Cellco Partnership - Verizon Wireless

[Pages:23]UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one) [ x ]

[ ]

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

For the quarterly period ended March 31, 2003

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 333-92214

Cellco Partnership

(Exact name of registrant as specified in its charter)

Delaware

(State of Organization)

22-3372889

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

180 Washington Valley Road Bedminster, New Jersey

(Address of principal executive offices)

07921

(Zip Code)

Registrant's telephone number (908) 306-7000

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 No __

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes__ No

Item No. Part I. Financial Information

Table of Contents

1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations and Comprehensive Income Three months ended March 31, 2003 and 2002 Condensed Consolidated Balance Sheets March 31, 2003 and December 31, 2002 Condensed Consolidated Statements of Cash Flows Three months ended March 31, 2003 and 2002 Notes to Unaudited Condensed Consolidated Financial Statements

2. Management's Discussion and Analysis of Financial Condition and Results of Operations

3. Quantitative and Qualitative Disclosures About Market Risk 4. Controls and Procedures

Part II. Other Information

1. Legal Proceedings 6. Exhibits and Reports on Form 8 -K

Signature Certifications

Page

1 2 3 4 8 14 14

15 15 16 17

Part I - Financial Information

Item 1. Financial Statements

(Dollar in Millions)(Unaudited)

Operating Revenue Service revenue Equipment and other

Total operating revenue

Condensed Consolidated Statements of Operations and Comprehensive Income Cellco Partnership (d/b/a Verizon Wireless)

Three Months Ended March 31,

2003

2002

$

4,660 $

4,052

426

378

5,086

4,430

Operating Costs and Expenses Cost of service (excluding depreciation and amortization related to network assets included below) Cost of equipment Selling, general and administrative Depreciation and amortization Sales of assets, net

Total operating costs and expenses

Operating Income

Other Income (Expenses) Interest expense, net Minority interests Equity in income of unconsolidated entities Other, net

Income before provision for income taxes Provision for income taxes

Net Income

Other Comprehensive Income Unrealized gain on derivative financial instruments

Comprehensive Income

710 729 1,866 907

-

4,212

874

(168 ) (36) 3 1

674 (45)

629

666 579 1,685 782

1

3,713

717

(153) (14)

3

-

553 (36)

517

5

1

$

634 $

518

See Notes to Unaudited Condensed Consolidated Financial Statements 1

Condensed Consolidated Balance Sheets Cellco Partnership (d/b/a Verizon Wireless)

(Dollars in Millions) (Unaudited)

Assets Current assets

Cash Receivables, net of allowances of $293 and $282 Unbilled revenue Inventories, net Prepaid expenses and other current assets

Total current assets

Property, plant and equipment, net Wireless licenses, net Other intangibles, net Investments in unconsolidated entities Deferred charges and other assets, net

Total assets

Liabilities and Partners' Capital Current liabilities

Short-term obligations, including current maturities Due to affiliates, net Accounts payable and accrued liabilities Advance billings Other current liabilities

Total current liabilities

Long-term debt Due to affiliates Deferred tax liabilities, net Other non-current liabilities

Total liabilities

Minority interests in consolidated entities Partner's capital subject to redemption

Commitments and contingencies (see Note 6) Partners' capital

Capital Accumulated other comprehensive loss

Total partners' capital

Total liabilities and partners' capital

See Notes to Unaudited Condensed Consolidated Financial Statements

2

March 31, 2003

December 31, 2002

$

203 $

124

1,702

1,988

340

369

290

331

428

404

2,963

3,216

17,957 40,093

1,461 227 431

17,688 40,014 1,594

225 449

$

63,132 $

63,186

$

1,581 $

1,576

7,424

6,580

2,343

2,618

562

536

136

139

12,046

11,449

2,541 2,781 4,175

370

21,913

1,521 20,000

2,569 2,781 4,165

358

21,322

1,575 20,000

19,698

-

20,294 (5)

19,698

20,289

$

63,132 $

63,186

Condensed Consolidated Statements of Cash Flows Cellco Partnership (d/b/a Verizon Wireless)

(Dollars in Millions) (Unaudited)

Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization Equity in loss of unconsolidated entities Minority interests Net loss on disposal of property, plant and equipment Changes in certain assets and liabilities (net of the effects of purchased and disposed businesses)

Net cash provided by operating activities

Cash Flows from Investing Activities Capital expenditures Proceeds from sale of property, plant and equipment Acquisitions of businesses and licenses, net of cash acquired Contributions to unconsolidated entities Distributions from unconsolidated entities

Net cash used in investing activities

Cash Flows from Financing Activities Net proceeds from affiliates Net change in short-term obligations Distribution to partners Contributions from minority investors Distribution to minority investors

Net cash (used in) provided by financing activities

Increase (decrease) in cash Cash, beginning of period

Cash, end of period

Three Months Ended March 31,

2003

2002

$

629 $

517

907

782

(3)

(3)

36

14

-

4

104

(144)

1,673

1,170

(1,107)

-

(146) (1) 2

(1,252)

(819) 1

(777)

-

4

(1,591)

933

378

(25)

(18)

(1,225)

-

2

6

(27)

(5)

(342)

361

79

(60)

124

198

$

203 $

138

See Notes to Unaudited Condensed Consolidated Financial Statements 3

Notes to Unaudited Condensed Consolidated Financial Statements Cellco Partnership (d/b/a Verizon Wireless)

1. Background and Basis of Presentation

Cellco Partnership (the ``Partnership''), doing business as Verizon Wireless, is the nation's leading provider of wireless communications in terms of the number of subscribers, network coverage, revenues and operating income. The Partnership provides wireless voice and data services and related equipment to consumers and business customers in its markets. The Partnership has the largest wireless network in the United States covering 49 of the 50 most populated metropolitan areas throughout the United States.

The accompanying unaudited interim financial statements have been prepared based upon Securities and Exchange Commission ("SEC") rules and regulations for interim reporting. These rules and regulations allow certain information required under generally accepted accounting principles to be condensed or omitted, provided that the interim financial statements, when read in conjunction with the Partnership's annual audited consolidated financial statements included in the most recent Annual Report on Form 10-K for the year ended December 31, 2002, provide a fair presentation of the Partnership's interim financial position, results of operations and cash flows. These interim financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items.

Certain reclassifications have been made to the 2002 condensed consolidated financial statements to conform to the current period presentation.

2. Recently Issued Accounting Pronouncements

In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation ? Transition and Disclosure," an amendment of FASB Statement No. 123, "Accounting for Stock-Based Compensation." This standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, this standard amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. On January 1, 2003, the Partnership adopted the fair value recognition provisions of SFAS No. 123, prospectively (as permitted under SFAS No. 148) with respect to all new stock-based employee compensation granted, modified or settled after January 1, 2003. As the Partnership accounts for its Value Appreciation Rights under a fair value approach, the impact of the adoption of the fair value recognition provisions of SFAS No. 123 had no effect on the Partnership's results of operations or financial position.

3. Wireless Licenses and Other Intangibles, Net

The Partnership treats wireless licenses as an indefinite life intangible asset under the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." The wireless licenses are not amortized but rather tested for impairment. The Partnership will reevaluate the useful life determination for wireless licenses at least annually to determine whether events and circumstances continue to support an indefinite useful life.

The changes in the carrying amount of wireless licenses are as follows:

(Dollars in Millions)

Wireless Licenses, net (a)

Wireless Licenses Associated with Equity Method Investments (b)

Total

Balance as of December 31, 2002 Wireless licenses acquired Aggregate impairment losses recognized Other

Balance as of March 31, 2003

$

40,014 $

76

-

3

$

40,093 $

168 $ -

168 $

40,182 76 3

40,261

(a) Interest costs of $3 and $21 were capitalized in wireless licenses during the three months ended March 31, 2003 and the year ended December 31, 2002, respectively.

(b) Included in investments in unconsolidated entities.

4

Other intangibles, net consist of the following:

(Dollars in Millions)

Customer lists (4-7 yrs.) Other (8 yrs.)

Less: accumulated amortization (a)(b) Other intangibles, net

March 31, 2003

December 31, 2002

$

3,425 $

3,424

1

1

3,426 1,965

3,425 1,831

$

1,461 $

1,594

(a) Amortization expense for the three months ended March 31, 2003 and 2002 was $134 and $152, respectively.

(b) Based solely on the amortized intangible assets existing at March 31, 2003, the estimated amortization expense for the five succeeding fiscal years is as follows:

For the year ended 12/31/03

$ 515

For the year ended 12/31/04

$ 469

For the year ended 12/31/05

$ 463

For the year ended 12/31/06

$ 131

For the year ended 12/31/07

$ 12

4. Business Combinations

Acquisitions in the three months ended March 31, 2003 consisted of various individually immaterial partnership interests and wireless licenses.

In February 2002, the Partnership acquired certain Dobson Communications Corporation ("Dobson ") wireless operations in California, Georgia, Ohio, Tennessee, and Arizona for approximately $552 million. All other acquisitions in the three months ended March 31, 2002 consisted of various individually immaterial partnership interests and wireless licenses.

All of the acquisitions of businesses included in these amounts were accounted for under the purchase method of accounting with results of operations included in the consolidated statements of operations from the date of acquisition. Had the acquisitions of businesses been consummated on January 1 of the year preceding the year of acquisition, the results of these acquired operations would not have had a significant impact on the Partnership's consolidated results of operations for each of the periods presented.

The following table presents information about the Partnership's acquisitions for the three months ended March 31, 2003 and 2002:

(Dollars in Millions)

Acquisition Date

Purchase Price (a)

Wireless Licenses

Other Intangibles

Net Tangible

Assets

2003 Various

2002 Dobson Various

Various $

Feb 2002 $ Various $

146

$

552

$

225

$

76

$

505

$

211

$

____________ (a) Purchase price includes cash, assumption of debt, as well as the fair value of assets exchanged, as applicable.

1

$

69

19

$

28

4

$

10

5

5. Supplementary Financial Information

Property, plant and equipment consists of the following: (Dollars in Millions)

Land and improvements Buildings (5-40 yrs.) Wireless plant equipment (4-15 yrs.) Rental equipment (1-3 yrs.) (a) Furniture, fixtures and equipment (2 -7 yrs.) Leasehold improvements (5 yrs.)

Less: accumulated depreciation (b)

Property, plant and equipment, net (c)(d)

March 31, 2003

$

95

3,874

22,666

-

2,615

803

30,053 12,096

$ 17,957

December 31, 2002

$

94

3,768

21,719

162

2,703

798

29,244 11,556

$ 17,688

(a) As of March 31, 2003, all rental equipment was retired; therefore, the cost and related accumulated depreciation have been removed from the condensed consolidated balance sheet.

(b) Depreciation expense for the three months ended March 31, 2003 and 2002 was $747 and $612, respectively.

(c) Construction-in -progress included in certain of the classifications shown in property, plant and equipment, principally wireless plant equipment, amounted to $1,130 and $837 at March 31, 2003 and December 31, 2002, respectively.

(d) Interest costs of $13 and $56 and network engineering costs of $48 and $203 were capitalized during the three months ended March 31, 2003 and the year ended December 31, 2002, respectively.

Supplementary cash flow information is as follows:

(Dollars in Millions)

Three Months Ended March 31,

2003

2002

Net cash paid (refunds received) for income taxes Interest paid, net of amounts capitalized

$

36

$

133

$

(2)

$

117

Business combinations and other acquisitions: Cash paid Debt and net liabilities assumed, less cash

Fair value of assets acquired

$

146

-

$

146

$

777

4

$

781

6. Commitments and Contingencies

Under the terms of the investment agreement entered into among the Partnership, Verizon Communications Inc. ("Verizon Communications") and Vodafone Group Plc ("Vodafone") on April 3, 2000, Vodafone may require the Partnership to purchase up to an aggregate of $20 billion of Vodafone's interest in the Partnership, at its then fair market value, with up to $10 billion redeemable during July 2003 and/or 2004 and the remainder, not to exceed $10 billion in any one year, during July 2005, 2006 and/or 2007. Verizon Communications has the right, exercisable at its sole discretion, to purchase all or a portion of this interest instead of the Partnership. However, even if Verizon Communications exercises this right, Vodafone has the option to require the Partnership to purchase up to $7.5 billion of this interest redeemable in July 2005, 2006 and/or 2007 with cash or contributed debt. Accordingly, $20 billion of partners' capital has been classified as redeemable on the accompanying condensed consolidated balance sheets.

The Alliance Agreement contains a provision, subject to specified limitations, that requires Vodafone and Verizon Communications to indemnify the Partnership for certain contingencies, excluding PrimeCo Personal Communications L.P. contingencies, arising prior to the formation of Verizon Wireless.

The Partnership is subject to several lawsuits and other claims including class actions, product liability, patent infringement, antitrust, partnership disputes, and claims involving the Partnership's relations with resellers and agents. The Partnership is also defending lawsuits filed against the Partnership and other participants in the wireless industry alleging various adverse effects as a result of wireless phone usage. Various consumer class action lawsuits allege that the Partnership breached contracts with consumers, violated certain state consumer protection laws and other statutes and defrauded customers through concealed or misleading billing practices. These matters may involve indemnification obligations by third parties and/or affiliated parties covering all or part of any potential

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