- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 ------------------------------------------------- OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------------- ------------------- Commission File Number 001-14157 - -------------------------------------------------------------------------------- TELEPHONE AND DATA SYSTEMS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-2669023 - --------------------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 30 North LaSalle Street, Chicago, Illinois 60602 --------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 630-1900 Not Applicable --------------------------------------------------------------------------- (Former address of principal executive offices) (Zip Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at April 30, 2001 --------------------------------- ----------------------------------- Common Shares, $.01 par value 51,824,141 Shares Series A Common Shares, $.01 par value 6,815,245 Shares - --------------------------------------------------------------------------------
TELEPHONE AND DATA SYSTEMS, INC. ------------------------------- 1st QUARTER REPORT ON FORM 10-Q ------------------------------- INDEX ----- Page No. -------- Part I. Financial Information Management's Discussion and Analysis of Results of Operations and Financial Condition 2-14 Consolidated Statements of Income - Three Months Ended March 31, 2001 and 2000 15 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2001 and 2000 16 Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 17-18 Notes to Consolidated Financial Statements 19-25 Part II. Other Information 26 Signatures 27
PART I. FINANCIAL INFORMATION ----------------------------- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS ------------------------------------------------------------- AND FINANCIAL CONDITION ----------------------- Telephone and Data Systems, Inc. ("TDS" or the "Company") is a diversified telecommunications company, which provides high-quality telecommunications services to 4.0 million wireless telephone and telephone customer units. TDS's business development strategy is to expand its existing operations through internal growth and acquisitions, and to explore and develop telecommunications businesses that management believes utilize TDS's expertise in customer-based telecommunications. The Company conducts substantially all of its wireless telephone operations through its 82.2%-owned subsidiary, United States Cellular Corporation ("U.S. Cellular") and its wireline telephone operations through its wholly owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom"). RESULTS OF OPERATIONS - --------------------- Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000 - -------------------------------------------------------------------------------- Operating Revenues increased 12% ($62.0 million) during the first three months of 2001 primarily as a result of a 18% increase in customer units served. U.S. Cellular's operating revenues increased 12% ($45.6 million) as customer units served increased by 514,000, or 19%, since March 31, 2000, to 3,221,000. TDS Telecom operating revenues increased 11% ($16.4 million) as total access lines increased by 78,300 or 12%, since March 31, 2000 to 730,500. Operating Expenses rose 14% ($63.1 million) in 2001 reflecting growth in operations. U.S. Cellular's operating expenses increased 14% ($47.8 million) and TDS Telecom's expenses increased 13% ($15.3 million). Operating Income totaled $90.5 million in 2001 and $91.5 million in 2000. U.S. Cellular's operating income decreased 4% ($2.2 million) to $58.5 million in 2001 from $60.6 million in 2000 and its operating income margin, as a percentage of service revenues, declined to 13.8% in 2001 from 16.0% in 2000. The decrease in U.S. Cellular's operating margin was primarily the result of increased revenues, offset by increased cost of minutes used and general and administrative expenses to retain and serve customers. TDS Telecom's operating income increased 4% ($1.1 million) to $32.0 million in 2001 from $30.9 million in 2000 and its operating margin declined to 19.9% in 2001 from 21.4% in 2000. The decrease in TDS Telecom's operating margin was primarily the result of expanding the competitive local exchange business activities. Investment and Other Income totaled $14.5 million in 2001 and $19.6 million in 2000. Gain on Cellular and Other Investments was $17.9 million in 2000 as a result of the sale of a non-strategic minority cellular interest. There were no gains in 2001. Investment Income, net, increased $5.3 million to $7.0 million in the first three months of 2001. Investment income represents the Company's share of income in unconsolidated entities in which the Company has a minority interest and follows the equity method of accounting. Investment income is net of amortization relating to these minority interests. Investment income in 2000 included equity losses and amortization of $7.0 million from the TSR Wireless paging investment while no equity losses or amortization are included in 2001. The paging investment was written off in 2000. 2
Interest Expense increased 27% ($6.1 million) in 2001 reflecting primarily additional interest on higher average short-term debt balances. Income Tax Expense decreased 16% ($5.7 million) in 2001 primarily due to the decline in pretax income. The effective tax rate was 43.9% in 2001 and 44.3% in 2000. Minority Share of (Income) includes the minority public shareholders' share of U.S. Cellular's net income, the minority shareholders' or partners' share of U.S. Cellular's subsidiaries' net income or loss and other minority interests. The decrease in minority share of income primarily reflects the decrease in U.S. Cellular's net income due to a decrease in gains. Three Months Ended March 31, -------------------------------- 2001 2000 Change ------- ------ ------- (Dollars in thousands) Minority Share of (Income) U.S. Cellular Minority Public Shareholders' $ (6,018) $ (8,981) $ 2,963 Minority Shareholders' or Partners' (2,279) (1,015) (1,264) ------ ------ ------ (8,297) (9,996) 1,699 Other 328 (193) 521 ------ ------ ------ $ (7,969) $(10,189) $ 2,220 ======= ======== ======= Income from Continuing Operations totaled $31.2 million, or $.52 per diluted share, in 2001 compared to $35.5 million, or $.57 per diluted share, in 2000. Income, excluding gains and losses, increased to $31.2 million, or $.52 per diluted share in 2001 from $29.2 million, or $.47 per diluted share in 2000. A summary of income from continuing operations and diluted earnings per share from operations and gains is shown below. Three Months Ended March 31, ------------------------------ 2001 2000 ------------ --------- (Dollars in thousands, except per share amounts) Income from Continuing Operations Operations $ 31,222 $ 29,164 Gains -- 6,361 ---------- --------- $ 31,222 35,525 ========== ========= Diluted Earnings Per Share from Continuing Operations Operations $ 0.52 $ 0.47 Gains -- 0.10 ---------- -------- $ 0.52 $ 0.57 ========== ======== Extraordinary Item - loss on debt extinguishment, net of minority interest is related to U.S. Cellular's repurchase of $8.5 million carrying value of its Liquid Yield Option Notes ("LYONS") for $12.0 million. A loss, net of minority interest, of $3.0 million, or $.05 per diluted share, reflects the difference between the purchase price and the carrying value. 3
Cumulative Effect of Accounting Change, net of tax and minority interests, of $(3.8) million in 2000, or $(.06) per diluted share, reflects the implementation of Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements." U.S. Cellular defers recognition of cellular activation and reconnection fees to the accounting period when cellular service is provided to the customer. Under the prior method of accounting, cellular activation fees were recognized at the time the customer signed a cellular contract for service. Net Income Available to Common totaled $28.1 million, or $.47 per diluted share, in 2001, compared to $31.6 million, or $.51 per diluted share, in 2000. 4
U.S. CELLULAR 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 cellular markets throughout the United States. Rapid growth in the customer base is a primary reason for the growth in U.S. Cellular's results of operations. The number of customer units served increased by 514,000, or 19%, since March 31, 2000, to 3,221,000. Three Months Ended March 31, -------------------------------- 2001 2000 -------- ---------- (Dollars in thousands) Operating Revenues Retail service $ 326,541 $ 281,610 Inbound roaming 64,026 73,251 Long-distance and other 33,392 25,169 ------ ------ Service Revenues 423,959 380,030 Equipment Sales 15,810 14,127 ------ ------ 439,769 394,157 ------- ------- Operating Expenses System operations 95,584 81,758 Marketing and selling 71,305 69,458 Cost of equipment sold 33,812 34,597 General and administrative 109,246 81,687 Depreciation 55,244 51,169 Amortization 16,095 14,839 ------ ------ 381,286 333,508 ------- ------- Operating Income $ 58,483 $ 60,649 ======== ======== Operating revenues increased 12% ($45.6 million) in 2001 primarily related to the increase in customer units. Average monthly service revenue per customer decreased 7% ($3.12) to $44.65 in 2001 from $47.77 in 2000. The decline reflects primarily the effect of lower roaming revenue per customer. Retail service revenues (charges to U.S. Cellular's customers for local system usage and usage of systems other than their local systems) increased 16% ($44.9 million) in 2001 due primarily to the 19% customer growth. Average local minutes of use per retail customer increased 41% to 181 in 2001 from 128 in 2000, 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 a lower average revenue per minute of use. Average monthly retail service revenue per customer decreased 3% ($1.01) to $34.39 in 2001 from $35.40 in 2000. Inbound roaming revenues (charges to customers of other systems who use U.S. Cellular's cellular systems when roaming) decreased 13% ($9.2 million) in 2001. The decline in inbound roaming revenue was a result of an increase in roaming minutes of use offset by a decrease in roaming revenue per minute due to the downward trend in negotiated rates. The increase in minutes of use was affected by certain pricing programs offered by other wireless companies. Wireless customers who sign up for these programs are given price incentives to roam in other markets, including U.S. Cellular's markets, thus driving an increase in U.S. Cellular's inbound roaming minutes of use. Management anticipates that the growth rate in inbound roaming minutes of use will be slower throughout the remainder of 2001 as the effect of these pricing programs become present in both periods of comparison. Additionally, as new wireless operators begin service in U.S. Cellular's markets, roaming partners could switch their business to these new operators, further slowing the growth in inbound roaming minutes of use. It is also anticipated that average inbound roaming revenue per minute of use will continue to decline. Average monthly inbound roaming 5
revenue per U.S. Cellular customer decreased 27% ($2.47) to $6.74 in 2001 compared to $9.21 in 2000. The decrease is attributable to a decrease in inbound roaming revenue compared to an increase in the U.S. Cellular customer base. Long-distance and other revenue increased 33% ($8.2 million) for the first three months of 2001 as the volume of long-distance calls billed by U.S. Cellular increased. Average monthly long-distance and other revenue per customer increased 11% ($.36) to $3.52 in 2001 compared to $3.16 in 2000. Operating expenses increased 14% ($47.8 million) in 2001. The increase is primarily related to costs incurred to serve the customer base and general and administrative expense. System operations expenses (costs to provide service) increased 17% ($13.8 million) and consumed 22.5% of service revenues in 2001 and 21.5% in 2000. System operations expenses include customer usage expenses and maintenance, utility and cell site expenses. This increase was due to an increase in the cost of maintaining the network ($5.9 million), an increase in the cost of minutes used on the systems ($4.3 million) and an increase in the costs associated with customer roaming on other companies systems ($3.3 million). Management expects system operations to increase over the next few years, driven by increases in the number of cell sites and increases in minutes of use on the U.S. Cellular system and on other systems when roaming. The number of cell sites increased to 2,597 in 2001 from 2,331 in 2000. General and administrative expenses increased 34% ($27.6 million) and consumed 25.8% of service revenues in 2001 and 21.5% in 2000. The overall increase in administrative expenses reflects the growing customer base and other expenses incurred related to the growth in U.S. Cellular's business. U.S. Cellular incurred additional costs in 2001 related to its customer care centers, which centralize certain customer service functions, and incurred additional costs to retain customers and to provide dual-mode phone units to customers who migrated from analog to digital rate plans. Costs to expand the customer base consist of marketing and selling expenses and the cost of equipment sold. Marketing and selling expenses increased 3% ($1.8 million) in 2001 while cost of equipment sold declined 2% ($785,000). These expenses, less equipment sales revenue, represent the cost to acquire a new customer. Equipment sales revenue increased 12% ($1.7 million) in 2001. Cost per gross customer addition decreased to $308 in 2001 from $338 in 2000. Gross customer activations increased to 290,000 in 2001 from 266,000 in 2000. The increase in marketing and selling expenses was primarily driven by an increase in gross activations. The decrease in cost of equipment sold results from the lower average cost of units sold offset by an increase in units sold, especially dual-mode units. As of March 31, 2001, 54% of U.S. Cellular's customers were on digital rate plans compared to 29% as of March 31, 2000. Depreciation expense increased 8% ($4.1 million) in 2001 primarily due to the 17% increase in average fixed assets since March 31, 2000. Operating income declined 4% ($2.2 million) to $58.5 million in 2001. Operating margin, as a percent of service revenue, decreased to 13.8% in 2001 compared to 16.0% in 2000. The reduction in operating income and operating income margin result from increased revenues, offset by increased costs of minutes used on U.S. Cellular systems and increased general and administrative expense. 6
Management expects service revenues to continue to grow during the remainder of 2001. However, management anticipates that average monthly revenue per customer will decrease as retail service and inbound roaming revenue per minute of use decline and as U.S. Cellular further penetrates the consumer market. Management continues to believe seasonal trends exist in both service revenue, which tend to increase more slowly in the first and fourth quarters, and operating expenses which tend to be higher in the fourth quarter due to increased marketing activities and customer growth, which may cause operating income to vary from quarter to quarter. Additionally, competitors licensed to provide personal communications services ("PCS") have initiated service in certain of U.S. Cellular's markets over the past several years. U.S. Cellular expects PCS operators to continue deployment of PCS throughout all of its market clusters throughout 2001. U.S. Cellular's management continues to monitor other wireless communications providers' strategies to determine how this additional competition is affecting U.S. Cellular's results. Management anticipates that customer growth will be slower in the future, primarily as a result of the increase in the number of competitors in U.S. Cellular's markets. 7
TDS TELECOM OPERATIONS TDS operates its wireline telephone business through TDS Telecommunications Corporation ("TDS Telecom"), a wholly-owned subsidiary. Total access lines served by TDS Telecom increased by 78,300, or 12%, since March 31, 2000 to 730,500. TDS Telecom's 105 incumbent local exchange ("ILEC") subsidiaries served 602,300 access lines at March 31, 2001, a 4.5% (26,200 access lines) increase over the 576,100 access lines at March 31, 2000. On an equivalent access line basis, ILEC access lines increased 5.9% (34,700 access lines) to 623,400 access lines at March 31, 2001 from 588,700 access lines at March 31, 2000. Access line equivalents are derived by converting high capacity data lines to the estimated capacity of one switched access line. TDS Telecom's competitive local exchange ("CLEC") subsidiaries served 128,200 access lines at March 31, 2001, an increase of 52,100 access lines from 76,100 access lines served at March 31, 2000. TDS Telecom plans to expand its CLEC operations into certain mid-sized cities, which are geographically proximate to existing TDS Telecom markets. Three Months Ended March 31, -------------------------------- 2001 2000 ---------- ----------- (Dollars in thousands) Local Telephone Operations Operating Revenues Local service $ 43,126 $ 40,111 Network access and long-distance 74,603 69,256 Miscellaneous 16,715 17,004 ------ ------ $ 134,444 $ 126,371 --------- --------- Operating Expenses Operating expenses 64,263 62,035 Depreciation and Amortization 32,400 30,760 ------ ------ 96,663 92,795 ------ ------ Local Telephone Operating Income $ 37,781 $ 33,576 --------- --------- Competitive Local Exchange Operations Operating Revenues $ 26,617 $ 18,214 --------- --------- Operating Expenses Operating expenses 29,193 18,968 Depreciation and Amortization 3,198 1,960 ----- ----- 32,391 20,928 ------ ------ Competitive Local Exchange Operating (Loss) $ (5,774) $ (2,714) --------- --------- Intercompany revenues (461) (415) Intercompany expenses (461) (415) --------- --------- Operating Income $ 32,007 $ 30,862 ========= ========= Operating revenues increased 11% ($16.4 million) in 2001, reflecting primarily customer growth. Revenues from local telephone operations increased 6% ($8.1 million) in 2001. Average monthly revenue per access line increased 1% ($1.09) to $74.50 in 2001 from $73.41 in 2000. Local service revenues increased 8% ($3.0 million) during 2001. Internal access line growth increased revenues by $1.7 million while the sale of custom calling and advanced features increased revenues by $670,000. Acquisitions increased local service revenue by an additional $650,000. Average monthly local service revenue per access line was $23.90 in 2001 and $23.30 in 2000. Network access and long-distance revenues increased 8% ($5.3 million) during 2001. TDS Telecom began selling long distance service in 2000 which increased revenues by $3.2 million. Revenue generated from access minute growth due to increased network usage increased $1.1 million in 2001. Acquisitions increased network access and long-distance revenues by an additional $930,000. 8
Compensation from state and national revenue pools for recovery of expenses of providing network access decreased $350,000 compared to 2000. Average monthly network access and long-distance revenue per access line was $41.34 in 2001 and $40.23 in 2000. Miscellaneous revenue decreased 2% ($289,000) during 2001. Average monthly miscellaneous revenue per access line was $9.26 in 2001 and $9.88 in 2000. Revenue from competitive local exchange operations increased 46% ($8.4 million) in 2001 as access lines served increased to 128,200 at March 31, 2001 from 76,100 at March 31, 2000. Operating expenses increased 13% ($15.3 million) during 2001. Expenses from local telephone operations increased by 4% ($3.9 million) in 2001. Cash operating expenses increased by 4% ($2.2 million) in 2001 while depreciation and amortization increased 5% ($1.6 million). Local telephone operating expenses are expected to increase due to inflation and the development and introduction of new revenue-producing programs. Competitive local exchange operating expenses increased 55% ($11.5 million) in 2001 due primarily to the costs incurred to grow and serve the customer base and expand competitive local exchange operations. Operating income increased 4% ($1.1 million) to $32.0 million in 2001 reflecting improved local telephone operations operating results offset by operating losses incurred from the expansion of competitive local exchange operations. Operating income from local telephone operations increased 13% ($4.2 million) to $37.8 million. Operating loss from competitive local exchange operations increased $3.1 million to $5.8 million. Operating income from local telephone operations should remain fairly stable or increase slightly with expense increases due to inflation and additional revenue and expenses from new or expanded product offerings. Operating loss from competitive local exchange operations is expected to increase somewhat throughout 2001 due to costs associated with continued expansion into new markets. 9
FINANCIAL RESOURCES AND LIQUIDITY Cash Flows From Continuing Operating Activities. The Company generates substantial internal funds from the operations of U.S. Cellular and TDS Telecom. Cash flows from operating activities totaled $163.8 million in the first three months of 2001 compared to $161.6 million in 2000. Income from continuing operations excluding all noncash items increased 7% ($10.7 million) to $157.6 million in the first three months of 2001. Changes in working capital and other assets and liabilities from operations provided $6.2 million in 2001 and $14.7 million in 2000 reflecting timing differences in the payment of accounts payable and accrued taxes and the receipt of accounts receivable. Three Months Ended March 31, ------------------------ 2001 2000 ---- ---- (Dollars in thousands) Income from continuing operations $ 31,222 $ 35,525 Noncash items included in Income from continuing operations 126,384 111,364 ------- ------- Income from continuing operations excluding all noncash items 157,606 146,889 Changes in working capital and other assets and liabilities from operations 6,235 14,669 ----- ------ $ 163,841 $ 161,558 ----------- --------- ----------- --------- Cash Flows From Continuing Investing Activities. TDS makes substantial investments each year to acquire, construct, operate and maintain modern high-quality communications networks and facilities as a basis for creating long-term value for shareowners. Cash flows from investing activities required $213.6 million in the first three months of 2001 compared to $48.5 million in 2000. Capital expenditures required $151.3 million in 2001 and $75.9 million in 2000. Acquisitions, net of cash acquired, required $56.2 million in 2001. U.S. Cellular acquired a majority interest in one cellular market. The sale of a non-strategic cellular interest provided $22.5 million in 2000, reducing total cash flows required for investing activities. The primary purpose of TDS's construction and expansion strategy is to provide for significant customer growth, to upgrade service, and to take advantage of service-enhancing and cost-reducing technological developments. U.S. Cellular capital expenditures totaled $120.4 million in 2001 and $59.8 million in 2000 representing the construction of cell sites, the development of office systems and the change out of analog radio equipment for digital radio equipment. TDS Telecom capital expenditures for its local telephone operations totaled $12.8 million in 2001 and $13.0 million in 2000 to accommodate growth in existing ILEC markets. Capital expenditures for competitive local exchange operations totaled $18.1 million in 2001 and $3.1 million in 2000 for expansion of new and existing CLEC markets. Cash Flows From Continuing Financing Activities. Cash flows from financing activities required $10.3 million in the first three months of 2001 and $111.9 million in 2000. During the first three months of 2001 and 2000, TDS repurchased 110,000 shares and 545,500 shares, respectively, for an aggregate price of $10.3 million and $58.0 million, respectively. Cash required for the repurchase of common shares totaled $13.5 million in 2001 and $59.6 million in 2000. The difference between the purchase price and cash paid is due to the timing of settlements on trades. 10
During the first three months of 2001, U.S. Cellular paid $11.0 million to settle repurchases of U.S. Cellular Common Shares made in late December 2000. During the first three months of 2000, U.S. Cellular repurchased 817,300 common shares for an aggregate price of $56.7 million. Cash required for the repurchase of common shares in 2000 totaled $51.5 million. In 2001, U.S. Cellular retired LYONs securities with a carrying value of $15.8 million for cash totaling $10.8 million and 162,000 U.S. Cellular Common Shares. An additional $1.2 million will be paid in April to settle retirements that occur at the end of March, 2001. Notes Payable balances increased by $36.5 million in 2001 and $7.7 million in 2000. Dividends paid on Common and Preferred Shares, excluding dividends reinvested, totaled $8.1 million in 2001 and $7.8 million in 2000. Cash Flows From Discontinued Operations. Cash outflows from discontinued operations totaled $68.3 million in 2000 reflecting primarily amounts borrowed from TDS to fund the operating activities of Aerial Communications, Inc. LIQUIDITY TDS and its subsidiaries had cash and temporary investments totaling $42.7 million at March 31, 2001. TDS also had $587 million of bank lines of credit for general corporate purposes at March 31, 2001. Unused amounts of such lines totaled $106.5 million. These line of credit agreements provide for borrowings at negotiated rates up to the prime rate. TDS is currently discussing, with its banks, options for increasing its short-term financing facilities to accommodate various acquisitions related expenditures, as outlined below. Management is confident that adequate arrangements will be made to finance any near-term capital requirements. U.S. Cellular's capital additions budget for 2001 totals approximately $425 - $450 million, primarily to add cell sites to expand and enhance coverage, including adding digital service capabilities to its systems. At March 31, 2001, the remaining amount of capital spending approximated $305 - $330 million. U.S. Cellular plans to finance its cellular construction program using primarily internally generated cash. U.S. Cellular's operating cash flow totaled $561.2 million for the twelve months ended March 31, 2001, up 10% ($52.7 million) from 2000. In addition, U.S. Cellular had $500 million of bank lines of credit for general corporate purposes at March 31, 2001, $445 million of which was unused. These line of credit agreements provide for borrowings at the London InterBank Offered Rate ("LIBOR") plus 19.5 basis points. TDS Telecom's capital additions budget for 2001 approximates $200 million. The local telephone companies are expected to spend approximately $100 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 $100 million to expand current markets and enter new markets. At March 31, 2001, the remaining amount of capital spending approximated $87 million for local telephone companies and $82 million for the competitive local exchange companies. TDS Telecom plans to finance its construction program using primarily internally generated cash supplemented by long-term financing from federal government programs. TDS Telecom's operating cash flow totaled $265.2 million for the twelve months ended March 31, 2001, up 9% ($21.2 million) from 2000. In addition, TDS Telecom local telephone subsidiaries had $105.6 million in unadvanced loan funds from federal government programs to finance the telephone construction activities as of March 31, 2001. TDS and U.S. Cellular plan to continue the repurchase of their common shares, as market conditions warrant, on the open market or at negotiated prices in private transactions. The repurchase programs are intended to create value for the shareholders. The repurchases of common shares will be funded by internal cash flow, supplemented by short-term borrowings. The U.S. Cellular Board of Directors has authorized management to opportunistically repurchase 11
LYONs in private transactions. U.S. Cellular may also purchase a limited amount of LYONs in open-market transactions from time to time. U.S. Cellular LYONs are convertible, at the option of their holders, at any time prior to maturity, redemption or purchase, into U.S. Cellular Common Shares at a conversion rate of 9.475 U.S. Cellular Common Shares per LYON. Upon conversion, U.S. Cellular has the option to deliver to holders either U.S. Cellular Common Shares or cash equal to the market value of the U.S. Cellular Common Shares into which the LYONs are convertible. TDS and U.S. Cellular continually review attractive opportunities to acquire additional telecommunications companies and wireless spectrum, which add value to the business. TDS, with U.S. Cellular and TDS Telecom, continues to assess the makeup of cellular and telephone holdings in order to maximize the benefits derived from clustering. At March 31, 2001, TDS had an agreement to acquire Chorus Communications Group, Ltd., for $195 million cash and the assumption of debt. In April 2001, U.S. Cellular entered into agreements to acquire certain 10 megahertz D and E block PCS licenses covering 4.9 million population equivalents in the Midwest for $78 million in cash. These transactions are expected to be completed during 2001. 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 Iowa as well as other Airadigm assets. As of March 31, 2001, TDS had provided funding of $46.4 million to Airadigm. Under the plan of reorganization, TDS's portion of the funding could possibly aggregate up to an additional $145 million. U.S. Cellular is a limited partner in Black Crow Wireless L.P., which was a successful bidder for 17 licenses in 13 markets for $283.9 million. As a result of its 85% economic interest in Black Crow, U.S. Cellular, as of March 31, 2001, has contributed $9.7 in capital and loaned $45.5 million to Black Crow, and loaned $563,000 to the general partner of Black Crow. The exact nature of U.S. Cellular's financial commitment going forward will be developed as Black Crow develops its long-term business and financing plans. U.S. Cellular is committed to contributing capital along the lines of its partnership interest, and has committed to loan the general partner up to $20 million. U.S. Cellular has no other loan commitments but it is possible that U.S. Cellular will provide guarantees or the other financial undertakings to support Black Crow's efforts at raising debt financing. Thirteen of the 17 licenses for which Black Crow was the successful bidder were auctioned by the FCC subject to the final outcome of certain judicial proceedings initiated by parties claiming to have continuing interests in such licenses. These 13 licenses, along with various other licenses were originally awarded by the FCC in a prior auction. The licenses were subsequently cancelled and reauctioned by the FCC after the winning bidders of the prior auctions were unable to make their required payments to the FCC on a timely basis. The winning bidders in the prior auctions are contesting the FCC's decision to revoke and reauction the licenses. In the event the parties are successful in their challenge against the FCC, the winning bidders in the January 2001 auctions, including Black Crow, may be required to surrender these licenses. In such event, Black Crow would receive a refund of payments made to the FCC for such licenses and only acquire four licenses in three markets for a total cost of $3.8 million, which would significantly reduce U.S. Cellular's current and potential future financial commitments. At March 31, 2001, TDS owned 35.8 million common shares of VoiceStream Wireless Corporation. On July 24, 2000, Deutsche Telekom AG announced a proposed merger of VoiceStream with Deutsche Telekom. The proposed merger calls for the exchange of 3.2 shares of Deutsche Telekom and $30 for each share of VoiceStream owned (subject to certain adjustments and 12
proration). The merger has been approved by VoiceStream stockholders and all required regulatory approvals have been received. Upon completion of the merger, TDS expects to receive approximately 125-130 million Deutsche Telekom shares and $400 - $500 million in cash, after taxes. These amounts are subject to change due to changes in the Deutsche Telekom share price and the euro to U.S. dollar exchange rate. The merger is anticipated to close in the second quarter of 2001. TDS holds various investments in publicly traded companies valued at $3.7 billion as of March 31, 2001. These assets are held for investment purposes and 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. Management believes that internal cash flows and funds available from cash and cash equivalents, lines of credit, and longer-term financing commitments provide sufficient financial flexibility. TDS and its subsidiaries have access to public and private capital markets to help meet its long-term financing needs. TDS and its subsidiaries anticipate accessing public and private capital markets to issue debt and equity securities only when and if capital requirements, financial market conditions and other factors warrant. MARKET RISK The Company is subject to market rate risks due to fluctuations in interest rates and equity markets. The majority of the Company's debt is in the form of long-term fixed-rate notes, debentures and trust securities with original maturities ranging up to 40 years. Accordingly, fluctuations in interest rates can lead to fluctuations in the fair value of such instruments. TDS has not entered into financial derivatives to reduce its exposure to interest rate risks. There have been no material changes to TDS's outstanding debt and trust securities instruments since December 31, 2000. TDS owns a portfolio of marketable equity securities. The market value of these investments, principally VoiceStream Wireless Corporation common shares and Vodafone AirTouch plc American Depository Receipts amounted to $3.73 billion at March 31, 2001. A hypothetical 10% decrease in the share prices of these investments would result in a $373.4 million decline in the market value of the investments. 13
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT This Management's Discussion and Analysis of Results of Operations and Financial Condition and other sections of this Quarterly Report contain statements that are not based on historical fact, including the words "believes", "anticipates", "intends", "expects", and similar words. These statements constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, but are not limited to: * general economic and business conditions, both nationally and in the regions in which TDS operates, * changes in competition in the markets in which TDS operates, * advances in telecommunications technology, * changes in telecommunications regulatory environment, * pending and future litigation, * acquisitions/divestitures of properties and or licenses, * changes in growth in wireless customers, penetration rates, churn rates, roaming rates and the mix of products and services offered in wireless markets, and * changes in growth of ILEC and CLEC customers, churn rates and mix of products and services offered in ILEC and CLEC markets. TDS undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Readers should evaluate any statements in light of these important factors. 14
<TABLE> <CAPTION> TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME --------------------------------- Unaudited --------- Three Months Ended March 31, --------------------------------------- 2001 2000 --------------- --------------- (Dollars in thousands, except per share amounts) <S> <C> <C> OPERATING REVENUES U.S. Cellular $ 439,769 $ 394,157 TDS Telecom 160,600 144,170 ------- ------- 600,369 538,327 OPERATING EXPENSES U.S. Cellular 381,286 333,508 TDS Telecom 128,593 113,308 ------- ------- 509,879 446,816 ------- ------- OPERATING INCOME 90,490 91,511 ------ ------ INVESTMENT AND OTHER INCOME Interest and dividend income 5,522 2,470 Investment income, net of amortization 6,965 1,659 Gain on cellular and other investments -- 17,851 Other income (expense), net 1,988 (2,411) ----- ------ 14,475 19,569 ------ ------ INCOME BEFORE INTEREST AND INCOME TAXES 104,965 111,080 Interest expense 28,957 22,829 Minority interest in income of subsidiary trust 6,203 6,203 ----- ----- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST 69,805 82,048 Income tax expense 30,614 36,334 ------ ------ INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 39,191 45,714 Minority Share of (Income) (7,969) (10,189) ------ ------- INCOME FROM CONTINUING OPERATIONS 31,222 35,525 Extraordinary Item - loss on extinguishment of debt, net of minority interest (2,988) -- Cumulative effect of Accounting Change net of tax and minority interest -- (3,841) ------ ------ NET INCOME 28,234 31,684 Preferred Dividend Requirement (118) (134) ------------ ------------- NET INCOME AVAILABLE TO COMMON $ 28,116 $ 31,550 ============ ============= BASIC WEIGHTED AVERAGE COMMON SHARES (000s) 58,718 61,078 BASIC EARNINGS PER SHARE (Note 8) Income from continuing operations $ 0.53 $ 0.58 Extraordinary Item - loss on extinguishment of debt, net of tax (0.05) -- Cumulative effect of Accounting Change -- (0.06) -------------- -------------- Net income available to common $ 0.48 $ 0.52 ============== ============== DILUTED EARNINGS PER SHARE (Note 8) Income from continuing operations $ 0.52 $ 0.57 Extraordinary Item - loss on extinguishment of debt, net of tax (0.05) -- Cumulative effect of Accounting Change $ -- (0.06) -------------- -------------- Net income available to common $ 0.47 $ 0.51 ============== ============== DIVIDENDS PER SHARE $ .135 $ .125 ============== ============== <FN> The accompanying notes to financial statements are an integral part of these statements. </FN> </TABLE> 15
<TABLE> <CAPTION> TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Unaudited --------- Three Months Ended March 31, ----------------------------------------- 2001 2000 ---------------- ---------------- (Dollars in thousands) CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES <S> <C> <C> Income from continuing operations $ 31,222 $ 35,525 Add (Deduct) adjustments to reconcile income from continuing operations to net cash provided by operating activities Depreciation and amortization 106,937 98,729 Deferred taxes 12,585 11,966 Investment income (7,679) (4,958) Minority share of income 7,969 10,189 (Gain) on cellular and other investments -- (17,851) Noncash interest expense 2,843 4,581 Other noncash expense 3,729 8,708 Changes in assets and liabilities from operations Change in accounts receivable 34,522 44,680 Change in materials and supplies 10,693 418 Change in accounts payable (36,441) (25,636) Change in accrued interest (12,511) (13,347) Change in accrued taxes 13,963 17,398 Change in other assets and liabilities (3,991) (8,844) ------ ------ 163,841 161,558 ------- ------- CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES Capital expenditures (151,345) (75,908) Acquisitions, net of cash acquired (56,180) -- Investments in and advances to investment entities and license costs (1,761) (730) Distributions from investments 3,620 5,827 Proceeds from investment sales -- 22,500 Other investing activities (7,896) (194) ------ ---- (213,562) (48,505) -------- ------- CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES Issuance of long-term debt 360 837 Repayments of long-term debt (3,915) (3,773) Change in notes payable 36,500 7,700 Dividends paid (8,053) (7,835) Repurchase of TDS Common Shares (13,461) (59,571) Repurchase of U.S. Cellular Common Shares (10,992) (51,522) Repurchase and conversion of LYONs (10,778) -- Other financing activities 55 2,223 ------- -------- (10,284) (111,941) ------- -------- CASH FLOWS FROM DISCONTINUED OPERATIONS -- (68,284) ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS (60,005) (67,172) CASH AND CASH EQUIVALENTS - Beginning of period 99,019 111,010 ------------- -------------- End of period $ 39,014 $ 43,838 ============= ============== <FN> The accompanying notes to financial statements are an integral part of these statements. </FN> </TABLE> 16
<TABLE> <CAPTION> TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------ (Unaudited) December 31, March 31, 2001 2000 ------------------- ----------------- (Dollars in thousands) CURRENT ASSETS <S> <C> <C> Cash and cash equivalents $ 39,014 $ 99,019 Temporary investments 3,640 3,616 Accounts receivable from customers and others 311,825 337,485 Notes Receivable 46,292 817 Materials and supplies, at average cost 52,016 61,450 Other current assets 25,700 24,713 ------ ------ 478,487 527,100 ------- ------- INVESTMENTS Marketable equity securities 3,733,547 4,121,904 Intangible Assets Cellular license acquisitions costs, net 1,248,974 1,167,776 Franchise costs and other costs, net 202,031 203,532 Investments in unconsolidated entities 191,007 233,710 Notes Receivable 91,624 128,707 Other investments 13,450 13,588 ------ ------ 5,480,633 5,869,217 --------- --------- PROPERTY, PLANT AND EQUIPMENT, NET U.S. Cellular 1,337,016 1,265,347 TDS Telecom 916,192 920,678 ------- ------- 2,253,208 2,186,025 --------- --------- OTHER ASSETS AND DEFERRED CHARGES 55,618 52,267 ------ ------ TOTAL ASSETS $ 8,267,946 $ 8,634,609 ================ ============= <FN> The accompanying notes to financial statements are an integral part of these statements. </FN> </TABLE> 17
<TABLE> <CAPTION> TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ (Unaudited) December 31, 2000 March 31, 2001 -------------------- ------------------- (Dollars in thousands) <S> <C> <C> CURRENT LIABILITIES Current portion of long-term debt $ 15,643 $ 15,639 Notes payable 535,500 499,000 Accounts payable 235,935 275,901 Advance billings and customer deposits 70,236 61,958 Accrued interest 12,401 24,912 Accrued taxes 31,744 17,904 Accrued compensation 41,023 52,314 Other current liabilities 38,559 36,783 ------ ------ 981,041 984,411 ------- ------- DEFERRED LIABILITIES AND CREDITS 1,659,967 1,802,207 --------- --------- LONG-TERM DEBT, excluding current portion 1,156,254 1,172,987 --------- --------- MINORITY INTEREST in subsidiaries 438,195 431,110 ------- ------- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES of Subsidiary Trusts Holding Solely Company Subordinated Debentures (a) 300,000 300,000 ------- ------- PREFERRED SHARES 7,692 7,827 ----- ----- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $.01 per share 556 555 Series A Common Shares, par value $.01 per share 68 69 Capital in excess of par value 1,820,041 1,816,619 Treasury Shares, at cost (3,780,000 shares and 3,716,000 shares, respectively) (392,016) (383,501) Accumulated other comprehensive income (loss) (404,702) (178,344) Retained earnings 2,700,850 2,680,669 --------- --------- 3,724,797 3,936,067 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,267,946 $ 8,634,609 ============== ============= (a) The sole asset of TDS Capital I is $154.6 million principal amount of 8.5% subordinated debentures due 2037 from TDS. The sole asset of TDS Capital II is $154.6 million principal amount of 8.04% subordinated debentures due 2038 from TDS. <FN> The accompanying notes to financial statements are an integral part of these statements. </FN> </TABLE> 18
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of March 31, 2001 and December 31, 2000, and the results of operations and cash flows for the three months ended March 31, 2001 and 2000. The results of operations for the three months ended March 31, 2001 and 2000, are not necessarily indicative of the results to be expected for the full year. 2. Discontinued Operations In September of 1999, the Board of Directors of TDS approved a plan of merger between Aerial Communications, Inc. ("Aerial"), its then over 80%-owned personal communications services company, and VoiceStream Wireless Corporation ("VoiceStream"). The merger closed on May 4, 2000. As a result of the merger, Aerial shareholders received 0.455 VoiceStream common shares for each share of Aerial stock they owned. TDS received 35,570,493 shares of VoiceStream common stock valued at $3.90 billion at closing. TDS recognized a gain of approximately $2.13 billion, net of $1.48 billion in taxes, on this transaction. TDS had a basis in Aerial of $287.8 million, including deferred losses of $75.9 million from September 17, 1999 to May 4, 2000. TDS was released from its guarantees of Aerial's long-term debt at the closing of the merger. In addition, the net settlement of intercompany amounts due from/to Aerial was repaid to TDS at the closing of the merger. 19
Summarized income statement information relating to discontinued operations, excluding any corporate charges and intercompany interest expense, is as follows: Three Months Ended March 31, 2000 ------------------------ (Dollars in thousands) Revenues $ 67,529 Expenses 121,472 ------- Operating (Loss) (53,943) Other income 5,255 Interest expense (6,330) ------ Loss Before Income Taxes and Minority Interest (55,018) Income tax benefit 18,251 ------ Loss before Minority Interest (36,767) Minority share of loss 11,655 ------ Loss from Discontinued Operations (25,112) Losses deferred after measurement date 25,112 ----------- Net Loss From Discontinued Operations $ -- =========== Summarized cash flow statement information relating to discontinued operations is as follows: Three Months Ended March 31, 2000 ------------------------ (Dollars in thousands) Cash flows from operating activities $ (35,138) Cash flows from financing activities (4,444) Cash flows from investing activities (13,128) ------- Cash provided (used) by discontinued operations (52,710) (Increase) decrease in cash included in net Assets of discontinued operations (15,574) ------- Cash flows from discontinued operations $ (68,284) ============ 3. Marketable Equity Securities Marketable equity securities include the Company's investments in equity securities, primarily VoiceStream common shares and Vodafone AirTouch plc American Depository Receipts. These securities are classified as available-for-sale and stated at fair market value. 20
Information regarding the Company's marketable equity securities is summarized below. March 31, December 31, 2001 2000 -------------- ------------- (Dollars in thousands) Available-for-sale Equity Securities Aggregate Fair Value $ 3,733,547 $ 4,121,904 Adjusted Basis 4,417,328 4,417,328 --------- --------- Gross Unrealized Holding Losses (683,781) (295,424) Tax Effect 266,621 114,213 ------- ------- Unrealized Holding Losses, net of tax (417,160) (181,211) Minority Share of Unrealized Holding Losses (12,458) (2,867) ------- ------ Net Unrealized Holding Losses $ (404,702) $ (178,344) =============== ============= 4. Common Stockholders' Equity The TDS Board of Directors authorized the repurchase of up to 2.0 million TDS Common Shares in February 2000 and an additional 2.0 million shares in August 2000. As of March 31, 2001, TDS has repurchased 2,775,700 common shares under this program, of which 110,000 were repurchased in the first three months of 2001. 5. Gain on Cellular and Other Investments TDS recognized gains of $17.9 million in 2000 due to the sale of a minority cellular interest. 6. Other Comprehensive Income (Loss) The Company's Comprehensive Income (Loss) includes Net Income and Unrealized Gains (Losses) from Marketable Equity Securities that are classified as "available-for-sale". The following table summarizes the Company's Comprehensive Income (Loss). Three Months Ended March 31, --------------------------- 2001 2000 --------- ----------- (Dollars in thousands) Accumulated Other Comprehensive Income (Loss) Balance, beginning of period $ (178,344) $ 179,071 ------------ ------------ Add: Net unrealized gains (losses) on securities (388,358) 50,564 Income tax effect 152,409 (19,834) ------- ------- (235,949) 30,730 Minority share of unrealized (gains) losses 9,591 (5,841) ----- ------ Net unrealized gains (losses) (226,358) 24,889 -------- ------ Balance, end of period $ (404,702) $ 203,960 ============ ============ 21
Three Months Ended March 31, -------------------------- 2001 2000 --------- -------- (Dollars in thousands) Comprehensive Income (Loss) Net Income $ 28,234 $ 31,684 Net change in unrealized gains (losses) on securities (226,358) 24,889 -------- ------ $ (198,124) $ 56,573 =========== ========= 7. Extraordinary Item - Loss on Extinguishment of Debt U.S. Cellular repurchased Liquid Yield Option Notes (LYONs) with a carrying value of $15.8 million for $12.0 million in cash and 162,000 U.S. Cellular Common Shares in the first three months of 2001. A loss, net of minority interest, of $3.0 million, or $.05 per diluted share in the first quarter was recorded to account for the difference between the purchase price and the carrying value of the LYONs repurchases for cash. 8. Earnings Per Share The amounts used in computing Earnings per Common Share and the effect on income and the weighted average number of Common and Series A Common Shares of dilutive potential common stock are as follows: <TABLE> <CAPTION> Basic Earnings Per Share Three Months Ended March 31, ---------------------------------- 2001 2000 ---------------- -------------- (Dollars in thousands, except per share amounts) <S> <C> <C> Income from Continuing Operations $ 31,222 $ 35,525 Less: Preferred Dividends 118 134 ----------- -------------- Income Available to Common Used in Basic Earnings Per Share 31,104 35,391 Extraordinary Item - loss on extinguishment of debt (2,988) -- Cumulative Effect of Accounting Change -- (3,841) Net Income Available to Common used in Basic Earnings Per Share $ 28,116 $ 31,550 =========== ============== Weighted Average Number of Common Shares Used in Basic Earnings Per Share 58,718 61,078 ====== ====== Basic Earnings Per Common Share From Continuing Operations $ 0.53 $ 0.58 Extraordinary Item - loss on extinguishment of debt (0.05) -- Cumulative Effect of Accounting Change -- (0.06) ----------- -------------- $ 0.48 $ 0.52 =========== ============== </TABLE> 22
<TABLE> <CAPTION> Three Months Ended Diluted Earnings Per Share: March 31, ----------------------------------- 2001 2000 ---------- ------------- (Dollars in thousands, except per share amounts) <S> <C> <C> Income Available to Common Used in Basic Earnings Per Share $ 31,104 $ 35,391 Reduction in Preferred Dividends if Preferred Shares Converted into Common Shares 58 78 Minority Income Adjustment (151) (206) -------- ------- Income Available to Common Used in Diluted Earnings Per Share 31,011 35,263 Extraordinary Item - loss on extinguishment of debt (2,988) -- Cumulative Effect of Accounting Change -- (3,841) Net Income Available to Common Used ------------- -------------- in Diluted Earnings Per Share $ 28,023 $ 31,422 ============= ============== Weighted Average Number of Common Shares Used in Basic Earnings Per Share 58,718 61,078 Effect of Dilutive Securities Common Shares Outstanding if Preferred Shares Converted 174 216 Stock Options 370 530 Common Shares Issuable -- 13 Weighted Average Number of Common Shares ------------- -------------- Used in Diluted Earnings Per Share 59,262 61,837 ============= ============== Diluted Earnings Per Common Share From Continuing Operations $ 0.52 $ 0.57 Extraordinary Item - loss on extinguishment of debt (0.05) -- Cumulative Effect of Accounting Change -- (0.06) ------------- -------------- $ 0.47 $ 0.51 ============= ============== </TABLE> The minority income adjustment reflects the additional minority share of U.S. Cellular's income computed as if all of U.S. Cellular's issuable securities were outstanding. 9. Supplemental Cash Flow Information Cash and cash equivalents include cash and those short-term, highly liquid investments with original maturities of three months or less. Those investments with original maturities of more than three months to twelve months are classified as temporary investments. Temporary investments are stated at cost, which approximates market. Those investments with original maturities of more than 12 months are classified with other investments and are stated at amortized cost. 23
TDS acquired a cellular market during the first three months of 2001. In conjunction with this acquisition, the following assets were acquired. Three Months Ended March 31, 2001 ------------------ (Dollars in thousands) Cellular licenses $ 55,055 Property, plant and equipment 1,125 ------------ Decrease in cash due to acquisitions $ 56,180 ============ The following table summarizes interest and income taxes paid. Three Months Ended March 31, ------------------ 2001 2000 ------ ---------- (Dollars in thousands) Interest Paid Continuing Operations $ 38,447 $ 31,418 Discontinued Operations -- 1,448 Income Taxes Paid (net of income tax refund received of $15,000 in 2000) $ 7,707 $ (6,233) 24
10. Business Segment Information <TABLE> <CAPTION> Financial data for the Company's business segments for each of the three month periods ended or at March 31, 2001 and 2000 are as follows: Three Months Ended Discontinued or at March 31, 2001 U.S. Cellular TDS Telecom All Other (1) Operations Total - -------------------- ------------- ----------- ------------- ---------- ----- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Operating revenues $ 439,769 $ 160,600 $ -- $ -- $ 600,369 Operating cash flow 129,822 67,605 -- -- 197,427 Depreciation and Amortization expense 71,339 35,598 -- -- 106,937 Operating income 58,483 32,007 -- -- 90,490 Marketable Equity Securities 288,616 83,262 3,361,669 -- 3,733,547 Total Assets 3,355,192 1,440,013 3,472,741 -- 8,267,946 Capital Expenditures $ 120,410 $ 30,935 $ -- $ -- $ 151,345 Three Months Ended Discontinued or at March 31, 2000 U.S. Cellular TDS Telecom All Other (1) Operations Total - -------------------- ------------- ----------- ------------- ---------- ----- (Dollars in thousands) Operating revenues $ 394,157 $ 144,170 $ -- $ -- $ 538,327 Operating cash flow 126,657 63,582 -- -- 190,239 Depreciation and Amortization expense 66,008 32,720 -- -- 98,728 Operating income 60,649 30,862 -- -- 91,511 Marketable Equity Securities 597,266 174,171 122,407 -- 893,844 Total Assets 3,325,817 1,441,235 276,109 309,940 5,353,101 Capital Expenditures $ 59,831 $ 16,077 $ -- $ -- $ 75,908 <FN> (1) Consists of the TDS Corporate operations and all other businesses not included in the U.S. Cellular or TDS Telecom segments. </FN> </TABLE> 25
PART II. OTHER INFORMATION Item 1. Legal Proceedings. - --------------------------- On April 11, 2000, two affiliates of U.S. Cellular, along with two unrelated wireless carriers, filed a declaratory judgment action in the United States District Court for the Northern District of Iowa against the Iowa Attorney General. This action was in response to the Attorney General's ongoing investigation of certain wireless industry practices involving wireless service agreements and related matters. The suit by U.S. Cellular and the other wireless carriers seeks to have certain state laws declared inapplicable to wireless service agreements and such practices. In response, the Iowa Attorney General filed suit in the Iowa State District Court for Polk County against U.S. Cellular, alleging violations of various state consumer credit and other consumer protection laws. The Attorney General is seeking injunctive relief, barring the enforcement of contracts in excess of four months, and related relief. The Attorney General is also seeking unspecified reimbursements for customers, statutory fines ($40,000 for certain violations and $5,000 for others, per violation) as well as fees and costs. This case was removed to the U.S. District Court for the Southern District of Iowa. On August 7, 2000 the U.S. District Court in the Southern District granted the Attorney General's motion to remand the case to state court. On September 15, 2000 the U.S. District Court in the Northern District dismissed U.S. Cellular's Complaint in its entirety. U.S. Cellular has filed an appeal of the grant of the motion to dismiss the Northern District case. U.S. Cellular vigorously denies the allegations of the Iowa Attorney General in the case now remanded to state court and intends to vigorously contest this case. Item 5. Other Information. - --------------------------- On May 3, 2001, U.S. Cellular announced that it had entered into a definitive agreement with McLeodUSA Incorporated of Cedar Rapids, Iowa to acquire certain 10 megahertz D and E block PCS licenses covering 4.7 million population equivalents in Iowa, Illinois and Nebraska. A copy of the news release is attached as Exhibit 99. Item 6. Exhibits and Reports on Form 8-K. - ------------------------------------------ (a) Exhibit 11 - Computation of earnings per common share is included herein as footnote 8 to the financial statements. (b) Exhibit 12 - Statement regarding computation of ratios. (c) Exhibit 99 - U.S. Cellular news release announcing the purchase of PCS Licenses from McLeodUSA Incorporated. (d) Reports on Form 8-K filed during the quarter ended March 31, 2001: TDS filed a Current Report on Form 8-K, dated January 25, 2001, reporting fourth quarter results and other financial information. TDS also announced that it was restating consolidated financial statements for 1993 through 1999 and the three quarters ended September 30, 2000. TDS filed a Current Report on Form 8-K dated January 26, 2001, for the purpose of filing United States Cellular Corporation's news release announcing that Black Crow Wireless L.P. was the high bidder for 17 licenses in 13 markets in the Federal Communications Commission C and F block broadband PCS spectrum auction that concluded on January 26, 2001. 26
SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELEPHONE AND DATA SYSTEMS, INC. -------------------------------- (Registrant) Date May 11, 2001 /s/ Sandra L. Helton -------------------------- --------------------------------- Sandra L. Helton, Executive Vice President (Chief Financial Officer) Date May 11, 2001 /s/ D. Michael Jack -------------------------- --------------------------------- D. Michael Jack, Vice President and Controller (Principal Accounting Officer) Signature page for the TDS 2001 First Quarter Form 10-Q