SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 1)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2003

 

 

 

 

OR

 

 

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                       to                        

 

 

 

 

Commission File Number 001-14157

 

TELEPHONE AND DATA SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-2669023

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

30 North LaSalle Street, Chicago, Illinois  60602

(Address of principal executive offices)  (Zip Code)

 

 

 

Registrant’s telephone number, including area code: (312) 630-1900

 

 

 

Not Applicable

(Former address of principal executive offices)  (Zip Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý  No  o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at September 30, 2003

Common Shares, $.01 par value

 

51,002,334 Shares

Series A Common Shares, $.01 par value

 

6,438,113 Shares

 

 



 

EXPLANATORY NOTE

 

Telephone and Data Systems, Inc. (“TDS”) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, which was originally filed with the Securities and Exchange Commission (the “SEC”) on November 12, 2003 (the “Quarterly Report”), to amend Item 1 “Financial Statements,” Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 4 “Controls and Procedures” contained in Part I “Financial Information” of the Quarterly Report and Item 6 “Exhibits and Reports of Form 8-K” contained in Part II “Other Information” of the Quarterly Report.

 

TDS is filing this amendment in response to a comment letter received from the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”).  This report revises the disclosures related to TDS’s adoption of Statement of Financial Accounting Standards (“SFAS”) No. 143 “Accounting for Asset Retirement Obligations” and restates the financial statements in response to such comments.  The SEC also requested additional disclosures be included in future filings which have been incorporated into this amendment.

 

In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by the TDS principal executive officer and principal financial officer are being filed with this Form 10-Q/A.

 

Except as expressly stated herein, this amendment does not update any of the disclosures contained in the original filing to reflect any events that occurred after the original filing date of November 12, 2003.  The filing of this Form 10-Q/A shall not be deemed an admission that the original filing, when made, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.

 



 

TELEPHONE AND DATA SYSTEMS, INC.

 

3rd QUARTER REPORT ON FORM 10-Q/A

 

INDEX

 

 

 

Page No.

 

 

 

Part I.

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

 

 

Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2003 and 2002 (as restated)

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2003 and 2002 (as restated)

5

 

 

 

 

 

 

Consolidated Balance Sheets -
September 30, 2003 (as restated) and December 31, 2002

6-7

 

 

 

 

 

 

Notes to Consolidated Financial Statements

8-24

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Results of Operations and Financial Condition

25-27

 

 

 

 

 

 

Nine Months Ended September 30, 2003 and 2002

 

 

 

U.S. Cellular Operations

28-33

 

 

TDS Telecom Operations

34-36

 

 

Three Months Ended September 30, 2003 and 2002

36-38

 

 

Recent Accounting Pronouncements

38-39

 

 

Financial Resources

39-40

 

 

Liquidity and Capital Resources

41-44

 

 

Application of Critical Accounting Policies and Estimates

45-48

 

 

Outlook

49

 

 

Certain Relationships and Related Transactions

49

 

 

Other Matters

49

 

 

Safe Harbor Cautionary Statement

50

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51-52

 

 

 

 

 

Item 4.

Controls and Procedures

53

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

54

 

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

54

 

 

 

 

Signatures

55

 



 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(As Restated)

 

(As Restated)

 

(As Restated)

 

(As Restated)

 

 

 

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

OPERATING REVENUES

 

$

874,754

 

$

784,102

 

$

2,533,459

 

$

2,169,742

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Cost of services and products (exclusive of depreciation, amortization and accretion expense shown below)

 

270,829

 

245,504

 

796,415

 

644,934

 

Selling, general and administrative expense

 

327,080

 

301,179

 

1,011,156

 

831,195

 

Depreciation, amortization and accretion expense

 

144,238

 

143,209

 

440,367

 

370,744

 

(Gain) Loss on assets held for sale

 

(1,442

)

 

25,558

 

 

 

 

740,705

 

689,892

 

2,273,496

 

1,846,873

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

134,049

 

94,210

 

259,963

 

322,869

 

 

 

 

 

 

 

 

 

 

 

INVESTMENT AND OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

4,426

 

2,213

 

14,823

 

52,447

 

Investment income

 

11,644

 

13,335

 

37,911

 

32,124

 

(Loss) on marketable securities and other investments

 

 

(90,071

)

(8,500

)

(1,846,597

)

Interest expense

 

(41,604

)

(33,451

)

(128,957

)

(92,170

)

Minority interest in income of subsidiary trust

 

(4,273

)

(6,202

)

(16,678

)

(18,607

)

Other (expense), net

 

(8,550

)

2,511

 

(14,488

)

2,494

 

 

 

(38,357

)

(111,665

)

(115,889

)

(1,870,309

)

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST

 

95,692

 

(17,455

)

144,074

 

(1,547,440

)

Income tax expense (benefit)

 

49,541

 

(1,205

)

76,988

 

(588,323

)

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE MINORITY INTEREST

 

46,151

 

(16,250

)

67,086

 

(959,117

)

Minority Share of (Income) Loss

 

(11,537

)

(4,238

)

(17,988

)

849

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

 

34,614

 

(20,488

)

49,098

 

(958,268

)

Discontinued Operations, net of tax

 

(1,609

)

 

(1,609

)

 

INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES

 

33,005

 

(20,488

)

47,489

 

(958,268

)

Cumulative effect of accounting changes, net of tax and minority interest

 

 

 

(11,789

)

3,366

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

33,005

 

(20,488

)

35,700

 

(954,902

)

Preferred Dividend Requirement

 

104

 

105

 

312

 

323

 

NET INCOME (LOSS) AVAILABLE TO COMMON

 

$

32,901

 

$

(20,593

)

$

35,388

 

$

(955,225

)

 

 

 

 

 

 

 

 

 

 

BASIC WEIGHTED AVERAGE SHARES OUTSTANDING (000s)

 

57,420

 

58,660

 

57,829

 

58,633

 

BASIC EARNINGS PER SHARE (Note 8)

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations

 

$

0.60

 

$

(0.35

)

$

0.84

 

$

(16.35

)

Discontinued Operations

 

(0.03

)

 

(0.03

)

 

Cumulative Effect of Accounting Changes

 

 

 

(0.20

)

0.06

 

Net income (loss) available to common

 

$

0.57

 

$

(0.35

)

$

0.61

 

$

(16.29

)

 

 

 

 

 

 

 

 

 

 

DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (000s)

 

57,793

 

58,660

 

57,924

 

58,633

 

DILUTED EARNINGS PER SHARE (Note 8)

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations

 

$

0.60

 

$

(0.35

)

$

0.84

 

$

(16.35

)

Discontinued Operations

 

(0.03

)

 

(0.03

)

 

Cumulative Effect of Accounting Changes

 

 

 

(0.20

)

0.06

 

Net income (loss) available to common

 

$

0.57

 

$

(0.35

)

$

0.61

 

$

(16.29

)

 

 

 

 

 

 

 

 

 

 

DIVIDENDS PER SHARE

 

$

0.155

 

$

0.145

 

$

0.465

 

$

0.435

 

 

The accompanying notes to financial statements are an integral part of these statements.

 

4



 

TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

 

 

Nine Months Ended
September 30,

 

 

 

2003

 

2002

 

 

 

(As Restated)

 

(As Restated)

 

 

 

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Income (loss) from continuing operations

 

$

49,098

 

$

(958,268

)

Add (Deduct) adjustments to reconcile income (loss) to net cash provided by operating activities

 

 

 

 

 

Depreciation, amortization and accretion

 

440,367

 

370,744

 

Deferred taxes

 

58,460

 

(660,318

)

Investment income

 

(37,911

)

(32,124

)

Minority share of income (loss)

 

17,988

 

(849

)

Loss on assets of operations held for sale

 

25,558

 

 

(Gain) loss on marketable securities and other investments

 

8,500

 

1,846,597

 

Noncash interest expense

 

19,868

 

7,326

 

Other noncash expense

 

27,236

 

12,557

 

Changes in assets and liabilities

 

 

 

 

 

Change in accounts receivable

 

76,360

 

(23,840

)

Change in materials and supplies

 

15,373

 

16,609

 

Change in accounts payable

 

(105,287

)

(1,035

)

Change in advanced billings and customer deposits

 

15,212

 

15,726

 

Change in accrued taxes

 

31,119

 

57,626

 

Change in other assets and liabilities

 

(27,000

)

(26,233

)

 

 

614,941

 

624,518

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(537,525

)

(565,679

)

Acquisitions, net of cash acquired

 

(1,251

)

(528,638

)

Proceeds from exchange transaction

 

33,958

 

 

Increase in notes receivable

 

(7

)

(2,581

)

Refund of FCC deposit

 

 

47,566

 

Distributions from unconsolidated entities

 

21,685

 

25,519

 

Investments in and advances to unconsolidated entities

 

(1,031

)

829

 

Other investing activities

 

(1,977

)

(10,229

)

 

 

(486,148

)

(1,033,213

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Change in notes payable

 

9,576

 

116,142

 

Issuance of long-term debt

 

900

 

2,395

 

Proceeds from forward contracts

 

 

680,360

 

Repayment of Trust Originated Preferred Securities

 

(300,000

)

 

Prepayment of long-term notes

 

(70,500

)

(51,000

)

Repayments of long-term debt

 

(55,250

)

(13,946

)

Repurchase of TDS Common Shares

 

(56,522

)

 

Dividends paid

 

(27,186

)

(25,837

)

Other financing activities

 

5,392

 

(3,406

)

 

 

(493,590

)

704,708

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(364,797

)

296,013

 

CASH AND CASH EQUIVALENTS -

 

 

 

 

 

Beginning of period

 

1,298,936

 

140,744

 

End of period

 

$

934,139

 

$

436,757

 

 

The accompanying notes to financial statements are an integral part of these statements.

 

5



 

TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

Unaudited

 

 

 

September 30,
2003

 

December 31,
2002

 

 

 

(As Restated)

 

 

 

 

 

(Dollars in thousands)

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

934,139

 

$

1,298,936

 

Accounts receivable

 

 

 

 

 

Due from customers, less allowance of $23,572 and $24,627, respectively

 

256,982

 

272,997

 

Other, principally connecting companies, less allowance of $11,477 and $15,848, respectively

 

143,290

 

175,036

 

Federal income tax receivable

 

 

40,000

 

Materials and supplies, at average cost

 

57,259

 

72,441

 

Other current assets

 

80,569

 

88,602

 

 

 

1,472,239

 

1,948,012

 

 

 

 

 

 

 

INVESTMENTS

 

 

 

 

 

Marketable equity securities

 

2,207,544

 

1,944,939

 

Wireless license costs

 

1,111,780

 

1,038,556

 

Wireless license rights

 

47,158

 

 

Goodwill

 

1,007,461

 

1,106,451

 

Customer lists, net of accumulated amortization of $19,453 and $6,567, respectively

 

27,201

 

40,087

 

Investments in unconsolidated entities

 

222,529

 

205,995

 

Notes receivable, less valuation allowance of $55,144 and $55,144, respectively

 

6,476

 

7,287

 

Other investments

 

15,374

 

14,914

 

 

 

4,645,523

 

4,358,229

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT, NET

 

 

 

 

 

U.S. Cellular

 

2,229,829

 

2,148,432

 

TDS Telecom

 

1,050,029

 

1,047,811

 

 

 

3,279,858

 

3,196,243

 

 

 

 

 

 

 

OTHER ASSETS AND DEFERRED CHARGES

 

 

 

 

 

Derivative asset

 

 

2,630

 

Other

 

88,405

 

96,914

 

 

 

88,405

 

99,544

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

9,486,025

 

$

9,602,028

 

 

The accompanying notes to financial statements are an integral part of these statements.

 

6



 

TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Unaudited

 

 

 

September 30,
2003

 

December 31,
2002

 

 

 

(As Restated)

 

 

 

 

 

(Dollars in thousands)

 

CURRENT LIABILITIES

 

 

 

 

 

Current portion of long-term debt

 

$

19,210

 

$

64,482

 

Notes payable

 

471,368

 

461,792

 

Accounts payable

 

250,763

 

361,758

 

Advance billings and customer deposits

 

108,469

 

95,922

 

Accrued interest

 

20,866

 

31,751

 

Accrued taxes

 

49,354

 

34,413

 

Accrued compensation

 

56,820

 

58,678

 

Other current liabilities

 

52,429

 

58,370

 

 

 

1,029,279

 

1,167,166

 

 

 

 

 

 

 

DEFERRED LIABILITIES AND CREDITS

 

 

 

 

 

Net deferred income tax liability

 

1,259,149

 

1,170,505

 

Derivative liability

 

222,685

 

61,160

 

Asset retirement obligations

 

93,103

 

 

Other

 

62,811

 

55,645

 

 

 

1,637,748

 

1,287,310

 

 

 

 

 

 

 

LONG-TERM DEBT

 

 

 

 

 

Long-term debt, excluding current portion

 

1,565,187

 

1,641,624

 

Prepaid forward contracts

 

1,668,656

 

1,656,616

 

 

 

3,233,843

 

3,298,240

 

 

 

 

 

 

 

MINORITY INTEREST IN SUBSIDIARIES

 

508,153

 

489,735

 

 

 

 

 

 

 

COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES of Subsidiary Trust Holding Solely Company Subordinated Debentures

 

 

300,000

 

 

 

 

 

 

 

PREFERRED SHARES

 

6,554

 

6,954

 

 

 

 

 

 

 

COMMON STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common Shares, par value $.01 per share; authorized 100,000,000 shares; issued and outstanding 56,138,000 and 55,875,000 shares, respectively

 

561

 

559

 

Series A Common Shares, par value $.01 per share; authorized 25,000,000; issued and outstanding 6,438,000 and 6,602,000 shares, respectively

 

64

 

66

 

Capital in excess of par value

 

1,836,384

 

1,832,806

 

Treasury Shares, at cost, 5,136,000 and 3,799,000 shares, respectively

 

(459,023

)

(404,169

)

Accumulated other comprehensive income

 

252,290

 

191,704

 

Retained earnings

 

1,440,172

 

1,431,657

 

 

 

3,070,448

 

3,052,623

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

9,486,025

 

$

9,602,028

 

 

The accompanying notes to financial statements are an integral part of these statements.

 

7



 

TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.               Basis of Presentation

 

The consolidated financial statements included herein have been prepared by TDS, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although TDS believes that the disclosures are adequate to make the information presented not misleading.  It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in TDS’s latest annual report on Form 10-K.

 

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of September 30, 2003 and December 31, 2002, the results of operations for the three and nine months ended September 30, 2003 and 2002 and the cash flows for the nine months ended September 30, 2003 and 2002.  The results of operations for the three and nine months ended September 30, 2003, are not necessarily indicative of the results to be expected for the full year.

 

Certain amounts reported in prior periods have been reclassified to conform to the current period presentation. The allocation of certain costs between cost of services and selling, general and administrative expenses for the competitive local exchange operations has been revised for the three and nine months ended September 30, 2003 and 2002.  Total expenses have not changed.

 

U.S. Cellular  and TDS adopted Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” in January 2003.  In the fourth quarter of 2003, U.S. Cellular revised the probability that its lease cell sites would require remediation resulting in TDS restating its financial statements for the three and nine months ended September 30, 2003.  See Note 19 – Restatement of Financial Statements and Note 7 - Cumulative Effect of Accounting Changes.

 

U.S. Cellular, an 82.2%-owned subsidiary of TDS, made changes to its accounting policies which required TDS to restate certain items on its statement of operations for the three and nine months ended September 30, 2002.  See Note 6 – “Effects of 2002 Accounting Changes” for the impact on operating income, net income (loss) and earnings per share.

 

2.               Summary of Significant Accounting Policies

 

Assets and Liabilities of Operations Held for Sale

 

TDS accounts for the disposal of long-lived assets in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”.  When long-lived assets meet the held for sale criteria set forth in SFAS No. 144, the balance sheet will reflect the assets and liabilities of the properties to be disposed of as assets and liabilities of operations held for sale.  The assets and liabilities of operations held for sale will be presented separately in the asset and liability sections of the balance sheet.  The revenues and expenses of the properties to be disposed of will be included in operations until the transaction is completed.  See Note 11 - Acquisitions and Divestitures – Completed for the discussion of the sale and exchange of long-lived assets.

 

Stock-Based Compensation

 

TDS accounts for stock options and employee stock purchase plans under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” as allowed by SFAS No. 123, “Accounting for Stock-Based Compensation.”

 

8



 

No compensation costs have been recognized for the stock option and employee stock purchase plans. Had compensation costs for all plans been expensed and the value determined consistent with SFAS No. 123, TDS’s net income (loss) available to common and earnings per share would have been the following pro forma amounts.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(As Restated)

 

 

 

(As Restated)

 

 

 

 

 

(Dollars in thousands, except per share amounts)

 

Net Income (Loss) Available to Common

 

 

 

 

 

 

 

 

 

As Reported

 

$

32,901

 

$

(20,593

)

$

35,388

 

$

(955,225

)

Pro Forma Expense

 

(4,601

)

(2,864

)

(8,992

)

(8,591

)

Pro Forma Net Income (Loss) Available to Common

 

$

28,300

 

$

(23,457

)

$

26,396

 

$

(963,816

)

 

 

 

 

 

 

 

 

 

 

Basic Earnings (Loss)Per Share

 

 

 

 

 

 

 

 

 

As Reported

 

$

0.57

 

$

(0.35

)

$

0.61

 

$

(16.29

)

Pro Forma Expense Per Share

 

(0.08

)

(0.05

)

(0.16

)

(0.15

)

Pro Forma Basic Earnings (Loss) Per Share

 

$

0.49

 

$

(0.40

)

$

0.45

 

$

(16.44

)

 

 

 

 

 

 

 

 

 

 

Diluted Earnings (Loss) Per Share

 

 

 

 

 

 

 

 

 

As Reported

 

$

0.57

 

$

(0.35

)

$

0.61

 

$

(16.29

)

Pro Forma Expense Per Share

 

(0.08

)

(0.05

)

(0.16

)

(0.15

)

Pro Forma Diluted Earnings (Loss) Per Share

 

$

0.49

 

$

(0.40

)

$

0.45

 

$

(16.44

)

 

Recent Accounting Pronouncements

 

FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” was issued in January 2003, and is effective for all variable interests in variable interest entities created after January 31, 2003, and is effective October 1, 2003 for variable interests in variable interest entities created before February 1, 2003.  This Interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  TDS has reviewed the provisions of FIN 46 and has determined that it will, as of the effective date of FIN 46, include in consolidated results the operations of an entity that it currently accounts for using the equity method of accounting.  This change, pursuant to the adoption of FIN 46, is not anticipated to have a material impact on TDS’s future financial position or results of operations.

 

SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” was issued in April 2003, and is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003.  SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” TDS adopted the provisions of this Standard to contracts entered into or modified after June 30, 2003 and to hedging relationships designated after June 30, 2003.  There was no effect on TDS’s financial position or results of operations.

 

SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” was issued in May 2003, and for TDS is effective for financial instruments entered into or modified after May 31, 2003, and otherwise beginning July 1, 2003. SFAS No. 150 requires freestanding financial instruments within its scope to be recorded as a liability in the financial statements.  Freestanding financial instruments include mandatorily redeemable financial instruments, obligations to repurchase issuer’s equity shares and certain obligations to issue a variable number of issuer’s shares. As of September 30, 2003, TDS had no freestanding financial instruments within the scope of SFAS No. 150 and therefore, that portion of this Statement did not have any effect on TDS’s financial position or results of operations.

 

TDS had two subsidiary trusts, TDS Capital I and TDS Capital II that would have been considered freestanding financial instruments under SFAS 150 and variable interest entities pursuant to FIN 46.  TDS Capital I had outstanding 6,000,000 8.5% Company-Obligated Mandatorily Redeemable Preferred Securities.  The sole asset of TDS Capital I was $154.6 million principal amount of TDS’s 8.5% Subordinated Debentures due December 31, 2037.  TDS Capital II had outstanding 6,000,000 8.04% Company-Obligated Mandatorily Redeemable Preferred Securities.  The sole asset of TDS

 

9



 

Capital II was $154.6 million principal amount of TDS’s 8.04% Subordinated Debentures due March 31, 2038.

 

On September 2, 2003, the subsidiary trusts, TDS Capital I and TDS Capital II redeemed all of their outstanding Trust Originated Preferred Securities (“TOPrSSM”). The redemption price of both the 8.5% and 8.04% TOPrS was equal to 100% of the principal amount, or $25.00 per security, plus accrued and unpaid distributions.

 

In addition, under SFAS No. 150, certain minority interests in consolidated entities with finite lives may meet the standard’s definition of a mandatorily redeemable financial instrument and thus require  reclassification as liabilities and remeasurement at the estimated amount of cash that would be due and payable to settle such minority interests under the applicable entity’s organization agreement assuming an orderly liquidation of the finite-lived entity, net of estimated liquidation costs (the “settlement value”).  TDS’s consolidated financial statements include such minority interests that meet the standard’s definition of mandatorily redeemable financial instruments.  These mandatorily redeemable minority interests represent interests held by third parties in consolidated partnerships and limited liability companies (“LLCs”), where the terms of the underlying partnership or LLC agreement provide for a defined termination date at which time the assets of the subsidiary are to be sold, the liabilities are to be extinguished and the remaining net proceeds are to be distributed to the minority interest holders and TDS in accordance with the respective partnership and LLC agreements.  The termination dates of TDS’s mandatorily redeemable minority interests range from 2042 to 2100.

 

On November 7, 2003, the FASB issued FASB Staff Position (“FSP”) No. FAS 150-3, Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, ‘Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity’.  The FSP indefinitely deferred the classification and measurement provisions of SFAS No. 150 related to the mandatorily redeemable minority interests associated with finite-lived subsidiaries, but retained the related disclosure provisions.  The settlement value of TDS’s mandatorily redeemable minority interests is estimated to be $83.5 million at September 30, 2003.  This represents the estimated amount of cash that would be due and payable to settle minority interests assuming an orderly liquidation of the finite-lived consolidated partnerships and LLCs on September 30, 2003, net of estimated liquidation costs.  This amount is being disclosed pursuant the requirements of FSP FAS150-3; TDS has no current plans or intentions to liquidate any of the related partnerships or LLCs prior to their scheduled termination dates.  The corresponding carrying value of the minority interests in finite-lived consolidated partnerships and LLCs at September 30, 2003 is $32.3 million, and is included in the balance sheet caption Minority Interest in Subsidiaries.  The excess of the aggregate settlement value over the aggregate carrying value of the mandatorily redeemable minority interests of $51.2 million is primarily due to the unrecognized appreciation of the minority interest holders’ share of the underlying net assets in the consolidated partnerships and LLCs.  Neither the minority interest holders’ share, nor TDS’s share, of the appreciation of the underlying net assets of these subsidiaries is reflected in the consolidated financial statements under U.S. GAAP.  The estimate of settlement value was based on certain factors and assumptions.  Change in those factors and assumptions could result in a materially larger or smaller settlement amount.

 

The FASB plans to reconsider certain implementation issues and perhaps the classification or measurement guidance for mandatorily redeemable minority interests during the deferral period.  The outcome of their deliberations cannot be determined at this point.  Accordingly, it is possible that the FASB could require the recognition and measurement of our mandatorily redeemable minority interests at their settlement value at a later date.

 

3.               Asset Retirement Obligation (As Restated)

 

SFAS No. 143, “Accounting for Asset Retirement Obligations,” was issued in June 2001, and became effective for TDS beginning January 1, 2003. SFAS No. 143 requires entities to record the fair value of a liability for legal obligations associated with an asset retirement in the period in which the obligations are incurred. When the liability is initially recorded, the entity capitalizes the cost of the asset retirement obligation by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the obligation, any difference between the cost to

 

10



 

retire the asset and the liability recorded is recognized in the statement of operations as a gain or loss.

 

U.S. Cellular is subject to asset retirement obligations associated primarily with its cell sites, retail sites and office locations.  Legal obligations include obligations to remediate leased land on which U.S. Cellular’s cell sites and switching offices are located.  U.S. Cellular is also required to return lease retail store premises and office space to their pre-existing conditions.

 

U.S. Cellular determined that it had an obligation to remove long-lived assets in its cell sites, retail sites and office locations as described by SFAS 143, and has recorded a $54.4 million liability upon adoption.  TDS also recorded a charge for a non-cash cumulative change in accounting principle of $11.8 million representing accumulated accretion and depreciation through December 31, 2002.  The U.S. Cellular asset retirement obligation increase by $7.5 million to $61.9 million as of September 30, 2003.  The increase was due to additional liabilities incurred of $4.2 million and accretion of $3.3 million.  See Note 19 – Restatement of Financial Statements for a discussion of the periodic impact due to accretion and depreciation.

 

In accordance with the transition rules of SFAS No. 143, the following pro forma amounts show the effect of the retroactive application of the change in accounting principle for the adoption of SFAS No. 143:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Actual

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

33,005

 

$

(20,488

)

$

35,700

 

$

(954,902

)

Basic earnings per share

 

$

0.57

 

$

(0.35

)

$

0.61

 

$

(16.29

)

Diluted earnings per share

 

$

0.57

 

$

(0.35

)

$

0.61

 

$

(16.29

)

 

 

 

 

 

 

 

 

 

 

Pro forma

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

33,005

 

$

(21,099

)

$

47,489

 

$

(965,950

)

Basic earnings per share

 

$

0.57

 

$

(0.36

)

$

0.81

 

$

(16.47

)

Diluted earnings per share

 

$

0.57

 

$

(0.36

)

$

0.81

 

$

(16.47

)

 

 

 

At December 31,
2002

 

At January 1,
2002

 

Pro forma

 

 

 

 

 

Asset Retirement Obligation

 

$

54,438

 

$

45,246

 

 

TDS Telecom’s incumbent local telephone companies follow the provisions of SFAS No. 71, and therefore conform to the regulatory accounting principles as prescribed by the respective state public utility commissions and the Federal Communications Commission (“FCC”), and where applicable, accounting principles generally accepted in the United States of America. On December 20, 2002, the FCC notified carriers by Order that it will not adopt SFAS No. 143 since the FCC concluded that SFAS No. 143 conflicted with the FCC’s current accounting rules that require incumbent local telephone companies to accrue for asset retirement obligations through prescribed depreciation rates. Pursuant to the FCC’s order, and the provisions of SFAS No. 71, the incumbent local telephone companies continue to accrue asset retirement obligations as a component of depreciation expense pursuant to depreciation rates set forth by the respective state public utility commissions.

 

At January 1, 2003, upon implementation of SFAS No. 143, TDS Telecom determined the amount of the incumbent local telephone companies asset retirement obligations required to be recorded was $29.9 million, and this asset retirement obligation was reclassified from accumulated depreciation to deferred liabilities and credits under the provisions of SFAS No. 143. The asset retirement obligation under SFAS No. 143 has increased to $31.2 million at September 30, 2003.  After the effect of this reclassification, the incumbent local telephone companies have an amount of $25.4 million as of January 1, 2003 ($27.7 million as of September 30, 2003) that remains in accumulated depreciation that represents asset retirement costs that have been accrued in accordance with depreciation rates promulgated by the respective state public utility commissions, which are in excess of asset retirement costs that are required to be accrued under the provisions of SFAS No. 143.  The accounting guidelines of the state public utility commission and the FCC provide that such costs of removal be recorded as accumulated depreciation.  These costs of removal are recorded based upon the

 

11



 

guidelines of the incumbent local telephone companies’ regulators and are not an asset retirement obligation as defined by SFAS No. 143.  The adoption of SFAS No. 143 by TDS Telecom’s incumbent local telephone companies did not have a material effect on TDS’s financial position or results of operations.

 

TDS Telecom’s competitive local telephone companies adopted SFAS No. 143 effective January 1, 2003. TDS Telecom determined that its competitive local telephone companies do not have a material legal obligation to remove long-lived assets as described by SFAS 143, and accordingly, adoption of SFAS 143 did not have a material impact on the competitive local telephone companies.

 

4.               Income Taxes

 

Income (loss) from continuing operations includes losses from marketable securities and other investments and losses on assets held for sale for the three and nine months ended September 30, 2003 and 2002.  The following table summarizes the effective income tax expense (benefit) rates in each of the periods.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

As Restated

 

As Restated

 

As Restated

 

As Restated

 

 

 

 

 

 

 

 

 

 

 

Effective Tax Rate From

 

 

 

 

 

 

 

 

 

Income from continuing operations excluding loss on marketable securities and other investments and loss on assets held for sale

 

42.2

%

43.3

%

42.4

%

43.6

%

Loss on marketable securities and other investments and loss on assets held for sale(1)

 

N/M

 

(36.2

)%

(4.1

)%

(38.9

)%

Income (Loss) from continuing operations

 

51.8

%

(6.9

)%

53.4

%

(38.0

)%

 


(1)          The effective tax rate related to the provision for Loss on marketable securities and other investments and loss on assets held for sale is not meaningful.  Because TDS’s tax basis in the assets transferred to AT&T Wireless was lower than its book basis it was necessary for TDS to record a tax provision of $9.8 million at the time of this transfer in the third quarter of 2003.  TDS had previously disclosed that it had anticipated that this amount would be approximately $12 million.

 

5.               (Losses) on Marketable Securities and Other Investments

 

U.S. Cellular recorded a license cost impairment loss of $3.5 million in the first quarter of 2003 related to the investment in a non-operating market in Florida that remained with U.S. Cellular upon completion of the exchange with AT&T Wireless.  See Note 11 Acquisitions and Divestitures – Completed for further information regarding the exchange transaction with AT&T Wireless.

 

TDS also recorded an impairment loss of $5.0 million in the second quarter of 2003 on a cellular market investment held by TDS Telecom in conjunction with its annual license cost and goodwill impairment testing.

 

The loss on marketable securities and other investments in 2002 includes an “other than temporary” investment loss of $1,756.5 million ($1,044.4 million, net of $686.2 million of income taxes and $25.9 million of minority interest) on TDS’s marketable securities.  The adjusted cost basis of TDS’s marketable securities was written down to market value upon determining that the unrealized losses on the securities were other than temporary.

 

TDS had notes receivable from Airadigm and Kington Management Corporation aggregating $100.6 million relating to the funding of Airadigm’s operations and the purchase by Kington of certain of U.S. Cellular’s minority interests in 2000.  The value of the notes were directly related to the value of certain assets and contractual rights of Airadigm and the value of the minority cellular market interests.  As a result of changes in management strategies and other events, a review of the Airadigm business plan and a review of the fair market analysis of the cellular markets, including third party fair value analysis, management concluded that the notes receivable were impaired and, accordingly recorded an impairment charge of $90.1 million ($53.6 million, net of tax of $32.6 million and minority interest of $3.9 million) in the third quarter of 2002.

 

12



 

6.               Effects of 2002 Accounting Changes

 

U.S. Cellular made certain changes to its accounting policies in the fourth quarter of 2002 which required TDS and U.S. Cellular to restate certain items on its income statement for the three and nine month periods ending September 30, 2002.  The impact of these changes in accounting policies on the prior periods is presented below.

 

 

 

Three Months Ended
September 30, 2002

 

 

 

As
Reported

 

Changes

 

As
Restated

 

 

 

(Dollars in thousands, except per share amounts)

 

Effects of 2002 Accounting Changes

 

 

 

 

 

 

 

Operating Revenues

 

 

 

 

 

 

 

Changes related to EITF 01-09 reclassification (1)

 

$

 

 

$

(14,850

)

$

 

 

Changes related to EITF 01-09 accrual (1)

 

 

 

(2,935

)

 

 

 

 

801,887

 

(17,785

)

784,102

 

Operating Expenses

 

 

 

 

 

 

 

Changes related to EITF 01-09 reclassification (1)

 

 

 

(14,850

)

 

 

Changes related to SAB 101(2)

 

 

 

(936

)

 

 

 

 

705,678

 

(15,786

)

689,892

 

Operating Income

 

96,209

 

(1,999

)

94,210

 

Net (Loss)

 

$

(19,511

)

$

(977

)

$

(20,488

)

 

 

 

 

 

 

 

 

Earnings Per Share — Net (Loss)

 

 

 

 

 

 

 

Basic

 

$

(0.33

)

$

(0.02

)

$

(0.35

)

Diluted

 

$

(0.33

)

$

(0.02

)

$

(0.35

)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended
September 30, 2002

 

 

 

As
Reported

 

Changes

 

As
Restated

 

 

 

(Dollars in thousands, except per share amounts)

 

Effects of 2002 Accounting Changes

 

 

 

 

 

 

 

Operating Revenues

 

 

 

 

 

 

 

Changes related to EITF 01-09 reclassification (1)

 

$

 

 

$

(18,221

)

$

 

 

Changes related to EITF 01-09 accrual (1)

 

 

 

(2,935

)

 

 

 

 

2,190,898

 

(21,156

)

2,169,742

 

Operating Expenses

 

 

 

 

 

 

 

Changes related to EITF 01-09 reclassification (1)

 

 

 

(18,221

)

 

 

Changes related to SAB 101(2)

 

 

 

(2,989

)

 

 

 

 

1,868,083

 

(21,210

)

1,846,873

 

Operating Income

 

322,815

 

54

 

322,869

 

Income (Loss) before Cumulative Effect of Accounting Change

 

(958,295

)

27

 

(958,268

)

Cumulative Effect of Accounting Change (2)

 

 

3,366

 

3,366

 

Net Income (Loss)

 

$

(958,295

)

$

3,393

 

$

(954,902

)

 

 

 

 

 

 

 

 

Earnings Per Share – Cumulative Effect of Accounting Change

 

 

 

 

 

 

 

Basic

 

$

 

$

0.06

 

$

0.06

 

Diluted

 

$

 

$

0.06

 

$

0.06

 

 

 

 

 

 

 

 

 

Earnings Per Share – Net (Loss)

 

 

 

 

 

 

 

Basic

 

$

(16.35

)

$

0.06

 

$

(16.29

)

Diluted

 

$

(16.35

)

$

0.06

 

$

(16.29

)

 


(1)          U.S. Cellular changed its accounting for certain rebate transactions pursuant to Emerging Issues Task Force Statement (“EITF”) No. 01-09 in the fourth quarter of 2002.  Under EITF No. 01-09, all rebates paid to agents who participate in qualifying new activation and retention transactions are recorded as a reduction of equipment sales revenues.  Previously, U.S. Cellular had recorded new activation rebates as marketing and selling expense and retention rebates as general and administrative expense.  Further, these rebates are now recorded at the time handsets are sold by U.S. Cellular to these agents.  Previously, U.S. Cellular recorded these transactions at the time the handsets were delivered by agents to U.S. Cellular’s customers.

 

(2)          U.S. Cellular changed its accounting policy related to certain transactions pursuant to Staff Accounting Bulletin (“SAB”) No. 101 during the fourth quarter of 2002.  U.S. Cellular had adopted SAB No. 101 as of January 1, 2000, and began deferring

 

13



 

certain customer activation fees as of that date.  As permitted by SAB No. 101, as of January 1, 2002, U.S. Cellular began deferring commission expenses equal to the amount of activation fees deferred.  In conjunction with this change, TDS recorded a $3.4 million addition to net income as of January 1, 2002, related to commission expenses which would have been deferred in prior years had U.S. Cellular adopted its new policy at the time it adopted SAB No. 101.

 

7.               Cumulative Effect of Accounting Changes (As restated)

 

Effective January 1, 2003, TDS adopted SFAS No.143, “Accounting for Asset Retirement Obligations” and recorded the initial liability for legal obligations associated with an asset retirement.  The cumulative effect of the implementation of this accounting standard on periods prior to 2003 was recorded in the first quarter of 2003, decreasing net income by $11.8 million net of tax and minority interest, or $0.20 per basic and diluted share.

 

Effective January 1, 2002, U.S. Cellular changed its method of accounting for commission expenses related to customer activations and began deferring expense recognition of a portion of commission expenses equal to the amount of activation fees revenue deferred.  U.S. Cellular believes this change is a preferable method of accounting for such costs primarily due to the fact that the new method of accounting provides for better matching of revenue from customer activations to direct incremental costs associated with these activations within each reporting period.  The cumulative effect of this accounting change on periods prior to 2002 was recorded in 2002 increasing net income by $3.4 million, net of tax and minority interest, or $0.06 per diluted share.

 

8.               Earnings Per Share

 

Basic earnings per share is computed by dividing net income available to common by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using net income available to common and weighted average common shares adjusted to include the effect of potentially dilutive securities. Potentially dilutive securities include incremental shares issuable upon exercise of outstanding stock options and the potential conversion of preferred stock to common shares.

 

14



 

The amounts used in computing earnings per share from operations and the effect on income and the weighted average number of Common and Series A Common Shares of dilutive potential common stock are as follows.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Basic Earnings per Share

 

2003

 

2002

 

2003

 

2002

 

 

 

As Restated

 

As Restated

 

As Restated

 

As Restated

 

 

 

(Dollars in thousands)

 

Income (Loss) from Continuing Operations

 

$

34,614

 

$

(20,488

)

$

49,098

 

$

(958,268

)

Less: Preferred Dividend requirement

 

104

 

105

 

312

 

323

 

Income (Loss) from Continuing Operations Available to Common

 

34,510

 

(20,593

)

48,786

 

(958,591

)

Discontinued Operations

 

(1,609

)

 

(1,609

)

 

Cumulative Effect of Accounting Changes

 

 

 

(11,789

)

3,366

 

Net Income (Loss) Available to Common used in Basic Earnings per Share

 

$

32,901

 

$

(20,593

)

$

35,388

 

$

(955,225

)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Diluted Earnings per Share

 

2003

 

2002

 

2003

 

2002

 

 

 

As Restated

 

As Restated

 

As Restated

 

As Restated

 

 

 

(Dollars in thousands)

 

Income (Loss) from Continuing Operations Available to Common used in Basic Earnings per Share

 

$

34,510

 

$

(20,593

)

$

48,786

 

$

(958,591

)

Reduction in preferred dividends if Preferred Shares Converted into Common Shares

 

50

 

 

 

 

Minority Income Adjustment (1)

 

(210

)

 

(218

)

 

Income (Loss) from Continuing Operations Available to Common

 

34,350

 

(20,593

)

48,568

 

(958,591

)

Discontinued Operations

 

(1,609

)

 

(1,609

)

 

Cumulative Effect of Accounting Changes

 

 

 

(11,789

)

3,366

 

Net Income (Loss) Available to Common used in Diluted Earnings per Share

 

$

32,741

 

$

(20,593

)

$

35,170

 

$

(955,225

)

 

 

 

 

 

 

 

 

 

 


(1) The minority income adjustment reflects the additional minority share of U.S. Cellular’s income computed as if all of U.S. Cellular’s issuable securities were outstanding.

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(Shares in thousands)

 

Weighted Average Number of Common Shares used in Basic Earnings per Share

 

57,420

 

58,660

 

57,829

 

58,633

 

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

 

Stock Options (2)

 

227

 

 

95

 

 

Common shares outstanding if Preferred Shares Converted

 

146

 

 

 

 

Weighted Average Number of Common Shares used in Diluted Earnings per Share

 

57,793

 

58,660

 

57,924

 

58,633

 

 


(2) Stock options and preferred shares convertible into 1,580,385 and 1,587,226 Common Shares in three and nine months ended September 30, 2002, respectively, were not included in computing Diluted Earnings per Share because their effects were antidilutive.  Stock options and preferred shares convertible into 1,365,197 and 1,672,044 Common Shares in the three and nine months ended September 30, 2003, respectively, were not included in computing Diluted Earnings per Share because their effects were antidilutive.

 

15



 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2003
As Restated

 

2002
As Restated

 

2003
As Restated

 

2002
As Restated

 

Basic Earnings (Loss) per Share

 

 

 

 

 

 

 

 

 

Continuing Operations

 

$

0.60

 

$

(0.35

)

$

0.84

 

$

(16.35

)

Discontinued Operations

 

(0.03

)

 

(0.03

)

 

Cumulative Effect of Accounting Changes

 

 

 

(0.20

)

0.06

 

 

 

$

0.57

 

$

(0.35

)

$

0.61

 

$

(16.29

)

 

 

 

 

 

 

 

 

 

 

Diluted Earnings (Loss) per Share

 

 

 

 

 

 

 

 

 

Continuing Operations

 

$

0.60

 

$

(0.35

)

$

0.84

 

$

(16.35

)

Discontinued Operations

 

(0.03

)

 

(0.03

)

 

Cumulative Effect of Accounting Changes

 

 

 

(0.20

)

0.06

 

 

 

$

0.57

 

$

(0.35

)

$

0.61

 

$

(16.29

)

 

9.               Marketable Equity Securities

 

TDS and its subsidiaries hold a substantial amount of marketable equity securities that are publicly traded and can have volatile share prices.  TDS does not make direct investments in publicly traded companies and all of these interests were acquired as a result of sales, exchanges or reorganizations of other investments.  The market values of the marketable securities may fall below the accounting cost basis of such securities.  If management determines the decline in value of the marketable securities to be “other than temporary”, the unrealized loss included in other comprehensive income is recognized and recorded as a loss in the Statement of Operations.

 

During the nine months ended September 30, 2002, management determined that the decline in the value of the marketable securities relative to its accounting cost basis was other than temporary and charged a $1,756.5 million loss to the Statement of Operations ($1,044.4 million, net of tax of $686.2 million, and minority interest of $25.9 million) and reduced the accounting cost basis of the marketable securities by a corresponding amount.  The loss was reported in the caption “Gain (loss) on marketable securities and other investments” in the Statement of Operations.

 

TDS and subsidiaries have entered into a number of forward contracts in 2002 related to the marketable equity securities that they hold.  The risk management objective of the forward contracts is to hedge the value of the marketable equity securities from losses due to decreases in the market prices of the securities while retaining a share of gains from increases in the market prices of such securities.  The downside risk is hedged at or above the accounting cost basis thereby eliminating risk of an other than temporary loss being recorded on these contracted securities.

 

Information regarding TDS’s marketable equity securities and the components of accumulated other comprehensive income are summarized as follows.

 

 

 

September 30,
2003

 

December 31,
2002

 

 

 

(Dollars in thousands)

 

Marketable Equity Securities – Fair Value

 

 

 

 

 

Deutsche Telekom AG - 131,461,861 ordinary shares

 

$

1,906,197

 

$

1,689,285

 

Vodafone Group Plc – 12,945,915 ADRs

 

262,155

 

234,580

 

VeriSign, Inc. – 2,361,333 and 2,525,786 common shares

 

31,784

 

20,257

 

Rural Cellular Corporation - 719,396 equivalent common shares

 

7,194

 

611

 

Other

 

214

 

206

 

Aggregate Fair Value

 

2,207,544

 

1,944,939

 

Accounting Cost Basis

 

1,543,934

 

1,545,713

 

Gross Unrealized Holding Gains

 

663,610

 

399,226

 

Income Tax (Expense)

 

(259,140

)

(155,794

)

Unrealized Holding Gains, net of tax

 

404,470

 

243,432

 

Derivatives, net of tax

 

(148,713

)

(50,508

)

Equity Method Unrealized Gains

 

126

 

615

 

Minority Share of Unrealized Holding (Gains)

 

(3,593

)

(1,835

)

Accumulated Other Comprehensive Income

 

$

252,290

 

$

191,704

 

 

16



 

10.         Goodwill and Customer Lists

 

TDS has recorded goodwill as a result of the acquisition of wireless licenses and markets, and the acquisition of operating telephone companies.  Included in U.S. Cellular’s goodwill is goodwill related to various acquisitions structured to be tax-free.  No deferred taxes have been provided on goodwill related to tax-free acquisitions.

 

The changes in the carrying amount of goodwill for the nine months ended September 30, 2003 and 2002, were as follows.  TDS Telecom’s incumbent local exchange carrier is designated as “ILEC” and its competitive local exchange carrier is designated as “CLEC” in the table.

 

 

 

U.S.

 

TDS Telecom

 

 

 

 

 

(Dollars in thousands)

 

Cellular

 

ILEC

 

CLEC

 

Other(1)

 

Total

 

Beginning Balance January 1, 2003

 

$

643,629

 

$

397,482

 

$

29,440

 

$

35,900

 

$

1,106,451

 

Divestiture

 

(93,658

)

 

 

 

(93,658

)

Impairment loss(2)

 

 

 

 

(5,000

)

(5,000

)

Other

 

(191

)

(141

)

 

 

(332

)

Ending Balance September 30, 2003

 

$

549,780

 

$

397,341

 

$

29,440

 

$

30,900

 

$

1,007,461

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance January 1, 2002

 

$

473,975

 

$

332,848

 

$

29,440

 

$

34,538

 

$

870,801

 

Acquisitions

 

155,566

 

60,936

 

 

 

216,502

 

Other

 

 

825

 

 

1,362

 

2,187

 

Ending Balance September 30, 2002

 

$

629,541

 

$

394,609

 

$

29,440

 

$

35,900

 

$

1,089,490

 

 


(1)Other consists of goodwill related to an investment in a cellular market owned by an incumbent local exchange carrier subsidiary.

(2)See Note 5 – (Losses) on Marketable Securities and Other Investments for discussion of the impairment loss.

 

TDS’s customer lists represent intangible assets from the acquisition of wireless properties and are being amortized based on average customer retention periods using the declining balance method.  Amortization expense was $3.9 million and $12.9 million for the three and nine months ended September 30, 2003, respectively.  Amortization expense was $1.3 million for both the three and nine months ended September 30, 2002.  The related amortization expense for the remainder of 2003 and for the years 2004-2007 is expected to be $2.8 million, $9.5 million, $5.8 million, $3.5 million and $2.1 million, respectively.

 

11.         Acquisitions and Divestitures - Completed

 

On March 10, 2003, U.S. Cellular announced that it had entered into a definitive agreement with AT&T Wireless to exchange wireless properties. When this transaction is fully consummated, U.S. Cellular will receive 10 and 20 megahertz personal communication service licenses in 13 states contiguous to and that overlap existing properties in the Midwest and the Northeast; approximately $34.0 million in cash and minority interests in six markets it currently controls. On August 1, 2003, U.S. Cellular completed the transfer of wireless assets and customers in 10 markets in Florida and Georgia to AT&T Wireless and the assignments to U.S. Cellular from AT&T Wireless of a portion of the personal communication service licenses.  The assignment and development of certain licenses has been deferred by U.S. Cellular for a period of up to five years from the closing date, in accordance with the agreement.  U.S. Cellular will take possession of the licenses in staggered closings over that five-year period to comply with service requirements of the Federal Communications Commission.  On the initial closing date, U.S. Cellular also received the cash and the minority interests.  The acquisition of the licenses in the exchange was accounted for as a purchase by U.S. Cellular and the transfer of the properties by U.S. Cellular to AT&T Wireless was accounted for as a sale.

 

The 14 licenses that have been transferred to U.S. Cellular as of September 30, 2003, with a fair value totaling $131.5 million, are included in Wireless license costs on the balance sheet.  The 22 licenses that have not yet been assigned to U.S. Cellular, with a fair value totaling $47.2 million, are included in Wireless license rights on the balance sheet.  All asset values related to the properties acquired or pending, including license values, were determined using an independent valuation.

 

Prior to the close of the AT&T Wireless exchange, TDS reflected the assets and liabilities to be transferred to AT&T Wireless as assets and liabilities of operations held for sale in accordance with

 

17



 

SFAS No. 144.  The results of operations of the markets transferred to AT&T Wireless were included in results of operations through July 31, 2003.

 

Also prior to the close of the AT&T Wireless exchange, U.S. Cellular allocated $93.7 million of goodwill related to the properties transferred to AT&T Wireless to the operations held for sale in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets.”  A total loss of $25.6 million (including a $1.4 million reduction recorded in the third quarter) was recorded as a “Loss on assets held for sale” (included in operating expenses) representing the difference between the book value of the markets transferred to AT&T Wireless and the fair value of the assets received or to be received in the transaction.

 

TDS recorded an additional charge to the Statement of Operations of approximately $10 million for income taxes in the three months ended September 30, 2003 and has a current tax liability of approximately $3.5 million related to state income taxes on the completion of the transaction. As a result of the Jobs and Growth Tax Relief Reconciliation Act of 2003, enacted in May of 2003, TDS anticipates that it will claim additional federal tax depreciation deductions in 2003. Such additional depreciation deductions are expected to result in a federal net operating loss for TDS for 2003; accordingly, TDS anticipates that there will be no current federal tax liability in 2003 attributable to the exchange of assets with AT&T Wireless.

 

U.S. Cellular and AT&T Wireless have entered into a Transition Services Agreement in order to ensure a smooth transition of the exchanged markets to AT&T Wireless.  U.S. Cellular will provide transitional services including information services, customer service, engineering, finance, and marketing.  The services will be provided for a period of up to one year after the closing date.  U.S. Cellular will be paid a monthly fee to offset its costs for services it provides to AT&T Wireless; these fees are primarily recorded as a reduction of general and administrative expenses in the consolidated statement of operations.  In the third quarter of 2003, U.S. Cellular billed AT&T Wireless $2.8 million for these services.

 

12.         Long-Term Debt

 

TDS repurchased $5.0 million of 10% Medium-Term Notes in the second quarter of 2003 at 115.75% of par value.  The loss on retirement of debt totaled $787,500 and was reported in the caption Other (expense), net in the Statement of Operations.

 

TDS redeemed $65.5 million of Series B Medium-Term Notes in the third quarter of 2003 at par.  There was no gain or loss on the retirement of these notes. TDS wrote off, to Other (expense), net in the Statement of Operations, deferred expenses related to the Medium-Term Notes totaling $0.4 million that were previously included in Other Assets and Deferred Charges on the balance sheet.

 

On September 2, 2003 TDS’s subsidiary trusts, TDS Capital l and TDS Capital II redeemed all of their outstanding Trust Originated Preferred Securities (“TOPrSSM”).  The redemption price of both the 8.5% and 8.04% TOPrS was equal to 100% of the principal amount, or $25.00 per security, plus accrued and unpaid distributions.  The outstanding amount of the 8.5% TOPrS redeemed was $150 million.  The outstanding amount of the 8.04% TOPrS redeemed was $150 million. The accrued distributions that were paid upon redemption totaled $4.4 million.  TDS wrote off, to Other (expense), net in the Statement of Operations, deferred expenses related to the TOPrS totaling $8.7 million that were previously included in Other Assets and Deferred Charges on the balance sheet.

 

13.         Common Share Repurchase Program

 

The Board of Directors of TDS from time to time has authorized the repurchase of TDS Common Shares. In 2003, the Board of Directors authorized the repurchase of up to 3.0 million Common Shares through February 2006.  TDS may use repurchased shares to fund acquisitions and for other corporate purposes.  As of September 30, 2003, TDS has repurchased 1.4 million Common Shares under this authorization for an aggregate of $56.5 million, representing an average per share price of $40.99, including commissions, leaving 1.6 million shares available for repurchase under the authorization.  Share repurchases may be made from time to time on the open market or at negotiated prices in private transactions.  No shares were repurchased in 2002.

 

18



 

14.         Accumulated Other Comprehensive Income (Loss)

 

The cumulative balance of unrealized gains (losses) on securities and derivative instruments and related income tax effects included in Accumulated other comprehensive income (loss) are as follows.

 

 

 

Nine Months Ended
September 30,

 

 

 

2003

 

2002

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Balance, beginning of period

 

$

191,704

 

$

(352,120

)

 

 

 

 

 

 

Marketable Equity Securities

 

 

 

 

 

 

 

 

 

 

 

Add (Deduct):

 

 

 

 

 

Unrealized gains (losses) on marketable equity securities

 

264,215

 

(1,429,504

)

Income tax (expense) benefit

 

(103,285

)

557,913

 

 

 

160,930

 

(871,591

)

Equity method unrealized gains (losses)

 

(489

)

218

 

Minority share of unrealized (gains) losses

 

(2,724

)

14,900

 

Net unrealized gains (losses)

 

157,717

 

(856,473

)

 

 

 

 

 

 

Deduct (Add):

 

 

 

 

 

Recognized (losses) on marketable equity securities

 

(168

)

(1,756,526

)

Income tax benefit

 

62

 

686,223

 

 

 

(106

)

(1,070,303

)

Minority share of recognized losses

 

21

 

25,900

 

Net recognized (losses) from Marketable Equity Securities included in Net Income

 

(85

)

(1,044,403

)

 

 

157,802

 

187,930

 

Derivative Instruments

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on derivative instruments

 

(160,639

)

193,093

 

Income tax (expense) benefit

 

62,433

 

(75,874

)

 

 

(98,206

)

117,219

 

Minority Share of unrealized (gains) losses

 

990

 

(3,809

)

 

 

(97,216

)

113,410

 

Net change in unrealized gains (losses) included in Comprehensive Income (Loss)

 

60,586

 

301,340

 

Balance, end of period

 

$

252,290

 

$

(50,780

)

 

 

 

 

 

 

 


 

Accumulated Unrealized Gain (Loss) on Derivative  Instruments

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(49,584

)

$

 

Add (Deduct):

 

 

 

 

 

Unrealized gains (losses) on derivative instruments

 

(160,639

)

193,093

 

Income (tax) benefit

 

62,433

 

(75,874

)

Minority share of unrealized (gains) losses

 

990

 

(3,809

)

 

 

(97,216

)

113,410

 

Balance, end of period

 

$

(146,800

)

$

113,410

 

 


 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2003
As Restated

 

2002
As Restated

 

2003
As Restated

 

2002
As Restated

 

 

 

(Dollars in thousands)

 

Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

Net Income (loss)

 

$

33,005

 

$

(20,488

)

$

35,700

 

$

(954,902

)

Net change in unrealized gains (losses) on marketable equity securities and derivative instruments

 

(8,616

)

(30,370

)

60,586

 

301,340

 

 

 

$

24,389

 

$

(50,858

)

$

96,286

 

$

(653,562

)

 

19



 

15.         Supplemental Cash Flow Information

 

Cash and cash equivalents include cash and those short-term, highly liquid investments with original maturities of three months or less.  The following table summarizes interest and income taxes paid by TDS.

 

 

 

Nine Months Ended
September 30,

 

 

 

2003

 

2002

 

 

 

(Dollars in thousands)

 

Interest Paid

 

$

123,411

 

$

88,998

 

 

 

 

 

 

 

Income Taxes Paid (Refunded)

 

$

(46,584

)

$

15,861

 

 

16.         Business Segment Information (As Restated)

 

Financial data for TDS’s business segments for each of the three-month and nine-month periods ended or at September 30, 2003 and 2002 are as follows.  TDS Telecom’s incumbent local exchange carrier is designated as “ILEC” and its competitive local exchange carrier is designated as “CLEC” in the table.

 

Three Months Ended or at
September 30, 2003

 

 

 

TDS Telecom

 

 

 

 

 

(Dollars in thousands)

 

U.S. Cellular

 

ILEC

 

CLEC

 

All Other(1)

 

Total

 

Operating revenues

 

$

657,343

 

$

164,650

 

$

53,468

 

$

(707

)

$

874,754

 

Cost of services and products

 

207,107

 

41,240

 

22,734

 

(252

)

270,829

 

Selling, general and administrative expense

 

252,483

 

44,571

 

30,481

 

(455

)

327,080

 

Operating income before depreciation, amortization and accretion and loss on assets held for sale(2)

 

197,753

 

78,839

 

253

 

 

276,845

 

Depreciation, amortization and accretion

 

103,634

 

32,059

 

8,545

 

 

144,238

 

Loss on assets held for sale

 

(1,442

)

 

 

 

(1,442

)

Operating income (loss)

 

95,561

 

46,780

 

(8,292

)

 

134,049

 

Significant noncash items:

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

11,301

 

149

 

 

194

 

11,644

 

Marketable securities

 

211,178

 

 

 

1,996,366

 

2,207,544

 

Investment in unconsolidated entities

 

178,417

 

19,218

 

 

24,894

 

222,529

 

Total assets

 

4,772,072

 

1,786,873

 

233,751

 

2,693,329

 

9,486,025

 

Capital expenditures

 

$

135,111

 

$

32,007

 

$

7,999

 

$

1,485

 

$

176,602

 

 

Three Months Ended or at
September 30, 2002

 

 

 

TDS Telecom

 

 

 

 

 

(Dollars in thousands)

 

U.S. Cellular

 

ILEC

 

CLEC

 

All Other(1)

 

Total

 

Operating revenues

 

$

579,786

 

$

158,961

 

$

45,998

 

$

(643

)

$

784,102

 

Cost of services and products

 

187,962

 

37,097

 

20,706

 

(261

)

245,504

 

Selling, general and administrative Expense

 

226,251

 

43,109

 

32,201

 

(382

)

301,179

 

Operating income (loss) before depreciation and amortization(2) (3)

 

165,573

 

78,755

 

(6,909

)

 

237,419

 

Depreciation and amortization

 

102,876

 

32,907

 

7,426

 

 

143,209

 

Operating income (loss)

 

62,697

 

45,848

 

(14,335

)

 

94,210

 

Significant noncash items:

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

12,963

 

125

 

 

247

 

13,335

 

Gain (loss) on marketable securities and other investments

 

(34,210

)

 

 

(55,861

)

(90,071

)

Marketable securities

 

131,767

 

 

 

1,139,038

 

1,270,805

 

Investment in unconsolidated entities

 

162,211

 

48,956

 

 

25,545

 

236,712

 

Total assets

 

4,443,558

 

1,705,284

 

235,486

 

1,610,271

 

7,994,599

 

Capital expenditures

 

$

192,256

 

$

36,484

 

$

9,653

 

$

 

$

238,393

 

 

20



 

Nine Months Ended or at
September 30, 2003

 

 

 

TDS Telecom

 

 

 

 

 

(Dollars in thousands)

 

U.S. Cellular

 

ILEC

 

CLEC

 

All Other(1)

 

Total

 

Operating revenues

 

$

1,893,067

 

$

484,052

 

$

158,386

 

$

(2,046

)

$

2,533,459

 

Cost of services and products

 

614,231

 

119,219

 

63,737

 

(772

)

796,415

 

Selling, general and administrative expense

 

793,039

 

131,604

 

87,787

 

(1,274

)

1,011,156

 

Operating income before depreciation, amortization, and accretion and loss on assets held for sale(2)

 

485,797

 

233,229

 

6,862

 

 

725,888

 

Depreciation, amortization and accretion

 

317,905

 

97,799

 

24,663

 

 

440,367

 

Loss on assets held for sale

 

25,558

 

 

 

 

25,558

 

Operating income (loss)

 

142,334

 

135,430

 

(17,801

)

 

259,963

 

Significant noncash items:

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

37,163

 

488

 

 

260

 

37,911

 

Gain (loss) on marketable securities and other investments

 

(3,500

)

 

 

(5,000

)

(8,500

)

Marketable securities

 

211,178

 

 

 

1,996,366

 

2,207,544

 

Investment in unconsolidated entities

 

178,417

 

19,218

 

 

24,894

 

222,529

 

Total assets

 

4,772,072

 

1,786,873

 

233,751

 

2,693,329

 

9,486,025

 

Capital expenditures

 

$

439,113

 

$

76,707

 

$

17,208

 

$

4,497

 

$

537,525

 

 

Nine Months Ended or at
September 30, 2002

 

 

 

TDS Telecom

 

 

 

 

 

(Dollars in thousands)

 

U.S. Cellular

 

ILEC

 

CLEC

 

All Other(1)

 

Total

 

Operating revenues

 

$

1,582,545

<