and 10,200 lines in 2000, and
internal growth added 6,100 lines in 2001 and 19,300 lines in 2000. Internal
growth in access lines has slowed, reflecting the softening of the economy.
TDS Telecom's competitive local exchange companies served 197,200 access lines
at the end of 2001 compared to 112,100 at the end of 2000 and 65,900 at the end
of 1999. Internal growth in access lines has increased as CLEC operations have
increased their presence in current markets and expanded into new markets.
Year Ended December 31, 2001 2000 1999
------------------------------------------------------------------------------
(Dollars in thousands)
LOCAL TELEPHONE OPERATIONS
Operating Revenues
Local Service $179,529 $168,775 $152,290
Network access and
long-distance 319,410 285,738 269,188
Miscellaneous 77,878 74,468 71,052
------------------------------------
576,817 528,981 492,530
------------------------------------
Operating Expenses
Operating expenses 283,114 261,884 250,994
Depreciation and
amortization 131,787 124,389 117,443
------------------------------------
414,901 386,273 368,437
------------------------------------
Local Telephone
Operating Income $161,916 $142,708 $124,093
------------------------------------
COMPETITIVE LOCAL
EXCHANGE OPERATIONS
Operating Revenues $118,812 $ 84,720 $ 55,173
------------------------------------
Operating Expenses
Operating expenses 144,211 90,619 58,808
Depreciation and
amortization 17,574 9,056 5,907
------------------------------------
161,785 99,675 64,715
------------------------------------
Competitive Local Exchange
Operating (Loss) $(42,973) $(14,955) $ (9,542)
------------------------------------
Intercompany revenue
elimination (1,917) (3,485) (1,786)
Intercompany expense
elimination (1,917) (3,485) (1,786)
------------------------------------
Operating Income $118,943 $127,753 $114,551
==============================================================================
Access lines (ILEC) 650,700 601,200 571,700
Access lines (CLEC) 197,200 112,100 65,900
Growth in ILEC access lines:
Acquisitions 43,400 10,200 500
Internal growth 6,100 19,300 23,700
Average monthly revenue
per ILEC access line $ 77.76 $ 74.75 $ 73.00
Employees 3,410 2,820 2,590
==============================================================================
OPERATING REVENUES increased 14% ($83.5 million) to $693.7 million in 2001,
and 12% ($64.3 million) to $610.2 million in 2000. The increase was due to
the growth in local telephone operations, including acquisitions, and the
expansion of competitive local exchange activities.
7
OPERATING EXPENSES totaled $574.8 million in 2001, up 19% ($92.3 million)
from 2000, and totaled $482.5 million in 2000, up 12% ($51.1 million) from 1999.
OPERATING INCOME decreased 7% ($8.8 million) in 2001 and increased 12%
($13.2 million) in 2000. TDS Telecom's overall operating margin was 17.1% in
2001, 20.9% in 2000 and 21.0% in 1999.
LOCAL TELEPHONE OPERATIONS
OPERATING REVENUES increased 9% ($47.8 million) to $576.8 million in 2001
and 7% ($36.5 million) to $529.0 million in 2000. Average monthly revenue per
local telephone access line was $77.76 in 2001, $74.75 in 2000 and $73.00 in
1999. The majority of the increase in average monthly revenue per local
telephone access line in 2001 is related to the increase in long-distance
revenues. The increases in all years reflect growth in local service revenues.
Local telephone operating revenues are anticipated to continue their pattern of
moderate growth.
LOCAL SERVICE REVENUES (provision of local telephone exchange service
within the franchise serving area of TDS Telecom's local telephone companies)
increased 6% ($10.8 million) in 2001 and 11% ($16.5 million) in 2000. Average
monthly local service revenue per customer was $24.20 in 2001, $23.85 in 2000
and $22.57 in 1999. Acquisitions increased revenues by $4.8 million in 2001.
Access line growth, excluding acquisitions, of 1.0% in 2001 and 3.4% in 2000,
resulted in increases in revenues of $3.5 million and $6.7 million,
respectively. The sale of custom calling and advanced features increased
revenues by $2.6 million in 2001 and $4.9 million in 2000.
NETWORK ACCESS AND LONG-DISTANCE REVENUES (compensation for carrying
interstate and intrastate long-distance traffic on TDS Telecom's local telephone
networks) increased 12% ($33.7 million) in 2001 and 6% ($16.6 million) in 2000.
Average monthly network access and long-distance revenue per customer was
$43.06 in 2001, $40.38 in 2000 and $39.90 in 1999. Revenues increased by $16.3
million in 2001 and $2.4 million in 2000 as TDS Telecom began selling
long-distance service to its customers in the third quarter of 2000. Revenue
generated from access minute growth due to increased network usage increased
$7.1 million in 2001 and $8.3 million in 2000. Acquisitions increased revenues
by $6.5 million in 2001. Compensation from state and national revenue pools due
to increased costs of providing network access increased $4.3 million in 2001
and $2.3 million in 2000.
MISCELLANEOUS REVENUES (charges for (i) leasing, selling, installing and
maintaining customer premise equipment, (ii) providing billing and collection
services, (iii) providing Internet services and (iv) selling of digital
broadcast satellite receivers) increased 5% ($3.4 million) in 2001 and 5% ($3.4
million) in 2000. Average monthly miscellaneous revenue per customer was $10.50
in 2001, $10.52 in 2000 and $10.53 in 1999.
OPERATING EXPENSES increased 7% ($28.6 million) in 2001 and 5% ($17.8
million) in 2000. Local telephone expenses as a percent of local telephone
revenues were 71.9% in 2001, 73.0% in 2000 and 74.8% in 1999. Local telephone
expenses are anticipated to increase due to inflation and new revenue-producing
programs and to level off somewhat as a percent of operating revenues.
The increases in local telephone expenses related primarily to the cost of
providing Internet service, the sale of long-distance service, acquisitions and
wage and benefit increases. TDS Telecom has emphasized cost containment measures
to offset rising costs. The sale of long-distance service by TDS Telecom
increased expenses by $10.7 million in 2001 and $1.7 million in 2000.
Acquisitions increased cash expenses by $10.0 million in 2001. Depreciation and
amortization expenses increased 6% ($7.4 million) in 2001, including $3.1
million from acquisitions, and 6% ($6.9 million) in 2000 as a result of
increased investment in plant and equipment.
OPERATING INCOME increased 14% ($19.2 million) to $161.9 million in 2001
and 15% ($18.6 million) to $142.7 million in 2000 from $124.1 million in 1999.
The local telephone operating margin was 28.1% in 2001, 27.0% in 2000 and 25.2%
in 1999. The increase in operating margin was caused by the growth in revenue
along with the emphasis on controlling costs. Local telephone operating expenses
are expected to increase due to inflation while additional revenues and expenses
are expected from new or expanded product offerings.
8
TDS Telecom's local telephone operations are subject to the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the
Effects of Certain Types of Regulation." TDS Telecom periodically reviews the
criteria for applying these provisions to determine whether continuing
application of SFAS No. 71 is appropriate. TDS Telecom believes that such
criteria are still being met and therefore has no current plans to change its
method of accounting.
In analyzing the effects of discontinuing the application of SFAS No. 71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles, and therefore, any adjustments to
telecommunications plant would be immaterial, as would be any write-off of
regulatory assets and liabilities.
COMPETITIVE LOCAL EXCHANGE OPERATIONS
TDS Telecom launched competitive local exchange operations in five new
markets serving over 25 cities in Illinois and Michigan in 2001 and will
continue to explore opportunities for future growth. Access lines increased
by 76% in 2001 and 70% in 2000. TDS Telecom has incurred and expects to incur
substantial operating losses from expansion of competitive operations.
OPERATING REVENUES (revenue from the provision of local and long-distance
telephone service and revenue from a long-distance provider) increased 40%
($34.1 million) to $118.8 million in 2001 and 54% ($29.5 million) to $84.7
million in 2000. The increases were primarily due to the increases in access
lines in both years.
OPERATING EXPENSES increased 62% ($62.1 million) in 2001 and 54% ($35.0
million) in 2000 due primarily to the costs incurred to grow the customer base
and expand the service territories, especially new market areas in Wisconsin,
Illinois and Michigan.
OPERATING LOSS was $43.0 million in 2001, $15.0 million in 2000 and $9.5
million in 1999. The competitive local exchange operating losses reflect the
expenses associated with the growth and expansion in the business. TDS Telecom
expects to continue to grow the competitive local exchange business in certain
mid-sized cities. Operating losses from competitive local exchange operations
are expected to increase in 2002 due to costs associated with market expansion.
INFLATION
Management believes that inflation affects TDS's business to no greater extent
than the general economy.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 141 "Business Combinations" and No. 142
"Goodwill and Other Intangible Assets" in July 2001. These statements require,
among other things, that all future business combinations be accounted for using
the purchase method of accounting and prohibit the use of the
pooling-of-interest method. For acquisitions completed after July 1, 2001,
goodwill will not be amortized. In addition, effective January 1, 2002,
previously recorded goodwill and other intangible assets with indefinite lives
will no longer be amortized but will be subject to impairment tests.
SFAS No. 142 defines the accounting for intangible assets. The accounting
for a recognized intangible asset is based on the useful life to the entity. An
intangible asset with a finite useful life is amortized; an intangible asset
with an indefinite useful life is not amortized. The useful life of the
intangible asset is the period over which the asset is expected to contribute
directly or indirectly to the future cash flows of the entity.
An intangible asset that is not subject to amortization shall be tested for
impairment annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The impairment test shall consist of
a comparison of the fair value of an intangible asset with its carrying amount.
If the carrying amount of an intangible asset exceeds its fair value, an
impairment loss shall be recognized in an amount equal to that excess.
SFAS No. 142 also defines the accounting for goodwill. Goodwill will be
tested for impairment annually. Impairment is the condition that exists when the
carrying amount of goodwill exceeds its implied fair value. If the carrying
amount of goodwill exceeds the implied fair value of that goodwill, an
impairment loss shall be recognized in an amount equal to that excess.
The Company will adopt SFAS No. 142 on January 1, 2002, and will no longer
amortize cellular license costs, telephone franchise and other costs in excess
of the underlying book value of subsidiaries or goodwill for equity method
investments. Cellular license costs, telephone franchise and other costs, and
equity method goodwill totaled $1,334.5 million, $348.7 million and $76.8
million respectively, at December 31, 2001, and amortization for the year ended
December 31, 2001 totaled $37.6 million, $6.2 million and $1.3 million,
respectively.
9
In addition, pursuant to SFAS No. 142, the Company is assessing its
recorded balances of Cellular license costs and telephone franchise and other
costs for potential impairment. As allowed under the standard, the Company
expects to complete its impairment assessment in the first quarter of 2002. Any
required impairment charge would be recorded as a cumulative effect of
accounting change as of January 1, 2002. The Company does not currently expect
to record an impairment charge upon the completion of the initial impairment
review. However, there can be no assurance that at the time the review is
completed a material impairment charge will not be recorded.
SFAS No. 143, "Accounting for Asset Retirement Obligations" was issued in
June 2001, and will become effective for the Company beginning January 1, 2003.
SFAS No. 143 requires entities to record the fair value of a liability for legal
obligations associated with an asset retirement in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. The Company is currently reviewing the requirements of this new standard
and has not yet determined the impact, if any, on the Company's financial
position or results of operations.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" was issued in October 2001, and became effective for the Company
beginning January 1, 2002. SFAS No. 144 requires entities to measure long-lived
assets at the lower of carrying amount or fair value less cost to sell, whether
reported in continuing operations or in discontinued operations. SFAS No. 144
also revises standards for the reporting of discontinued operations. This
statement broadens the presentation of discontinued operations to include a
component of an entity (rather than a segment of a business). A component of an
entity comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The Company is currently reviewing the requirements of this new standard, but
does not expect implementation to have a material impact on its financial
position or results of operations.
The Financial Accounting Standards Board issued an exposure draft on
November 15, 2001, "Rescission of FASB Statements No. 4, 44 and 64 and Technical
Corrections." This proposed Statement would rescind Statement 4 and Statement
64, an amendment to Statement 4, thereby eliminating the requirements that gains
and losses from extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. The
provisions of this Statement related to the rescission of Statement 4 shall be
applied as of the beginning of the fiscal year in which this Statement is
issued. The Board expects to issue the final Statement in the first quarter of
2002. When adopted, the Company would no longer report gains and losses on the
retirement of long-term debt as an extraordinary item.
FINANCIAL RESOURCES
The following table shows certain information relating to TDS's financial
resources and requirements.
Year Ended December 31, 2001 2000 1999
------------------------------------------------------------------------------
(Dollars in thousands)
Cash flows from (used in)
Operating activities $ 545,805 $ 755,422 $ 479,832
Investing activities (519,858) (605,659) (285,350)
Financing activities 15,778 (155,191) (272,522)
Discontinued operations -- (6,563) 143,911
---------------------------------------
Net increase (decrease) in
cash and cash equivalents $ 41,725 $ (11,991) $ 65,871
==============================================================================
Capitalization $ 6,134,589 $ 6,362,631 $ 4,561,767
Percent equity to total capital 65.0% 68.6% 64.8%
Interest coverage ratio
(excluding gains and losses) 3.9X 3.6x 3.1x
Book value per share $ 56.36 $ 63.07 $ 39.25
Senior unsecured debt rating
S&P/Xxxxx'x X-/X0 X-/X0 BBB/Baa3
Year-end stock price $ 89.75 $ 90.00 $ 126.00
==============================================================================
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES represents a significant
source of funds to the Company. Income from continuing operations excluding all
noncash items totaled $583.7 million in 2001, $592.5 million in 2000 and $554.9
million in 1999. Proceeds from the settlement of litigation added $42.5 million
in 2000. Changes in assets and liabilities from operations required $37.9
million in 2001, provided $120.5 million in 2000 and required $75.0 million in
1999, reflecting timing differences in the collection of accounts receivable,
payment of accounts payable and accrued taxes.
Year Ended December 31, 2001 2000 1999
------------------------------------------------------------------------------
(Dollars in thousands)
Income (loss) from
continuing operations $(168,248) $ 145,527 $ 291,326
Noncash items included
in income from continuing
operations 751,973 446,949 263,532
-------------------------------------
Income from continuing
operations excluding
noncash items 583,725 592,476 554,858
Proceeds from
litigation settlement -- 42,457 --
Changes in assets and
liabilities from operations (37,920) 120,489 (75,026)
-------------------------------------
$ 545,805 $ 755,422 $ 479,832
==============================================================================
10
CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES primarily represents uses
of funds to acquire, construct and upgrade modern high-quality communications
networks and facilities as a basis for creating long-term value for shareowners.
In recent years, rapid changes in technology and new opportunities have required
substantial investments in revenue enhancing and cost reducing upgrades of TDS's
networks. Cash flows used for investing activities primarily represent cash
required for capital expenditures, and the acquisition of cellular and telephone
properties and wireless spectrum. Proceeds from merger transactions, the sale of
non-strategic properties and distributions from unconsolidated entities have
provided substantial funds in recent years which have partially offset the cash
requirements for investing activities; however, such sources cannot be relied
upon to provide continuing or regular sources of financing.
The primary purpose of TDS's construction and expansion expenditures is to
provide for significant customer growth, to upgrade service, and to take
advantage of service-enhancing and cost-reducing technological developments in
order to maintain competitive services. Cash expenditures for capital additions
totaled $700.2 million in 2001, $456.0 million in 2000 and $399.6 million in
1999. U.S. Cellular's capital additions totaled $503.3 million in 2001, $305.4
million in 2000 and $277.4 million in 1999 representing expenditures to build
377 cell sites in 2001, 224 in 2000 and 225 in 1999, to change out analog
equipment for digital equipment and to improve business systems, primarily its
customer information system. TDS Telecom's capital additions for its local
telephone operations totaled $99.9 million in 2001, $93.4 million in 2000 and
$99.2 million in 1999 representing expenditures for switch modernization and
outside plant facilities to maintain and enhance the quality of service and
offer new revenue opportunities. TDS Telecom's capital additions also included
expenditures of $96.9 million in 2001, $57.2 million in 2000 and $23.0 million
in 1999 for switching and other network facilities for its competitive local
exchange business.
Cash used for acquisitions, excluding cash acquired, totaled $392.8 million
in 2001, $200.7 million in 2000 and $31.3 million in 1999. TDS's acquisitions
include primarily the purchase of controlling interests in cellular telephone
and telephone properties, minority interests that increased the ownership of
majority-owned markets and wireless spectrum. These expenditures added the
majority interest in one cellular market, 26 PCS licenses and two telephone
companies representing 6.8 million population equivalents, 1,000 customer units
and 43,400 access lines in 2001. In 2000, the Company acquired the majority
interest in two cellular markets, one telephone company and a minority interest
in one telephone company representing 387,000 population equivalents and 10,200
access lines. In 1999, the Company acquired the majority interest in one
cellular market and one telephone company representing 245,000 population
equivalents, 15,000 customer units and 500 access lines. The 2000 expenditures
also include a deposit on certain PCS licenses. The PCS licenses were acquired
on U.S. Cellular's behalf and through joint ventures. The interests acquired
through joint ventures are 100% owned by the joint ventures, and the Company is
considered to have the controlling financial interest in these joint ventures
for financial reporting purposes.
TDS received $570.0 million in cash from the merger of Deutsche Telekom
and VoiceStream in 2001 and $46.6 million in cash from the merger of AirTouch
and Vodafone in 1999. The sale of non-strategic cellular assets, and certain
other assets and properties provided $0.5 million in 2001, $73.0 million in
2000 and $73.4 million in 1999. TDS loans and advances, primarily to Airadigm
Communications, Inc., totaled $9.8 million in 2001 and $55.1 million in 2000.
Distributions from unconsolidated investments provided $16.6 million in 2001,
$34.8 million in 2000 and $26.1 million in 1999. The 2000 amount included a
special nonrecurring distribution of $11.8 million.
11
CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES primarily reflects changes
in short-term debt balances, cash used to repurchase common shares, cash used
for the repurchase and conversion of XXXXx securities and proceeds from the sale
of long-term debt and equity securities to refinance short-term debt.
The Company has used short-term debt to finance acquisitions, for general
corporate purposes and to repurchase common shares. Internally generated funds
as well as proceeds from the sale of non-strategic cellular and other
investments, from time to time, have been used to reduce short-term debt. In
addition, TDS has taken advantage of attractive opportunities to reduce
short-term debt with proceeds from the sale of long-term debt securities,
including sales of debt securities by subsidiaries. TDS has cash management
arrangements with its subsidiaries under which the subsidiaries may from time to
time deposit excess cash with TDS for investment.
TDS received $484.2 million from the sale of $500 million 40-year 7.6%
Series A Notes in 2001. The proceeds were used to reduce short-term debt. A
total of $65.5 million was paid to retire medium-term notes called at par in
2001. Short-term debt required cash totaling $249.5 million in 2001 and $170.9
million in 1999, and provided $499.0 million in 2000. During 1999, TDS reduced
notes payable balances primarily through Aerial's repayment of intercompany
indebtedness as a result of Aerial's receipt of an equity investment from a
strategic investor, and as a result of internally generated cash and improved
cash management.
The boards of directors of TDS and U.S. Cellular have authorized the
repurchase of common shares of TDS and U.S. Cellular. During 2001, 2000 and
1999, TDS repurchased 325,000 shares, 2,666,000 shares and 664,000 shares,
respectively, for an aggregate purchase price of $30.3 million, or an average of
$93.47 per share, $287.7 million, or an average of $107.94 per share, and $80.5
million, or an average of $121.18 per share, respectively. Cash required for the
repurchase of common shares totaled $39.4 million in 2001, $290.1 million in
2000 and $69.0 million in 1999 reflecting differences in the number of shares
acquired and timing differences in the cash disbursements. During 2001 and 2000,
U.S. Cellular repurchased 643,000 and 3,524,000 common shares for an aggregate
purchase price of $29.9 million, or an average of $46.45 per share and $234.8
million, or an average of $66.64 per share, respectively. Cash required for the
repurchase of U.S. Cellular common shares totaled $40.9 million and $223.8
million in 2001 and 2000, respectively.
U.S. Cellular's XXXXx securities are convertible, at the option of the
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 notice of 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
such common shares. In addition, U.S. Cellular has opportunistically repurchased
XXXXx securities in private transactions and in open-market transactions. In
2001, U.S. Cellular paid $32.0 million and issued 644,000 U.S. Cellular common
shares to retire XXXXx securities with a carrying value of $55.1 million. During
2000, U.S. Cellular retired XXXXx securities with a carrying value of $126.2
million for cash totaling $99.4 million and for 1,416,000 U.S. Cellular common
shares.
CASH FLOWS FROM DISCONTINUED OPERATIONS represents the net cash used to
fund the construction and operating activities of Aerial and cash provided by
financing activities of Aerial prior to the merger with VoiceStream. Aerial's
financing activities included investments aggregating $230 million in 1999 in
Aerial and one of its subsidiaries by a strategic investor. The cash provided by
these investments was, upon receipt, used to reduce intercompany debt incurred
to fund the construction and operating activities of Aerial.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that internal cash flow, existing cash and cash equivalents,
and funds available from line of credit arrangements provide sufficient
financial resources to finance its near-term capital, business development and
expansion expenditures. 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. However, the availability of
financial resources is dependent on economic events, business developments,
technological changes, financial conditions or other factors, some of which may
not be in TDS's control. If at any time financing is not available on terms
acceptable to TDS, TDS might be required to reduce its business development and
capital expenditure plans, which could have a materially adverse effect on its
business and financial condition. TDS does not believe that any circumstances
that could materially adversely affect TDS's liquidity or capital resources are
currently reasonably likely to occur, but it cannot provide assurances that such
circumstances will not occur or that they will not occur rapidly. Economic
downturns, changes in financial markets or other factors could rapidly change
the availability of TDS's liquidity and capital resources.
As of December 31, 2001, the resources required for scheduled repayment of
long-term debt (including announced prepayments of medium-term notes), trust
originated securities, and aggregate minimum commitments under noncancelable
long-term operating leases, and with respect to 2002, announced acquisitions,
were as follows.
12
Contractual After
Obligations 2002 2003 2004 2005 2006 5 years
------------------------------------------------------------------------
(Dollars in Millions)
Long-term Debt
Repayments(1) $ 67.5 $17.2 $18.2 $21.7 $219.2 $ 1,402.2
Average
Interest Rate
on Debt 8.53% 7.23% 7.23% 7.47% 7.02% 7.26%
Trust Originated
Securities $ -- $ -- $ -- $ -- $ -- $ 300.0
Operating
Leases 62.9 56.9 51.5 47.3 41.7 168.9
Acquisitions 90.4 -- -- -- -- --
----------------------------------------------------
$220.8 $74.1 $69.7 $69.0 $260.9 $ 1,871.1
========================================================================
(1) SCHEDULED DEBT REPAYMENTS INCLUDE LONG-TERM DEBT, THE CURRENT PORTION OF
LONG-TERM DEBT AND EXCLUDES THE UNAMORTIZED DISCOUNT ON THE ZERO COUPON
DEBENTURES (XXXXX).
At December 31, 2001, TDS and its subsidiaries are in compliance with all
covenants and other requirements set forth in long-term debt indentures. TDS
does not have any rating downgrade triggers that would accelerate the maturity
dates of its debt. However, a downgrade in TDS's credit rating could adversely
affect the terms on which it is able to renew existing, or obtain access to new,
credit facilities in the future.
TDS and its subsidiaries had cash and cash equivalents totaling $140.7
million at December 31, 2001. In January 2002, TDS replaced its $500 million
revolving credit facility, all of which was unused at December 31, 2001, with a
new $600 million facility that expires in January 2007. Borrowings will bear
interest at the London Interbank Borrowing Rate ("LIBOR") plus a margin based on
the Company's credit rating (30 basis points at inception).
TDS's interest cost would increase if TDS's credit rating goes down which
would increase TDS's cost of financing, but such credit facility would not cease
to be available solely as a result of a decline in its credit rating. However,
the continued availability of this revolving credit facility requires TDS to
comply with certain negative and affirmative covenants, maintain certain
financial ratios and to represent certain matters at the time of each borrowing.
At December 31, 2001, TDS was in compliance with all covenants and other
requirements set forth in the credit agreement.
TDS also had $87 million of bank lines of credit for general corporate
purposes at December 31, 2001, all of which was unused. These line of credit
agreements provide for borrowings at negotiated rates up to the prime rate.
U.S. Cellular's capital additions budget for 2002 is approximately
$620-$640 million, primarily to add additional cell sites to expand and enhance
coverage, to provide additional digital service capabilities including the
initial steps toward the migration to CDMA technology and to enhance office
systems. The conversion to CDMA is expected to be completed by 2004, at an
approximate cost of $400-$450 million, spread over the next three years. The
estimated capital additions in 2002 include $80-$95 million related to this
conversion. U.S. Cellular plans to finance its construction expenditures
primarily with internally generated cash and short-term debt. U.S. Cellular's
operating cash flow (operating income plus depreciation and amortization)
totaled $617.9 million in 2001, up 11% ($59.9 million) from 2000. In addition,
at December 31, 2001, U.S. Cellular had a $500 million of bank revolving line of
credit for general corporate purposes, $236 million of which was unused. This
line of credit provides for borrowing at LIBOR plus a contractual spread, based
on U.S. Cellular's credit rating. The contractual spread was 19.5 basis points
as of December 31, 2001.
U.S. Cellular's interest cost would increase if its credit rating goes
down which would increase its cost of financing, but such line of credit
would not cease to be available solely as a result of a decline in its credit
rating. However, the continued availability of this revolving line of credit
requires U.S. Cellular to comply with certain negative and affirmative
covenants, maintain certain financial ratios and to represent certain matters
at the time of each borrowing. At December 31, 2001, U.S. Cellular was in
compliance with all covenants and other requirements set forth in the credit
agreement.
TDS Telecom's capital additions budget for 2002 is approximately $170-$190
million. TDS Telecom expects the local telephone companies to spend
approximately $115-$125 million to provide for normal growth and to upgrade
plant and equipment to provide enhanced services. The competitive local exchange
companies are expected to spend approximately $55-$65 million to build switching
and other network facilities to expand its markets. TDS Telecom plans to finance
its construction expenditures using primarily internally generated cash.
Operating cash flow totaled $268.3 million in 2001, up 3% ($7.1 million) from
2000.
13
As of December 31, 2001, TDS gave notice to the note holders of its intent
to retire $51.0 million of Medium-Term Notes in the first quarter of 2002 that
were called at par value. This amount was classified as current portion of
long-term debt on the December 31, 2001 balance sheet. TDS may consider retiring
debt, when it becomes redeemable, when and if financial market conditions and
other factors warrant. The table below indicates the long-term debt which could
be retired in 2002 and the initial call dates of the remaining TDS long-term
debt to show the amounts that TDS could redeem in advance of the maturity date
if it chose to do so.
Redemption Amounts Total 2002 2003 2004 2005 2006
-------------------------------------------------------------------------------------------
(Dollars in Millions)
TDS Medium Term Notes $ 173.7 $ 51.0 $ 65.5 $ -- $17.2 $ 40.0
TDS 7% Notes 200.0 200.0 -- -- -- --
TDS 7.6% Series A Notes 500.0 -- -- -- -- 500.0
U.S. Cellular 7.25% Notes 250.0 -- -- 250.0 -- --
U.S. Cellular XXXXx 140.2 140.2 -- -- -- --
TDS TELECOM Debt 288.9 288.9 -- -- -- --
Other Debt 22.5 9.5 -- -- 3.0 10.0
Mandatory
Redeemable
Preferred
Securities 300.0 150.0 150.0 -- -- --
-----------------------------------------------------------------
$1,875.3 $ 839.6 $215.5 $250.0 $20.2 $550.0
===========================================================================================
TDS reviews attractive opportunities to acquire additional
telecommunications companies and wireless spectrum, which add value to the
business. At December 31, 2001, the Company had agreements to acquire two
telephone companies serving 25,500 access lines, and certain PCS licenses for
aggregate consideration of $90.4 million in cash.
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 service provider. Under the
terms of the plan of reorganization, TDS and an unrelated entity 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 the unrelated entity, or their respective
designees, may each acquire certain PCS licenses for areas of Wisconsin and Iowa
as well as other Airadigm assets. As of December 31, 2001, TDS had provided
funding of $52.7 million to Airadigm. Under the plan of reorganization, TDS's
portion of the funding and the cost of the assets to be acquired could possibly
aggregate up to an additional $145 million.
U.S. Cellular is a limited partner in a joint venture that was a successful
bidder for 17 licenses in 13 markets in the January 2001 FCC spectrum auction.
The cost for the 17 licenses totaled $283.9 million. Although legally the
general partner controls the joint venture, the Company has included the joint
venture in its consolidated financial statements because U.S. Cellular is
considered to have controlling financial interest for financial reporting
purposes. The joint venture has acquired 5 of such licenses in 4 markets for a
total of $4.1 million and has deposits with the FCC totaling $56.1 million for
the remaining licenses (classified as a current asset at December 31, 2001).
Subject to the final outcome of the proceedings discussed below, the joint
venture's portion of the funding could possibly aggregate up to an additional
$223.7 million to fund the acquisition of the remaining licenses. In addition,
U.S. Cellular has agreed to loan the general partner up to $20 million that
could be used by the general partner to fund its investment in the licenses.
With respect to the remaining 12 licenses in 9 markets, such licenses had
been reauctioned by the FCC after defaults by winning bidders in a prior auction
and were made subject by the FCC to the final outcome of certain legal
proceedings initiated by the prior winning bidders. Following the reauction, one
of the prior winning bidders obtained a court ruling that the FCC's actions were
illegal. In an effort to resolve this matter, on November 15, 2001, the joint
venture and other bidders in the reauction entered into a settlement agreement
with the prior winning bidder and the FCC. However, the settlement agreement
terminated due to the failure to satisfy a condition to obtain certain
Congressional action by December 31, 2001. The U.S. Supreme Court has agreed to
review this matter. In the event the prior winning bidder is successful in this
litigation, the joint venture would receive a refund of its deposit of $56.1
million made to the FCC for such 12 licenses. The joint venture's financial
requirements would then be limited to the 5 licenses in 4 markets that it
acquired in 2001. If the FCC is successful in this litigation or the matter is
otherwise resolved in a manner that will permit the joint venture to acquire the
remaining licenses, the joint venture would likely be required to pay to the FCC
the balance of the auction price for such licenses. The joint venture would then
have significant financial requirements to build out such markets. The exact
nature of U.S. Cellular's financial commitment going forward will be determined
as the joint venture develops its long-term business and financing plans.
TDS paid total dividends on its common and preferred stock of $32.1 million
in 2001, $30.5 million in 2000 and $29.4 million in 1999. TDS does not
anticipate any change in its policy of paying dividends. TDS paid quarterly
dividends of $0.135, $0.125 and $0.115 in 2001, 2000 and 1999, respectively.
14
TDS and U.S. Cellular may 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 XXXXx in private transactions. U.S. Cellular may
also purchase a limited amount of XXXXx in open-market transactions from time to
time. U.S. Cellular XXXXx 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 XXXXx are convertible. U.S. Cellular may redeem the
notes for cash at the issue price plus accrued original issue discount through
the date of redemption.
TDS holds various investments in publicly traded companies valued at
$2,700.2 million as of December 31, 2001. These assets are classified for
financial reporting purposes as available-for-sale securities. TDS may purchase
additional shares, sell or transfer shares in public or private transactions
and/or may enter into privately negotiated derivative transactions to hedge the
market risk of some or all of its positions in the securities.
MARKET RISK
TDS is subject to market rate risks due to fluctuations in interest rates and
equity markets. The majority of TDS's debt is in the form of long-term,
fixed-rate notes, convertible debt, debentures and trust securities with
original maturities ranging up to 40 years. Accordingly, fluctuations in
interest rates can lead to significant fluctuations in the fair value of such
instruments. TDS has not entered into any significant financial derivatives to
reduce its exposure to interest rate risks. The annual requirements for
principal payments on long-term debt and the average interest rates are shown
above in the Liquidity section. The aggregate principal amounts of long-term
debt were $1,746.0 million at December 31, 2001 and $1,438.5 million at December
31, 2000, the estimated fair value was $1,559.7 million and $1,367.9 million,
respectively, and the average interest rate on the debt was 7.28% and 7.14%,
respectively. The fair value was estimated using market prices for TDS's 7.6%
Series A Notes and U.S. Cellular XXXXx and discounted cash flow analysis for the
remaining debt. The trust securities instruments totaling $300 million, with an
average interest rate of 8.27%, are due in 2037 and 2038. The fair value of the
trust securities was $299.2 million and $279.0 million based upon the market
price at December 31, 2001 and 2000, respectively.
TDS maintains a portfolio of available-for-sale marketable equity
securities. The market value of these investments aggregated $2,700.2 million at
December 31, 2001 and $4,121.9 million at December 31, 2000. A hypothetical 10%
decrease in the share prices of these investments at December 31, 2001 would
result in a $270.0 million decline in the market value of the investments. As of
December 31, 2001, the net unrealized holding loss, net of tax, included in
accumulated other comprehensive loss totaled $352.1 million. Management does not
consider the unrealized loss to be "other than temporary." Management continues
to review the valuation of the investments on a periodic basis. If management
determines in the future that the unrealized loss is other than temporary, the
loss will be recognized and recorded in the income statement.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management bases its estimates on historical experience and on
various other assumptions and information that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgements about the carrying values of assets and liabilities. Actual results
may differ from estimates under different assumptions or conditions.
Management believes the following critical accounting policies reflect its
more significant judgements and estimates used in the preparation of its
consolidated financial statements.
The Company holds a substantial amount of marketable securities that are
publicly traded and can have volatile share prices. The marketable securities
are marked to market each period with the change in value of the securities
reported as Other Comprehensive Income, net of income taxes, which is included
in the stockholders' equity section of the balance sheet. If management
determined that the decline in value of the marketable securities was "other
than temporary," the unrealized loss included in other comprehensive income
would be recognized and recorded as a loss in the income statement. Factors that
management reviews in determining an other than temporary decline include
whether there has been a significant change in the financial condition,
operational structure or near-term prospects of the issuer; how long the
security has been below historical cost; and whether TDS has the ability to
retain its investment in the issuer's securities to allow the market value to
return to historical cost levels.
TDS has substantial investments in long-lived assets, including substantial
amounts of intangible assets, primarily cellular license costs and telephone
franchise costs (goodwill), as a result of acquisitions of wireless markets and
licenses, and telephone companies. The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. The Company evaluates the asset for
possible impairment based on
15
an estimate of related undiscounted cash flows over the remaining asset life. If
an impairment is identified, a loss is recognized for the difference between the
fair value of the asset (less cost to sell) and the carrying value of the asset.
TDS will adopt SFAS No. 142, "Goodwill and Other Intangible Assets," on
January 1, 2002, and will no longer amortize cellular license costs, telephone
franchise and other costs in excess of the underlying book value of
subsidiaries, and goodwill for equity method investments. In connection with
SFAS No. 142, TDS is assessing its recorded balances of cellular license costs
and telephone franchise and other costs for potential impairment. The Company
expects to complete its impairment assessment in the first quarter of 2002. Any
required impairment charge would be recorded as a cumulative effect of
accounting change as of January 1, 2002. The Company does not currently expect
to record an impairment charge upon the completion of the initial impairment
review. However, there can be no assurance that at the time the review is
completed a material impairment charge will not be recorded.
Deferred tax assets are reduced by a valuation allowance when, in
management's opinion, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. TDS considers future taxable
income and ongoing prudent and feasible tax planning strategies in assessing
the need for the valuation allowance. If it were determined that TDS would be
able to realize the deferred tax asset in excess of its net recorded amount,
an adjustment to deferred tax assets would increase income. Likewise, if it
were determined that TDS would not be able to realize the net deferred tax
asset amount, an adjustment to deferred tax assets would reduce income.
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 ANNUAL 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 THE FOLLOWING:
- INCREASES IN THE LEVEL OF COMPLETION IN THE MARKETS IN WHICH TDS OPERATES
COULD ADVERSELY AFFECT TDS'S REVENUES OR INCREASES ITS COSTS TO COMPETE.
- ADVANCES OR CHANGES IN TELECOMMUNICATIONS TECHNOLOGY COULD RENDER CERTAIN
TECHNOLOGIES USED BY TDS OBSOLETE.
- CHANGES IN TELECOMMUNICATIONS REGULATORY ENVIRONMENT COULD ADVERSELY AFFECT
TDS'S FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
- CHANGES IN THE SUPPLY OR DEMAND OF THE MARKET FOR WIRELESS LICENSES OR
TELEPHONE COMPANIES, INCREASED COMPETITION, ADVERSE DEVELOPMENTS IN THE
TDS'S BUSINESSES OR THE INDUSTRIES IN WHICH TDS IS INVOLVED AND/OR OTHER
FACTORS COULD RESULT IN AN IMPAIRMENT OF THE VALUE OF TDS'S LICENSE COSTS
AND/OR GOODWILL, WHICH MAY REQUIRE TDS TO RECORD A WRITE DOWN IN THE VALUE
OF SUCH ASSETS.
- COMPETITION, CONSTRUCTION DELAYS AND OTHER CHALLENGES IN EXECUTING TDS'S
EXPANSION AND DEVELOPMENT OF ITS CLEC BUSINESS COULD RESULT IN HIGHER THAN
PLANNED LOSSES, ADDITIONAL FINANCING REQUIREMENTS AND/OR THE WRITE DOWN OF
THE CLEC ASSETS IF TDS IS UNABLE TO SUCCESSFULLY IMPLEMENT ITS PLANS IN
THIS BUSINESS UNDERTAKING.
- CONTINUED DEPRESSED MARKET VALUES, CONTINUED DECLINES THEREOF OR OTHER
EVENTS EVIDENCING AN IMPAIRMENT IN THE VALUE OF TDS'S INVESTMENTS IN
AVAILABLE-FOR-SALE MARKETABLE EQUITY SECURITIES THAT ARE OTHER THAN
TEMPORARY MAY REQUIRE TDS TO WRITE DOWN THE VALUE OF SUCH SECURITIES.
- SETTLEMENT, JUDGMENTS, RESTRAINTS ON ITS CURRENT MANNER OF DOING BUSINESS
AND/OR LEGAL COSTS RESULTING FROM PENDING AND FUTURE LITIGATION COULD HAVE
AN ADVERSE EFFECT ON TDS'S FINANCIAL CONDITION, RESULTS OF OPERATIONS OR
ABILITY TO DO BUSINESS.
- COSTS, INTEGRATION PROBLEMS OR OTHER FACTORS ASSOCIATED WITH
ACQUISITIONS/DIVERSITIES OF PROPERTIES AND/OR LICENSES COULD HAVE AN
ADVERSE EFFECT ON TDS'S FINANCIAL CONDITION OR RESULTS OR OPERATIONS.
- CHANGES IN GROWTH IN THE NUMBER OF WIRELESS CUSTOMERS, AVERAGE REVENUE
PER UNIT, PENETRATION RATES, CHURN RATES, ROAMING RATES AND THE MIX OF
PRODUCTS AND SERVICES OFFERED IN WIRELESS MARKETS COULD HAVE AN ADVERSE
EFFECT ON TDS'S WIRELESS BUSINESS OPERATIONS.
- CHANGES IN GROWTH IN THE NUMBER OF ILEC AND CLEC CUSTOMERS, CHURN RATES AND
MIX OF PRODUCTS AND SERVICES OFFERED IN ILEC AND CLEC MARKETS COULD HAVE AN
ADVERSE EFFECT ON SUCH TDS BUSINESS SEGMENTS.
- CHANGES IN MARKET CONDITIONS OR OTHER FACTORS COULD LIMIT OR RESTRICT THE
AVAILABILITY OF FINANCING ON TERMS AND PRICES ACCEPTABLE TO TDS, WHICH
COULD REQUIRE TDS TO REDUCE ITS CONSTRUCTION, DEVELOPMENT AND ACQUISITION
PROGRAMS.
- CHANGES IN GENERAL ECONOMIC AND BUSINESS CONDITIONS, BOTH NATIONALLY AND IN
THE REGIONS IN WHICH TDS OPERATES, COULD HAVE AN ADVERSE EFFECT ON TDS'S
BUSINESSES.
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.
16
------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
U.S. Cellular $1,894,830 $1,716,640 $1,576,429
TDS Telecom 693,712 610,216 545,917
---------------------------------------
2,588,542 2,326,856 2,122,346
---------------------------------------
OPERATING EXPENSES
U.S. Cellular 1,577,618 1,424,327 1,320,587
TDS Telecom 574,769 482,463 431,366
---------------------------------------
2,152,387 1,906,790 1,751,953
---------------------------------------
436,155 420,066 370,393
---------------------------------------
OPERATING INCOME
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest and dividend income 14,246 15,637 8,708
Investment income 50,639 38,723 31,324
Amortization of costs related to minority investments (1,263) (10,258) (12,927)
Gain (loss) on marketable securities and other investments (548,305) 15,716 345,938
Other income (expense), net 5,048 (8,082) (11,198)
---------------------------------------
(479,635) 51,736 361,845
---------------------------------------
INCOME (LOSS) BEFORE INTEREST AND INCOME TAXES (43,480) 471,802 732,238
Interest expense 103,710 100,559 99,984
Minority interest in income of subsidiary trust 24,810 24,810 24,810
---------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST (172,000) 346,433 607,444
Income tax expense (benefit) (44,908) 149,481 251,001
---------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (127,092) 196,952 356,443
Minority share of income (41,156) (51,425) (65,117)
---------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (168,248) 145,527 291,326
---------------------------------------
DISCONTINUED OPERATIONS
Gain (loss) on disposal of Aerial, net of tax (24,092) 2,125,787 --
Loss from operations of Aerial, net of tax -- -- (111,492)
---------------------------------------
(24,092) 2,125,787 (111,492)
---------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (192,340) 2,271,314 179,834
EXTRAORDINARY ITEM-LOSS ON EXTINGUISHMENT OF DEBT, NET OF MINORITY INTEREST (5,715) (30,471) --
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX AND MINORITY INTEREST -- (3,841) --
---------------------------------------
NET INCOME (198,055) 2,237,002 179,834
Preferred Dividend Requirement (458) (504) (1,147)
---------------------------------------
NET INCOME (LOSS) AVAILABLE TO COMMON $ (198,513) $2,236,498 $ 178,687
=============================================================================================================================
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING (000S) 58,661 59,922 61,436
BASIC EARNINGS PER SHARE
Income (Loss) from Continuing Operations $ (2.87) $ 2.42 $ 4.72
Net Income (Loss) Available to Common (3.38) 37.32 2.91
=============================================================================================================================
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (000S) 58,661 60,636 62,376
DILUTED EARNINGS PER SHARE
Income (Loss) from Continuing Operations $ (2.87) $ 2.39 $ 4.65
Net Income (Loss) Available to Common (3.38) 36.88 2.87
=============================================================================================================================
DIVIDENDS PER SHARE $ .54 $ .50 $ .46
=============================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
17
------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
Income (loss) from continuing operations $(168,248) $ 145,527 $ 291,326
Add (deduct) adjustments to reconcile income from continuing
operations to net cash provided by operating activities
Depreciation and amortization 450,019 399,143 353,322
Deferred income taxes, net (266,406) (370) 175,047
Investment income (50,639) (38,723) (31,324)
Minority share of income 41,156 51,425 65,117
(Gain) Loss on cellular and other investments 548,305 (15,716) (345,938)
Noncash interest expense 10,176 16,448 18,297
Other noncash expense 19,362 34,742 29,011
Proceeds from litigation settlement -- 42,457 --
Changes in assets and liabilities from operations
Change in accounts receivable (34,125) (14,619) (50,417)
Change in materials and supplies (7,100) (18,786) (13,436)
Change in accounts payable (7,828) 59,550 (22,421)
Change in accrued taxes (1,151) 56,303 (17,051)
Change in other assets and liabilities 12,284 38,041 28,299
-------------------------------------------
545,805 755,422 479,832
-------------------------------------------
CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES
Capital expenditures (700,150) (456,019) (399,631)
Acquisitions, net of cash acquired (392,842) (200,718) (31,323)
Increase in notes receivable (9,763) (55,141) --
Cash received from mergers 570,035 -- 46,606
Proceeds from investment sales 487 72,973 73,394
Distributions from unconsolidated entities 16,644 34,834 26,061
Investments in and advances to unconsolidated entities (46) (4,187) 5,497
Other investing activities (4,223) 2,599 (5,954)
-------------------------------------------
(519,858) (605,659) (285,350)
-------------------------------------------
CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES
Change in notes payable (249,522) 499,000 (170,889)
Issuance of long-term debt 489,656 2,209 9,902
Repayments of long-term debt (17,806) (17,096) (22,131)
Prepayment of medium-term notes (65,500) -- --
Repurchase and conversion of XXXXx (31,963) (99,356) --
Repurchase of TDS Common Shares (39,441) (290,069) (69,014)
Repurchase of U.S. Cellular Common Shares (40,862) (223,847) --
Dividends paid (32,141) (30,472) (29,391)
Other financing activities 3,357 4,440 9,001
-------------------------------------------
15,778 (155,191) (272,522)
-------------------------------------------
CASH FLOWS FROM DISCONTINUED OPERATIONS -- (6,563) 143,911
-------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 41,725 (11,991) 65,871
CASH AND CASH EQUIVALENTS
Beginning of period 99,019 111,010 45,139
-------------------------------------------
End of period $ 140,744 $ 99,019 $ 111,010
===============================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
18
------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - ASSETS
------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 2000
----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 140,744 $ 99,019
Accounts receivable
Due from customers, less allowance of $13,657 and $13,664, respectively 202,714 189,078
Other, principally connecting companies 176,447 148,407
Deposit receivable from FCC 56,060 --
Materials and supplies, at average cost 71,370 61,450
Other current assets 27,021 29,146
-----------------------------
674,356 527,100
-----------------------------
INVESTMENTS
Marketable equity securities 2,700,230 4,121,904
Intangible assets
Cellular license costs, net of amortization 1,334,523 1,261,404
Telephone franchise and other costs in excess of the underlying
book value of subsidiaries, net of amortization 348,696 203,532
Investments in unconsolidated entities 233,678 182,325
Notes receivable 101,887 86,464
Other investments 15,078 13,588
-----------------------------
4,734,092 5,869,217
-----------------------------
PROPERTY, PLANT AND EQUIPMENT, NET
U.S. Cellular 1,527,805 1,265,347
TDS Telecom 1,030,226 920,678
-----------------------------
2,558,031 2,186,025
-----------------------------
OTHER ASSETS AND DEFERRED CHARGES 80,313 52,267
-----------------------------
$8,046,792 $8,634,609
================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
19
------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 2000
----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of long-term debt $ 67,461 $ 15,639
Notes payable 265,300 499,000
Accounts payable 270,005 275,901
Advance xxxxxxxx and customer deposits 68,044 61,958
Accrued interest 24,264 24,912
Accrued taxes 14,263 17,904
Accrued compensation 56,973 52,314
Other current liabilities 49,906 36,783
-----------------------------
816,216 984,411
-----------------------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 1,378,280 1,756,217
Other 50,468 45,990
-----------------------------
1,428,748 1,802,207
-----------------------------
LONG-TERM DEBT, excluding current portion 1,507,764 1,172,987
-----------------------------
MINORITY INTEREST in subsidiaries 467,698 431,110
-----------------------------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES (a) 300,000 300,000
-----------------------------
PREFERRED SHARES 7,442 7,827
-----------------------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $.01 per share;
authorized 100,000,000 shares; issued and outstanding
55,659,000 and 55,524,000 shares, respectively 557 555
Series A Common Shares, par value $.01 per share;
authorized 25,000,000 shares; issued and outstanding
6,778,000 and 6,880,000 shares, respectively 68 69
Capital in excess of par value 1,826,840 1,816,619
Treasury Shares, at cost, 3,868,000 and 3,716,000 shares, respectively (406,894) (383,501)
Accumulated other comprehensive (loss) (352,120) (178,344)
Retained earnings 2,450,473 2,680,669
-----------------------------
3,518,924 3,936,067
-----------------------------
$8,046,792 $8,634,609
================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
(a) AS DESCRIBED IN NOTE 17, THE SOLE ASSET OF TDS CAPITAL I IS $154.6 MILLION
PRINCIPAL AMOUNT OF 8.5% SUBORDINATED DEBENTURES DUE 2037 FROM TDS, AND THE
SOLE ASSET OF TDS CAPITAL II IS $154.6 MILLION PRINCIPAL AMOUNT OF 8.04%
SUBORDINATED DEBENTURES DUE 2038 FROM TDS.
20
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Compre- Accumulated
Series A Capital in hensive Other Com-
Common Common Excess of Treasury Income prehensive Retained
Shares Shares Par Value Shares (Loss) Income (Loss) Earnings
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
BALANCE, DECEMBER 31, 1998 $ 550 $ 69 $1,882,710 $ (29,439) $ 75,609 $ 323,696
Comprehensive Income
Net income -- -- -- -- $ 179,834 -- 179,834
Net unrealized gains on securities -- -- -- -- 103,462 103,462 --
----------
Comprehensive income $ 283,296
==========
Dividends
Common and series A common shares -- -- -- -- -- (28,290)
Preferred shares -- -- -- -- -- (1,101)
Repurchase Common Shares -- -- -- (80,457) -- --
Dividend Reinvestment, Incentive
and Compensation Plans 1 1 177 6,921 -- --
Conversion of Preferred Shares 3 -- 17,273 -- -- --
Other -- -- (2,758) -- -- --
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 554 70 1,897,402 (102,975) 179,071 474,139
Comprehensive Income
Net income -- -- -- -- $2,237,002 -- 2,237,002
Net unrealized losses on securities -- -- -- -- (357,415) (357,415) --
----------
Comprehensive income $1,879,587
==========
Dividends
Common and series A common shares -- -- -- -- -- (29,904)
Preferred shares -- -- -- -- -- (568)
Repurchase Common Shares -- -- -- (287,732) -- --
Dividend Reinvestment, Incentive
and Compensation Plans -- -- 5,787 7,206 -- --
Conversion of Series A and Preferred Shares 1 (1) 393 -- -- --
Adjust Investment in Subsidiary for
Common Share Issuances and Repurchases -- -- (86,549) -- -- --
Other -- -- (414) -- -- --
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 555 69 1,816,619 (383,501) (178,344) 2,680,669
Comprehensive (Loss)
Net (loss) -- -- -- -- $ (198,055) -- (198,055)
Net unrealized losses on securities -- -- -- -- (173,776) (173,776) --
----------
Comprehensive (loss) $ (371,831)
==========
Dividends
Common and series A common shares -- -- -- -- -- (31,683)
Preferred shares -- -- -- -- -- (458)
Repurchase Common Shares -- -- -- (30,335) -- --
Dividend Reinvestment, Incentive
and Compensation Plans -- -- 995 6,942 -- --
Conversion of Series A and Preferred Shares 2 (1) 746 -- -- --
Adjust Investment in Subsidiary for
Common Share Issuances and Repurchases -- -- 8,368 -- -- --
Other -- -- 112 -- -- --
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $ 557 $ 68 $1,826,840 $(406,894) $(352,120) $2,450,473
===================================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Telephone and Data Systems, Inc. ("TDS" or "the Company") is a diversified
telecommunications company that provided high-quality telecommunications
services to approximately 4.3 million cellular telephone and telephone customers
in 34 states at December 31, 2001. The Company conducts substantially all of its
wireless telephone operations through its 82.2%-owned subsidiary, United States
Cellular Corporation ("U.S. Cellular") and its wireline telephone operations
through its wholly-owned subsidiary, TDS Telecommunications Corporation ("TDS
Telecom").
See Note 23 -- Business Segment Information for summary financial
information on each business segment.
PRINCIPLES OF CONSOLIDATION
The accounting policies of TDS conform to generally accepted accounting
principles. The consolidated financial statements include the accounts of TDS,
its majority-owned subsidiaries since acquisition and the cellular partnerships
in which TDS has a majority general partnership interest or has a controlling
financial interest. All material intercompany items have been eliminated.
BUSINESS COMBINATIONS
TDS uses the purchase method of accounting for business combinations. TDS
includes as investments in subsidiaries the value of the consideration given and
all direct and incremental costs relating to acquisitions. All costs relating to
unsuccessful negotiations for acquisitions are charged to expense.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts reported in prior years have been reclassified to conform to
current period presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. The carrying
amounts of Cash and cash equivalents approximate fair value due to the
short-term nature of these investments.
Outstanding checks aggregating $47.8 million and $35.3 million at December 31,
2001 and 2000, respectively, are classified as Accounts payable in the
Consolidated Balance Sheets. Sufficient funds were available to fund these
outstanding checks when presented for payment.
TDS has cash management arrangements with its subsidiaries under which the
subsidiaries may from time to time deposit excess cash with TDS for investment
under TDS's cash management program.
MARKETABLE EQUITY SECURITIES
Marketable equity securities are classified as available-for-sale, and are
stated at fair market value. Net unrealized holding gains and losses are
included in Accumulated other comprehensive income. Realized gains and losses
are determined on the basis of specific identification.
As of December 31, 2001, the net unrealized holding loss, net of tax,
aggregated $352.1 million. Management does not consider the unrealized loss to
be "other than temporary." Management continues to review the valuation of the
investments on a periodic basis. If management determines an unrealized loss is
other than temporary, the loss is recognized and recorded in the income
statement.
INTANGIBLE ASSETS
CELLULAR LICENSE COSTS
Cellular license costs consist of costs incurred in acquiring Federal
Communications Commission licenses to provide cellular service. These costs
include amounts paid to license applicants and owners of interests in cellular
entities awarded licenses and all direct and incremental costs relating to
acquiring the licenses. These costs are capitalized and were amortized through
charges to expense over 40 years upon commencement of operations. See Note 1 --
Recent Accounting Pronouncements.
TELEPHONE FRANCHISE AND OTHER COSTS IN EXCESS
OF THE UNDERLYING BOOK VALUE OF SUBSIDIARIES
Telephone franchise and other costs include the costs in excess of the
underlying book value of acquired telephone companies. Costs aggregating $399.8
million and $248.4 million at December 31, 2001 and 2000, respectively, relating
to acquisitions since November 1, 1970, were amortized on a straight-line basis
over a 40-year period. Costs in excess of the underlying book value relating to
acquisitions initiated before November 1, 1970, aggregating $6.5 million, were
not amortized. See Note 1 -- Recent Accounting Pronouncements.
INVESTMENTS IN UNCONSOLIDATED ENTITIES
Investments in unconsolidated entities consists of investments where the Company
holds a less than 50% ownership interest and where a quoted share price is not
available. The Company
22
follows the equity method of accounting, which recognizes TDS's proportionate
share of the income and losses accruing to it under the terms of its partnership
or shareholder agreements, where the Company's ownership interest equals or
exceeds 20% for corporations and 3% for partnerships. Equity method investments
aggregated $179.9 million and $149.0 million at December 31, 2001 and 2000,
respectively. Income and losses from these entities are reflected in the
Consolidated Statements of Operations on a pretax basis as Investment income. At
December 31, 2001, the cumulative share of income from minority investments
accounted for under the equity method was $310.2 million, of which $119.4
million was undistributed. The cost method of accounting is followed for certain
minority interests where the Company's ownership interest is less than 20% for
corporations and 3% for partnerships. Cost method investments aggregated $53.8
million and $33.3 million at December 31, 2001 and 2000, respectively.
PROPERTY, PLANT AND EQUIPMENT
U.S. CELLULAR
U.S. Cellular's property, plant and equipment is stated at the original cost of
construction including capitalized costs of certain taxes and payroll-related
expenses.
Renewals and betterments of units of property are recorded as additions to
cellular plant in service. The original cost of depreciable property retired
(along with the related accumulated depreciation) is removed from plant in
service and, together with removal cost less any salvage realized, is charged to
depreciation expense. Repairs and renewals of minor units of property are
charged to system operations expense.
TDS TELECOM
TDS Telecom's property, plant and equipment is stated at the original cost of
construction including the capitalized costs of certain taxes, payroll-related
expenses, and an allowance for funds used during construction.
Renewals and betterments of units of property are recorded as additions to
telephone plant in service. The original cost of depreciable property retired is
removed from plant in service and, together with removal cost less any salvage
realized, is charged to accumulated depreciation. No gain or loss is recognized
on ordinary retirements of depreciable telephone property. Repairs and renewals
of minor units of property are charged to plant operations expense.
The Company's incumbent local telephone operations follow accounting for
regulated enterprises prescribed by Statement of Financial Accounting Standards
("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation."
Management periodically reviews the criteria for applying these provisions to
determine whether continuing application of SFAS No. 71 is appropriate.
Management believes that such criteria are still being met and therefore has no
current plans to change its method of accounting.
In analyzing the effects of discontinuing the application of SFAS No. 71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles and, therefore, any adjustments to
telecommunications plant would be immaterial, as would be any write-off of
regulatory assets and liabilities.
DEPRECIATION
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets.
REVENUE RECOGNITION
Revenues from cellular operations primarily consist of charges for access,
airtime, roaming and value added services provided for U.S. Cellular's retail
customers; charges to customers of other systems who use U.S. Cellular's
cellular systems when roaming; charges for long-distance calls made on U.S.
Cellular's systems; end user equipment sales; and sales of accessories. Revenues
are recognized as services are rendered. Certain activation and reconnection
fees are recognized over average customer service periods. U.S. Cellular does
not defer any of the related direct incremental customer acquisition costs;
these costs are charged to expense as incurred. Unbilled revenues, resulting
from cellular service provided from the billing cycle date to the end of each
month and from other cellular carriers' customers using U.S. Cellular's cellular
systems for the last half of each month, are estimated and recorded. Equipment
sales represent a separate earnings process. Equipment and accessory sales are
recognized upon delivery to the customer and reflect charges to customers for
equipment purchased.
TDS's telephone subsidiaries participate in revenue pools with other
telephone companies for interstate revenue and for certain intrastate revenue.
Such pools are funded by toll revenue and/or access charges within state
jurisdiction and by
23
access charges in the interstate market. Revenues earned through the various
pooling processes are initially recorded based on TDS Telecom's estimates.
Effective January 1, 2000, U.S. Cellular changed its method of accounting
for certain activation and reconnect fees charged to its customers when
initiating service through its retail and direct channels or when resuming
service after suspension. This accounting change is in compliance with Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." Based upon this guidance, U.S. Cellular recognizes these fees as
revenue ratably over the average customer service periods (ranging from six to
48 months). Prior to implementing SAB No. 101, U.S. Cellular recorded these fees
as operating revenues in the period they were charged to the customer. SAB No.
101 had no effect on the operating results of TDS Telecom.
The cumulative effect of the accounting change on periods prior to 2000 was
recorded in 2000 reducing net income by $3.8 million, net of taxes of $3.7
million and minority interest of $820,000, or $.06 per basic and diluted share.
Had results for the year ended December 31, 1999, been restated, the effect of
this change would have been to decrease operating revenues by $4.5 million, net
income from continuing operations by $1.5 million and basic and diluted earnings
per share by $.03 and $.04, respectively.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense totaled
$77.2 million, $77.0 million and $69.0 million in 2001, 2000, and 1999,
respectively.
INCOME TAXES
TDS files a consolidated federal income tax return. Deferred taxes are computed
using the liability method, whereby deferred tax assets are recognized for
deductible temporary differences and operating loss carryforwards, and deferred
tax liabilities are recognized for taxable temporary differences. Both deferred
tax assets and liabilities are measured using the current enacted tax rates.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax basis. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment. Deferred tax assets are reduced by a valuation allowance when, in
management's opinion, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period.
Potentially dilutive securities included in diluted earnings per share represent
incremental shares issuable upon exercise of outstanding stock options or the
potential conversion of preferred stock to common shares. For the year ended
December 31, 2001, the diluted loss per share calculation excludes the effect of
the potentially dilutive securities because their inclusion would be
anti-dilutive.
STOCK-BASED COMPENSATION
The Company accounts for stock options, stock appreciation rights ("SARs") and
employee stock purchase plans under Accounting Principles Board ("APB") Opinion
No. 25 as allowed by SFAS No. 123 "Accounting for Stock-Based Compensation."
ASSET IMPAIRMENT
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. The
Company evaluates the asset for possible impairment based on an estimate of
related undiscounted cash flows over the remaining asset life. If an impairment
is identified, a loss is recognized for the difference between the fair value
of the asset (less cost to sell) and the carrying value of the asset.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 141 "Business Combinations" and No. 142
"Goodwill and Other Intangible Assets" in July 2001. These statements require,
among other things, that all future business combinations be accounted for using
the purchase method of accounting and prohibit the use of the
pooling-of-interest method. For acquisitions completed after July 1, 2001,
goodwill will not be amortized. In addition, effective January 1, 2002,
previously recorded goodwill and other intangible assets with indefinite lives
will no longer be amortized but will be subject to impairment tests.
SFAS No. 142 defines the accounting for intangible assets. The accounting
for a recognized intangible asset is based on the useful life to the entity. An
intangible asset with a finite useful life is amortized; an intangible asset
with an indefinite useful life is not amortized. The useful life of the
intangible asset is the period over which the asset is expected to contribute
directly or indirectly to the future cash flows of the entity.
24
An intangible asset that is not subject to amortization shall be tested for
impairment annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The impairment test shall consist of
a comparison of the fair value of an intangible asset with its carrying amount.
If the carrying amount of an intangible asset exceeds its fair value, an
impairment loss shall be recognized in an amount equal to that excess.
SFAS No. 142 also defines the accounting for goodwill. Goodwill will be
tested for impairment annually. Impairment is the condition that exists when the
carrying amount of goodwill exceeds its implied fair value. If the carrying
amount of goodwill exceeds the implied fair value of that goodwill, an
impairment loss shall be recognized in an amount equal to that excess.
The Company will adopt SFAS No. 142 on January 1, 2002, and will no longer
amortize cellular license costs, telephone franchise and other costs in excess
of the underlying book value of subsidiaries, or goodwill for equity method
investments. Cellular license costs, telephone franchise and other costs, and
equity method goodwill totaled $1,334.5 million, $348.7 million and $76.8
million, respectively, at December 31, 2001, and amortization for the year ended
December 31, 2001, totaled $37.6 million, $6.2 million and $1.3 million,
respectively.
In addition, pursuant to SFAS No. 142, the Company is assessing its
recorded balances of Cellular license costs and telephone franchise and other
costs for potential impairment. As allowed under the standard, the Company
expects to complete its impairment assessment in the first quarter of 2002. Any
required impairment charge would be recorded as a cumulative effect of
accounting change as of January 1, 2002. The Company does not currently expect
to record an impairment charge upon the completion of the initial impairment
review. However, there can be no assurance that at the time the review is
completed a material impairment charge will not be recorded.
SFAS No. 143, "Accounting for Asset Retirement Obligations" was issued in
June 2001, and will become effective for the Company beginning January 1, 2003.
SFAS No. 143 requires entities to record the fair value of a liability for legal
obligations associated with an asset retirement in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. The Company is currently reviewing the requirements of this new standard
and has not yet determined the impact, if any, on the Company's financial
position or results of operations.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" was issued in October 2001, and became effective for the Company
beginning January 1, 2002. SFAS No. 144 requires entities to measure long-lived
assets at the lower of carrying amount or fair value less cost to sell, whether
reported in continuing operations or in discontinued operations. SFAS No. 144
also revises standards for the reporting of discontinued operations. This
statement broadens the presentation of discontinued operations to include a
component of an entity (rather than a segment of a business). A component of an
entity comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The Company is currently reviewing the requirements of this new standard, but
does not expect implementation to have a material impact on its financial
position or results of operations.
The Financial Accounting Standards Board issued an exposure draft on
November 15, 2001, "Rescission of FASB Statements No. 4, 44 and 64 and
Technical Corrections." This proposed Statement would rescind Statement 4 and
Statement 64, an amendment of Statement 4, thereby eliminating the requirements
that gains and losses from extinguishment of debt be aggregated and, if
material, classified as an extraordinary item, net of related income tax effect.
The provisions of this Statement related to the rescission of Statement 4 shall
be applied as of the beginning of the fiscal year in which this Statement is
issued. The Board expects to issue the final Statement in the first quarter of
2002. When adopted, the Company would no longer report gains and losses on the
retirement of long-term debt as an extraordinary item.
2 INCOME TAXES
Income tax provisions charged to net income from continuing operations are
summarized as follows.
Year Ended December 31, 2001 2000 1999
-------------------------------------------------------------------------
(Dollars in thousands)
Current
Federal $ 184,562 $126,596 $ 61,261
State 36,936 23,255 14,693
Deferred
Federal (210,893) 6,196 149,752
State (55,513) (6,566) 25,295
---------------------------------------
Total income tax
expense (benefit) from
continuing operations $ (44,908) $149,481 $251,001
=========================================================================
25
A reconciliation of the Company's expected income tax expense (benefit)
from continuing operations computed at the statutory rate to reported income tax
expense (benefit) from continuing operations, and the statutory federal income
tax rate to the Company's effective income tax rate for continuing operations,
is as follows.
2001 2000 1999
-------------- ------------- --------------
Year Ended December 31, Amount Rate Amount Rate Amount Rate
--------------------------------------------------------------------------------
(Dollars in millions)
Statutory federal
income tax (benefit) $(60.2) (35.0)% $121.3 35.0% $212.6 35.0%
State income taxes,
net of federal benefit (4.8) (2.8) 10.7 3.1 25.5 4.2
Amortization of license
costs and costs in
excess of book value 6.3 3.7 4.7 1.3 4.4 0.7
Minority share of
income not included
in consolidated
tax return (2.6) (1.5) (1.3) (0.4) (0.9) (0.1)
Sale of investments 3.8 2.2 11.3 3.3 -- --
Resolution of prior
period tax issues 9.8 5.7 3.6 1.0 5.2 0.9
Other differences, net 2.8 1.6 (0.8) (0.2) 4.3 0.6
--------------------------------------------------------
Total income tax $(44.9) (26.1)% $149.5 43.1% $251.1 41.3%
================================================================================
Income from continuing operations for each of the three years ended
December 31, 2001, includes gains and losses from marketable securities and
other investments. The effective income tax rate excluding such gains and losses
was 44.4%, 40.4% and 44.3% for the years ended December 31, 2001, 2000 and
1999, respectively.
Income tax provisions charged to net income are summarized as follows.
Year Ended December 31, 2001 2000 1999
--------------------------------------------------------------------
(Dollars in thousands)
Current
Federal $ 184,562 $ 85,149 $ 3,312
State 36,936 16,642 6,060
Deferred
Federal (204,469) 1,299,481 179,343
State (55,513) 234,081 31,528
----------------------------------------
Total income tax
expense (benefit) $ (38,484) $1,635,353 $ 220,243
====================================================================
The Company's current net deferred tax assets totaled $3.6 million and $3.4
million as of December 31, 2001 and 2000, respectively. The net current deferred
tax asset primarily represents the deferred tax effects of the allowance for
doubtful accounts on customer receivables.
The temporary differences that gave rise to the noncurrent deferred tax
assets and liabilities are as follows.
December 31, 2001 2000
--------------------------------------------------------------------
(Dollars in thousands)
Deferred Tax Asset
Net operating loss carryforwards $ 46,526 $ 35,032
Taxes on acquisitions 32,782 32,782
Alternative minimum tax
credit carryforward -- 78,849
Partnership investments 5,970 69,738
Other 1,962 11,205
----------- --------------
87,240 227,606
Less valuation allowance (35,927) (26,509)
----------- --------------
Total Deferred Tax Asset 51,313 201,097
----------- --------------
Deferred Tax Liability
Marketable equity securities 1,137,518 1,677,828
Property, plant and equipment 178,869 184,248
Licenses 113,206 95,238
----------- --------------
Total Deferred Tax Liability 1,429,593 1,957,314
----------- --------------
Net Deferred Income Tax Liability $ 1,378,280 $1,756,217
====================================================================
TDS and certain subsidiaries had $494.6 million of state net operating loss
carryforward (generating a $41.1 million deferred tax asset) at December 31,
2001, expiring between 2002 and 2021, which is available to offset future
taxable income primarily of the individual subsidiaries which generated the
loss. In addition, certain subsidiaries which are not included in the federal
consolidated income tax return, but file separate tax returns, had a federal net
operating loss carryforward (generating a $5.4 million deferred tax asset)
available to offset future taxable income which expires between 2003 and 2021. A
valuation allowance was established for the state and federal operating loss
carryforwards since it is more likely than not that a portion will expire before
such carryforwards can be utilized.
The financial reporting basis of the marketable equity securities was
greater than the tax basis at December 31, 2001, generating a $1,137.5 million
deferred tax liability.
3 DISCONTINUED OPERATIONS
In September 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
26
received 35,570,493 shares of VoiceStream common stock valued at $3,899.4
million at closing. TDS recognized a gain of approximately $2,125.8 million, net
of $1,515.9 million in taxes, on this transaction. TDS had a basis in Aerial of
$287.8 million, including deferred losses of $75.9 million from September 17,
1999 to May 4, 2000. In 2001, the gain on disposal of Aerial was reduced by
$24.1 million, or $.41 per share, reflecting adjustments to estimates used
during the closing in the calculation of income and other tax liabilities.
Summarized income statement information relating to discontinued operations,
excluding any corporate charges and intercompany interest expense, is as
follows.
Year Ended December 31, 2000 1999
---------------------------------------------------------------------
(Dollars in thousands)
Revenues $ 94,463 $ 225,501
Expenses 164,148 435,509
----------------------------
Operating (Loss) (69,685) (210,008)
Minority share of loss 33,459 21,369
Other (expense) income (29,533) (6,504)
Interest expense (8,605) (22,119)
----------------------------
(Loss) Before Income Taxes (74,364) (217,262)
Income tax (benefit) (36,624) (67,650)
----------------------------
Net (Loss) (37,740) (149,612)
Losses deferred after measurement date 37,740 38,120
----------------------------
Net (Loss) from Discontinued Operations $ -- $ (111,492)
=====================================================================
Summarized cash flow statement information relating to discontinued
operations is as follows.
Year Ended December 31, 2000 1999
--------------------------------------------------------------------
(Dollars in thousands)
Cash flows from operating activities $(55,851) $(62,633)
Cash flows from investing activities (17,325) (32,351)
Cash flows from financing activities 108,180 239,213
--------------------------
Cash provided (used) by
discontinued operations 35,004 144,229
(Increase) in cash included in
Net Assets of Discontinued Operations (41,567) (318)
--------------------------
Cash flows from discontinued operations $ (6,563) $143,911
====================================================================
4 EXTRAORDINARY ITEM
U.S. Cellular retired Liquid Yield Option Notes ("XXXXx") with an aggregate
carrying value of $25.4 million and $63.6 million during 2001 and 2000,
respectively, for cash totaling $32.0 million and $99.4 million, respectively.
These retirements resulted in an extraordinary loss of $5.7 million, net of
minority interest of $1.2 million, or $.10 per basic and diluted share, in 2001,
and $30.5 million, net of minority interest of $6.4 million, or $.51 per basic
and diluted share in 2000. There were no income tax benefits due to the
conversion feature associated with these XXXXx.
5 EARNINGS PER SHARE
The amounts used in computing Earnings per Share from Continuing Operations and
the effect on income and the weighted average number of Common and Series A
Common Shares of dilutive potential common stock are as follows.
Year Ended December 31, 2001 2000 1999
----------------------------------------------------------------------
(Dollars in thousands)
BASIC EARNINGS PER SHARE
Income (Loss) from
Continuing Operations $(168,248) $ 145,527 $ 291,326
Preferred Dividend
Requirement (458) (504) (1,147)
---------------------------------------
Income (Loss) from
Continuing Operations
Available to Common
used in Basic Earnings
per Share (168,706) 145,023 290,179
Discontinued Operations
Gain (loss) on disposal (24,092) 2,125,787 --
Loss from operations -- -- (111,492)
Extraordinary item-loss
on extinguishment of debt (5,715) (30,471) --
Cumulative effect of
accounting change -- (3,841) --
---------------------------------------
Net Income (Loss) Available
to Common used in Basic
Earnings per Share $(198,513) $2,236,498 $ 178,687
=======================================================================
DILUTED EARNINGS PER SHARE
Income (Loss) from
Continuing Operations
Available to Common
used in Basic Earnings
per Share $(168,706) $ 145,023 $ 290,179
Reduction in preferred
dividends if Preferred
Shares converted into
Common Shares -- 446 1,031
Minority income adjustment (1) -- (798) (937)
---------------------------------------
Income (Loss) Available to
Common from Continuing
Operations used in Diluted
Earnings per Share (168,706) 144,671 290,273
Discontinued Operations
Gain (loss) on disposal (24,092) 2,125,787 --
Loss from operations -- -- (111,492)
Extraordinary item-loss
on extinguishment of debt (5,715) (30,471) --
Cumulative effect of
accounting change -- (3,841) --
---------------------------------------
Net Income (Loss) Available
to Common used in Diluted
Earnings per Share $(198,513) $2,236,146 $ 178,781
======================================================================
(1) THE MINORITY INCOME ADJUSTMENT REFLECTS THE ADDITIONAL MINORITY SHARE OF
U.S. CELLULAR'S INCOME COMPUTED AS IF ALL OF U.S. CELLULAR'S ISSUABLE
SECURITIES WERE OUTSTANDING.
27
Year Ended December 31, 2001 2000 1999
--------------------------------------------------------------------
(Shares in thousands)
Weighted Average Number
of Common Shares used in
Basic Earnings per Share 58,661 59,922 61,436
Effect of Dilutive Securities:
Common Shares
outstanding if Preferred
Shares converted (1) -- 206 550
Stock options (2) -- 498 377
Common Shares issuable -- 10 13
------------------------------------
Weighted Average Number
of Common Shares
used in Diluted
Earnings per Share 58,661 60,636 62,376
=====================================================================
(1) PREFERRED SHARES CONVERTIBLE INTO 239,514 COMMON SHARES IN 2001 WERE NOT
INCLUDED IN COMPUTING DILUTED EARNINGS PER SHARE BECAUSE THEIR EFFECTS WERE
ANTIDILUTIVE.
(2) STOCK OPTIONS CONVERTIBLE INTO 1,381,041 COMMON SHARES IN 2001 WERE NOT
INCLUDED IN COMPUTING DILUTED EARNINGS PER SHARE BECAUSE THEIR EFFECTS WERE
ANTIDILUTIVE.
Year Ended December 31, 2001 2000 1999
------------------------------------------------------------
BASIC EARNINGS PER SHARE
Continuing Operations
Excluding Gains $ 2.86 $ 2.57 $ 1.80
Gains (loss)(1) (5.73) (.15) 2.92
----------------------------
(2.87) 2.42 4.72
Discontinued Operations
Gain (loss) on disposal (.41) 35.47 --
Loss from operations -- -- (1.81)
Extraordinary Item-loss on
extinguishment of debt (.10) (.51) --
Cumulative effect of
accounting change -- (.06) --
----------------------------
$(3.38) $37.32 $ 2.91
============================================================
DILUTED EARNINGS PER SHARE
Continuing Operations
Excluding Gains $ 2.86 $ 2.54 $ 1.78
Gains (loss)(1) (5.73) (.15) 2.87
----------------------------
(2.87) 2.39 4.65
Discontinued Operations
Gain (loss) on disposal (.41) 35.06 --
Loss from operations -- -- (1.78)
Extraordinary Item-loss on
extinguishment of debt (.10) (.51) --
Cumulative effect of
accounting change -- (.06) --
----------------------------
$(3.38) $36.88 $ 2.87
============================================================
(1) INCOME FROM CONTINUING OPERATIONS AND BASIC AND DILUTED EARNINGS PER SHARE
WERE SIGNIFICANTLY AFFECTED BY GAINS AND LOSSES FROM MARKETABLE SECURITIES
AND OTHER INVESTMENTS. IN 2000, THE GAIN ON MARKETABLE SECURITIES AND OTHER
INVESTMENTS WAS OFFSET BY INCOME TAXES ON SUCH GAINS RESULTING IN A NET
LOSS.
6 MARKETABLE EQUITY SECURITIES
Information regarding the Company's marketable equity securities is summarized
as follows.
December 31, 2001 2000
--------------------------------------------------------------------
(Dollars in thousands)
Deutsche Telekom AG $ 2,257,200 $ --
131,461,861 Ordinary Shares
VoiceStream Wireless Corp. -- 3,579,281
35,570,493 Common Shares
Vodafone AirTouch plc 332,451 463,626
12,945,915 ADRs
VeriSign, Inc. 92,998 --
2,444,735 Common Shares
Illuminet Holdings, Inc. -- 57,115
2,490,012 Common Shares
Rural Cellular Corporation 16,006 21,312
719,396 equivalent Common Shares
Other 1,575 570
------------------------------
Aggregate Fair Value 2,700,230 4,121,904
Original Cost 3,303,106 4,417,328
------------------------------
Gross Unrealized Holding (Losses) (602,876) (295,424)
Tax (benefit) (236,331) (114,213)
------------------------------
Unrealized Holding (Losses), net of tax (366,545) (181,211)
Equity Method unrealized gains 397 --
Minority Share of Unrealized
Holding Losses 14,028 2,867
------------------------------
Net Unrealized Holding (Losses) $ (352,120) $ (178,344)
====================================================================
Cash proceeds from the exchange of available-for-sale securities totaled
$570.0 million in 2001 and $46.6 million in 1999. Gross realized losses from the
exchange of available-for-sale securities totaled $548.8 million in 2001 and
gross realized gains totaled $327.1 million in 1999.
The merger of Deutsche Telekom AG and VoiceStream Wireless Corporation was
completed in 2001. As a result of the merger, the Company's 35,837,271
VoiceStream common shares (including 266,778 shares received as a dividend in
2001) were converted into 131,461,861 Deutsche Telekom AG ordinary shares and
$570.0 million in cash, and the Company recognized a $644.9 million loss.
The merger of VeriSign, Inc. and Illuminet Holdings, Inc. was also
completed in 2001. As a result of the merger, the Company's 2,628,748 Illuminet
shares (including 138,736 shares acquired through the acquisition of Chorus in
2001) were converted into 2,444,735 VeriSign, Inc. shares, and the
Company recognized a $96.1 million gain.
28
In 1999, Vodafone merged with AirTouch Communications, Inc. The Company
received 12,945,915 Vodafone AirTouch plc ADRs for its AirTouch Communications,
Inc. shares, and $46.6 million of cash, and recognized a $327.1 million gain.
7 INTANGIBLE ASSETS
CELLULAR LICENSE COSTS
Following is a schedule of activity of cellular license costs.
December 31, 2001 2000 1999
----------------------------------------------------------------------
(Dollars in thousands)
Balance, beginning of year $ 1,261,404 $ 1,188,066 $ 1,233,406
Additions 165,678 111,487 22,567
Amortization (37,564) (34,371) (34,333)
Sales -- (9,234) (41,274)
Deposit receivable from FCC (56,060) -- --
Other changes 1,065 5,456 7,700
----------- -----------------------------
Balance, end of year $ 1,334,523 $ 1,261,404 $ 1,188,066
======================================================================
Accumulated amortization of cellular license costs was $259.9 million and
$221.5 million at December 31, 2001 and 2000, respectively. Beginning January 1,
2002, upon implementation of SFAS No. 142, the Company expects to cease the
amortization of license costs.
TELEPHONE FRANCHISE AND OTHER COSTS IN EXCESS OF THE UNDERLYING BOOK VALUE OF
SUBSIDIARIES
Following is a schedule of activity of telephone franchise and other costs in
excess of the underlying book value.
December 31, 2001 2000 1999
----------------------------------------------------------------------
(Dollars in thousands)
Balance, beginning of year $ 203,532 $ 177,677 $ 181,517
Additions 151,401 31,656 1,500
Amortization (6,237) (5,801) (5,340)
-----------------------------------------
Balance, end of year $ 348,696 $ 203,532 $ 177,677
======================================================================
Accumulated amortization of excess cost was $57.6 million and $51.4 million
at December 31, 2001 and 2000, respectively. Beginning January 1, 2002, upon
implementation of SFAS No. 142, the Company will cease the amortization of
excess cost.
8 INVESTMENTS IN UNCONSOLIDATED ENTITIES
Following is a schedule of activity of investments in unconsolidated entities.
December 31, 2001 2000 1999
---------------------------------------------------------------
(Dollars in thousands)
Balance, beginning of year $182,325 $240,709 $269,168
Investment Income 50,639 38,723 31,324
Distributions (14,729) (33,787) (24,385)
Amortization (1,257) (9,291) (12,036)
Acquisitions 23,000 50,093 203
Sales (2,305) (33,095) (12,999)
TSR Wireless write-down -- (69,360) --
Other (3,995) (1,667) (10,566)
---------------------------------
Balance, end of year $233,678 $182,325 $240,709
===============================================================
Investments in unconsolidated entities include goodwill and costs in excess
of the underlying book value of certain investments. These costs were amortized
from 10 to 40 years.
The aggregate carrying value, net of accumulated amortization, of
investments in unconsolidated entities was $233.7 million at December 31, 2001,
of which $156.9 million represented the investment in underlying equity and
$76.8 million in unamortized goodwill. Beginning January 1, 2002, upon
implementation of SFAS No. 142, the Company will cease the amortization of
equity method goodwill.
The Company's more significant investments in unconsolidated entities
consist of the following.
Percentage Ownership
December 31, 2001 2000
--------------------------------------------------------------------
Cellular investments
Los Angeles SMSA Limited Partnership 5.5% 5.5%
Volcano Communications Company 45.0% 45.0%
Raleigh-Durham MSA Limited Partnership 8.0% 8.0%
Midwest Wireless Communication, LLC 15.7% 14.7%
North Carolina RSA 1 Partnership 50.0% 50.0%
Oklahoma City SMSA Limited Partnership 14.6% 14.6%
--------------------------------------------------------------------
TDS reduced the carrying value of its investment (including $11.0 million
of notes receivable) in TSR Wireless Holdings, LLC by $80.4 million to zero in
2000. The charge was included in the caption Gain (loss) on marketable
securities and other investments in the Consolidated Statements of Operations.
In December 2000, TSR Wireless filed for Chapter 7 bankruptcy.
29
Based primarily on data furnished to the Company by third parties, the
following summarizes the unaudited combined assets, liabilities and equity, and
the unaudited combined results of operations of the entities for which TDS's
investments are accounted for by the equity method.
December 31, 2001 2000
--------------------------------------------------------------------
(Unaudited, dollars in millions)
Assets
Current $ 278 $ 338
Due from affiliates 371 7
Property and other 1,431 1,307
----------------------------
$ 2,080 $1,652
====================================================================
Liabilities and Equity
Current liabilities $ 215 $ 479
Due to affiliates 24 10
Deferred credits 123 7
Long-term debt 43 13
Partners' capital and
stockholders' equity 1,675 1,143
----------------------------
$ 2,080 $1,652
====================================================================
Year Ended December 31, 2001 2000 1999
--------------------------------------------------------------------
(Unaudited, dollars in millions)
Results of Operations
Revenues $2,107 $1,996 $1,794
Costs and expenses 1,504 1,472 1,492
-------------------------------------
Operating Income 603 524 302
Other income (expense) (1) (13) 29
Interest expense (4) (21) (15)
Income taxes (5) (6) (19)
-------------------------------------
Net income $ 593 $ 484 $ 297
====================================================================
9 NOTES RECEIVABLE
Notes receivable at December 31, 2001 and 2000, reflect primarily loans to
Airadigm Communications, Inc. ($52.7 million and $44.1 million, respectively)
and Kington Management Corporation ($44.2 million and $37.3 million,
respectively). The notes range in length from one to twelve years and bear
interest at rates from six to eleven percent.
The notes have a weighted average interest rate of 8.2% and average life of
8.1 years at December 31, 2001. The carrying amount of Notes receivable
approximates their fair value.
10 PROPERTY, PLANT AND EQUIPMENT
U.S. CELLULAR
U.S. Cellular's property, plant and equipment consists of the following.
December 31, 2001 2000
--------------------------------------------------------------------
(Dollars in thousands)
Cell site-related equipment $ 1,274,315 $ 1,041,670
Land, buildings and leasehold
improvements 370,732 305,617
Switching-related equipment 251,706 201,202
Office furniture and equipment 132,305 114,399
Systems development 168,591 163,150
Other operating equipment 86,796 71,160
Work in process 137,162 67,330
-------------------------------
2,421,607 1,964,528
Accumulated depreciation 893,802 699,181
-------------------------------
$ 1,527,805 $ 1,265,347
====================================================================
Useful lives range from four to twenty-five years for cell site-related
equipment, ten to twenty years for buildings and leasehold improvements, three
to eight years for switching-related equipment, three to five years for office
furniture and equipment, three to seven years for systems development, and ten
years for other operating equipment. The provision for depreciation as a
percentage of depreciable property was 12.1% in 2001, 13.0% in 2000, and 12.4%
in 1999.
TDS TELECOM
TDS Telecom's property, plant and equipment consists of the following.
December 31, 2001 2000
--------------------------------------------------------------------
(Dollars in thousands)
Cable and wire $ 991,354 $ 873,308
Central office equipment 656,865 543,053
Office furniture and equipment 222,140 178,738
Land and buildings 81,332 70,625
Other equipment 75,017 66,020
Work in process 33,775 51,695
-------------------------------
2,060,483 1,783,439
Accumulated depreciation 1,030,257 862,761
-------------------------------
$ 1,030,226 $ 920,678
====================================================================
30
Useful lives range from fifteen to twenty years for cable and wire, eight
to twelve years for central office equipment, five to ten years for office
furniture and equipment, and ten to fifteen for other equipment. Buildings are
depreciated over thirty years. The provision for depreciation as a percentage of
depreciable property was 7.9% in 2001, 7.9% in 2000, and 7.8% in 1999.
11 SUPPLEMENTAL CASH FLOW DISCLOSURES
Following are supplemental cash flow disclosures for interest and income taxes
paid and certain noncash transactions.
Year Ended December 31, 2001 2000 1999
--------------------------------------------------------------------
(Dollars in thousands)
Interest paid $ 91,629 $ 82,629 $ 81,629
Income taxes paid 220,163 75,029 19,976
Common Shares issued for
conversion of
Preferred Shares 250 472 16,465
Conversion of XXXXx
for Common Shares
of Subsidiary $ 29,642 $ 62,560 $ 2,096
====================================================================
12 ACQUISITIONS
Cash expenditures for acquisitions aggregated $392.8 million in 2001,
$200.7 million in 2000, and $31.3 million in 1999.
On September 4, 2001, the Company acquired 100 percent of the outstanding
common shares of Chorus Communications Group, Ltd. The aggregate purchase price
was $202.8 million in cash, excluding cash acquired. The results of Chorus'
operations are included in the consolidated financial statements since that
date. Chorus is a telecommunications company serving approximately 43,000
business and residential access lines and 27,000 Internet customers primarily in
Wisconsin. Its other operations include selling, installing, and servicing
business telephone and videoconferencing systems, data networks, Internet access
and long-distance.
The following table summarizes the estimated fair values of the Chorus
assets acquired and liabilities assumed at the date of acquisition.
September 4, 2001
---------------------------------------------------------------
(Dollars in thousands)
Current assets, excluding cash acquired $ 9,089
Property, plant and equipment 55,170
Investment in unconsolidated entities 23,000
Other assets 5,445
Goodwill 149,969
-----------
Total assets acquired 242,673
-----------
Current liabilities (26,546)
Non-current liabilities (7,307)
Long-term debt (5,997)
-----------
Total liabilities assumed (39,850)
-----------
Net assets acquired $ 202,823
===============================================================
The $150.0 million of goodwill was assigned to the telephone segment. None
of the goodwill is expected to be deductible for tax purposes.
In addition, during 2001 the Company acquired 100 percent of an
operating cellular market for $56.2 million in cash, certain PCS licenses for
$124.1 million in cash and a small telephone company and certain other assets
for $9.7 million in cash and $1.1 million of deferred cash payments. These
expenditures increased cellular license costs by $165.7 million and telephone
franchise and other costs by $1.4 million.
During 2000, the Company acquired 100 percent of the stock of Southeast
Telephone Company, an operating telephone company serving approximately 10,000
access lines in southeastern Wisconsin, for $39.5 million in cash (net of cash
acquired). The Company also acquired additional interests in majority-owned
operations and in certain unconsolidated entities during 2000. The Company
purchased the 48.7% interest in a telephone company it did not own for $52.5
million in cash; purchased additional interests in certain majority-owned
cellular markets for $18.5 million in cash; made a deposit on certain PCS
licenses totaling $51.1 million; and purchased additional interests in certain
cellular markets where the Company holds a minority position for $39.1 million
in cash and $13.0 million of deferred cash payments. These expenditures
increased cellular license costs by $111.5 million, telephone franchise and
other costs by $31.6 million and investments in unconsolidated entities by $50.1
million.
31
During 1999, the Company acquired additional interests in majority-owned
markets, a controlling interest in a cellular market and a small operating
telephone company for an aggregate cash consideration of $31.3 million. These
expenditures increased cellular license costs by $22.6 million and telephone
franchise and other costs by $1.5 million.
13 GAIN (LOSS) ON MARKETABLE SECURITIES AND OTHER INVESTMENTS
During 2001, the Company recognized a $644.9 million loss as a result of the
VoiceStream Wireless Corporation merger with Deutsche Telekom AG and a $96.1
million gain as a result of the VeriSign, Inc. acquisition of Illuminet
Holdings, Inc. During 1999, the Company recognized a $327.1 million gain as a
result of the merger of AirTouch and Vodafone Group plc. The Company
recognizes gains and losses on the difference between the accounting basis of
the shares given up and the fair value of the shares and cash, if any,
received.
The sale of non-strategic cellular interests and other investments, and the
write-down of the carrying value of the investment in TSR Wireless and the
settlement of a legal matter in 2000 generated net gains totaling $0.5 million,
$15.7 million and $18.8 million in 2001, 2000 and 1999, respectively.
These transactions generated net cash proceeds of $570.5 million, $115.4
million and $120.0 million in 2001, 2000 and 1999, respectively.
14 NOTES PAYABLE
The Company has used short-term debt to finance acquisitions, for general
corporate purposes and to repurchase common shares. Proceeds from the sale of
long-term debt and equity securities from time to time have been used to reduce
such short-term debt. Proceeds from the sale of non-strategic cellular and other
investments from time to time have also been used to reduce short-term debt.
TDS had a $500 million revolving credit facility with a group of banks at
December 31, 2001, all of which was unused. On January 24, 2002, TDS completed a
new $600 million credit facility with a group of banks replacing the existing
credit facility. The terms of the Revolving Credit Facility provide for
borrowings with interest at the London InterBank Offered Rate ("LIBOR") plus a
margin percentage based on the Company's credit rating. The margin percentage on
the new facility is 30.0 basis points (for a rate of 2.2% based on the LIBOR
rate at December 31, 2001). The margin percentage increases by 10.0 basis points
if more than 50% of the facility is outstanding. Interest and principal are due
the last day of the borrowing period, as selected by TDS, of either seven days
or one, two, three, or six months. TDS pays facility and administration fees at
an aggregate annual rate of 0.146% of the total $600 million facility. The
credit facility expires in January 2007.
TDS also had $87 million in direct bank lines of credit at December 31,
2001, all of which was unused. The terms of the direct bank lines of credit
provide for borrowings at negotiated rates up to the prime rate.
U.S. Cellular had a $500 million revolving credit facility with a group of
banks at December 31, 2001, $236 million of which was unused. The terms of the
credit facility provide for borrowings with interest at the LIBOR rate plus a
margin percentage based on the Company's credit rating. At December 31, 2001,
the margin percentage was 19.5 basis points (for a rate of 2.1%). Interest and
principal are due the last day of the borrowing period, as selected by U.S.
Cellular, of either seven days or one, two, three or six months. U.S. Cellular
pays facility and administration fees at an aggregate annual rate of 0.142% of
the total $500 million facility. The credit facility expires in August 2004.
The carrying amount of short-term debt approximates fair value due to
the short-term nature of these instruments. Information concerning notes
payable is shown in the table that follows.
Year Ended December 31, 2001 2000 1999
--------------------------------------------------------------------
(Dollars in thousands)
Balance at end of year $265,300 $499,000 $ --
Weighted average interest
rate at end of year 2.4% 6.9% --
Maximum amount outstanding
during the year $584,850 $499,000 $214,968
Average amount outstanding
during the year(1) $412,804 $183,533 $148,818
Weighted average interest
rate during the year(1) 4.3% 6.8% 5.8%
--------------------------------------------------------------------
(1) THE AVERAGE WAS COMPUTED BASED ON MONTH-END BALANCES.
32
15 LONG-TERM DEBT
Long-term debt is as follows.
December 31, 2001 2000
--------------------------------------------------------------------
(Dollars in thousands)
TELEPHONE AND DATA SYSTEMS, INC. (PARENT)
7.60% Series A Notes, due in 2041 $ 500,000 $ --
Medium-term notes, averaging 9.1%
9.2% due in 2007 22,000 87,500
8.0% to 10.0% due 2021-2025 51,700 151,700
--------------------------
673,700 239,200
7.0% notes, maturing in 2006 200,000 200,000
Purchase contracts, averaging 7.2%,
due through 2003 1,283 300
--------------------------
Total Parent 874,983 439,500
--------------------------
SUBSIDIARIES
U.S. Cellular
6.0% zero coupon convertible
redeemable debentures (XXXXx),
maturing in 2015 310,941 437,169
Unamortized discount (170,785) (251,352)
--------------------------
140,156 185,817
7.25% notes, maturing in 2007 250,000 250,000
Other, 9.0% due 2005-2010 13,000 13,000
TDS Telecom
RUS, RTB and FFB Mortgage
Notes, various rates averaging
5.6% in 2001 and 5.5% in 2000,
due through 2031 279,287 290,195
Other long-term notes, various rates
averaging 7.2% in 2001 and
7.1% in 2000, due through 2006 9,631 6,945
Other
Long-term notes, 7.3% to 8.0%,
due through 2009 8,168 3,169
--------------------------
Total Subsidiaries 700,242 749,126
--------------------------
Total long-term debt 1,575,225 1,188,626
Less: Current portion of long-term debt 67,461 15,639
--------------------------
Total long-term debt,
excluding current portion $1,507,764 $1,172,987
======================================================================
TELEPHONE AND DATA SYSTEMS, INC. (PARENT)
TDS sold $500 million principal amount of 7.6% unsecured Series A Notes in 2001
with proceeds to the Company of $484.2 million. The notes are due in 2041.
Interest is payable quarterly. The notes are redeemable beginning December 2006
at 100% of the principal amount plus accrued and unpaid interest.
The Medium-Term Notes ("MTNs") mature at various times from 2007 to 2025.
Interest is payable semi-annually. The MTNs may be redeemed by the Company at
par value plus accrued but unpaid interest. TDS redeemed MTNs aggregating $65.5
million in 2001. As of December 31, 2001, MTNs aggregating $29.0 million may be
redeemed at anytime, and MTNs aggregating $22.0 million, $65.5 million, $17.2
million and $40.0 million have initial redemption dates in 2002, 2003, 2005, and
2006, respectively. The Company has notified the holders of the MTNs currently
redeemable and redeemable in 2002 ($51.0 million in aggregate) of its intent to
redeem these notes. These notes are reflected as current portion of long-term
debt on the balance sheet.
The 7.0% unsecured notes are due August 2006. Interest is payable
semi-annually. The notes are redeemable at any time at the option of the
Company, at a redemption price equal to the greater of (a) 100% of the principal
amount of such notes, plus accrued but unpaid interest, or (b) the sum of the
present values of the remaining scheduled payments of principal and interest
thereon discounted to the redemption date on a semi-annual basis at the Treasury
Rate plus .25%.
SUBSIDIARIES -- U.S. CELLULAR
U.S. Cellular's 6.0% yield to maturity zero coupon convertible redeemable
unsecured notes (XXXXx) are due in 2015. There is no periodic payment of
interest. Each note is convertible at the option of the holder at any time at
a conversion rate of 9.475 U.S. Cellular Common Shares per $1,000 of notes.
Upon notice of conversion, U.S. Cellular may elect to deliver its Common
Shares or cash equal to the market value of the Common Shares. U.S. Cellular
may redeem the notes for cash at the issue price plus accrued original issue
discount through the date of redemption. Holders have the right to exercise
their conversion option prior to the redemption date. During 2001, holders
converted $55.1 million carrying value of XXXXx. U.S. Cellular delivered
$32.0 million in cash and 644,000 U.S. Cellular Common Shares for these
conversions. During 2000, holders converted $126.2 million carrying value of
XXXXx. U.S. Cellular delivered $99.4 million in cash and 1,416,000 U.S.
Cellular Common Shares for these conversions. The XXXXx converted for cash
resulted in an extraordinary loss. See Note 4 --Extraordinary Item for a
description of these transactions.
U.S. Cellular's 7.25% unsecured senior notes are due 2007 and interest is
payable semi-annually. U.S. Cellular may redeem the notes beginning 2004 at
principal amount plus accrued interest.
33
SUBSIDIARIES -- TDS TELECOM
TDS Telecom's RUS, RTB and FFB Mortgage Notes issued under certain loan
agreements with the Rural Utilities Service ("RUS"), Rural Telephone Bank
("RTB") and Federal Financing Bank ("FFB"), agencies of the United States of
America, are to be repaid in equal monthly or quarterly installments covering
principal and interest beginning six months to three years after dates of
issue and expiring through 2031. Substantially all telephone plant is pledged
under RUS and RTB mortgage notes and various other obligations of the
telephone subsidiaries.
CONSOLIDATED
The annual requirements for principal payments on long-term debt are
approximately $67.5 million, $17.2 million, $18.2 million, $21.7 million and
$219.2 million for the years 2002 through 2006, respectively.
The carrying value and estimated fair value of the Company's Long-term Debt
were $1,575.2 million and $1,559.7 million at December 31, 2001, and $1,188.6
million and $1,367.9 million at December 31, 2000, respectively. The fair value
of the Company's Long-term Debt was estimated using market prices for the 7.6%
Series A Notes and the 6.0% zero coupon convertible debentures, and discounted
cash flow analysis for the remaining debt.
16 MINORITY INTEREST IN SUBSIDIARIES
The following table summarizes the minority shareholders' and partners'
interests in the equity of consolidated subsidiaries.
December 31, 2001 2000
--------------------------------------------------------------------
(Dollars in thousands)
U.S. Cellular
Public shareholders $409,000 $386,096
Subsidiaries' partners and shareholders 46,432 34,933
-------- --------
455,432 421,029
Other minority interests 12,266 10,081
-------- --------
$467,698 $431,110
====================================================================
The Board of Directors of U.S. Cellular from time to time has authorized
the repurchase of U.S. Cellular Common Shares not owned by TDS. U.S. Cellular
may use repurchased shares to fund acquisitions, for the conversion of XXXXx and
for other corporate purposes. U.S. Cellular repurchased 643,000 Common Shares in
2001 for $29.9 million and 3,524,000 Common Shares in 2000 for $234.8 million
and reissued 644,000 Common Shares in 2001 and 1,311,000 Common Shares in 2000
for the conversion of U.S. Cellular's zero coupon convertible debt.
17 COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES
TDS Capital I, a subsidiary trust of TDS ("Capital I"), has outstanding
6,000,000 8.5% Company-Obligated Mandatorily Redeemable Preferred Securities.
The sole asset of TDS Capital I is $154.6 million principal amount of TDS's 8.5%
Subordinated Debentures due December 31, 2037.
TDS Capital II, a subsidiary trust of TDS ("Capital II"), has outstanding
6,000,000 8.04% Company-Obligated Mandatorily Redeemable Preferred Securities.
The sole asset of TDS Capital II is $154.6 million principal amount of TDS's
8.04% Subordinated Debentures due March 31, 2038.
Payments due on the obligations of TDS Capital I and II under preferred
securities issued by TDS Capital I and II are fully and unconditionally
guaranteed by TDS to the extent each trust has funds available therefor.
However, TDS's obligations are subordinate and junior in right of payment to
certain other indebtedness of TDS. TDS has the right to defer payments of
interest on the Subordinated Debentures by extending the interest payment
period, at any time, for up to 20 consecutive quarters. If interest payments on
the Subordinated Debentures are so deferred, distributions on the preferred
securities will also be deferred. During any deferral, distributions will
continue to accrue with interest thereon. In addition, during any such deferral,
TDS may not declare or pay any dividend or other distribution on, or redeem or
purchase, any of its common stock.
The 8.5% and 8.04% Subordinated Debentures are redeemable by TDS, in whole
or in part, from time to time, on or after November 18, 2002, and March 31,
2003, respectively, or, in whole but not in part, at any time in the event of
certain income tax circumstances. If the Subordinated Debentures are redeemed,
TDS Capital I and II must redeem preferred securities on a pro rata basis having
an aggregate liquidation amount equal to the aggregate principal amount of the
Subordinated Debentures so redeemed. In the event of the dissolution, winding up
or termination of TDS Capital I and II, the holders of preferred securities will
be entitled to receive, for each preferred security, a liquidation amount of $25
plus accrued and unpaid distributions thereon to the date of payment, unless, in
connection with the dissolution, winding up or termination, Subordinated
Debentures are distributed to the holders of the preferred securities.
34
The carrying value and estimated fair value of the preferred securities was
$300.0 million and $299.2 million, respectively, at December 31, 2001, and
$300.0 million and $279.0 million, respectively, at December 31, 2000. The fair
value of the preferred securities was determined using the market prices of the
preferred securities at December 31, 2001 and 2000.
18 PREFERRED SHARES
The holders of outstanding Preferred Shares are entitled to one vote per share.
The Company had 74,423 Preferred Shares authorized, issued and outstanding at
December 31, 2001, of which 69,287 Shares were redeemable at the option of TDS
and 5,136 Shares were redeemable at the option of the holder, at $100 per share
plus accrued and unpaid dividends. The average dividend rate was $6.01 per
share. At December 31, 2001, 68,840 Preferred Shares were convertible into
238,492 TDS Common Shares.
The following is a schedule of Preferred Shares activity.
Year Ended December 31, 2001 2000 1999
-------------------------------------------------------------
(Dollars in thousands)
Balance, beginning of year $ 7,827 $ 9,005 $ 25,985
Less:
Conversion of preferred (250) (472) (16,465)
Redemption of preferred (135) (706) (515)
--------------------------------
Balance, end of year $ 7,442 $ 7,827 $ 9,005
===============================================================
The carrying value and estimated fair value of the Company's Preferred
Shares was $7.4 million and $5.4 million, respectively, at December 31, 2001,
and $7.8 million and $5.3 million, respectively, at December 31, 2000. The
fair value of the Company's Preferred Shares was estimated using discounted
cash flow analysis.
19 COMMON STOCKHOLDERS' EQUITY
COMMON STOCK
The holders of Common Shares are entitled to one vote per share. The holders of
Series A Common shares are entitled to ten votes per share. Series A Common
Shares are convertible, on a share-for-share basis, into Common Shares. TDS has
reserved 6,778,000 Common Shares at December 31,2001, for possible issuance
upon such conversion.
The following table summarizes the number of Common and Series A Common
Shares outstanding.
SERIES A COMMON
COMMON SHARES SHARES TREASURY SHARES
-----------------------------------------------------------------------------------------------------------
(Shares in thousands)
Balance December 31, 1998 54,988 6,950 (761)
Repurchase Common Shares -- -- (664)
Dividend reinvestment, incentive
and compensation plans 8 9 188
Other 7 -- --
Conversion of Preferred shares 409 -- --
--------------------------------------------------------
Balance December 31, 1999 55,412 6,959 (1,237)
Repurchase Common Shares -- -- (2,666)
Conversion of Series A Common
Shares 86 (86) --
Dividend reinvestment, incentive
and compensation plans 6 7 175
Other -- -- 12
Conversion of Preferred Shares 20 -- --
--------------------------------------------------------
Balance December 31, 2000 55,524 6,880 (3,716)
Repurchase Common Shares -- -- (325)
Conversion of Series A Common
Shares 111 (111) --
Dividend reinvestment, incentive
and compensation plans 6 9 172
Other 5 -- 1
Conversion of Preferred Shares 13 -- --
--------------------------------------------------------
Balance December 31, 2001 55,659 6,778 (3,868)
===========================================================================================================
COMMON SHARE REPURCHASE PROGRAM
The Board of Directors of TDS from time to time has authorized the repurchase of
TDS Common Shares. The Company may use repurchased shares to fund acquisitions
and for other corporate purposes.
The Company repurchased 325,000 Common shares in 2001 for $30.3 million,
2,666,000 Common Shares in 2000 for $287.7 million and 664,000 Common shares in
1999 for $80.5 million. The Company reissued 173,000 Common Shares in 2001,
187,000 in 2000 and 188,000 in 1999 for acquisitions and incentive and
compensation plans.
35
ACCUMULATED OTHER COMPREHENSIVE INCOME(LOSS)
The cumulative balance of unrealized gains (losses) on securities and related
income tax effects included in Accumulated other comprehensive income(loss) are
as follows.
Year Ended December 31, 2001 2000 1999
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance, beginning of year $(178,344) $ 179,071 $ 75,609
----------------------------------------
Add(Deduct):
Unrealized gains(losses)on securities (856,244) (620,834) 504,055
Income tax effect (343,869) (244,829) 201,801
----------------------------------------
(512,375) (376,005) (302,254)
Equity method unrealized gains 397 -- --
Minority share of unrealized (gains) losses 11,161 18,590 (32,179)
----------------------------------------
Net unrealized gains (losses) (500,817) (357,415) 270,075
----------------------------------------
Deduct (Add):
Recognized gains on sales of securities (548,793) -- 327,113
Income tax expense (benefit) (221,752) -- 130,845
----------------------------------------
(327,041) -- 196,268
Minority share of recognized (gains) -- -- (29,655)
----------------------------------------
Net recognized gains(losses) included in Net Income (327,041) -- 166,613
----------------------------------------
Net change in unrealized gains(losses) included in
Comprehensive Income (173,776) (357,415) 103,462)
----------------------------------------
Balance, end of year $(352,120) $(178,344) $ 179,071
================================================================================================
20 DIVIDEND REINVESTMENT, INCENTIVE AND COMPENSATION PLANS
The following table summarizes Common and Series A common Shares issued,
including reissued Treasury Shares, for the employee stock ownership plans and
dividend reinvestment plans described below.
Year Ended December 31, 2001 2000 1999
----------------------------------------------------------------------------------
Common Shares
Tax-deferred savings plan 18,000 14,000 25,000
Dividend reinvestment plan 6,000 5,000 8,000
Employee stock purchase plan 18,000 20,000 5,000
Stock-based compensation plans 136,000 142,000 158,000
-------------------------------------
178,000 181,000 196,000
==================================================================================
Series A Common Shares
Dividend reinvestment plan 9,000 7,000 9,000
==================================================================================
TAX-DEFERRED SAVINGS PLAN
TDS has reserved 62,000 Common Shares for issuance under the TDS Tax-Deferred
Savings Plan, a qualified profit-sharing plan pursuant to Sections 401(a) and
401(k) of the Internal Revenue Code. Participating employees have the option of
investing their contributions in TDS Common Shares, U.S. Cellular Common Shares
or seven nonaffiliated funds.
DIVIDEND REINVESTMENT PLANS
TDS had reserved 427,000 Common Shares for issuance under the Automatic Dividend
Reinvestment and Stock Purchase Plan and 134,000 Series A Common Shares for
issuance under the Sereis A Common Share Automatic Dividend Reinvestment Plan.
These plans enable holders of TDS's Common Shares and Preferred Shares to
reinvest cash dividends in Common Shares and holders of Series A Common Shares
to reinvest cash dividends in Series A Common Shares. The purchase price of the
shares is 95% of the market value, based on the average of the daily high and
low sales prices for TDS's Common Shares on the American Stock Exchange for the
ten trading days preceding the date on which the purchase is made.
EMPLOYEE STOCK PURCHASE PLAN
TDS had reserved 167,000 Common Shares for sale to the employees of TDS and its
subsidiaries.
STOCK-BASED COMPENSATION PLANS
TDS had reserved 2,512,000 Common Shares for options granted and to be granted
to key employees. TDS has established certain plans that provide for the grant
of stock options to officers and employees. The options are exercisable over a
specified period not in excess of ten years. The options expire from 2002 to
2010 or 30 days after the date of the employee's termination of employment, if
earlier.
No compensation costs have been recognized for the stock option and
employee stock purchase plans. Had compensation cost for all plans been
determined consistent with SFAS No. 123, " Accounting for Stock-Based
Compensation," the Company's net income and earnings per share from continuing
operations would have been reduced to the following pro forma amounts.
Year Ended December 31, 2001 2000 1999
--------------------------------------------------------------------------------------------------
Income(loss) from Continuing Operations
As Reported $(168,248) $145,527 $291,326
Pro Forma (173,677) 138,024 287,674
Basic Earnings per Share from Continuing Operations
As Reported (2.87) 2.42 4.72
Pro Forma (2.97) 2.29 4.66
Diluted Earnings per Share from Continuing Operations
As Reported (2.87) 2.39 4.65
Pro Forma $ (2.97) $ 2.26 $ 4.60
==================================================================================================
36
A summary of the status of TDS stock option plans at December 31,2001, 2000
and 1999 and changes during the years then endeed is presented in the table
and narrative that follows.
Weighted Weighted
Number Average Average
of Shares Option Prices Fair Values
---------------------------------------------------------------------------
Stock Options:
Outstanding December 31, 1998
(777,000 exercisable) 1,003,000 $ 38.70
Granted 124,000 $ 63.82 $25.51
Exercised (199,000) $ 31.32
Cancelled (10,000) $ 43.75
---------
Outstanding December 31, 1999
(813,000 exercisable) 918,000 $ 43.66
Granted 584,000 $ 111.50 $47.07
Exercised (141,000) $ 41.10
Canceled (28,000) $ 92.92
---------
Outstanding December 31, 2000
(933,000 exercisable) 1,333,000 $ 72.90
Granted 216,000 $ 99.58 $51.05
Exercised (153,000) $ 36.38
Cancelled (5,000) $ 108.94
---------
Outstanding December 31, 2001
(1,031,000 exercisable) 1,391,000 $ 80.37
===========================================================================
At December 31, 2001, 1,031,000 options are exercisable, have exercise
prices between $34.51 and $119.28 with a weighted average exercise price of
$69.39, and a weighted average remaining contractual life of 7.3 years. The
remaining 360,000 options are not exercisable, have exercise prices between
$87.05 and $119.08 with a weighted average exercise price of $111.87 and a
weighted average remaining contractual life of 8.6 years.
The fair value of each option grant was estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2001, 2000 and 1999, respectively: risk-free
interest rates of 4.9%, 5.2% and 5.2%; expected dividend yields of 0.7%,0.5% and
0.6%; expected lives of 8.1 years, 7.6 years and 7.5 years and expected
volatility of 32.3%, 29.4% and 27.3%.
21 EMPLOYEE BENEFIT PLANS
The Company sponsors a qualified noncontributory defined contribution pension
plan. Effective January 1, 2001, the Company merged two previous plans into a
new successor pension plan and combined the plan assets held for the previous
two plans. The plan provides benefits for the employees of TDS, TDS Telecom and
U.S. Cellular. (Employees of certain telephone subsidiaries are covered under
other pension plans or receive direct pension payments.) Under this plan,
pension costs are calculated separately for each participant and are funded
currently. TDS also sponsors an unfunded non-qualified deferred supplemental
executive retirement plan to supplement the benefits under these plans to offset
the reduction of benefits caused by the limitation on annual employee
compensation under tax laws.
Total pension costs were $8.8 million, $8.6 million and $8.8 million in
2001, 2000 and 1999, respectively.
OTHER POSTRETIREMENT BENEFITS
The Company sponsors two defined benefit postretirement plans that cover most of
the employees of TDS, TDS Telecom and the subsidiaries of TDS Telecom. One plan
provides medical benefits and the other plan provides life insurance benefits.
Both plans are contributory, with retiree contributions adjusted annually. The
medical plan anticipates future cost sharing changes that are consistent with
the Company's intent to increase retiree contributions by the health care cost
trend rate.
An amount not to exceed 25 percent of the total contribution to the pension
plan may be contributed to fund the cost of the medical benefits annually. An
additional contribution equal to a reasonable amortization of the past service
cost may be made without regard to the 25 percent limitation.
The following table reconciles the beginning and ending balances of the
benefit obligation and the fair value of plan assets for the other
postretirement benefit plans.
December 31, 2001 2000
-----------------------------------------------------------------------------------
(Dollars in Thousands)
Change in Benefit Obligation
Benefit obligation at beginning of year $20,109 $21,099
Service cost 750 1,028
Interest cost 1,482 1,592
Amendments -- (2,612)
Actuarial (gain) loss 6,249 (169)
Benefits paid (984) (829)
----------------------
Benefit obligation at end of year 27,606 20,109
----------------------
Change in Plan Assets
Fair value of plan assets at beginning of year 21,948 24,185
Actual return on plan assets (3,036) (1,432)
Employer contribution 31 24
Benefits paid (984) (829)
----------------------
Fair value of plan assets at end of year 17,959 21,948
----------------------
Funded Status (9,647) 1,839
Unrecognized net actuarial (gain) loss 2,062 (9,250)
Unrecognized prior service cost (1,087) (1,216)
----------------------
(Accrued) benefit cost $(8,672) $(8,627)
===================================================================================
37
The following table sets forth the weighted average assumptions used in
accounting for the plans.
December 31, 2001 2000
-------------------------------------------------------------------------------
Discount rate 7.25% 7.5%
Expected return on plan assets 8.5% 8.5%
--------------------------------------------------------------------------------
For measurement purposes, a 10.0% and 7.8% annual rate of increase in the
per capita cost of covered health care benefits was assumed for 2001 and 2000,
respectively. The 2001 annual rate of increase is expected to remain at 10% in
2002 and then decrease to 5.75% by 2010 while the 2000 annual rate of increase
was expected to decrease to 5.5% by 2002.
Net periodic benefit cost for the years ended December 31, 2001, 2000 and
1999 include the following components.
Year Ended December 31, 2001 2000 1999
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 750 $ 1,028 $1,019
Interest cost on accumulated postretirement
benefit obligation 1,482 1,592 1,475
Expected return on plan assets (1,836) (1,909) (1,498)
Net amortization and deferral (543) (420) (228)
---------------------------------------
Net postretirement (income) cost $ (147) $ 291 $ 768
================================================================================================
The health care cost trend rate assumption has a significant effect on the
amounts reported. A one-percentage-point increase or decrease in assumed health
care cost trend rates would have the following effects.
One Percentage Point
Increase Decrease
------------------------------------------------------------------------------------------
(Dollars in thousands)
Effect on total of service and interest cost components $ 505 $ (432)
Effect on postretirement benefit obligation $ 3,456 $ (3,071)
------------------------------------------------------------------------------------------
22 COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
The primary purpose of TDS's construction and expansion expenditures is to
provide for normal growth, to upgrade communications service, to expand into new
communication areas and to take advantage of service-enhancing and cost-reducing
technological developments. The U.S. Cellular capital additions budget totals
approximately $620-$640 million for 2002, primarily to add additional cell sites
to expand and enhance coverage, including adding digital service capabilities to
its systems. The TDS Telecom capital additions budget totals approximately
$170-$190 million for 2002, including approximately $115-$125 million for the
local telephone markets to provide for normal growth, and to upgrade plant and
equipment to provide enhanced services, and approximately $55-$65 million for
the competitive local exchange business to build switching and other network
facilities to expand operations.
PENDING ACQUISITIONS
At December 31, 2001, the Company had agreements to acquire a telephone company
and certain PCS licenses for aggregate consideration of $90.4 million in cash.
LEASE COMMITMENTS
TDS and its subsidiaries have leases for certain cellular plant facilities,
office space and data processing equipment, most of which are classified as
operating leases. For the years 2001, 2000 and 1999, rent expense for
noncancelable, long-term leases was $52.9 million, $48.0 million and $31.2
million, respectively, and rent expense under cancelable, short-term leases was
$3.0 million, $5.4 million and $14.6 million, respectively, At December 31,
2001, the aggregate minimum rental commitments under noncancelable, long-term
operating leases were as follows.
------------------------------------------------------------
Minimum Future
Rental Payments
------------------------------------------------------------
(Dollars in thousands)
2002 $ 62,919
2003 56,918
2004 51,531
2005 47,350
2006 41,727
Thereafter $168,857
------------------------------------------------------------
CONTINGENCIES
The Company is involved in legal proceedings before the Federal Communications
Commission and various state and federal courts from time to time. Management
does not believe that any of such proceedings should have a material adverse
impact on the financial position, results of operations or cash flows of the
Company.
OTHER COMMITMENTS
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 an unrelated entity 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 the unrelated entity, or their respective
designees, may each acquire certain personal communications services licenses
for areas of Wisconsin and
38
Iowa as well as other Airadigm assets. As of December 31, 2001, TDS had provided
funding of $52.7 million to Airadigm. Under the plan of reorganization, TDS's
portion of the funding and the cost of the assets to be acquired could possibly
aggregate up to an additional $145 million.
U.S. Cellular is a limited partner in a joint venture that was a successful
bidder for 17 licenses in 13 markets in the January 2001 FCC spectrum auction.
The cost for the 17 licenses totaled $283.9 million. Although legally the
general partner controls the joint venture, the Company has included the joint
venture in its consolidated financial statements because U.S. Cellular is
considered to have controlling financial interest for financial reporting
purposes. The joint venture has acquired 5 of such licenses in 4 markets for a
total of $4.1 million and has deposits with the FCC totaling $56.1 million for
the remaining licenses (classified as a current asset at December 31, 2001).
Subject to the final outcome of the proceedings discussed below, the joint
venture's portion of the funding could possible aggregate up to an additional
$223.7 million to fund the acquisition of the remaining licenses. In addition,
U.S. Cellular has agreed to loan the general partner up to $20 million that
could be used by the general partner to fun its investment in the licenses.
With respect to the remaining 12 licenses in 9 markets, such licenses had
been reauctioned by the FCC after defaults by winning bidders in a prior auction
and were made subject by the FCC to the final outcome of certain legal
proceedings initiated by the prior winning bidders. Following the reauction, one
of the prior winning bidders obtained a court ruling that the FCC's actions were
illegal. In an effort to resolve this matter, on November 15, 2001, the joint
venture and other bidders in the reauction entered into a settlement agreement
with the prior winning bidder and the FCC. However, the settlement agreement
terminated due to the failure to satisfy a condition to obtain certain
Congressional action by December 31, 2001. The U.S. Supreme Court has agreed to
review this matter. In the event the prior winning bidder is successful in this
litigation, the joint venture would receive a refund of its deposit of $56.1
million made to the FCC for such 12 licenses. The joint venture's financial
requirements would then be limited to the 5 licenses in 4 markets that it
acquired in 2001. If the FCC is successful in this litigation or the matter is
otherwise resolved in a manner that will permit the joint venture to acquire the
remaining licenses, the joint venture would likely be required to pay the FCC
the balance of the auction price for such licenses. The joint venture would then
have significant financial requirements to build out such markets. The exact
nature of U.S. Cellular's financial commitment going forward will be determined
as the joint venture develops its long-term business and financing plans.
23 BUSINESS SEGMENT INFORMATION
The Company conducts substantially all of its wireless telephone operations
through its 82.2%-owned subsidiary, United Sates Cellular Corporation ("U.S.
Cellular"). At December 31, 2001, U.S. Cellular provided cellular telephone
service to 3,461,000 customers through 142 majority-owned cellular
systems in 25 states. The Company conducts its wireline telephone operations
through its wholly owned subsidiary, TDS Telecommunications Corporation ("TDS
Telecom"). TDS Telecom provides service through local telephone operation, or
Incumbent Local Exchange Carrier ("ILEC") companies and through Competitive
Local Exchange Carrier ("CLEC") companies. At December 31, 2001, TDS Telecom
operated 109 incumbent telephone companies serving 650,700 access lines in 28
states and two competitive local exchange carriers serving 197,200 access
lines in four states.
In September 1999, TDS approved a plan of merger between Aerial and
VoiceStream. The merger was completed in May 2000. The results of operations and
net assets of Aerial are reflected as discontinued operations in the
consolidated financial statements. See Note 3 -- Discontinued Operations.
U.S. Cellular and TDS Telecom are billed for all services they receive from
TDS, consisting primarily of information processing and general management
services. Such xxxxxxxx are based on expenses specifically identified to U.S.
Cellular and TDS Telecom and on allocations of common expenses. Management
believes the method used to allocate common expenses is reasonable and that all
expenses and costs applicable to U.S. Cellular and TDS Telecom are reflected in
the accompanying business segment information on a basis which is representative
of what they would have been if U.S Cellular and TDS Telecom operated on a
stand-alone basis.
39
Financial data for the Company's business segments for each of the years ended
December 31, 2001, 2000 and 1999 are as follows.
TDS Telecom
Year Ended or at December 31, 2001 U.S. Cellular ILEC CLEC All Other(1) Total
---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 1,894,830 $ 576,817 $ 118,812 $ (1,917) $2,588,542
Operating cash flow(2) 617,870 293,703 (25,399) -- 886,174
Depreciation and amortization expense 300,658 131,787 17,574 -- 450,019
Operating income (loss) 317,212 161,916 (42,973) -- 436,155
Significant noncash items:
Investment income 41,934 1,739 -- 6,966 50,639
Gain (loss) on marketable securities
and other investments -- -- -- (548,305) (548,305)
Marketable securities 272,390 -- -- 2,427,840 2,700,230
Total assets 3,725,014 1,527,758 213,566 2,580,454 8,046,792
Investment in unconsolidated entities 159,454 48,320 -- 25,904 233,678
Capital expenditures $ 503,334 $ 99,866 $ 96,950 $ -- $ 700,150
---------------------------------------------------------------------------------------------------------------------
TDS Telecom
Year Ended or at December 31, 2001 U.S. Cellular ILEC CLEC All Other(1) Total
-----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 1,716,640 $ 528,981 $ 84,720 $ (3,485) $2,326,856
Operating cash flow(2) 558,011 267,097 (5,899) -- 819,209
Depreciation and amortization expense 265,698 124,389 9,056 -- 399,143
Operating income (loss) 292,313 142,708 (14,955) -- 420,066
Significant noncash items:
Investment income 43,727 1,731 -- (6,735) 38,723
Gain (loss) on marketable securities
and other investments 96,075 -- -- (80,359) 15,716
Marketable securities 377,900 -- -- 3,744,004 4,121,904
Total assets 3,412,709 1,245,260 120,543 3,856,097 8,634,609
Investment in unconsolidated entities 137,474 24,619 -- 20,232 182,325
Capital expenditures $ 305,417 $ 93,401 $ 57,201 $ -- $ 456,019
-----------------------------------------------------------------------------------------------------------------------
TDS Telecom
Year Ended or at December 31, 2001 U.S. Cellular ILEC CLEC All Other(1) Total
-----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 1,576,429 $ 492,530 $ 55,173 $ (1,786) $2,122,346
Operating cash flow(2) 485,814 241,536 (3,635) -- 723,715
Depreciation and amortization expense 229,972 117,443 5,907 -- 353,322
Operating income (loss) 255,842 124,093 (9,542) -- 370,393
Significant noncash items:
Investment income 30,374 1,369 -- (419) 31,324
Gain (loss) on marketable securities
and other investments 266,744 -- -- 79,194 345,938
Marketable securities 540,711 -- -- 302,569 843,280
Total assets 3,331,590 1,243,068 63,661 759,157 5,397,476
Investment in unconsolidated entities 111,471 14,183 -- 115,055 240,709
Capital expenditures $ 277,450 $ 99,154 $ 23,027 $ -- $ 399,631
-----------------------------------------------------------------------------------------------------------------------
(1) CONSISTS OF THE TDS CORPORATE OPERATIONS, TDS TELECOM INTERCOMPANY
ELIMINATIONS, TDS CORPORATE AND TDS TELECOM MARKETABLE EQUITY SECURITIES,
$258.8 MILLION OF DISCONTINUED OPERATIONS IN 1999 AND ALL OTHER BUSINESSES
NOT INCLUDED IN THE U.S. CELLULAR OR TDS TELECOM SEGMENTS.
(2) OPERATING CASH FLOW IS OPERATING INCOME PLUS DEPRECIATION AND AMORTIZATION.
40
--------------------------------------------------------------------------------
REPORT OF MANAGEMENT
--------------------------------------------------------------------------------
Management of Telephone and Data Systems, Inc. has the responsibility for
preparing the accompanying consolidated financial statements and for their
integrity and objectivity. The statements were prepared in accordance with
generally accepted accounting principles applied on a consistent basis, and in
management's opinion are fairly presented. The financial statements include
amounts that are based on management's best estimates and judgments. Management
also prepared the other information in the annual report and is responsible for
its accuracy and consistency with the financial statements.
Management of TDS has established and maintains a system of internal
control that provides reasonable assurance as to the integrity and reliability
of the financial statements, the protection of assets from unauthorized use or
disposition, and the prevention and detection of fraudulent financial reporting.
The system of internal control provides appropriate division of
responsibility and is documented written policies and procedures that
communicated to employees with significant roles the financial reporting
process and updated necessary. Management monitors the system internal
control for compliance, considers recommendations for improvements and
updates such policies and procedures as necessary. Monitoring includes an
internal auditing program to independently assess the effectiveness of the
internal controls recommend possible improvements thereto. Management
believes that TDS's system of internal control is adequate to accomplish the
objectives discussed herein. The concept of reasonable assurance recognizes
that the costs of a system of internal accounting controls should not exceed,
in management's judgment, the benefits to be derived.
The consolidated financial statements of TDS have been audited by Xxxxxx
Xxxxxxxx LLP, Independent Public Accountants.
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
--------------------------------------------------------------------------------
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF TELEPHONE AND DATA SYSTEMS, INC.:
We have audited the accompanying consolidated balance sheets of Telephone and
Data Systems, Inc. (a Delaware corporation) and Subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations, common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Telephone and Data Systems,
Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
As explained in Note 1 of Notes to Consolidated Financial Statements,
effective January 1, 2000, the Company changed certain of its accounting
principles for revenue recognition as a result of the adoption of Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements."
/s/ Xxxxxx Xxxxxxxx LLP
Chicago, Illinois
January 25, 2002
41
-------------------------------------------------------------------------------------------------------------
CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED)
-------------------------------------------------------------------------------------------------------------
Quarter Ended March 31 June 30 Sept. 30 Dec. 31
-------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
2001
Operating Revenues $600,369 $ 642,301 $ 675,009 $ 670,863
Operating Income 90,490 122,243 118,419 105,003
Gain (Loss) on Marketable Securities
and Other Investments -- (644,929) -- 96,624
Net Income (Loss) Available to Common
from Continuing Operations
From Operations 31,104 46,652 52,832 37,065
From Gains (losses) -- (385,223) -- 48,864
------------------------------------------------------
31,104 (338,571) 52,832 85,929
Net Income (Loss) Available to Common $ 28,116 $ (339,832) $ 51,384 $ 61,819
Weighted Average Shares Outstanding (000s) 58,718 58,683 58,711 58,561
Basic Earnings per Share
from Continuing Operations $ .53 $ (5.77) $ .90 $ 1.47
Diluted Earnings per Share
from Continuing Operations
From Operations .52 .80 .89 .63
From Gains (losses) -- (6.57) -- .83
------------------------------------------------------
.52 (5.77) .89 1.46
Basic Earnings per Share - Net Income (Loss) .48 (5.79) .88 1.06
Diluted Earnings per Share - Net Income (Loss) $ .47 $ (5.79) $ .87 $ 1.05
2000
Operating Revenues $538,327 $ 585,654 $ 605,511 $ 597,364
Operating Income 91,511 126,398 123,971 78,186
Gain (Loss) on Marketable Securities
and Other Investments 17,851 (50,000) 57,743 (9,878)
Net Income Available to Common
from Continuing Operations
From Operations 29,030 50,826 46,653 27,740
From Gains (losses) 6,361 (30,260) 20,428 (5,755)
------------------------------------------------------
35,391 20,566 67,081 21,985
Net Income (Loss) Available to Common $ 31,550 $ 2,142,894 $ 46,168 $ 15,886
Weighted Average Shares Outstanding (000s) 61,078 60,306 59,537 58,768
Basic Earnings per Share
from Continuing Operations $ .58 $ .34 $ 1.13 $ .37
Diluted Earnings per Share
from Continuing Operations
From Operations .47 .83 .77 .46
From Gains (losses) .10 (.49) .34 (.09)
------------------------------------------------------
.57 .34 1.11 .37
Basic Earnings per Share - Net Income (Loss) .52 35.53 .78 .27
Diluted Earnings per Share - Net Income (Loss) $ .51 $ 35.23 $ .76 $ .27
=============================================================================================================
NET INCOME AVAILABLE TO COMMON FROM CONTINUING OPERATIONS FOR 2001 AND 2000
INCLUDED SIGNIFICANT GAINS AND LOSSES FROM MARKETABLE SECURITIES AND OTHER
INVESTMENTS. THE TABLE ABOVE SUMMARIZES THE EFFECT OF THE GAINS AND LOSSES ON
NET INCOME AVAILABLE TO COMMON FROM CONTINUING OPERATIONS AND DILUTED EARNINGS
PER SHARE FROM CONTINUING OPERATIONS.
MANAGEMENT BELIEVES U.S. CELLULAR'S OPERATING RESULTS REFLECT SEASONALITY IN
BOTH SERVICE REVENUES, WHICH TEND TO INCREASE MORE SLOWLY IN THE FIRST AND
FOURTH QUARTERS, AND OPERATING EXPENSES, WHICH TEND TO BE HIGHER IN THE FOURTH
QUARTER DUE TO INCREASED MARKETING ACTIVITIES AND CUSTOMER GROWTH. THIS
SEASONALITY MAY CAUSE OPERATING INCOME TO VARY FROM QUARTER TO QUARTER.
42
--------------------------------------------------------------------------------
TDS STOCK AND DIVIDEND INFORMATION
--------------------------------------------------------------------------------
TDS's Common Shares are listed on the American Stock Exchange ("AMEX") under the
symbol "TDS" and in the newspapers as "TeleData." As of February 28, 2002, TDS
Common Shares were held by 2,386 record owners and the Series A Common Shares
were held by 110 record owners. TDS has paid cash dividends on Common Shares
since 1974, and paid dividends of $.54 and $.50 per Common and Series A Common
Share during 2001 and 2000, respectively.
The Common Shares of United States Cellular Corporation, an 82.2%-owned
subsidiary of TDS, are listed on the AMEX under the symbol "USM" and in the
newspapers as "US Cellular."
--------------------------------------------------------------------------------
MARKET PRICE PER COMMON SHARE BY QUARTER
--------------------------------------------------------------------------------
TDS's Series A Common Shares and Preferred Shares are not actively traded and
therefore, quotations are not reported for such securities. Dividends on TDS's
Preferred Shares have been paid quarterly since the dates of issue. The high and
low sales prices of the Common Shares on the AMEX as reported by the Dow Xxxxx
News Service are as follows.
2001 1st 2nd 3rd 4th
--------------------------------------------------------------------------
High $ 107.20 $ 110.60 $ 111.25 $ 98.90
Low 85.16 89.50 86.60 87.50
Dividends Paid $ .135 $ .135 $ .135 $ .135
--------------------------------------------------------------------------
2000 1st 2nd 3rd 4th
--------------------------------------------------------------------------
High $ 128.25 $ 114.63 $ 128.50 $113.20
Low 93.63 89.75 100.75 80.60
Dividends Paid $ .125 $ .125 $ .125 $ .125
--------------------------------------------------------------------------
43
