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0001104659-06-027797.txt : 20060426
0001104659-06-027797.hdr.sgml : 20060426
20060426125243
ACCESSION NUMBER: 0001104659-06-027797
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20050930
FILED AS OF DATE: 20060426
DATE AS OF CHANGE: 20060426
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: TELEPHONE & DATA SYSTEMS INC /DE/
CENTRAL INDEX KEY: 0001051512
STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813]
IRS NUMBER: 362669023
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-14157
FILM NUMBER: 06780412
BUSINESS ADDRESS:
STREET 1: 30 NORTH LASALLE STREET
STREET 2: STE 4000
CITY: CHICAGO
STATE: IL
ZIP: 60602
BUSINESS PHONE: 3126301900
MAIL ADDRESS:
STREET 1: 30 NORTH LASALLE STREET
STREET 2: STE 4000
CITY: CHICAGO
STATE: IL
ZIP: 60602
10-Q
1
a06-1473_310q.htm
AMENDMENT TO QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
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
|
|
(I.R.S. Employer Identification No.)
|
incorporation or organization)
|
|
|
|
|
|
30 North LaSalle Street, Chicago, Illinois
60602
|
(Address of principal executive offices)
(Zip Code)
|
Registrants telephone number, including area
code: (312) 630-1900
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 o No ý
Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Yes ý No o
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes o No ý
Indicate the number of shares outstanding
of each of the issuers classes of common stock, as of the latest practicable
date.
Class
|
|
Outstanding at September 30, 2005
|
Common Shares, $.01 par value
|
|
51,327,429 Shares
|
Special Common Shares, $.01 par value
|
|
57,727,347 Shares
|
Series A Common Shares, $.01 par value
|
|
6,433,545 Shares
|
TELEPHONE AND DATA SYSTEMS, INC.
THIRD QUARTER REPORT ON FORM 10-Q
INDEX
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,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING REVENUES
|
|
$
|
1,028,751
|
|
$
|
964,416
|
|
$
|
2,934,397
|
|
$
|
2,763,600
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
Cost of services and products (exclusive of
depreciation, amortization and accretion shown below)
|
|
369,889
|
|
349,222
|
|
1,046,113
|
|
992,782
|
|
Selling, general and administrative
|
|
383,500
|
|
355,714
|
|
1,088,428
|
|
1,015,325
|
|
Depreciation, amortization and accretion
|
|
167,588
|
|
170,177
|
|
505,911
|
|
491,383
|
|
(Gain) on assets held for sale
|
|
|
|
|
|
|
|
(725
|
)
|
Total Operating Expenses
|
|
920,977
|
|
875,113
|
|
2,640,452
|
|
2,498,765
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
107,774
|
|
89,303
|
|
293,945
|
|
264,835
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT AND OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
18,065
|
|
18,316
|
|
51,007
|
|
48,911
|
|
Interest and dividend income
|
|
14,204
|
|
6,105
|
|
141,386
|
|
14,163
|
|
Interest (expense)
|
|
(53,852
|
)
|
(52,135
|
)
|
(160,240
|
)
|
(147,378
|
)
|
Gain (loss) on investments
|
|
|
|
(491
|
)
|
500
|
|
(2,321
|
)
|
Other (expense)
|
|
(2,968
|
)
|
(2,711
|
)
|
(13,997
|
)
|
(5,682
|
)
|
Total Investment and Other Income (Expense)
|
|
(24,551
|
)
|
(30,916
|
)
|
18,656
|
|
(92,307
|
)
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST
|
|
83,223
|
|
58,387
|
|
312,601
|
|
172,528
|
|
Income tax expense
|
|
32,766
|
|
11,461
|
|
127,141
|
|
58,201
|
|
INCOME FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST
|
|
50,457
|
|
46,926
|
|
185,460
|
|
114,327
|
|
Minority share of income
|
|
(9,231
|
)
|
(7,904
|
)
|
(24,129
|
)
|
(19,713
|
)
|
INCOME FROM CONTINUING OPERATIONS
|
|
41,226
|
|
39,022
|
|
161,331
|
|
94,614
|
|
Discontinued Operations, Net of Tax
|
|
340
|
|
4,351
|
|
340
|
|
4,351
|
|
NET INCOME
|
|
41,566
|
|
43,373
|
|
161,671
|
|
98,965
|
|
Preferred dividend requirement
|
|
(50
|
)
|
(51
|
)
|
(152
|
)
|
(152
|
)
|
NET INCOME AVAILABLE TO COMMON
|
|
$
|
41,516
|
|
$
|
43,322
|
|
$
|
161,519
|
|
$
|
98,813
|
|
|
|
|
|
|
|
|
|
|
|
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING (000s)
|
|
115,423
|
|
114,641
|
|
115,217
|
|
114,506
|
|
BASIC EARNINGS PER SHARE (Note 7)
|
|
$
|
0.36
|
|
$
|
0.38
|
|
$
|
1.40
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING (000s)
|
|
116,212
|
|
115,267
|
|
116,063
|
|
115,040
|
|
DILUTED EARNINGS PER SHARE (Note 7)
|
|
$
|
0.36
|
|
$
|
0.37
|
|
$
|
1.39
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS PER SHARE
|
|
$
|
0.0875
|
|
$
|
0.0825
|
|
$
|
0.263
|
|
$
|
0.248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated
financial statements are an integral part of these statements.
3
TELEPHONE AND DATA SYSTEMS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
|
|
Nine months ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net income
|
|
$
|
161,671
|
|
$
|
98,965
|
|
Add (Deduct) adjustments to reconcile net income to net cash provided
by operating activities
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
505,911
|
|
491,383
|
|
Bad debts expense
|
|
30,862
|
|
38,342
|
|
Deferred income taxes
|
|
(11,701
|
)
|
46,617
|
|
Investment income
|
|
(51,007
|
)
|
(48,911
|
)
|
Distributions from unconsolidated entities
|
|
31,488
|
|
23,718
|
|
Minority share of income
|
|
24,129
|
|
19,713
|
|
(Gain) on assets held for sale
|
|
|
|
(725
|
)
|
(Gain) loss on investments
|
|
(500
|
)
|
2,321
|
|
Discontinued operations
|
|
(340
|
)
|
(4,351
|
)
|
Noncash interest expense
|
|
15,242
|
|
19,966
|
|
Other noncash expense
|
|
14,013
|
|
14,544
|
|
Accreted interest on repayment of U.S.
Cellular long-term debt
|
|
|
|
(68,056
|
)
|
Changes in assets and liabilities
|
|
|
|
|
|
Change in accounts receivable
|
|
(47,729
|
)
|
(82,942
|
)
|
Change in materials and supplies
|
|
22,154
|
|
9,462
|
|
Change in accounts payable
|
|
(49,362
|
)
|
(69,212
|
)
|
Change in customer deposits and deferred
revenues
|
|
1,778
|
|
11,480
|
|
Change in accrued taxes
|
|
38,664
|
|
6,538
|
|
Change in other assets and liabilities
|
|
(3,369
|
)
|
(9,606
|
)
|
|
|
681,904
|
|
499,246
|
|
|
|
|
|
|
|
CASH FLOWS
FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
(470,714
|
)
|
(500,888
|
)
|
Cash received from sale of assets
|
|
|
|
96,932
|
|
Acquisitions, net of cash acquired
|
|
(125,660
|
)
|
(40,367
|
)
|
Other investing activities
|
|
(4,660
|
)
|
(6,091
|
)
|
|
|
(601,034
|
)
|
(450,414
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Issuance of notes payable
|
|
350,000
|
|
355,000
|
|
Issuance of long-term debt
|
|
112,835
|
|
420,316
|
|
Repayment of notes payable
|
|
(380,000
|
)
|
(300,000
|
)
|
Repayment of U.S. Cellular long-term debt
|
|
|
|
(345,232
|
)
|
Repayment of other long-term debt
|
|
(258,647
|
)
|
(21,488
|
)
|
Repurchase of TDS common shares
|
|
|
|
(20,440
|
)
|
TDS common shares issued for benefit plans
|
|
18,150
|
|
29,591
|
|
U.S. Cellular common shares issued for
benefit plans
|
|
22,228
|
|
4,919
|
|
Dividends paid
|
|
(30,415
|
)
|
(28,520
|
)
|
Other financing activities
|
|
(1,586
|
)
|
512
|
|
|
|
(167,435
|
)
|
94,658
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
|
|
(86,565
|
)
|
143,490
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS -
|
|
|
|
|
|
Beginning of period
|
|
1,171,105
|
|
940,578
|
|
End of period
|
|
$
|
1,084,540
|
|
$
|
1,084,068
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated
financial statements are an integral part of these statements.
4
TELEPHONE AND DATA SYSTEMS, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Unaudited
|
|
September 30,
2005
|
|
December 31,
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
CURRENT ASSETS
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,084,540
|
|
$
|
1,171,105
|
|
Accounts receivable
|
|
|
|
|
|
Due from customers, less allowance of
$14,023 and $14,317, respectively
|
|
308,963
|
|
304,851
|
|
Other, principally connecting companies,
less allowance of $4,829 and $3,170, respectively
|
|
143,189
|
|
134,458
|
|
Deferred income tax asset
|
|
18,599
|
|
43,867
|
|
Materials and supplies, at average cost
|
|
66,132
|
|
91,556
|
|
Other current assets
|
|
63,720
|
|
71,877
|
|
|
|
1,685,143
|
|
1,817,714
|
|
|
|
|
|
|
|
INVESTMENTS
|
|
|
|
|
|
Marketable equity securities
|
|
2,797,224
|
|
3,398,804
|
|
Licenses
|
|
1,340,489
|
|
1,228,801
|
|
Goodwill
|
|
840,873
|
|
843,387
|
|
Customer lists, net of accumulated
amortization of $41,289 and $34,630, respectively
|
|
18,876
|
|
24,915
|
|
Investments in unconsolidated entities
|
|
223,770
|
|
199,518
|
|
Other investments, less valuation allowance
of $55,144 in both periods
|
|
22,387
|
|
23,039
|
|
|
|
5,243,619
|
|
5,718,464
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
|
|
|
|
|
U.S. Cellular
|
|
2,421,407
|
|
2,440,720
|
|
TDS Telecom
|
|
909,741
|
|
945,762
|
|
Corporate and other
|
|
31,553
|
|
32,962
|
|
|
|
3,362,701
|
|
3,419,444
|
|
|
|
|
|
|
|
OTHER ASSETS
AND DEFERRED CHARGES
|
|
54,008
|
|
56,981
|
|
|
|
|
|
|
|
ASSETS OF
OPERATIONS HELD FOR SALE
|
|
66,644
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
10,412,115
|
|
$
|
11,012,603
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated
financial statements are an integral part of these statements.
5
TELEPHONE AND DATA SYSTEMS, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS EQUITY
Unaudited
|
|
September 30,
2005
|
|
December 31,
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
202,727
|
|
$
|
38,787
|
|
Notes payable
|
|
|
|
30,000
|
|
Accounts payable
|
|
272,110
|
|
327,497
|
|
Customer deposits and deferred revenues
|
|
119,366
|
|
119,196
|
|
Accrued taxes
|
|
92,654
|
|
63,184
|
|
Accrued compensation
|
|
56,414
|
|
71,707
|
|
Accrued interest other
|
|
32,703
|
|
27,936
|
|
Other current liabilities
|
|
60,701
|
|
51,164
|
|
|
|
836,675
|
|
729,471
|
|
|
|
|
|
|
|
DEFERRED LIABILITIES AND CREDITS
|
|
|
|
|
|
Net deferred income tax liability
|
|
1,417,552
|
|
1,488,655
|
|
Derivative liability
|
|
686,327
|
|
1,210,500
|
|
Other deferred liabilities and credits
|
|
240,165
|
|
220,206
|
|
|
|
2,344,044
|
|
2,919,361
|
|
|
|
|
|
|
|
LONG-TERM DEBT
|
|
|
|
|
|
Long-term debt, excluding current portion
|
|
1,669,347
|
|
1,974,599
|
|
Forward contracts
|
|
1,702,800
|
|
1,689,644
|
|
|
|
3,372,147
|
|
3,664,243
|
|
|
|
|
|
|
|
LIABILITIES OF OPERATIONS HELD FOR SALE
|
|
5,585
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST IN SUBSIDIARIES
|
|
547,539
|
|
499,468
|
|
|
|
|
|
|
|
PREFERRED SHARES
|
|
3,863
|
|
3,864
|
|
|
|
|
|
|
|
COMMON STOCKHOLDERS EQUITY (Note 2)
|
|
|
|
|
|
Common Shares, par value $.01 per share;
authorized 100,000,000 shares; issued 56,455,000 and 56,377,000 shares,
respectively
|
|
565
|
|
564
|
|
Special Common Shares, par value $.01 per
share; authorized 165,000,000 shares; issued 62,865,000 shares and 0 shares,
respectively
|
|
629
|
|
|
|
Series A Common Shares, par value $.01 per
share; authorized 25,000,000 shares; issued and outstanding 6,434,000 and
6,421,000 shares; respectively
|
|
64
|
|
64
|
|
Additional paid-in capital
|
|
1,815,886
|
|
1,822,541
|
|
Treasury Shares, at cost:
|
|
|
|
|
|
Common Shares, 5,128,000 and 5,362,000
shares, respectively
|
|
(209,971
|
)
|
(449,173
|
)
|
Special Common Shares, 5,138,000 and 0
shares, respectively
|
|
(211,201
|
)
|
|
|
Accumulated other comprehensive income
|
|
324,324
|
|
370,857
|
|
Retained earnings
|
|
1,581,966
|
|
1,451,343
|
|
|
|
3,302,262
|
|
3,196,196
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
10,412,115
|
|
$
|
11,012,603
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated
financial statements are an integral part of these statements.
6
TELEPHONE AND DATA SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis
of Presentation
The accounting policies of Telephone and Data Systems, Inc. (TDS)
conform to accounting principles generally accepted in the United States of
America (U.S. GAAP). The consolidated financial statements include the
accounts of TDS and its majority-owned subsidiaries, including TDSs
81.3%-owned wireless telephone subsidiary, United States Cellular Corporation (U.S.
Cellular), TDSs 100%-owned wireline telephone subsidiary, TDS
Telecommunications Corporation (TDS Telecom) and TDSs 80%-owned printing and
distribution company, Suttle Straus, Inc. In addition, the consolidated
financial statements include all entities in which TDS has a variable interest
that requires TDS to absorb a majority of the entitys expected gains or
losses. All material intercompany accounts and transactions have been
eliminated.
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 (SEC). Certain information and note
disclosures normally included in financial statements prepared in accordance
with U.S. GAAP have been condensed or omitted pursuant to such rules and
regulations, although TDS believes that the disclosures included herein 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 TDSs
latest annual report on Form 10-K/A. (See discussion of Restatement
below.)
The accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring items unless otherwise
disclosed) necessary to present fairly TDSs financial position as of September 30,
2005, and its results of operations for the three and nine months ended September 30,
2005 and 2004 and its cash flows for the nine months ended September 30,
2005 and 2004. The results of operations for the three and nine months ended September 30,
2005, and the cash flow for the nine months ended September 30, 2005, are
not necessarily indicative of the results to be expected for the full year.
Certain amounts reported in the prior year have been reclassified to
conform to current period presentation.
The reclassifications had no impact on previously reported net income,
financial condition or cash flows.
Restatement
TDS and its audit committee concluded on November 9, 2005, that
TDS would amend its Annual Report on Form 10-K for the year ended December 31,
2004 to restate its financial statements and financial information for each of
the three years in the period ended December 31, 2004 including quarterly
information for 2004 and 2003, and certain selected financial data for the
years 2001 and 2000. TDS and its audit committee also concluded that TDS would
amend its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
2005 and June 30, 2005 to restate the financial statements and financial
information included therewith.
On November 11, 2005, TDS and U.S. Cellular announced that the
staff of the Midwest Regional Office of the Securities and Exchange Commission
(SEC) had advised both companies that it was conducting an investigation into
the restatement of financial statements announced by TDS and U.S. Cellular on November 10,
2005. TDS and U.S. Cellular intend to cooperate fully with the SEC
staff in this investigation.
7
The
restatement adjustments principally correct items that were recorded in the
financial statements previously but not in the proper periods and certain
income tax, interest income and consolidation errors. Correction of the errors,
with the exception of income taxes discussed below, individually did not have a
material impact on income before income taxes and minority interest, net income
or earnings per share; however, when aggregated, the items were considered to
be material. The restatement adjustments to correct income tax accounting had a
material impact individually on net income and earnings per share in prior
periods. The restated financial statements are adjusted to record obligations
in the periods such certain obligations were incurred, correct the timing of
the reversal of certain tax liabilities, correct the consolidation of an 80%
owned subsidiary, and record revenues in the periods such revenues were earned.
The adjustments are described below.
Income taxes In the restatement, TDS
corrected its income tax expense, federal and state taxes payable, liabilities
accrued for tax contingencies, deferred income tax assets and liabilities and
related disclosures for the first and second quarters of 2005 and the years
ended December 31, 2004, 2003 and 2002 for items identified based on a
reconciliation of income tax accounts.
The reconciliation compared amounts used for financial reporting
purposes to the amounts used in the preparation of the income tax returns, and
took into consideration the results of federal and state income tax audits and
the resulting book/tax basis differences which generate deferred tax assets and
liabilities. In addition, a review of
the state deferred income tax rates used to establish deferred income tax
assets and liabilities identified errors in the state income tax rate used
which resulted in adjustments to correct the amount of deferred income tax
assets and liabilities recorded for temporary differences between the timing of
when certain transactions are recognized for financial and income tax
reporting.
Federal universal service fund (USF)
contributions In 2004 and 2003, Universal Service Administrative Company
(USAC) billings to U.S. Cellular for USF contributions were based on
estimated revenues reported to USAC by U.S. Cellular in accordance with USACs
established procedures. However, U.S. Cellulars actual liability for USF is
based upon its actual revenues and USACs established procedures provide a
method to adjust U.S. Cellulars estimated liability to its actual liability.
In the first six months of 2005 and the full years of 2004 and 2003, U.S.
Cellulars actual revenues exceeded estimated revenues reported to USAC on an
interim basis. As a result, additional amounts were due to USAC in 2005 and
2004 based on U.S. Cellulars annual report filings. Such additional amounts
were incorrectly expensed when the invoices were received from USAC rather than
at the time the obligation was incurred. In the third quarter of 2005, U.S.
Cellular corrected its accounting for USF contributions to record expense
reflecting the estimated obligation incurred based on actual revenues reported
during the period. Accordingly, in the restatement, TDS has adjusted previously
reported USF contributions expense by U.S. Cellular to reflect the estimated
liability incurred during the period.
Customer contract termination fees In the
fourth quarter of 2003, U.S. Cellular revised its business practices related to
the billing of contract termination fees charged when a customer disconnected
service prior to the end of the customers contract. This change resulted in an
increase in amounts billed to customers and revenues even though a high
percentage of the amounts billed were deemed uncollectible. At the time of the
change in business practice, U.S. Cellular incorrectly recorded revenues
related to such fees at the time of billing, as generally accepted accounting
principles (GAAP) would preclude revenue recognition if the receivable is not
reasonably assured of collection. In the first quarter of 2005, U.S. Cellular
corrected its accounting to record revenues related to such fees only upon
collection, in recognition of the fact that the collectibility of the revenues
was not reasonably assured at the time of billing. In the restatement, TDS made
adjustments to properly reflect U.S. Cellulars revenues for such fees upon
collection beginning on October 1, 2003.
Leases
and contracts TDS and U.S. Cellular had entered into certain operating leases
(as both lessee and lessor) that provide for specific scheduled increases in
payments over the lease term. In the third quarter of 2004, TDS made
adjustments for the cumulative effect which were not considered to be material
to either that quarter or to prior periods to correct its accounting and to
recognize revenues and expenses under such agreements on a straight-line basis
over the term of the lease in accordance with Statement of Financial Accounting
Standards (SFAS) No. 13, Accounting for Leases, as amended, and related
pronouncements. In addition, the accounting for certain other long-term
contracts, for which a cumulative effect adjustment was made in the first
quarter of 2005, was corrected to recognize expenses in the appropriate
periods. The restatement adjustments reverse the cumulative amounts previously
recorded in the third quarter of 2004 and the first quarter of 2005, and
properly record such revenues and expenses on a straight-line basis in the
appropriate periods.
8
Promotion rebates From time to time, U.S.
Cellulars sales promotions include rebates on sales of handsets to customers.
In such cases, U.S. Cellular reduces revenues and records a liability at the
time of sale reflecting an estimate of rebates to be paid under the promotion.
Previously, the accrued liability was not adjusted on a timely basis upon
expiration of the promotion to reflect the actual amount of rebates paid based
upon information available at the date the financial statements were issued. In
the restatement, TDS has corrected revenues and accrued liabilities to reflect
the impacts associated with promotion rebates in the appropriate periods.
Operations of consolidated partnerships
managed by a third party Historically, U.S. Cellular recorded the results of
operations of certain consolidated partnerships managed by a third party on an
estimated basis, and adjusted such estimated results to the actual results upon
receipt of financial statements in the following quarter. However, GAAP
requires that the actual amounts be used. In the restatement, TDS has corrected
its financial statements to recognize results of operations in the appropriate
period based on the partnerships actual results of operations reported for
such periods.
Investment income from entities accounted
for by the equity method Historically, U.S. Cellular recorded an estimate
each quarter of its proportionate share of net income (loss) from certain
entities accounted for by the equity method, and adjusted such estimate to the
actual share of net income (loss) upon receipt of financial statements in the
following quarter. However, GAAP requires that the actual amounts be used. In
the restatement, TDS has corrected its financial statements to recognize
investment income in the appropriate period based on the entities actual net
income (loss) reported for such periods.
Historically, TDS had not fully consolidated
its 80%-owned subsidiary, Suttle Straus, to present the operating results of
such subsidiary in revenues, cost of service, selling, general and
administrative expenses and depreciation. Previously, the net operating results
of the subsidiary were included in other income (expense). However, the non-operating portion of the
income statement of Suttle Straus was properly presented. The restatement
correctly consolidates the results of Suttle Straus. Also, property, plant and
equipment was corrected to properly include Suttle Straus fixed assets. Previously, the balances were included in
other assets and deferred charges. In addition, certain intercompany
elimination entries between TDS, U.S. Cellular, TDS Telecom and Suttle Straus
have been recorded.
Revenue and cost of service accruals TDS
Telecom reviewed accruals in the first and second quarter of 2004 and
determined that an adjustment was required to record unbilled revenue related
to its competitive local exchange carrier that were not previously recorded.
TDS Telecom also reduced cost of service accruals related to long-distance
service as a result of shifting long-distance traffic to a second provider. In
the restatement, the adjustments reverse the cumulative amounts previously
recorded in the first and second quarters of 2004, and record such revenues and
expenses in the appropriate periods.
Consolidated statements of cash flows In the restatement, the
classification of cash distributions received from unconsolidated entities has
been corrected to properly reflect cash received, which represents a return on
investment in the unconsolidated entities, as cash flows from operating
activities; previously, the cash received on such investments was classified as
cash flows from investing activities. Also, the classification of certain
noncash stock-based compensation expense has been corrected to properly reflect
such noncash expense as an adjustment to cash flows from operating activities;
previously, such expense was classified as cash flows from financing
activities.
Interest
income In the restatement, TDS corrected its accounting for recording
interest income earned by its subsidiaries through a cash management agreement
for the first and second quarters of 2005 and the years ended December
31, 2004, 2003 and 2002. TDS
subsidiaries participating in the cash management agreement had not recorded an
accrual to increase cash and interest income for their portion of the interest
income earned. The correcting entries increased cash and interest income for
each period presented.
Other items In addition to the adjustments
described above, TDS recorded a number of other adjustments to correct and
record revenues and expenses in the periods in which such revenues and expenses
were earned or incurred. These adjustments were not significant, either
individually or in aggregate.
9
The table below summarizes the impacts of the restatement on income from
continuing operations before income taxes and minority interest.
|
|
Three Months Ended
September 30, 2004
|
|
Nine Months Ended
September 30, 2004
|
|
|
|
(Increase (decrease)
dollars in thousands)
|
|
Income From Continuing Operations Before
Income Taxes and Minority Interest, as previously reported
|
|
$
|
44,185
|
|
$
|
169,380
|
|
Federal universal service fund
contributions
|
|
5,132
|
|
5,019
|
|
Customer contract termination fees
|
|
(379
|
)
|
(614
|
)
|
Leases and contracts
|
|
5,739
|
|
4,495
|
|
Promotion rebates
|
|
719
|
|
719
|
|
Operations of consolidated partnerships
managed by a third party
|
|
2,655
|
|
1,861
|
|
Investment income from entities accounted
for by the equity method
|
|
(1,262
|
)
|
(3,830
|
)
|
Revenue and cost of service accruals
|
|
|
|
(5,702
|
)
|
Interest income
|
|
(112
|
)
|
(178
|
)
|
Other items
|
|
1,710
|
|
1,378
|
|
Total adjustment
|
|
14,202
|
|
3,148
|
|
Income From
Continuing Operations Before Income Taxes and Minority Interest, as restated
|
|
$
|
58,387
|
|
$
|
172,528
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the impact on net income and earnings per
share as a result of the restatement.
|
|
Three Months Ended
September 30, 2004
|
|
Nine Months Ended
September 30, 2004
|
|
|
|
Net Income
(Loss)
|
|
Diluted
Earnings
Per Share
|
|
Net Income
(Loss)
|
|
Diluted
Earnings
Per Share
|
|
|
|
(Increase (decrease) dollars in thousands, except per share amounts)
|
|
As previously reported
|
|
$
|
25,151
|
|
$
|
0.22
|
|
$
|
86,277
|
|
$
|
0.75
|
|
Federal universal service fund contributions
|
|
2,357
|
|
0.02
|
|
2,303
|
|
0.02
|
|
Customer contract termination fees
|
|
(177
|
)
|
|
|
(285
|
)
|
|
|
Leases and contracts
|
|
3,013
|
|
0.03
|
|
2,423
|
|
0.02
|
|
Promotion rebates
|
|
334
|
|
|
|
334
|
|
|
|
Operations of consolidated partnerships
managed by a third party
|
|
965
|
|
0.01
|
|
674
|
|
0.01
|
|
Investment income from entities accounted
for by the equity method
|
|
(626
|
)
|
(0.01
|
)
|
(1,901
|
)
|
(0.02
|
)
|
Revenue and cost of service accruals
|
|
|
|
|
|
(3,449
|
)
|
(0.03
|
)
|
Income taxes
|
|
11,409
|
|
0.09
|
|
11,833
|
|
0.10
|
|
Interest income
|
|
(68
|
)
|
|
|
(108
|
)
|
|
|
Other items
|
|
1,015
|
|
0.01
|
|
864
|
|
0.01
|
|
Total adjustment
|
|
18,222
|
|
0.15
|
|
12,688
|
|
0.11
|
|
As restated
|
|
$
|
43,373
|
|
$
|
0.37
|
|
$
|
98,965
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
The amounts of the reclassification and elimination entries in the
three and nine months ended September 30, 2005 and 2004 are shown in the
following table:
|
|
Three Months Ended
September 30, 2005
|
|
Nine Months Ended
September 30, 2005
|
|
|
|
Adjustment for
Suttle Straus
|
|
Intercompany
Eliminations
|
|
Adjustment for
Suttle Straus
|
|
Intercompany
Eliminations
|
|
|
|
(Increase/(decrease) dollars in thousands)
|
|
Operating
Revenue
|
|
$
|
8,820
|
|
$
|
(3,715
|
)
|
$
|
24,083
|
|
$
|
(9,891
|
)
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
Cost of service and products
|
|
6,172
|
|
309
|
|
16,659
|
|
908
|
|
Selling, general and administrative
|
|
1,389
|
|
(4,024
|
)
|
4,235
|
|
(10,799
|
)
|
Depreciation, amortization and accretion
|
|
688
|
|
|
|
2,063
|
|
|
|
Total Operating Expenses
|
|
8,249
|
|
(3,715
|
)
|
22,957
|
|
(9,891
|
)
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
571
|
|
|
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
(571
|
)
|
|
|
(1,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment and Other Income (Expense)
|
|
(571
|
)
|
|
|
(1,126
|
)
|
|
|
Income From Continuing
Operations Before Income Taxes and Minority Interest
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2004
|
|
Nine Months Ended
September 30, 2004
|
|
|
|
Adjustment for
Suttle Straus
|
|
Intercompany
Eliminations
|
|
Adjustment for
Suttle Straus
|
|
Intercompany
Eliminations
|
|
|
|
(Increase/(decrease) dollars in thousands)
|
|
Operating
Revenue
|
|
$
|
7,126
|
|
$
|
(3,185
|
)
|
$
|
19,519
|
|
$
|
(8,024
|
)
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
Cost of service and products
|
|
4,813
|
|
254
|
|
13,147
|
|
677
|
|
Selling, general and administrative
|
|
1,307
|
|
(3,439
|
)
|
3,630
|
|
(8,701
|
)
|
Depreciation, amortization and accretion
|
|
620
|
|
|
|
1,860
|
|
|
|
Total Operating Expenses
|
|
6,740
|
|
(3,185
|
)
|
18,637
|
|
(8,024
|
)
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
386
|
|
|
|
882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
(386
|
)
|
|
|
(882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment and Other Income (Expense)
|
|
|
(386
|
)
|
|
|
|
|
(882
|
)
|
|
|
|
Income From Continuing
Operations Before Income Taxes and Minority Interest
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
11
The effect of the restatement on the previously reported Consolidated
Statements of Operations is as follows:
|
|
Three Months Ended
September 30, 2004
|
|
Nine Months Ended
September 30, 2004
|
|
|
|
As
Previously
Reported
|
|
As
Restated
|
|
As
Previously
Reported
|
|
As
Restated
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
968,780
|
|
$
|
964,416
|
|
$
|
2,773,880
|
|
$
|
2,763,600
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
Cost of service and products (exclusive of
depreciation, amortization and accretion shown separately below)
|
|
349,024
|
|
349,222
|
|
977,647
|
|
992,782
|
|
Selling, general and administrative expense
|
|
375,314
|
|
355,714
|
|
1,049,015
|
|
1,015,325
|
|
Depreciation, amortization and accretion
expense
|
|
169,462
|
|
170,177
|
|
489,325
|
|
491,383
|
|
(Gain) loss on assets held for sale
|
|
|
|
|
|
(725
|
)
|
(725
|
)
|
Total Operating Expenses
|
|
893,800
|
|
875,113
|
|
2,515,262
|
|
2,498,765
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
74,980
|
|
89,303
|
|
258,618
|
|
264,835
|
|
|
|
|
|
|
|
|
|
|
|
Investment and Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
19,579
|
|
18,316
|
|
52,741
|
|
48,911
|
|
Interest and dividend income
|
|
6,227
|
|
6,105
|
|
14,369
|
|
14,163
|
|
Interest expense
|
|
(52,135
|
)
|
(52,135
|
)
|
(147,378
|
)
|
(147,378
|
)
|
Gain (loss) on investments
|
|
(491
|
)
|
(491
|
)
|
(2,321
|
)
|
(2,321
|
)
|
Other income (expense), net
|
|
(3,975
|
)
|
(2,711
|
)
|
(6,649
|
)
|
(5,682
|
)
|
Total Investment and Other Income (Expense)
|
|
(30,795
|
)
|
(30,916
|
)
|
(89,238
|
)
|
(92,307
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) From Continuing Operations
Before Income Taxes and Minority Interest
|
|
44,185
|
|
58,387
|
|
169,380
|
|
172,528
|
|
Income Tax Expense (benefit)
|
|
17,864
|
|
11,461
|
|
69,246
|
|
58,201
|
|
Income (Loss) From Continuing Operations
Before Minority Interest
|
|
26,321
|
|
46,926
|
|
100,134
|
|
114,327
|
|
Minority Share of Income
|
|
(5,521
|
)
|
(7,904
|
)
|
(18,208
|
)
|
(19,713
|
)
|
Income (Loss) From Continuing Operations
|
|
20,800
|
|
39,022
|
|
81,926
|
|
94,614
|
|
Discontinued Operations, Net of Tax
|
|
4,351
|
|
4,351
|
|
4,351
|
|
4,351
|
|
Net Income (Loss)
|
|
25,151
|
|
43,373
|
|
86,277
|
|
98,965
|
|
Preferred Dividend Requirement
|
|
(51
|
)
|
(51
|
)
|
(152
|
)
|
(152
|
)
|
Net Income (Loss) Available to Common
|
|
$
|
25,100
|
|
$
|
43,322
|
|
$
|
86,125
|
|
$
|
98,813
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
Income (Loss) From Continuing Operations
|
|
$
|
0.18
|
|
$
|
0.34
|
|
$
|
0.71
|
|
$
|
0.82
|
|
Net Income (Loss) Available to Common
|
|
$
|
0.22
|
|
$
|
0.38
|
|
$
|
0.75
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
Income (Loss) From Continuing Operations
|
|
$
|
0.18
|
|
$
|
0.33
|
|
$
|
0.71
|
|
$
|
0.82
|
|
Net Income (Loss) Available to Common
|
|
$
|
0.22
|
|
$
|
0.37
|
|
$
|
0.75
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
The effect of the restatement on the previously reported Consolidated
Statements of Cash Flows is as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2004
|
|
2004
|
|
|
|
As Previously
Reported
|
|
As
Restated
|
|
|
|
(Dollars in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net income
|
|
$
|
86,277
|
|
$
|
98,965
|
|
Add (Deduct) adjustments to reconcile net
income to net cash provided by operating activities
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
489,325
|
|
491,383
|
|
Bad debts expense
|
|
|
|
38,342
|
|
Deferred income taxes
|
|
57,661
|
|
46,617
|
|
Investment income
|
|
(52,741
|
)
|
(48,911
|
)
|
Distributions from unconsolidated entities
|
|
|
|
23,718
|
|
Minority share of income
|
|
18,208
|
|
19,713
|
|
(Gain) on assets held for sale
|
|
(725
|
)
|
(725
|
)
|
(Gain) loss on investments
|
|
2,321
|
|
2,321
|
|
Discontinued operations
|
|
(4,351
|
)
|
(4,351
|
)
|
Noncash interest expense
|
|
19,966
|
|
19,966
|
|
Other noncash expense
|
|
18,127
|
|
14,544
|
|
Accreted interest on repayment of U.S.
Cellular long-term debt
|
|
(68,056
|
)
|
(68,056
|
)
|
Changes in assets and liabilities
|
|
|
|
|
|
Change in accounts receivable
|
|
(47,333
|
)
|
(82,942
|
)
|
Change in materials and supplies
|
|
9,462
|
|
9,462
|
|
Change in accounts payable
|
|
(70,833
|
)
|
(69,212
|
)
|
Change in customer deposits and deferred revenues
|
|
11,906
|
|
11,480
|
|
Change in accrued taxes
|
|
6,538
|
|
6,538
|
|
Change in other assets and liabilities
|
|
(182
|
)
|
(9,606
|
)
|
|
|
475,570
|
|
499,246
|
|
|
|
|
|
|
|
CASH FLOWS
FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
(496,674
|
)
|
(500,888
|
)
|
Cash received from sale of assets
|
|
96,932
|
|
96,932
|
|
Acquisitions, net of cash acquired
|
|
(40,367
|
)
|
(40,367
|
)
|
Distributions from unconsolidated entities
|
|
23,718
|
|
|
|
Other investing activities
|
|
(10,498
|
)
|
(6,091
|
)
|
|
|
(426,889
|
)
|
(450,414
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Issuance of notes payable
|
|
355,000
|
|
355,000
|
|
Issuance of long-term debt
|
|
420,316
|
|
420,316
|
|
Repayment of notes payable
|
|
(300,000
|
)
|
(300,000
|
)
|
Repayment of U.S. Cellular long-term debt
|
|
(345,232
|
)
|
(345,232
|
)
|
Repayment of other long-term debt
|
|
(21,488
|
)
|
(21,488
|
)
|
Repurchase of TDS common shares
|
|
(20,440
|
)
|
(20,440
|
)
|
TDS common shares issued for benefit plans
|
|
29,591
|
|
29,591
|
|
U.S. Cellular common shares issued for
benefit plans
|
|
5,137
|
|
4,919
|
|
Dividends paid
|
|
(28,520
|
)
|
(28,520
|
)
|
Other financing activities
|
|
512
|
|
512
|
|
|
|
94,876
|
|
94,658
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
|
|
143,557
|
|
143,490
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
Beginning of period
|
|
937,651
|
|
940,578
|
|
End of period
|
|
$
|
1,081,208
|
|
$
|
1,084,068
|
|
|
|
|
|
|
|
|
|
|
|
13
The effect of the restatement on the previously reported Consolidated
Balance Sheets is as follows:
|
|
December 31,
|
|
|
|
2004
|
|
2004
|
|
|
|
As Previously
Reported
|
|
As
Restated
|
|
|
|
(Dollars in thousands)
|
|
CURRENT ASSETS
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,168,581
|
|
$
|
1,171,105
|
|
Accounts receivable
|
|
|
|
|
|
Due from customers
|
|
308,410
|
|
304,851
|
|
Other, principally connecting companies
|
|
131,665
|
|
134,458
|
|
Deferred income tax asset
|
|
36,040
|
|
43,867
|
|
Materials and supplies, at average cost
|
|
91,556
|
|
91,556
|
|
Other current assets
|
|
73,965
|
|
71,877
|
|
|
|
1,810,217
|
|
1,817,714
|
|
|
|
|
|
|
|
INVESTMENTS
|
|
|
|
|
|
Marketable equity securities
|
|
3,398,804
|
|
3,398,804
|
|
Licenses
|
|
1,228,801
|
|
1,228,801
|
|
Goodwill
|
|
823,259
|
|
843,387
|
|
Customer lists, net of accumulated
amortization
|
|
24,915
|
|
24,915
|
|
Investments in unconsolidated entities
|
|
206,763
|
|
199,518
|
|
Other investments
|
|
23,039
|
|
23,039
|
|
|
|
5,705,581
|
|
5,718,464
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
|
|
|
|
|
U.S. Cellular
|
|
2,439,719
|
|
2,440,720
|
|
TDS Telecom
|
|
945,762
|
|
945,762
|
|
Corporate and other
|
|
|
|
32,962
|
|
|
|
3,385,481
|
|
3,419,444
|
|
|
|
|
|
|
|
OTHER ASSETS
AND DEFERRED CHARGES
|
|
92,562
|
|
56,981
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
10,993,841
|
|
$
|
11,012,603
|
|
14
|
|
December 31,
|
|
|
|
2004
|
|
2004
|
|
|
|
As Previously
Reported
|
|
As
Restated
|
|
|
|
(Dollars in thousands)
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
38,787
|
|
$
|
38,787
|
|
Notes payable
|
|
30,000
|
|
30,000
|
|
Accounts payable
|
|
323,256
|
|
327,497
|
|
Customer deposits and deferred revenues
|
|
119,380
|
|
119,196
|
|
Accrued taxes
|
|
76,266
|
|
63,184
|
|
Accrued compensation
|
|
71,707
|
|
71,707
|
|
Accrued interest other
|
|
27,936
|
|
27,936
|
|
Other current liabilities
|
|
53,991
|
|
51,164
|
|
|
|
741,323
|
|
729,471
|
|
|
|
|
|
|
|
DEFERRED LIABILITIES AND CREDITS
|
|
|
|
|
|
Net deferred income tax liability
|
|
1,466,649
|
|
1,488,655
|
|
Derivative liability
|
|
1,210,500
|
|
1,210,500
|
|
Other deferred liabilities and credits
|
|
217,208
|
|
220,206
|
|
|
|
2,894,357
|
|
2,919,361
|
|
|
|
|
|
|
|
LONG-TERM DEBT
|
|
|
|
|
|
Long-term debt, excluding current portion
|
|
1,974,599
|
|
1,974,599
|
|
Forward contracts
|
|
1,689,644
|
|
1,689,644
|
|
|
|
3,664,243
|
|
3,664,243
|
|
|
|
|
|
|
|
MINORITY INTEREST IN SUBSIDIARIES
|
|
499,306
|
|
499,468
|
|
|
|
|
|
|
|
PREFERRED SHARES
|
|
3,864
|
|
3,864
|
|
|
|
|
|
|
|
COMMON STOCKHOLDERS EQUITY
|
|
|
|
|
|
Common Shares, par value $.01 per share
|
|
564
|
|
564
|
|
Special Common Shares, par value $.01 per
share
|
|
|
|
|
|
Series A Common Shares, par value $.01 per
share
|
|
64
|
|
64
|
|
Additional paid-in capital
|
|
1,823,161
|
|
1,822,541
|
|
Treasury Shares, at cost:
|
|
|
|
|
|
Common Shares
|
|
(449,173
|
)
|
(449,173
|
)
|
Special Common Shares
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
373,505
|
|
370,857
|
|
Retained earnings
|
|
1,442,627
|
|
1,451,343
|
|
|
|
3,190,748
|
|
3,196,196
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
10,993,841
|
|
$
|
11,012,603
|
|
|
|
|
|
|
|
|
|
|
|
2. Stock
Dividend
On February 17, 2005, the TDS Board of Directors unanimously
approved, and on April 11, 2005, the TDS shareholders approved an
amendment (the Amendment) to the Restated Certificate of Incorporation of TDS
to increase the authorized number of Special Common Shares of TDS from
20,000,000 to 165,000,000. Following such approval, the Amendment was filed
with the Secretary of State of Delaware and became effective on April 11,
2005.
On February 17, 2005, the TDS Board of Directors also approved a
distribution of one Special Common Share in the form of a stock dividend with
respect to each outstanding Common Share and Series A Common Share of TDS
(the Distribution), which was effective May 13, 2005 to shareholders of
record on April 29, 2005.
15
The Special Common Shares have a par value of $0.01. In the election of
directors, the holders of Special Common Shares will vote together with the
holders of Common Shares in the election of 25% of the directors (rounded up)
plus one director (or four directors based on a board of twelve directors).
Each Special Common Share will be entitled to one vote in the election of such
directors. Other than the election of such directors, the Special Common Shares
will have no votes except as otherwise required by law. Subject to the
satisfaction of all Preferred Share dividend preferences, the holders of
Special Common Shares will be entitled to receive the same dividend on a per
share basis as the Common Shares and Series A Common Shares. The Special
Common Shares are not convertible into any other class of common stock or any
other security of TDS. Series A Common Shares are convertible on a
share-for-share basis into either Common Shares or Special Common Shares.
Prior period earnings per share have been retroactively adjusted to
give effect to the new capital structure. The tables below summarize the
unaudited adjusted earnings per share data for the three years ended December 31,
2004 and the quarterly results for 2004 and 2005. The amounts in the As Reported columns include
the restatements described in Note 1 - Basis of Presentation.
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
As
Reported(1)
|
|
As
Adjusted
|
|
As
Reported(1)
|
|
As
Adjusted
|
|
As
Reported(1)
|
|
As
Adjusted
|
|
Basic Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
1.05
|
|
$
|
0.53
|
|
$
|
0.78
|
|
$
|
0.38
|
|
$
|
(16.26
|
)
|
$
|
(8.13
|
)
|
Discontinued operations
|
|
0.11
|
|
0.05
|
|
(0.03
|
)
|
(0.01
|
)
|
|
|
|
|
Cumulative effect of accounting change
|
|
|
|
|
|
(0.20
|
)
|
(0.10
|
)
|
(0.12
|
)
|
(0.06
|
)
|
Net income (loss) available to common
|
|
$
|
1.16
|
|
$
|
0.58
|
|
$
|
0.55
|
|
$
|
0.27
|
|
$
|
(16.38
|
)
|
$
|
(8.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
1.04
|
|
$
|
0.52
|
|
$
|
0.77
|
|
$
|
0.38
|
|
$
|
(16.26
|
)
|
$
|
(8.13
|
)
|
Discontinued operations
|
|
0.11
|
|
0.05
|
|
(0.03
|
)
|
(0.01
|
)
|
|
|
|
|
Cumulative effect of accounting change
|
|
|
|
|
|
(0.20
|
)
|
(0.10
|
)
|
(0.12
|
)
|
(0.06
|
)
|
Net income (loss) available to common
|
|
$
|
1.15
|
|
$
|
0.57
|
|
$
|
0.54
|
|
$
|
0.27
|
|
$
|
(16.38
|
)
|
$
|
(8.19
|
)
|
|
|
Quarter Ended
|
|
|
|
March 31, 2004
|
|
June 30, 2004
|
|
September 30, 2004
|
|
December 31, 2004
|
|
|
|
As
Reported(1)
|
|
As
Adjusted
|
|
As
Reported(1)
|
|
As
Adjusted
|
|
As
Reported(1)
|
|
As
Adjusted
|
|
As
Reported(1)
|
|
As
Adjusted
|
|
Basic Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.32
|
|
$
|
0.16
|
|
$
|
0.65
|
|
$
|
0.33
|
|
$
|
0.68
|
|
$
|
0.34
|
|
$
|
(0.60
|
)
|
$
|
(0.30
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
0.08
|
|
0.04
|
|
0.04
|
|
0.02
|
|
Net income (loss) available to common
|
|
$
|
0.32
|
|
$
|
0.16
|
|
$
|
0.65
|
|
$
|
0.33
|
|
$
|
0.76
|
|
$
|
0.38
|
|
$
|
(0.56
|
)
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.32
|
|
$
|
0.16
|
|
$
|
0.65
|
|
$
|
0.32
|
|
$
|
0.67
|
|
$
|
0.33
|
|
$
|
(0.60
|
)
|
$
|
(0.30
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
0.08
|
|
0.04
|
|
0.04
|
|
0.02
|
|
Net income (loss) available to common
|
|
$
|
0.32
|
|
$
|
0.16
|
|
$
|
0.65
|
|
$
|
0.32
|
|
$
|
0.75
|
|
$
|
0.37
|
|
$
|
(0.56
|
)
|
$
|
(0.28
|
)
|
|
|
Quarter Ended
March 31, 2005
|
|
|
|
As
Reported(1)
|
|
As
Adjusted
|
|
Basic Earnings per Share:
|
|
|
|
|
|
Net income available to common
|
|
$
|
0.40
|
|
$
|
0.20
|
|
|
|
|
|
|
|
Diluted Earnings per Share:
|
|
|
|
|
|
Net income available to common
|
|
$
|
0.40
|
|
$
|
0.20
|
|
(1)The
As Reported earnings per share amounts reflect the restatement
adjustments as disclosed in Note 1.
16
3. Summary
of Significant Accounting Policies
Other Postretirement Benefits
TDS sponsors two contributory defined benefit postretirement plans that
cover most employees of TDS Corporate, TDS Telecom and the subsidiaries of TDS
Telecom. One plan provides medical benefits and the other plan provides life
insurance benefits.
Net periodic benefit costs for the defined benefit postretirement plans
include the following components:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
Service Cost
|
|
$
|
553
|
|
$
|
591
|
|
$
|
1,659
|
|
$
|
1,772
|
|
Interest on accumulated benefit obligation
|
|
659
|
|
665
|
|
1,977
|
|
1,995
|
|
Expected return on plan assets
|
|
(558
|
)
|
(337
|
)
|
(1,673
|
)
|
(1,011
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
(279
|
)
|
(179
|
)
|
(838
|
)
|
(536
|
)
|
Net loss
|
|
288
|
|
237
|
|
865
|
|
712
|
|
Net postretirement cost
|
|
$
|
663
|
|
$
|
977
|
|
$
|
1,990
|
|
$
|
2,932
|
|
TDS has contributed $5.3 million to the postretirement plan assets
during 2005.
On December 8, 2003, the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (the Act) was enacted. The Act expands Medicare
coverage, primarily by adding a prescription drug benefit for Medicare-eligible
participants starting in 2006. The Act provides employers currently sponsoring
prescription drug programs for Medicare-eligible participants with a range of
options for coordinating with the new government-sponsored program to
potentially reduce employers costs. One alternative allows employers to
receive a subsidy from the federal government for all retirees enrolled in the
employer-sponsored prescription drug plan. TDS has determined that the most
beneficial option will be to accept this direct subsidy from the federal
government. During the fourth quarter of 2005, TDS will notify its employees
and will apply for the federal subsidy. The affects of the subsidy will be
considered when TDS remeasures its accumulated postretirement benefit obligation
at year-end.
Pension Plan
TDS sponsors a qualified noncontributory defined contribution pension
plan. The plan provides benefits for the employees of TDS Corporate, TDS
Telecom and U.S. Cellular. Under this plan, pension benefits and costs are
calculated separately for each participant and are funded currently. Pension
costs were $3.3 million and $10.1 million for the three and nine months ended September 30,
2005, respectively, and $3.2 million and $9.2 million for the three and nine
months ended September 30, 2004, respectively.
TDS also sponsors an unfunded non-qualified deferred supplemental
executive retirement plan to supplement the benefits under the qualified plan
to offset the reduction of benefits caused by the limitation on annual employee
compensation under the tax laws.
Stock-Based Compensation
TDS accounts for stock options, stock appreciation rights 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. No compensation costs have been recognized for
stock options in 2005 and 2004 because, under TDSs stock option plans, the
option exercise price for each grant is equal to the quoted stock price at the
grant date.
17
No compensation costs have been recognized for employee stock purchase
plans because the purchase price is not less than 85 percent of the fair market
value of the stock at the purchase date. Had compensation cost for all plans
been determined consistent with Statement of Financial Accounting Standard (SFAS)
No. 123, TDSs net income available to common and earnings per share would
have been reduced to the following pro forma amounts:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
Net Income Available to Common
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
41,516
|
|
$
|
43,322
|
|
$
|
161,519
|
|
$
|
98,813
|
|
Pro forma expense
|
|
(7,164
|
)
|
(5,706
|
)
|
(15,646
|
)
|
(13,989
|
)
|
Pro forma net income available to common
|
|
$
|
34,352
|
|
$
|
37,616
|
|
$
|
145,873
|
|
$
|
84,824
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.36
|
|
$
|
0.38
|
|
$
|
1.40
|
|
$
|
0.86
|
|
Pro forma expense per share
|
|
(0.06
|
)
|
(0.05
|
)
|
(0.14
|
)
|
(0.12
|
)
|
Pro forma basic earnings per share
|
|
$
|
0.30
|
|
$
|
0.33
|
|
$
|
1.26
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.36
|
|
$
|
0.37
|
|
$
|
1.39
|
|
$
|
0.86
|
|
Pro forma expense per share
|
|
(0.06
|
)
|
(0.05
|
)
|
(0.14
|
)
|
(0.12
|
)
|
Pro forma diluted earnings per share
|
|
$
|
0.30
|
|
$
|
0.32
|
|
$
|
1.25
|
|
$
|
0.74
|
|
Certain employees were eligible for retirement at the time that
compensatory stock options were granted. Under the terms of the U.S. Cellular
option plans, options granted to these individuals will fully vest upon their
retirement. Under the terms of TDS option plans, options granted to these
individuals do not fully vest upon retirement. TDS and U.S. Cellular use the nominal
vesting method to recognize the pro forma expense of these options. This
method does not take into account the effect of early vesting due to the
retirements of eligible employees.
Upon adoption of Statement of SFAS No. 123(R), Share-Based
Payment, TDS will adopt the non-substantive vesting method. This method
immediately recognizes the entire expense of options granted to
retirement-eligible employees. TDS
believes that if the non-substantive vesting method had been applied to prior
periods, the effect on the previously disclosed pro forma expense would be
insignificant.
In April 2005, TDS initiated a program granting shares of
restricted stock to key employees. The shares will fully vest in December 2007.
There were 91,158 shares granted in the nine months ended September 30,
2005. All restricted stock was granted prior to the TDS Special Common Share
dividend; when fully vested, employees will receive 91,158 shares of TDS Common
Shares and 91,158 shares of TDS Special Common Shares. The combined
weighted-average value of the shares when granted was $77.62. The expense
included in operating income due to grants of restricted stock was $1.2 million
for the nine months ended September 30, 2005.
U.S. Cellular has granted key employees restricted stock units that
fully vest after three years. The number of U.S. Cellular Common Shares
underlying the units granted were 218,703 and 85,753 for the nine months ended September 30,
2005 and 2004, respectively. The weighted-average values of the shares
underlying the units granted were $ 45.63 and $38.65 in 2005 and 2004,
respectively. The expenses included in operating income due to grants of
restricted stock units were $5.0 million and $3.1 million in the nine months
ended September 30, 2005 and 2004, respectively.
18
Recent Accounting Pronouncements
Share-Based Payment
SFAS No. 123(R), Share-Based Payment, was issued in December 2004.
In April 2005, the SEC postponed the effective date of SFAS 123(R) until
the issuers first fiscal year beginning after June 15, 2005. As a result,
TDS will be required to adopt SFAS 123(R) in the first quarter of 2006. The
statement requires that compensation cost resulting from all share-based payment
transactions be recognized in the financial statements. SFAS 123(R) also
requires that the benefits of tax deductions in excess of recognized
compensation cost be reported as a financing cash flow, rather than as an
operating cash flow. This requirement may reduce net cash flows from operating
activities and increase net cash flows from financing activities in periods
after adoption. In addition, in March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (SAB 107) regarding the SECs interpretation
of SFAS 123(R) and the valuation of share-based payments for public companies.
TDS has reviewed the provisions of these statements and expects to record
additional compensation expense for certain share-based payment transactions,
primarily related to stock options, in the Consolidated Statements of
Operations upon adoption of SFAS 123(R). See Stock-Based Compensation above
for a discussion of the pro forma impact of SFAS 123 on reported net income and
earnings per share.
Accounting Changes and Error Corrections
SFAS No. 154, Accounting Changes and Error Corrections (SFAS
154) which replaces Accounting Principles Board Opinions No. 20 Accounting
Changes and SFAS No. 3, Reporting Accounting Changes in Interim
Financial StatementsAn Amendment of APB Opinion No. 28 was issued in May 2005.
SFAS 154 provides guidance on the accounting for and reporting of accounting
changes and error corrections. Specifically, this statement requires retrospective
application of the direct effect of a voluntary change in accounting principle
to prior periods financial statements, if it is practicable to do so. SFAS 154
also strictly redefines the term restatement to mean the correction of an
error by revising previously issued financial statements. SFAS 154 replaces APB
No. 20, which requires that most voluntary changes in accounting principle
be recognized by including in net income of the period of the change the
cumulative effect of changing to the new accounting principle. Unless adopted
early, SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. TDS does not
expect the adoption of SFAS 154 to have a material impact on its financial
position or results of operations except to the extent that the statement
requires retrospective application for voluntary changes in accounting
principle that previously would have been effected in the period of the change
under APB No. 20.
Conditional Asset Retirement Obligations
Financial Accounting Standards Board (FASB) Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations was issued in March 2005.
It is effective no later than December 31, 2005. This Interpretation
clarifies that the term conditional asset retirement obligation as used in
SFAS No. 143, Accounting for Asset Retirement Obligations, refers to a
legal obligation to perform an asset retirement activity in which the timing
and (or) method of settlement are conditional on a future event that may or may
not be within the control of the entity. The obligation to perform the asset
retirement activity is unconditional even though uncertainty exists about the
timing and (or) method of settlement. Uncertainty about the timing and (or)
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. FASB Interpretation No. 47 also clarifies when an entity would
have sufficient information to reasonably estimate the fair value of an asset
retirement obligation. TDS is currently reviewing the requirements of this
Interpretation and expects to record an asset retirement obligation in the
fourth quarter of 2005 for TDS Telecoms competitive local exchange carrier.
19
4. Income
Taxes
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,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(As Restated)
|
|
Effective Income Tax (Benefit) Rate From:
|
|
|
|
|
|
|
|
|
|
Operations excluding gain (loss) on
investments and gain on assets held for sale
|
|
39.4
|
%
|
0.1
|
%
|
40.7
|
%
|
25.7
|
%
|
Gain (loss) on investments and gain on
assets held for sale (1)
|
|
|
|
N/M
|
|
35.7
|
%
|
N/M
|
|
Income before income taxes and minority
interest
|
|
39.4
|
%
|
19.6
|
%
|
40.7
|
%
|
33.7
|
%
|
N/M Not Meaningful
(1) The effective tax rate in the nine
months ended September 30, 2004 related to the provision for gain (loss)
on investments and gain on assets held for sale is not meaningful primarily
because TDS recorded a tax expense of $11.6 million in the third quarter of
2004 related to the pending sale of certain assets to ALLTEL Corporation (ALLTEL).
Such pending sale resulted from an agreement between TDS and ALLTEL which was
signed during the quarter. The signing
of such agreement triggered the recognition of $11.6 million of income tax
expense; however no book gain on the transaction with ALLTEL was recorded until
the transaction closed in the fourth quarter of 2004.
Excluding the impacts of gains and losses,
the effective tax rate on operations for the three months ended September 30,
2005 and 2004 was 39.4% and 0.1%, respectively. The effective tax rate on
operations for the 2004 period is lower than 2005 due to a favorable tax
settlement adjustment. During the third quarter of 2004, the Internal Revenue
Service (IRS) substantially completed its audit of the consolidated federal
income tax returns of TDS for the years 1997 through 2001 and TDSs claims for
research tax credits for the years 1995 through 2001. U.S. Cellular and its
subsidiaries are included in the TDS consolidated group. Primarily based on the
results of the audit, TDS reduced its accrual for audit contingencies by $18.2
million in the third quarter of 2004. Also in the third quarter of 2004, TDS
recorded a $5.6 million benefit for the research tax credits that were allowed
in the federal income tax audit. The overall effective tax rate on income
before income taxes and minority interest for the three months ended September
30, 2005 and 2004 was 39.4% and 19.6%, respectively.
Excluding the impacts of gains and losses, the effective tax rate on
operations for the nine months ended September 30, 2005 and 2004 was 40.7%
and 25.7%, respectively. The effective tax rate for the 2004 period is lower
than 2005 primarily due to the favorable tax settlement adjustment discussed
above. The overall effective tax rate on income before income taxes and
minority interest for the nine months ended September 30, 2005 and 2004
was 40.7% and 33.7%, respectively. The effective tax rate for the 2004 includes
the favorable tax settlement adjustment, offset somewhat by the tax provision
of $11.6 million related to the pending sale of certain assets to ALLTEL, as
discussed above.
Based on the final results of the IRS
examination of TDSs income tax returns for the years 1997 through 2001 and
claims for research tax credits for 1995 through 2001, TDS paid an additional
$6.1 million tax liability to the IRS in October 2005. The amount was recorded
in Accrued taxes on the Consolidated Balance Sheet as of September 30, 2005.
5. Gain
(Loss) on Investments
In the first quarter of 2005, TDS finalized the working capital
adjustment to the previously reported gain related to its sale to ALLTEL of
certain wireless properties on November 30, 2004. The adjustment increased
the total gain on investment from this transaction by $0.5 million ($0.3
million net of taxes and minority interests of $0.2 million).
TDS reported a loss on investments of $2.3 million in the nine months
ended September 30, 2004. This dollar amount is comprised of two
transactions. In the nine months ended September 2004, U.S. Cellular
recorded a $1.8 million loss ($0.9 million net of taxes and minority interest
of $0.9 million) to reflect an impairment in the carrying value of a wireless
license held in a non-operational market in Florida that was sold in December 2004.
In September 2004, TDS recorded a $0.5 million impairment loss ($0.3
million net of taxes of $0.2 million) on an investment in a telephone company
accounted for using the cost method.
See Note 17 Acquisitions, Divestitures and Exchanges for 2005 and
2004 activity related to these transactions.
20
6. Discontinued
Operations
TDS is a party to an indemnity agreement with T-Mobile USA, Inc. (T-Mobile)
regarding certain contingent liabilities for Aerial Communications, Inc. (Aerial),
a former subsidiary of TDS. TDS has recorded an accrual for expenses, primarily
tax related, resulting from Aerials merger into VoiceStream Wireless
Corporation (VoiceStream) in 2000.
In July 2005, TDS paid $7.1 million in settlement of items related
to this indemnity which is recorded in discontinued operations on the Statement
of Cash Flows.
In the third quarter of 2005, TDS recorded a gain of $0.3 million ($0.5
million, net of a $0.2 million income tax expense), or $0.00 per diluted share,
for discontinued operations relating to a reduction in this indemnity accrual
due to the favorable outcome of a state tax audit which reduced the potential
indemnity obligation.
In the third quarter of 2004, TDS recorded a gain of $7.0 million ($4.4
million, net of a $2.6 million income tax benefit), or $0.04 per diluted share,
for discontinued operations relating to a reduction in this indemnity accrual.
The accrual was reduced in the third quarter of 2004 due to favorable outcomes
of federal and state tax audits which reduced the potential indemnity
obligation.
7. Earnings
per Share
Basic earnings per share is computed by dividing net income available
to common by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share is computed using net income
available to common and weighted average number of shares of common stock
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 Shares into
Common and Special Common Shares.
21
Net income used in computing earnings per share and the effects of
potentially dilutive securities on the weighted average number of shares and
earnings per share are as follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(As Restated)
|
|
|
|
(Dollars and shares in thousands, except earnings per share)
|
|
Basic Earnings per Share:
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
$
|
41,226
|
|
$
|
39,022
|
|
$
|
161,331
|
|
$
|
94,614
|
|
Preferred dividend requirement
|
|
(50
|
)
|
(51
|
)
|
(152
|
)
|
(152
|
)
|
Income from Continuing Operations Available
to Common
|
|
41,176
|
|
38,971
|
|
161,179
|
|
94,462
|
|
Discontinued Operations
|
|
340
|
|
4,351
|
|
340
|
|
4,351
|
|
Net income available to common used in
basic earnings per share
|
|
$
|
41,516
|
|
$
|
43,322
|
|
$
|
161,519
|
|
$
|
98,813
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available
to common used in basic earnings per share
|
|
$
|
41,176
|
|
$
|
38,971
|
|
$
|
161,179
|
|
$
|
94,462
|
|
Reduction in Preferred Dividends if
Preferred Shares Converted into Common Shares
|
|
50
|
|
12
|
|
149
|
|
|
|
Minority income adjustment (1)
|
|
(241
|
)
|
(137
|
)
|
(607
|
)
|
(338
|
)
|
Income from Continuing Operations Available
to Common
|
|
40,985
|
|
38,846
|
|
160,721
|
|
94,124
|
|
Discontinued Operations
|
|
340
|
|
4,351
|
|
340
|
|
4,351
|
|
Net income available to common used in
diluted earnings per share
|
|
$
|
41,325
|
|
$
|
43,197
|
|
$
|
161,061
|
|
$
|
98,475
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of Common
Stock used in basic earnings per share (2)
|
|
115,423
|
|
114,641
|
|
115,217
|
|
114,506
|
|
Effects of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
Effects of stock options (2)(3)
|
|
630
|
|
589
|
|
687
|
|
534
|
|
Conversion of preferred shares (2)(4)
|
|
159
|
|
37
|
|
159
|
|
|
|
Weighted average number of shares of Common
Stock used in diluted earnings per share
|
|
116,212
|
|
115,267
|
|
116,063
|
|
115,040
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
0.36
|
|
$
|
0.34
|
|
$
|
1.40
|
|
$
|
0.82
|
|
Discontinued Operations
|
|
|
|
0.04
|
|
|
|
0.04
|
|
|
|
$
|
0.36
|
|
$
|
0.38
|
|
$
|
1.40
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
0.36
|
|
$
|
0.33
|
|
$
|
1.39
|
|
$
|
0.82
|
|
Discontinued Operations
|
|
|
|
0.04
|
|
|
|
0.04
|
|
|
|
$
|
0.36
|
|
$
|
0.37
|
|
$
|
1.39
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The minority income adjustment reflects the
additional minority share of U.S. Cellulars income computed as if all of U.S.
Cellulars issuable securities were outstanding.
(2) The numbers of shares of common stock for 2004
has been retroactively adjusted to reflect the stock dividend discussed in Note
2 Stock Dividend.
(3) Stock options convertible into 1,348,498
shares (total of common and special common) were not included in computing
diluted earnings per share in the three and nine months ended September 30,
2005 because their effects were antidilutive. Stock options convertible into
1,362,804 shares (total of common and special common) in the three and nine
months ended September 30, 2004 were not included in computing diluted
earnings per share because their effects were antidilutive.
(4) Preferred shares convertible into 109,080 and 145,612
shares (total of common and special common) were not included in computing
diluted earnings per share in the three and nine months ended September 30,
2004 because their effect was antidilutive.
22
8. Marketable
Equity Securities
TDS and its subsidiaries hold a
substantial amount of marketable equity securities that are publicly traded and
can have volatile movements in share prices. TDS and its subsidiaries do not
make direct investments in publicly traded companies and all of these interests
were acquired as a result of sales, trades or reorganizations of other assets.
The investment in Deutsche Telekom AG (Deutsche Telekom) resulted from TDSs
disposition of its over 80%-owned personal communication services operating
subsidiary, Aerial Communications, Inc., to VoiceStream Wireless
Corporation (VoiceStream) in exchange for stock of VoiceStream, which was
then acquired by Deutsche Telekom in exchange for Deutsche Telekom stock. The
investment in Vodafone Group Plc (Vodafone) resulted from certain
dispositions of non-strategic cellular investments to or settlements with
AirTouch Communications Inc. (AirTouch), in exchange for stock of AirTouch,
which was then acquired by Vodafone whereby TDS and its subsidiaries received
American Depositary Receipts representing Vodafone stock. The investment in
Rural Cellular Corporation (Rural Cellular) is the result of a consolidation
of several cellular partnerships in which TDS subsidiaries held interests in
Rural Cellular, and the distribution of Rural Cellular stock in exchange for
these interests. The investment in VeriSign, Inc. (VeriSign) is the
result of the acquisition by VeriSign of Illuminet, Inc., a
telecommunication entity in which several TDS subsidiaries held interests.
TDS and its subsidiaries have entered into a number of forward
contracts 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 the risk of an other-than-temporary loss
being recorded on these contracted securities.
(For additional information, see Note 12 Revolving Credit Facilities
and Forward Contracts.)
Information regarding the fair value of TDSs marketable equity
securities is summarized as follows:
|
|
September 30,
2005
|
|
December 31,
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Marketable Equity Securities
|
|
|
|
|
|
Deutsche Telekom AG 131,461,861 Ordinary
Shares
|
|
$
|
2,401,808
|
|
$
|
2,960,521
|
|
Vodafone Group Plc 12,945,915 American
Depositary Receipts
|
|
336,205
|
|
354,459
|
|
VeriSign, Inc. 2,361,333 Common
Shares
|
|
50,462
|
|
79,341
|
|
Rural Cellular Corporation 719,396
equivalent Common Shares
|
|
8,748
|
|
4,482
|
|
Other
|
|
1
|
|
1
|
|
Aggregate fair value
|
|
2,797,224
|
|
3,398,804
|
|
Accounting cost basis, as adjusted
|
|
1,543,677
|
|
1,543,677
|
|
Gross unrealized holding gains
|
|
1,253,547
|
|
1,855,127
|
|
Equity method unrealized gains
|
|
543
|
|
261
|
|
Deferred income tax (expense)
|
|
(493,630
|
)
|
(732,179
|
)
|
Minority share of unrealized holding gains
|
|
(13,066
|
)
|
(13,987
|
)
|
Unrealized holding gains, net of tax and
minority share
|
|
747,394
|
|
1,109,222
|
|
Derivative instruments, net of tax and
minority share
|
|
(423,070
|
)
|
(738,365
|
)
|
Accumulated other comprehensive income
|
|
$
|
324,324
|
|
$
|
370,857
|
|
|
|
|
|
|
|
|
|
|
TDS recorded dividend income on its Deutsche Telekom investment of
$105.7 million, before taxes, in the second quarter of 2005. Deutsche Telekom
did not pay a dividend in 2004.
23
9. Goodwill
TDS has substantial amounts of goodwill as a result of acquisitions of
wireless markets, and operating telephone companies. The changes in goodwill
for the nine months ended September 30, 2005 and 2004, were as follows.
TDS Telecoms incumbent local exchange carriers are designated as ILEC and its
competitive local exchange carrier is designated as CLEC in the table.
|
|
U.S.
Cellular (1)
|
|
TDS Telecom
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
ILEC
|
|
CLEC (2)
|
|
Other (3)
|
|
Total
|
|
Balance December 31, 2004
As Restated
|
|
$
|
445,212
|
|
$
|
395,894
|
|
$
|
|
|
$
|
2,281
|
|
$
|
843,387
|
|
Acquisitions
|
|
237
|
|
|
|
|
|
|
|
237
|
|
Assets of operations held for
sale
|
|
(2,741
|
)
|
|
|
|
|
|
|
(2,741
|
)
|
Other Adjustments
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
Balance September 30, 2005
|
|
$
|
442,698
|
|
$
|
395,894
|
|
$
|
|
|
$
|
2,281
|
|
$
|
840,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2003
As Restated
|
|
$
|
449,550
|
|
$
|
395,894
|
|
$
|
29,440
|
|
$
|
33,181
|
|
$
|
908,065
|
|
Acquisitions
|
|
3,649
|
|
|
|
|
|
|
|
3,649
|
|
Assets of operations held for
sale
|
|
(8,257
|
)
|
|
|
|
|
(30,900
|
)
|
(39,157
|
)
|
Other
|
|
(305
|
)
|
|
|
|
|
|
|
(305
|
)
|
Balance September 30, 2004
As Restated
|
|
$
|
444,637
|
|
$
|
395,894
|
|
$
|
29,440
|
|
$
|
2,281
|
|
$
|
872,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) As a result of the 2005 exchange agreement
entered into with ALLTEL during the third quarter of 2005, U.S. Cellular
reclassified $2.7 million of goodwill to assets of operations held for sale as
of September 30, 2005. As a result of the 2004 agreements with ALLTEL,
U.S. Cellular reclassified $8.3 million of goodwill to assets of operations
held for sale as of September 30, 2004. See
Notes 17 and 18 for additional information related to these transactions.
(2) In December 2004, TDS Telecom concluded
that the CLEC goodwill was impaired, and recorded a $29.4 million loss on
impairment of intangible assets. This reduced the goodwill balance to zero.
(3) Other consists of goodwill related to Suttle
Straus and an investment in a cellular market owned by an ILEC subsidiary. This
investment was sold to ALLTEL in November 2004.
10. Unconsolidated
Entities
Investments
in unconsolidated entities consist of amounts invested in wireless and wireline
entities in which TDS holds a minority interest. These investments are
accounted for using either the equity or cost method.
Information
regarding TDSs significant investments in unconsolidated entities and its
respective ownership share of each is summarized below:
|
|
September 30,
2005
|
|
September 30,
2004
|
|
Los Angeles SMSA Limited Partnership
|
|
5.5
|
%
|
5.5
|
%
|
Raleigh-Durham MSA Limited Partnership (1)
|
|
|
|
8.0
|
%
|
Midwest Wireless Communications, L.L.C. (2)
|
|
14.2
|
%
|
14.2
|
%
|
North Carolina RSA 1 Partnership
|
|
50.0
|
%
|
50.0
|
%
|
Oklahoma City SMSA Limited Partnership
|
|
14.6
|
%
|
14.6
|
%
|
(1) As more fully described in Note 17, U.S.
Cellulars investment in this partnership was included in Assets of Operations
Held for Sale as of September 30, 2004 and sold to ALLTEL on November 30,
2004.
(2) In addition, U.S. Cellular has a 49% interest in
Pine Island Cellular Telephone Company, which has an approximately 2.9%
interest in Midwest Wireless Holdings, L.L.C., the parent company of Midwest
Wireless Communications.
24
Based primarily on data furnished to TDS by third parties, the
following table summarizes the combined results of operations of all wireless
and wireline entities which TDS accounts for by the equity method:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
(as restated)
|
|
|
|
(as restated)
|
|
|
|
(Dollars in thousands)
|
|
Results of operations
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
912,000
|
|
$
|
725,000
|
|
$
|
2,527,000
|
|
$
|
2,237,000
|
|
Operating expenses
|
|
631,000
|
|
498,000
|
|
1,754,000
|
|
1,557,000
|
|
Operating income
|
|
281,000
|
|
227,000
|
|
773,000
|
|
680,000
|
|
Other income (expense), net
|
|
1,000
|
|
30,000
|
|
15,000
|
|
22,000
|
|
Net Income
|
|
$
|
282,000
|
|
$
|
257,000
|
|
$
|
788,000
|
|
$
|
702,000
|
|
11. Customer
Lists
Customer
lists, which represent intangible assets from the acquisition of wireless
properties, are being amortized based on average customer retention periods
using the declining balance method. The acquisition of certain minority
interests in the nine months ended September 30, 2005 and 2004 added $0.6
million and $12.9 million, respectively, to the gross balance of customer
lists. Customer list amortization expense was $2.1 million and $6.7 million for
the three and nine months ended September 30, 2005, respectively, and $3.2
and $9.9 million for the three and nine months ended September 30, 2004,
respectively. Amortization expense for the remainder of 2005 and for the years
2006-2009 is expected to be $1.7 million, $5.3 million, $3.5 million, $2.3
million and $1.6 million, respectively.
12. Revolving
Credit Facilities and Forward Contracts
TDS has a $600 million revolving credit facility available for general
corporate purposes. At September 30, 2005, this credit facility had $596.6
million available for use, net of $3.4 million committed to support outstanding
letters of credit. This credit facility expires in December 2009.
Generally, borrowings bear interest at the London InterBank Offered Rate (LIBOR)
plus a contractual spread based on TDSs credit rating. At September 30,
2005, the contractual spread was 45 basis points (the one-month LIBOR rate was
3.86% at September 30, 2005). Under certain circumstances, with less than
two days notice of intent to borrow, interest on borrowings are at the prime
rate less 50 basis points (the prime rate was 6.75% at September 30,
2005).
TDS also has $75 million of direct bank lines of credit at September 30,
2005, all of which were unused. The terms of the direct lines of credit provide
for borrowings at negotiated rates up to the prime rate.
U.S. Cellular has a $700 million revolving credit facility available
for general corporate purposes. At September 30, 2005, this credit
facility had $699.7 million available for use, net of $0.3 million committed to
outstanding letters of credit. This credit facility expires in December of
2009. Generally, borrowings bear interest at the London InterBank Offered Rate
(LIBOR) plus a contractual spread based on U.S. Cellulars credit rating. At September 30,
2005, the contractual spread was 45 basis points. Under certain circumstances,
with less than two days notice of intent to borrow, interest on borrowings are
at the prime rate less 50 basis points.
On July 11, 2005, Moodys Investors Service downgraded TDS and
U.S. Cellular from a Baa1 rating with a negative outlook to Baa2 with a stable
outlook. As a result of the downgrade, the contractual spread applied to LIBOR
in determining the interest rate applicable to the borrowings under the TDS and
U.S. Cellular revolving credit facilities increased to 45 basis points from 30
basis points. In addition, the facility fee increased to 15 basis points from
10 basis points.
As disclosed in Note 1, TDS and its audit
committee concluded on November 9, 2005 that TDS would amend its Annual
Report on Form 10-K for the year ended December 31, 2004 to restate
the financial statements and financial information for each of the three years
ended December 31, 2004, including quarterly information for 2004 and
2003, and certain selected financial data for the years 2001 and 2000. TDS and its audit committee also concluded
that TDS would amend its Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 2005 and June 30, 2005 to restate the
financial statements and financial information included therein. In addition, due to the restatement, TDS did
not file this Form 10-Q by the extended due date of November 14,
2005.
25
The restatement and delay in filing this Form 10-Q
resulted in defaults under the revolving credit agreements, one line of credit
agreement and certain of the forward contracts.
TDS and U.S. Cellular were not in violation of any covenants that
require TDS and U.S. Cellular to maintain certain financial ratios. TDS and U.S. Cellular did not fail to make
any scheduled payments under such credit agreements or forward contracts. TDS and U.S. Cellular received waivers from
the lenders associated with the credit agreements and from the counterparty to
such forward contracts, under which the lenders and the counterparty agreed to
waive any defaults that may have occurred as a result of the restatement and
the late filing of this Form 10-Q.
On November 10, 2005, Moodys Investors
Service downgraded TDS and U.S. Cellular from a Baa2 rating with a stable
outlook to Baa3 and placed the ratings under review for possible
downgrade. The contractual spread
applied to LIBOR in determining the interest rate applicable to the borrowings
under the TDS and U.S. Cellular revolving credit facilities has increased to 60
basis points from 45 basis points. In
addition, the facility fee has increased to 20 basis points from 15 basis
points.
On November 9, 2005, TDS, as Lender, entered into an Intercompany
Revolving Credit Agreement (Intercompany Credit Agreement) with U.S.
Cellular, as Borrower. This Intercompany
Credit Agreement was entered into to provide U.S. Cellular with a senior revolving
credit facility for general corporate purposes, including capital expenditures
and working capital. Amounts could be
borrowed, repaid and reborrowed from time to time under the Intercompany Credit
Agreement until such facility matured.
The facility was $105 million and the maturity date was December 23,
2005. As discussed above, U.S.
Cellulars $700 million revolving credit facility was in default and U.S.
Cellular was unable to make borrowings thereunder until it obtained waivers
from the lenders. Accordingly, TDS and
U.S. Cellular entered into the Intercompany Credit Agreement to permit U.S.
Cellular to borrow funds from TDS temporarily until it received such
waivers. Because such waivers were
received, this Intercompany Credit Agreement was terminated according to its
terms and all borrowings and accrued interest were repaid in full on December
23, 2005.
TDS believes that the Intercompany Credit Agreement included
representations and warranties and events of default that are usual and
customary for senior facilities of this type. TDS also believes that the
Intercompany Credit Agreement contained other terms and conditions that are
usual and customary for senior credit facilities of this type, The Intercompany
Credit Agreement included limitations on U.S. Cellular and its subsidiaries
with respect to liens, indebtedness, sales of assets, consolidations and
mergers that are similar to those contained in U.S. Cellulars $700 million
revolving credit facility with unrelated lenders. The Intercompany Credit
Agreement did not have any financial covenants.
U.S. Cellulars Board of Directors unanimously approved the terms and
conditions of the Intercompany Credit Agreement and determined that such terms
and conditions were fair to U.S. Cellular and all of its shareholders. TDSs Board of Directors also unanimously
approved the terms and conditions of the Intercompany Credit Agreement and
determined that such terms and conditions were fair to TDS and all of its
shareholders.
The pricing terms
of the Intercompany Credit Agreement were the same as those under the Revolving
Credit Facility. Borrowings bore
interest at LIBOR plus a contractual spread based on U.S. Cellulars credit
rating. As of November 9, 2005, U.S. Cellulars borrowing rate for a seven-day
loan was 4.52% based on the seven day LIBOR rate of 4.07% and a contractual
spread of 45 basis points. As a result of the downgrade on November 10, 2005 by
Moodys Investors Services, the contractual spread increased to 60 basis
points.
On January 25,
2006, Standard & Poors placed its ratings of TDS and U.S. Cellular on
Credit Watch with negative implications. The change in ratings did not have an
impact on the contractual spread applied to LIBOR in determining the interest
rate applicable to the borrowings under the TDS and U.S. Cellular revolving
credit facilities.
26
13. Asset Retirement
Obligation
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 certain leased land on which U.S.
Cellulars cell sites and switching offices are located. U.S. Cellular is also
required to return certain leased 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 No. 143, Accounting for Asset
Retirement Obligations, and has recorded a liability, which is included in
other deferred liabilities and credits on the Consolidated Balance Sheets, and
related asset retirement obligation expense, reflected in depreciation,
amortization and accretion expense in the Consolidated Statements of
Operations. The asset retirement obligation, included in Other deferred
liabilities and credits, calculated in accordance with the provisions of SFAS No. 143
at September 30, 2005 was $80.1 million.
During the second quarter of 2005, U.S. Cellular reviewed the
assumptions related to its asset retirement obligations and made certain
changes to those assumptions as a result. Such changes did not have a material
impact on U.S. Cellulars financial condition or results of operations.
TDS Telecoms incumbent local exchange carriers have recorded an asset
retirement obligation in accordance with the requirements of SFAS No. 143
and a regulatory liability for the costs of removal that state public utility
commissions have required to be recorded for regulatory accounting purposes which
are in excess of the amounts required to be recorded in accordance with SFAS No. 143.
These amounts combined make up the asset retirement obligation amounts shown on
the Consolidated Balance Sheets. The asset retirement obligation calculated in
accordance with the provisions of SFAS No. 143 at September 30, 2005
was $35.4 million. The regulatory liability in excess of the amounts required
to be recorded in accordance with SFAS No. 143 at September 30, 2005
was $33.3 million.
TDS is currently reviewing the requirements
of FASB Interpretation No. 47 Accounting for Conditional Asset Retirement
Obligations and expects to record an asset retirement obligation in the fourth
quarter of 2005 for TDS Telecoms competitive local exchange carrier.
The table below summarizes the changes in asset retirement obligations
during the nine months ended September 30, 2005.
|
|
U.S.
Cellular
|
|
TDS
Telecom
|
|
TDS
Consolidated
|
|
|
|
(Dollars in thousands)
|
|
Beginning
Balance December 31, 2004
|
|
$
|
72,575
|
|
$
|
65,000
|
|
$
|
137,575
|
|
Additional
liabilities accrued
|
|
4,701
|
|
4,253
|
|
8,954
|
|
Accretion
expense
|
|
4,733
|
|
|
|
4,733
|
|
Liabilities
of operations held for sale (1)
|
|
(1,925
|
)
|
|
|
(1,925
|
)
|
Costs of
removal incurred in 2005
|
|
|
|
(613
|
)
|
(613
|
)
|
Ending
Balance September 30, 2005
|
|
$
|
80,084
|
|
$
|
68,640
|
|
$
|
148,724
|
|
(1) Reclassified to Liabilities of Operations
Held for Sale as a result of agreements with ALLTEL in 2005 as described in
Notes 17 and 18.
27
14. Long-Term Debt
On March 31, 2005, TDS issued $116.25 million in aggregate
principal amount of unsecured 6.625% senior notes due March 31, 2045.
Interest on the notes is payable quarterly. TDS may redeem the notes, in whole
or in part, at any time on and after March 31, 2010, at a redemption price
equal to 100% of the principal amount redeemed plus accrued and unpaid interest
to the redemption date. The net proceeds from this offering, after deducting
underwriting discounts, were approximately $112.6 million.
On March 31, 2005, TDS Telecom subsidiaries repaid approximately
$105.6 million in principal amount of notes to the Rural Utilities Service (RUS)
and the Rural Telephone Bank (RTB) plus accrued interest of $0.6 million. TDS
Telecom subsidiaries incurred prepayment costs of $0.6 million associated with
these repayments. Unamortized debt issuance costs related to the notes totaling
$0.1 million were expensed and included in other income (expense), net in the
Statements of Operations. The RUS and RTB debt, held at individual TDS Telecom
incumbent local exchange carriers, had a weighted average interest rate of 5.5%
and maturity of approximately 12 years.
On June 30, 2005, TDS Telecom subsidiaries repaid approximately
$127.0 million in principal amount of notes to the RUS, the RTB, and the
Federal Financing Bank (FFB), all agencies of the United States Department of
Agriculture, and the Rural Telephone Finance Cooperative (RTFC), a
member-owned, not-for-profit lending cooperative that serves the financial
needs of the rural telecommunications industry. TDS Telecom subsidiaries paid
accrued interest of $0.8 million and additional prepayment costs of $1.2
million associated with these repayments. Unamortized debt issuance costs
related to the notes totaling $0.3 million were expensed and included in other
income (expense), net in the Statements of Operations. The RUS, RTB, FFB and
RTFC debt, held at individual TDS Telecom incumbent local exchange carriers,
had a weighted average interest rate of 6.2% and maturity of approximately 15
years. TDS determined that is was advantageous to repay RUS, RTB and FFB debt
to reduce administrative costs and to increase financial flexibility.
TDS redeemed $17.2 million of medium-term notes in January and February of
2005 which carried interest rates of 9.25 9.35%.
TDS has reclassified its $200.0 million unsecured 7% senior notes to
Current portion of long-term debt on the Consolidated Balance Sheet as the
notes are due in August 2006.
The late filing of this Form 10-Q and the failure to deliver such Form 10-Q
to the trustees of the TDS debt indentures on a timely basis resulted in
non-compliance under such debt indentures. However, this non-compliance did not
result in an event of default or a default and TDS believes that such non-compliance
was cured upon the filing of this Form 10-Q. In addition, the late filing of the Form 10-Q
for the period ended September 30, 2005 by U.S. Cellular and the failure
to deliver such Form 10-Q to the trustees of the U.S. Cellular debt
indentures on a timely basis resulted in non-compliance under such debt
indentures. However, this non-compliance did not result in an event of default
or a default and U.S. Cellular believes that such non-compliance was cured upon
the filing of this Form 10-Q.
Neither TDS nor U.S. Cellular has failed to make or expects to fail to
make any scheduled payment of principal or interest under such indentures.
15. Minority Interest in
Subsidiaries
Under SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity, certain minority interests in consolidated entities with finite lives
may meet the standards 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 entitys organization agreement
assuming an orderly liquidation of the finite-lived entity, net of estimated
liquidation costs (the settlement value). TDSs consolidated financial
statements include such minority interests that meet the standards 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 TDSs mandatorily redeemable
minority interests range from 2042 to 2103.
28
The settlement value of TDSs mandatorily
redeemable minority interests is estimated to be $134.5 million at September 30,
2005. 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, 2005, net
of estimated liquidation costs. This amount is being disclosed pursuant to the
requirements of FSP No. FAS 150-3; 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, 2005
is $34.4 million, and is included in the Consolidated 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 $100.1 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 TDSs share, of the appreciation of the underlying net assets of
these subsidiaries is reflected in the consolidated financial statements. The
estimate of settlement value was based on certain factors and assumptions.
Changes in those factors and assumptions could result in a materially larger or
smaller settlement amount.
16. Common Share Repurchase
Programs
In 2003, the Board of Directors of TDS
authorized the repurchase of up to 3.0 million TDS Common Shares through February 2006.
As market conditions warrant, TDS may repurchase Common Shares on the open
market or at negotiated prices in private transactions, at prices approximating
then existing market prices. TDS may use repurchased shares to fund
acquisitions and for other corporate purposes. Currently, TDS does not have
authorization to repurchase Special Common Shares.
No TDS Common Shares were repurchased in the
first nine months of 2005. As of September 30, 2005, shares remaining
available for repurchase under this authorization totaled 824,300. In the nine
months ended September 30, 2004, TDS repurchased 214,800 Common Shares
under this authorization for an aggregate purchase price of $14.9 million,
representing an average per share price of $69.15, including commissions. An
additional $5.6 million was paid in January 2004 to settle repurchases
that occurred at the end of December 2003.
U.S. Cellular has an ongoing authorization to repurchase a limited
amount of U.S. Cellular Common Shares on a quarterly basis, primarily for use
in employee benefit plans. In the nine
months ended September 30, 2004, U.S. Cellular repurchased 5,100 U.S.
Cellular Common Shares under this authorization for an aggregate purchase price
of $204,000, representing an average per share price of $40.04 including
commissions. The repurchase is reported in Other financing activities on the
Consolidated Statement of Cash Flows. No
U.S. Cellular Common Shares were repurchased in the nine months ended September 30,
2005.
17. Acquisitions,
Divestitures and Exchanges
2005 Activity
U.S.
Cellular is a limited partner in Carroll Wireless, L.P. (Carroll Wireless),
an entity which participated in the auction of wireless spectrum designated by
the Federal Communications Commission (FCC) as Auction 58. Carroll Wireless
was qualified to bid on spectrum which was available only to companies that
fall under the FCC definition of designated entities, which are small
businesses that have a limited amount of assets. Carroll Wireless was a
successful bidder for 17 licensed areas in Auction 58, which ended on February 15,
2005. The aggregate amount paid to the FCC for the 17 licenses was $129.9
million, net of all bidding credits to which Carroll Wireless was entitled as a
designated entity. These 17 licensed areas cover portions of 12 states and are
in markets which are either adjacent to or overlap current U.S. Cellular
licensed areas.
On January 6,
2006, the FCC granted Carroll Wireless applications with respect to 16 of the
17 licenses for which it had been the successful bidder and dismissed one
application, relating to Walla Walla, Washington. Following the completion of
Auction 58, the FCC determined that a portion of the Walla Walla license was
already licensed to another party and should not have been included in Auction
58. Carroll Wireless expects to receive a full refund of the $228,000 paid to
the FCC with respect to the Walla Walla license.
29
Carroll Wireless is in the process of
developing its long-term business and financing plans. As of September 30,
2005, U.S. Cellular has made capital contributions and advances to Carroll
Wireless and/or its general partner of $129.9 million to fund the amount
deposited with the FCC; this amount is included in Licenses in the Consolidated
Balance Sheet as of September 30, 2005. U.S. Cellular consolidates Carroll
Wireless and Carroll PCS, Inc., the general partner of Carroll Wireless,
for financial reporting purposes, pursuant to the guidelines of Financial
Accounting Standards Board (FASB) Interpretation No. 46R (FIN 46R), as
U.S. Cellular anticipates absorbing a majority of Carroll Wireless expected
gains or losses. Pending finalization of Carroll Wireless permanent financing
plan, and upon request by Carroll Wireless, U.S. Cellular may agree to make
additional capital contributions and advances to Carroll Wireless and/or its
general partner. In November 2005, U.S. Cellular approved additional
funding of up to $1.4 million of which $0.1 million of funding has been
provided to date, for Carroll Wireless and Carroll PCS.
In the first quarter of 2005, TDS adjusted the previously reported gain
related to its sale to ALLTEL of certain wireless properties on November 30,
2004. The adjustment increased the total gain on investment from this transaction
by $0.5 million due to a working capital adjustment which was finalized in the
first six months of 2005 related to the entities sold in which TDS previously
owned a noncontrolling investment interest.
In addition, in the first nine months of 2005
U.S. Cellular purchased one wireless property and certain minority interests in
wireless markets in which it already owned a controlling interest for $5.2
million in cash. These acquisition costs were allocated among U.S. Cellulars
tangible assets, investments in licenses, goodwill and customer lists in
accordance with SFAS No. 141, Business Combinations.
2004 Activity
On September 23,
2004, U.S. Cellular announced that it had entered into a definitive agreement
to sell its Daytona Beach, Florida 20 MHz C block personal communications
service license to MetroPCS for $8.5 million. In the nine months ended September 30,
2004, U.S. Cellular recorded a loss on investments of $1.8 million to reflect
impairment in the carrying value of this license and reclassified the license
to assets of operations held for sale on the Balance Sheet. The transaction
closed on December 20, 2004.
On August 4,
2004, TDS and U.S. Cellular announced that they had entered into definitive
agreements with ALLTEL to sell certain wireless properties. TDS and U.S.
Cellular subsidiaries sold three consolidated properties and six minority
interests to ALLTEL for approximately $143 million in cash, including repayment
of debt and working capital that was adjusted in the first quarter of 2005. TDS
reclassified the assets and liabilities of the properties to be transferred to
Assets and Liabilities of Operations Held for Sale on the Balance Sheet as of September 30,
2004.
On February 18,
2004, U.S. Cellular completed the sale of certain of its wireless properties in
southern Texas to AT&T Wireless for $96.9 million in cash, subject to a
working capital adjustment. The U.S. Cellular markets sold to AT&T Wireless
included wireless assets and customers in six cellular markets. An aggregate loss
of $21.3 million (including a $22.0 million estimate of the loss on assets held
for sale in the fourth quarter of 2003 and subsequent $0.1 million and $0.6
million reductions of the loss in the first and second quarters of 2004,
respectively) was recorded as a loss on assets held for sale (included in
Operating Expenses), representing the difference between the carrying value of
the markets sold to AT&T Wireless and the cash received in the transaction.
The results of operations of the markets sold to AT&T Wireless were
included in results of operations through February 17, 2004.
In addition, in the first nine months of 2004
U.S. Cellular purchased certain minority interests in several wireless markets
in which it already owned a controlling interest for $40.4 million in cash.
These acquisition costs were allocated among U.S. Cellulars Investments in
License, Goodwill and Customer lists.
30
18. Assets and Liabilities of
Operations Held for Sale
On September 12, 2005, U.S. Cellular announced that it had entered
into a definitive agreement with a subsidiary of ALLTEL to exchange certain
cellular properties. Under the agreement, U.S. Cellular acquired fifteen Rural
Service Area (RSA) markets in Kansas and Nebraska in exchange for two RSA
markets in Idaho and $50 million in cash, subject to working capital
adjustments. U.S. Cellular will record
the transaction in the fourth quarter of 2005 and, subject to the results of
the valuation analysis which is currently underway, expects to report a pre-tax
gain that will increase operating income by approximately $40 - $45
million. The gain represents the excess
of the estimated fair value of the assets and liabilities received over the
amount of cash and net book value of the assets and liabilities delivered in
the exchange.
In connection with the definitive exchange
agreement with ALLTEL the Consolidated Balance Sheet of U.S. Cellular as of September 30,
2005 reflects the assets and liabilities of the markets delivered in the
exchange as Assets and Liabilities of Operations Held for Sale in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The results of
operations of the markets delivered in the exchange are included in results of
continuing operations through September 30, 2005 and will continue to be
included in results of operations through December 19, 2005, the closing
date of the transaction.
Summarized assets and liabilities relating to
operations held for sale are as follows:
(Dollars in thousands)
|
|
September 30,
2005
|
|
|
|
|
|
Current
assets
|
|
$
|
4,673
|
|
Wireless
license costs
|
|
21,945
|
|
Goodwill
|
|
2,741
|
|
Property,
plant and equipment, net
|
|
35,039
|
|
Other assets
|
|
2,246
|
|
Assets of
operations held for sale
|
|
$
|
66,644
|
|
|
|
|
|
Current
liabilities
|
|
$
|
3,456
|
|
Deferred
credits
|
|
2,129
|
|
Liabilities
of operations held for sale
|
|
$
|
5,585
|
|
31
19. Accumulated Other
Comprehensive Income
The cumulative balances of unrealized gains
(losses) on securities and derivative instruments and related income tax
effects included in Accumulated other comprehensive income are as follows.
|
|
Nine months ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Marketable
Equity Securities
|
|
|
|
Balance,
beginning of period
|
|
$
|
1,109,222
|
|
$
|
732,904
|
|
Add
(deduct):
|
|
|
|
|
|
Unrealized gain (loss) on marketable equity
securities
|
|
(601,580
|
)
|
27,860
|
|
Income tax benefit
|
|
238,549
|
|
(11,474
|
)
|
|
|
(363,031
|
)
|
16,386
|
|
Unrealized gain (loss) of equity method
companies
|
|
282
|
|
135
|
|
Minority share of unrealized loss
|
|
921
|
|
1,086
|
|
Net change
in unrealized gain (loss) on marketable equity securities in comprehensive
income
|
|
(361,828
|
)
|
17,607
|
|
Balance, end
of period
|
|
$
|
747,394
|
|
$
|
750,511
|
|
|
|
|
|
|
|
Derivative
Instruments
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
(738,365
|
)
|
$
|
(438,086
|
)
|
Add
(deduct):
|
|
|
|
|
|
Unrealized loss on derivative instruments
|
|
523,890
|
|
46,315
|
|
Income tax benefit
|
|
(207,724
|
)
|
(17,836
|
)
|
|
|
316,166
|
|
28,479
|
|
Minority
share of unrealized loss
|
|
(871
|
)
|
(1,205
|
)
|
Net change
in unrealized loss on derivative instruments included in comprehensive income
|
|
315,295
|
|
27,274
|
|
Balance, end
of period
|
|
$
|
(423,070
|
)
|
$
|
(410,812
|
)
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Income
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
370,857
|
|
$
|
294,818
|
|
Net change in marketable equity securities
|
|
(361,828
|
)
|
17,607
|
|
Net change in derivative instruments
|
|
315,295
|
|
27,274
|
|
Net change in unrealized gain (loss)
included in comprehensive income
|
|
(46,533
|
)
|
44,881
|
|
Balance, end
of period
|
|
$
|
324,324
|
|
$
|
339,699
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
41,566
|
|
$
|
43,373
|
|
$
|
161,671
|
|
$
|
98,965
|
|
Net change in unrealized gain (loss) included in comprehensive income
|
|
(7,192
|
)
|
41,897
|
|
(46,533
|
)
|
44,881
|
|
|
|
$
|
34,374
|
|
$
|
85,270
|
|
$
|
115,138
|
|
$
|
143,846
|
|
32
20. Business Segment
Information
Financial data for TDSs business segments
for each of the three and nine month periods ended or at September 30,
2005 and 2004 are as follows. TDS Telecoms incumbent local exchange carriers
are designated as ILEC in the table and its competitive local exchange
carrier is designated as CLEC.
Three months ended or at
September 30, 2005
|
|
U.S.
|
|
TDS Telecom
|
|
|
|
Other
Reconciling
|
|
|
|
|
Cellular
|
|
ILEC
|
|
CLEC
|
|
Other(3)
|
|
Items (1)
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
795,506
|
|
$
|
168,569
|
|
$
|
60,697
|
|
$
|
8,820
|
|
$
|
(4,841
|
)
|
$
|
1,028,751
|
|
Cost of
services and products
|
|
289,925
|
|
47,601
|
|
26,736
|
|
6,172
|
|
(545
|
)
|
369,889
|
|
Selling,
general and administrative expense
|
|
312,777
|
|
43,837
|
|
29,793
|
|
1,389
|
|
(4,296
|
)
|
383,500
|
|
Operating
income before depreciation, amortization and accretion (2)
|
|
192,804
|
|
77,131
|
|
4,168
|
|
1,259
|
|
|
|
275,362
|
|
Depreciation,
amortization and accretion expense
|
|
126,583
|
|
33,319
|
|
6,998
|
|
688
|
|
|
|
167,588
|
|
Operating
income (loss)
|
|
66,221
|
|
43,812
|
|
(2,830
|
)
|
571
|
|
|
|
107,774
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
17,744
|
|
58
|
|
|
|
|
|
263
|
|
18,065
|
|
Gain (loss)
on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
equity securities
|
|
270,582
|
|
|
|
|
|
|
|
2,526,642
|
|
2,797,224
|
|
Investment
in unconsolidated entities
|
|
178,874
|
|
3,623
|
|
|
|
|
|
41,273
|
|
223,770
|
|
Total assets
|
|
5,243,627
|
|
1,661,501
|
|
152,486
|
|
27,245
|
|
3,327,256
|
|
10,412,115
|
|
Capital
expenditures
|
|
$
|
128,287
|
|
$
|
25,105
|
|
$
|
7,145
|
|
$
|
1,226
|
|
$
|
1,546
|
|
$
|
163,309
|
|
Three months ended or at
September 30, 2004 As Restated
|
|
U.S.
|
|
TDS Telecom
|
|
|
|
Other
Reconciling
|
|
|
|
|
Cellular
|
|
ILEC
|
|
CLEC
|
|
Other(3)
|
|
Items (1)
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
740,293
|
|
$
|
164,838
|
|
$
|
56,574
|
|
$
|
7,126
|
|
$
|
(4,415
|
)
|
$
|
964,416
|
|
Cost of
services and products
|
|
277,833
|
|
43,257
|
|
23,800
|
|
4,813
|
|
(481
|
)
|
349,222
|
|
Selling,
general and administrative expense
|
|
281,522
|
|
43,508
|
|
33,311
|
|
1,307
|
|
(3,934
|
)
|
355,714
|
|
Operating
income (loss) before depreciation, amortization and accretion(2)
|
|
180,938
|
|
78,073
|
|
(537
|
)
|
1,006
|
|
|
|
259,480
|
|
Depreciation,
amortization and accretion expense
|
|
127,503
|
|
32,667
|
|
9,387
|
|
620
|
|
|
|
170,177
|
|
Operating
income (loss)
|
|
53,435
|
|
45,406
|
|
(9,924
|
)
|
386
|
|
|
|
89,303
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
18,002
|
|
175
|
|
|
|
|
|
139
|
|
18,316
|
|
(Loss) on investments
|
|
|
|
|
|
|
|
|
|
(491
|
)
|
(491
|
)
|
Marketable
equity securities
|
|
249,571
|
|
|
|
|
|
|
|
2,550,444
|
|
2,800,015
|
|
Investment
in unconsolidated entities
|
|
165,506
|
|
19,630
|
|
|
|
|
|
24,272
|
|
209,408
|
|
Total assets
|
|
4,985,927
|
|
1,836,562
|
|
235,340
|
|
26,551
|
|
3,308,003
|
|
10,392,383
|
|
Capital
expenditures
|
|
$
|
130,836
|
|
$
|
31,571
|
|
$
|
7,198
|
|
$
|
2,849
|
|
$
|
1,142
|
|
$
|
173,596
|
|
33
Nine months ended or at
September 30, 2005
|
|
U.S.
|
|
TDS Telecom
|
|
|
|
Other
Reconciling
|
|
|
|
|
Cellular
|
|
ILEC
|
|
CLEC
|
|
Other(3)
|
|
Items (1)
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
2,248,542
|
|
$
|
494,791
|
|
$
|
180,736
|
|
$
|
24,083
|
|
$
|
(13,755
|
)
|
$
|
2,934,397
|
|
Cost of
services and products
|
|
819,693
|
|
134,234
|
|
77,252
|
|
16,659
|
|
(1,725
|
)
|
1,046,113
|
|
Selling,
general and administrative expense
|
|
875,316
|
|
131,859
|
|
89,048
|
|
4,235
|
|
(12,030
|
)
|
1,088,428
|
|
Operating
income before depreciation, amortization and accretion (2)
|
|
553,533
|
|
228,698
|
|
14,436
|
|
3,189
|
|
|
|
799,856
|
|
Depreciation,
amortization and accretion expense
|
|
380,860
|
|
101,165
|
|
21,823
|
|
2,063
|
|
|
|
505,911
|
|
Operating
income (loss)
|
|
172,673
|
|
127,533
|
|
(7,387
|
)
|
1,126
|
|
|
|
293,945
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
50,009
|
|
408
|
|
|
|
|
|
590
|
|
51,007
|
|
Gain (loss) on investments
|
|
551
|
|
(51
|
)
|
|
|
|
|
|
|
500
|
|
Marketable equity securities
|
|
270,582
|
|
|
|
|
|
|
|
2,526,642
|
|
2,797,224
|
|
Investment in unconsolidated entities
|
|
178,874
|
|
3,623
|
|
|
|
|
|
41,273
|
|
223,770
|
|
Total assets
|
|
5,243,627
|
|
1,661,501
|
|
152,486
|
|
27,245
|
|
3,327,256
|
|
10,412,115
|
|
Capital expenditures
|
|
$
|
384,844
|
|
$
|
59,965
|
|
$
|
18,681
|
|
$
|
3,204
|
|
$
|
4,020
|
|
$
|
470,714
|
|
Nine months ended or at
September 30, 2004 As Restated
|
|
U.S.
|
|
TDS Telecom
|
|
|
|
Other
Reconciling
|
|
|
|
|
Cellular
|
|
ILEC
|
|
CLEC
|
|
Other(3)
|
|
Items (1)
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
2,099,058
|
|
$
|
487,650
|
|
$
|
168,555
|
|
$
|
19,519
|
|
$
|
(11,182
|
)
|
$
|
2,763,600
|
|
Cost of
services and products
|
|
793,201
|
|
120,250
|
|
67,361
|
|
13,147
|
|
(1,177
|
)
|
992,782
|
|
Selling,
general and administrative expense
|
|
797,938
|
|
130,106
|
|
93,656
|
|
3,630
|
|
(10,005
|
)
|
1,015,325
|
|
Operating
income before depreciation, amortization, accretion and gain on assets held
for sale (2)
|
|
507,919
|
|
237,294
|
|
7,538
|
|
2,742
|
|
|
|
755,493
|
|
Depreciation,
amortization and accretion expense
|
|
363,749
|
|
97,639
|
|
28,135
|
|
1,860
|
|
|
|
491,383
|
|
(Gain) on
assets held for sale
|
|
(725
|
)
|
|
|
|
|
|
|
|
|
(725
|
)
|
Operating
income (loss)
|
|
144,895
|
|
139,655
|
|
(20,597
|
)
|
882
|
|
|
|
264,835
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
48,083
|
|
525
|
|
|
|
|
|
303
|
|
48,911
|
|
(Loss) on investments
|
|
(1,830
|
)
|
|
|
|
|
|
|
(491
|
)
|
(2,321
|
)
|
Marketable
equity securities
|
|
249,571
|
|
|
|
|
|
|
|
2,550,444
|
|
2,800,015
|
|
Investment in unconsolidated entities
|
|
165,506
|
|
19,630
|
|
|
|
|
|
24,272
|
|
209,408
|
|
Total assets
|
|
4,985,927
|
|
1,836,562
|
|
235,340
|
|
26,551
|
|
3,308,003
|
|
10,392,383
|
|
Capital
expenditures
|
|
$
|
394,739
|
|
$
|
76,148
|
|
$
|
22,250
|
|
$
|
4,237
|
|
$
|
3,514
|
|
$
|
500,888
|
|
(1) Consists of the TDS Corporate operations, intercompany and intracompany
revenue and expense eliminations, TDS Corporate and TDS Telecom marketable equity
securities and all other businesses not included in the U.S. Cellular, TDS
Telecom, or Other segments.
(2) The amount of operating income before depreciation, amortization and
accretion (and (gain) loss on assets held for sale in 2004) is a non-GAAP financial
measure. The amount may also be commonly referred to by management as operating
cash flow. TDS has presented operating cash flow because this financial
measure, in combination with other financial measures, is an integral part of
our internal reporting system utilized by management to assess and evaluate the
performance of its business. Operating cash flow is also considered a
significant performance measure. It is used by management as a measurement of
its success in obtaining, retaining and servicing customers by reflecting its
ability to generate subscriber revenue while providing a high level of customer
service in a cost effective manner. The components of operating cash flow
include the key revenue and expense items for which operating managers are
responsible and upon which TDS evaluates its performance.
Other companies in the
wireless industry may define operating cash flow in a different manner or
present other varying financial measures, and, accordingly, TDSs presentation
may not be comparable to other similarly titled measures of other companies.
Operating cash flow should
not be construed as an alternative to operating income (loss), as determined in
accordance with GAAP, as an alternative to cash flows from operating
activities, as determined in accordance with GAAP, or as a measure of
liquidity. TDS believes operating cash flow is useful to investors as a means
to evaluate TDSs operating performance prior to non-cash depreciation and
amortization expense, and certain other non-cash charges. Although operating
cash flow may be defined differently by other companies in the wireless
industry, TDS believes that operating cash flow provides some commonality of
measurement in analyzing operating performance of companies in the wireless industry.
(3) Represents Suttle Straus.
34
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Total
operating income from reportable and other segments
|
|
$
|
107,774
|
|
$
|
89,303
|
|
$
|
293,945
|
|
$
|
264,835
|
|
Total Investment and other income (expense)
|
|
(24,551
|
)
|
(30,916
|
)
|
18,656
|
|
(92,307
|
)
|
Income
before income taxes and minority interest
|
|
$
|
83,223
|
|
$
|
58,387
|
|
$
|
312,601
|
|
$
|
172,528
|
|
21. Commitments and
Contingencies
Indemnifications
TDS enters into agreements in the normal
course of business that provide for indemnification of counterparties. These
include certain asset sales and financings with other parties. The terms of the
indemnifications vary by agreement. The events or circumstances that would
require TDS to perform under these indemnities are transaction specific;
however, these agreements may require TDS to indemnify the counterparty for
costs and losses incurred from litigation or claims arising from the underlying
transaction. TDS is unable to estimate the maximum potential liability for
these types of indemnifications as the amounts are dependent on the outcome of
future events, the nature and likelihood of which cannot be determined at this
time. Historically, TDS has not made any significant indemnification payments
under such agreements. TDS is party to an indemnity agreement with T-Mobile
regarding certain contingent liabilities at Aerial Communications for the
period prior to Aerials merger into VoiceStream Wireless. In 2005, TDS paid
$7.1 million on behalf of Aerial. As of September 30, 2005, TDS had a
liability balance of $4.3 million relating to this indemnity.
Legal Proceedings
TDS is involved in a number of legal
proceedings before the FCC and various state and federal courts. If TDS
believes that a loss arising from such legal proceedings is probable and can be
reasonably estimated, an amount is accrued in the financial statements for the
estimated loss. If only a range of loss can be determined, the best estimate
within that range is accrued; if none of the estimates within that range is
better than another, the low end of the range is accrued. The assessment of
legal proceedings is a highly subjective process that requires judgments about
future events. The legal proceedings are reviewed at least quarterly to
determine the adequacy of the accruals and related financial statement
disclosure. The ultimate settlement of proceedings may differ materially from
amounts accrued in the financial statements.
Regulatory Environment
Changes in the telecommunications regulatory environment, including the
effects of potential changes in the rules governing universal service
funding and potential changes in the amounts or methods of intercarrier
compensation, could have a material adverse effect on TDSs financial
condition, results of operations or cash flows.
35
22. Subsequent Events
In April 2006,
an interexchange carrier for which TDS Telecom provides both originating and
terminating access asserted a claim for refund, net of counterclaims, of
approximately $10 million for past billed amounts for certain types of traffic.
TDS Telecom believes its billing methods and procedures were appropriate under
the terms of its state and federal tariffs and will contest this claim.
TDS Telecom
has in the past obtained financing from the RTB, which is an agency of the
United States of America. In connection with such financings, TDS Telecom
purchased stock in the RTB. TDS Telecom has repaid all of its debt to the RTB,
but continues to own the RTB stock. In August 2005, the board of directors of
the RTB approved resolutions to liquidate and dissolve the RTB, and legislation
that would enable these resolutions was passed by both Houses of Congress and
was signed into law by the President in November 2005. In order to effect the
dissolution and liquidation, shareholders were asked to remit their shares to
receive cash compensation for those shares. TDS Telecom remitted its shares and
received approximately $100 million from the RTB in the second quarter of 2006.
TDS Telecoms book basis in the RTB stock was approximately $9 million.
36
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TELEPHONE AND
DATA SYSTEMS, INC. AND SUBSIDIARIES
Telephone and Data Systems, Inc. (TDS- AMEX symbol: TDS) is a
diversified telecommunications company providing high-quality
telecommunications services to approximately 6.5 million wireless telephone
customers and wireline telephone equivalent access lines. TDS conducts
substantially all of its wireless telephone operations through its 81.3%-owned
subsidiary, United States Cellular Corporation (U.S. Cellular), its incumbent
local exchange carrier and competitive local exchange carrier wireline
telephone operations through its wholly owned subsidiary, TDS
Telecommunications Corporation (TDS Telecom) and its 80%-owned commercial
printing and distribution operations subsidiary, Suttle Straus, Inc.
The following discussion and analysis should be read in conjunction
with TDSs interim consolidated financial statements and notes thereto included
herein, and with TDSs audited consolidated financial statements and notes
thereto and Managements Discussion and Analysis of Financial Condition and
Results of Operations included in TDSs Annual Report on Form 10-K for the
year ended December 31, 2004.
Restatement
TDS and its audit committee concluded on November 9, 2005, that
TDS would amend its Annual Report on Form 10-K for the year ended December 31,
2004 to restate its financial statements and financial information for each of
the three years in the period ended December 31, 2004 including interim
quarterly information for 2004 and 2003, and certain selected financial data
for the years 2001 and 2000. TDS and its audit committee also concluded that
TDS would amend its Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 2005 and June 30, 2005 to restate the
financial statements and financial information included therewith.
On November 11, 2005, TDS and U.S. Cellular announced that the
staff of the Midwest Regional Office of the Securities and Exchange Commission
(SEC) had advised both companies that it was conducting an investigation into
the restatement of financial statements announced by TDS and U.S. Cellular on November 10,
2005. TDS and U.S. Cellular intend to cooperate fully with the SEC
staff in this investigation.
The restatement adjustments principally correct items that were
recorded in the financial statements previously but not in the proper periods
and certain income tax, interest income and consolidation errors. Correction of
the errors, with the exception of income taxes discussed below, individually
did not have a material impact on income before income taxes and minority
interest, net income or earnings per share; however, when aggregated, the items
were considered to be material. The restatement adjustments to correct income
tax accounting had a material impact individually on net income and earnings
per share in prior periods. The restated financial statements are adjusted to
record certain obligations in the periods such obligations were incurred,
correct the timing of the reversal of certain tax liabilities, correct the
consolidation of an 80% owned subsidiary, and record revenues in the periods
such revenues were earned. The adjustments are described below.
Income taxes In the restatement, TDS
corrected its income tax expense, federal and state taxes payable, liabilities
accrued for tax contingencies, deferred income tax assets and liabilities and
related disclosures for the first and second quarters of 2005 and the years
ended December 31, 2004, 2003 and 2002 for items identified based on a
reconciliation of income tax accounts.
The reconciliation compared amounts used for financial reporting
purposes to the amounts used in the preparation of the income tax returns, and
took into consideration the results of federal and state income tax audits and
the resulting book/tax basis differences which generate deferred tax assets and
liabilities. In addition, a review of
the state deferred income tax rates used to establish deferred income tax
assets and liabilities identified errors in the state income tax rate used
which resulted in adjustments to correct the amount of deferred income tax
assets and liabilities recorded for temporary differences between the timing of
when certain transactions are recognized for financial and income tax
reporting.
37
Federal universal service fund (USF)
contributions In 2004 and 2003, Universal Service Administrative Company
(USAC) billings to U.S. Cellular for USF contributions were based on
estimated revenues reported to USAC by U.S. Cellular in accordance with USACs
established procedures. However, U.S. Cellulars actual liability for USF is
based upon its actual revenues and USACs established procedures provide a
method to adjust U.S. Cellulars estimated liability to its actual liability.
In the first six months of 2005 and the full years of 2004 and 2003, U.S.
Cellulars actual revenues exceeded estimated revenues reported to USAC on an
interim basis. As a result, additional amounts were due to USAC in 2005 and
2004 based on U.S. Cellulars annual report filings. Such additional amounts
were incorrectly expensed when the invoices were received from USAC rather than
at the time the obligation was incurred. In the third quarter of 2005, U.S.
Cellular corrected its accounting for USF contributions to record expense
reflecting the estimated obligation incurred based on actual revenues reported
during the period. Accordingly, in the restatement, TDS has adjusted previously
reported USF contributions expense by U.S. Cellular to reflect the estimated
liability incurred during the period.
Customer contract termination fees In
the fourth quarter of 2003, U.S. Cellular revised its business practices
related to the billing of contract termination fees charged when a customer
disconnected service prior to the end of the customers contract. This change
resulted in an increase in amounts billed to customers and revenues even though
a high percentage of the amounts billed were deemed uncollectible. At the time
of the change in business practice, U.S. Cellular incorrectly recorded revenues
related to such fees at the time of billing, as generally accepted accounting
principles (GAAP) would preclude revenue recognition if the receivable is not
reasonably assured of collection. In the first quarter of 2005, U.S. Cellular
corrected its accounting to record revenues related to such fees only upon
collection, in recognition of the fact that the collectibility of the revenues
was not reasonably assured at the time of billing. In the restatement, TDS made
adjustments to properly reflect U.S. Cellulars revenues for such fees upon
collection beginning on October 1, 2003.
Leases and contracts TDS and U.S.
Cellular had entered into certain operating leases (as both lessee and lessor)
that provide for specific scheduled increases in payments over the lease term.
In the third quarter of 2004, TDS made adjustments for the cumulative effect
which were not considered to be material to either that quarter or to prior
periods to correct its accounting and to recognize revenues and expenses under
such agreements on a straight-line basis over the term of the lease in
accordance with Statement of Financial Accounting Standards (SFAS) No. 13,
Accounting for Leases, as amended, and related pronouncements. In addition,
the accounting for certain other long-term contracts, for which a cumulative
effect adjustment was made in the first quarter of 2005, was corrected to
recognize expenses in the appropriate periods. The restatement adjustments
reverse the cumulative amounts previously recorded in the third quarter of 2004
and the first quarter of 2005, and properly record such revenues and expenses
on a straight-line basis in the appropriate periods.
Promotion rebates From time to time,
U.S. Cellulars sales promotions include rebates on sales of handsets to
customers. In such cases, U.S. Cellular reduces revenues and records a
liability at the time of sale reflecting an estimate of rebates to be paid
under the promotion. Previously, the accrued liability was not adjusted on a
timely basis upon expiration of the promotion to reflect the actual amount of
rebates paid based upon information available at the date the financial
statements were issued. In the restatement, TDS has corrected revenues and
accrued liabilities to reflect the impacts associated with promotion rebates in
the appropriate periods.
Operations of consolidated partnerships managed
by a third party Historically, U.S. Cellular recorded the results of
operations of certain consolidated partnerships managed by a third party on an
estimated basis, and adjusted such estimated results to the actual results upon
receipt of financial statements in the following quarter. However, GAAP
requires that the actual amounts be used. In the restatement, TDS has corrected
its financial statements to recognize results of operations in the appropriate
period based on the partnerships actual results of operations reported for
such period.
Investment income from entities accounted
for by the equity method Historically, U.S. Cellular recorded an estimate
each quarter of its proportionate share of net income (loss) from certain
entities accounted for by the equity method, and adjusted such estimate to the
actual share of net income (loss) upon receipt of financial statements in the
following quarter. However, GAAP requires that the actual amounts be used. In
the restatement, TDS has corrected its financial statements to recognize
investment income in the appropriate period based on the entities actual net
income (loss) reported for such periods.
38
Historically, TDS had not fully
consolidated its 80%-owned subsidiary, Suttle Straus, to present the operating
results of such subsidiary in revenues, cost of service, selling, general and
administrative expenses and depreciation. Previously, the net operating results
of the subsidiary were included in other income (expense). However, the non-operating portion of the
income statement of Suttle Straus was properly presented. The restatement
correctly consolidates the results of Suttle Straus. Also, property, plant and
equipment was corrected to properly include Suttle Straus fixed assets. Previously, the balances were included in
other assets and deferred charges. In addition, certain intercompany
elimination entries between TDS, U.S. Cellular, TDS Telecom and Suttle Straus
have been recorded.
Revenue and cost of service accruals TDS
Telecom reviewed accruals in the first and second quarter of 2004 and
determined that an adjustment was required to record unbilled revenue related
to its competitive local exchange carrier that were not previously recorded.
TDS Telecom also reduced cost of service accruals related to long-distance
service as a result of shifting long-distance traffic to a second provider. In
the restatement, the adjustments reverse the cumulative amounts previously
recorded in the first and second quarters of 2004, and record such revenues and
expenses in the appropriate periods.
Consolidated statements of cash flows In
the restatement, the classification of cash distributions received from
unconsolidated entities has been corrected to properly reflect cash received,
which represents a return on investment in the unconsolidated entities, as cash
flows from operating activities; previously, the cash received on such
investments was classified as cash flows from investing activities. Also, the
classification of certain noncash stock-based compensation expense has been
corrected to properly reflect such noncash expense as an adjustment to cash
flows from operating activities; previously, such expense was classified as
cash flows from financing activities.
Interest income In the restatement, TDS
corrected its accounting for recording interest income earned by its
subsidiaries through a cash management agreement for the first and
second quarters of 2005 and the years ended December 31, 2004, 2003 and 2002. TDS subsidiaries participating in the cash
management agreement had not recorded an accrual to increase cash and interest
income for their portion of the interest income earned. The correcting entries
increased cash and interest income for each period presented.
Other items In addition to the
adjustments described above, TDS recorded a number of other adjustments to
correct and record revenues and expenses in the periods in which such revenues
and expenses were earned or incurred. These adjustments were not significant,
either individually or in aggregate.
The table below summarizes the impacts of the restatement on income from
continuing operations before income taxes and minority interest.
|
|
Three Months Ended
September 30, 2004
|
|
Nine Months Ended
September 30, 2004
|
|
|
|
(Increase
(decrease) dollars in thousands)
|
|
Income From
Continuing Operations Before Income Taxes and Minority Interest, as
previously reported
|
|
$
|
44,185
|
|
$
|
169,380
|
|
Federal
universal service fund contributions
|
|
5,132
|
|
5,019
|
|
Customer
contract termination fees
|
|
(379
|
)
|
(614
|
)
|
Leases and
contracts
|
|
5,739
|
|
4,495
|
|
Promotion
rebates
|
|
719
|
|
719
|
|
Operations
of consolidated partnerships managed by a third party
|
|
2,655
|
|
1,861
|
|
Investment
income from entities accounted for by the equity method
|
|
(1,262
|
)
|
(3,830
|
)
|
Revenue and
cost of service accruals
|
|
|
|
(5,702
|
)
|
Interest income
|
|
(112
|
)
|
(178
|
)
|
Other items
|
|
1,710
|
|
1,378
|
|
Total adjustment
|
|
14,202
|
|
3,148
|
|
Income From
Continuing Operations Before Income Taxes and Minority Interest, as restated
|
|
$
|
58,387
|
|
$
|
172,528
|
|
39
The table below summarizes the impact on net
income and earnings per share as a result of the restatement.
|
|
Three Months Ended
September 30, 2004
|
|
Nine Months Ended
September 30, 2004
|
|
|
|
Net Income
(Loss)
|
|
Diluted
Earnings
Per Share
|
|
Net Income
(Loss)
|
|
Diluted
Earnings
Per Share
|
|
|
|
(Increase (decrease) dollars in
thousands, except per share amounts)
|
|
As previously
reported
|
|
$
|
25,151
|
|
$
|
0.22
|
|
$
|
86,277
|
|
$
|
0.75
|
|
Federal
universal service fund contributions
|
|
2,357
|
|
0.02
|
|
2,303
|
|
0.02
|
|
Customer
contract termination fees
|
|
(177
|
)
|
|
|
(285
|
)
|
|
|
Leases and
contracts
|
|
3,013
|
|
0.03
|
|
2,423
|
|
0.02
|
|
Promotion
rebates
|
|
334
|
|
|
|
334
|
|
|
|
Operations
of consolidated partnerships managed by a third party
|
|
965
|
|
0.01
|
|
674
|
|
0.01
|
|
Investment income from entities accounted
for by the equity method
|
|
(626
|
)
|
(0.01
|
)
|
(1,901
|
)
|
(0.02
|
)
|
Revenue and cost of service accruals
|
|
|
|
|
|
(3,449
|
)
|
(0.03
|
)
|
Income taxes
|
|
11,409
|
|
0.09
|
|
11,833
|
|
0.10
|
|
Interest income
|
|
(68
|
)
|
|
|
(108
|
)
|
|
|
Other items
|
|
1,015
|
|
0.01
|
|
864
|
|
0.01
|
|
Total adjustment
|
|
18,222
|
|
0.15
|
|
12,688
|
|
0.11
|
|
As restated
|
|
$
|
43,373
|
|
$
|
0.37
|
|
$
|
98,965
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts of the reclassification and elimination entries in the
three and nine months ended September 30, 2005 and 2004 are shown in the
following table:
|
|
Three Months Ended
September 30, 2005
|
|
Nine Months Ended
September 30, 2005
|
|
|
|
Adjustment for
Suttle Straus
|
|
Intercompany
Eliminations
|
|
Adjustment for
Suttle Straus
|
|
Intercompany
Eliminations
|
|
|
|
(Increase/(decrease) dollars in
thousands)
|
|
Operating
Revenue
|
|
$
|
8,820
|
|
$
|
(3,715
|
)
|
$
|
24,083
|
|
$
|
(9,891
|
)
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
Cost of
service and products
|
|
6,172
|
|
309
|
|
16,659
|
|
908
|
|
Selling,
general and administrative
|
|
1,389
|
|
(4,024
|
)
|
4,235
|
|
(10,799
|
)
|
Depreciation,
amortization and accretion
|
|
688
|
|
|
|
2,063
|
|
|
|
Total
Operating Expenses
|
|
8,249
|
|
(3,715
|
)
|
22,957
|
|
(9,891
|
)
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
571
|
|
|
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense), net
|
|
(571
|
)
|
|
|
(1,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investment and Other Income (Expense)
|
|
|
(571
|
)
|
|
|
|
|
(1,126
|
)
|
|
|
|
Income From Continuing
Operations Before Income Taxes and Minority Interest
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
40
|
|
Three Months Ended
September 30, 2004
|
|
Nine Months Ended
September 30, 2004
|
|
|
|
Adjustment for
Suttle Straus
|
|
Intercompany
Eliminations
|
|
Adjustment for
Suttle Straus
|
|
Intercompany
Eliminations
|
|
|
|
(Increase/(decrease) dollars in
thousands)
|
|
Operating
Revenue
|
|
$
|
7,126
|
|
$
|
(3,185
|
)
|
$
|
19,519
|
|
$
|
(8,024
|
)
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
Cost of
service and products
|
|
4,813
|
|
254
|
|
13,147
|
|
677
|
|
Selling,
general and administrative
|
|
1,307
|
|
(3,439
|
)
|
3,630
|
|
(8,701
|
)
|
Depreciation,
amortization and accretion
|
|
620
|
|
|
|
1,860
|
|
|
|
Total
Operating Expenses
|
|
6,740
|
|
(3,185
|
)
|
18,637
|
|
(8,024
|
)
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
386
|
|
|
|
882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense), net
|
|
(386
|
)
|
|
|
(882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investment and Other Income (Expense)
|
|
|
(386
|
)
|
|
|
|
|
(882
|
)
|
|
|
|
Income From Continuing
Operations Before Income Taxes and Minority Interest
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
41
OVERVIEW
The following is a summary of certain selected information contained in
the comprehensive Managements Discussion and Analysis of Financial Condition
and Results of Operations that follows. The overview does not contain all of the
information that may be important. You should carefully read this entire
Managements Discussion and Analysis of Financial Condition and Results of
Operations and not rely solely on the overview.
Results of Operations
U.S. CellularU.S. Cellular positions itself as a regional operator,
focusing its efforts on providing wireless service to customers in the
geographic areas where it has licenses to provide such service. U.S. Cellular
differentiates itself from its competitors through a customer satisfaction
strategy, reflecting broad product distribution, a customer service focus and a
high-quality wireless network.
U.S. Cellulars business development strategy is to operate controlling
interests in wireless licenses in areas adjacent to or in proximity to its
other wireless licenses, thereby building contiguous operating market areas.
U.S. Cellulars operating strategy is to strengthen the geographic areas where
it can continue to build long-term operating synergies and to exit those areas
where it does not have opportunities to build such synergies. To that end, U.S.
Cellular launched commercial service in three metropolitan markets Lincoln,
Nebraska; Oklahoma City, Oklahoma; and Portland, Maine during the second half
of 2004, and in the St. Louis, Missouri market during the third quarter of
2005.
In addition, on September 12, 2005, U.S. Cellular announced that
it had entered into a definitive agreement with a subsidiary of ALLTEL
Corporation (ALLTEL) to exchange certain cellular properties. Under the
agreement, U.S. Cellular acquired fifteen Rural Service Area (RSA) markets in
Kansas and Nebraska in exchange for two RSA markets in Idaho and $50 million in
cash, subject to working capital adjustments.
U.S. Cellular will record the transaction in the fourth quarter of 2005
and, subject to the results of the valuation analysis which is currently
underway, expects to report a pre-tax gain that will increase operating income
by approximately $40 - $45 million. The
gain represents the excess of the estimated fair value of the assets and
liabilities received over the amount of cash and net book value of the assets
and liabilities delivered in the exchange.
On September 19, 2005, U.S. Cellular announced that it would close
its Customer Care Center (CCC) in Medford, Oregon and transfer the Medford
CCC activities to certain of its other CCCs over the next several months. The
costs of exit activities related to closing the Medford CCC are expected to be
approximately $2.0 million to $4.0 million over that same time period. Expenses
totaling $1.8 million were recorded in the third quarter of 2005 related to the
Medford closing.
U.S. Cellulars operating income in the nine months ended September 30,
2005 increased $27.8 million, or 19%, to $172.7 million from $144.9 million in
2004. The operating income margins (as a percent of service revenues) were 8.3%
in 2005 and 7.4% in 2004. Although operating income and margins improved in
2005, TDS expects that there will be pressure on U.S. Cellulars operating income
and margins in the next few years related to the following factors:
costs
of customer acquisition and retention;
effects
of competition;
increased
customer use of its services;
launching
service in new areas;
increases
in prepaid and reseller customers as a percentage of U.S. Cellulars customer
base; and
continued
enhancements to its wireless networks.
The effects of these factors are expected to be mitigated to some
extent by the expansion of revenues from additional customers, data-related
products and services and newly launched markets.
See U.S. Cellular Operations.
TDS Telecom-TDS Telecom provides high-quality telecommunication
services, including full-service local exchange service, long distance
telephone service and Internet access, to rural, suburban and selected small
urban area communities. TDS Telecoms business plan is designed for a
full-service telecommunications company, including competitive local exchange
carrier operations, by leveraging TDS Telecoms strength as an incumbent local
exchange carrier. TDS Telecom is focused on achieving three central strategic
objectives: growth, market leadership, and profitability. TDS Telecoms
strategy includes gaining additional market share and deepening penetration of
vertical services within established markets.
42
TDS Telecoms operating income in the nine months ended September 30,
2005 increased $1.0 million, or 1%, to $120.1 million from $119.1 million in
2004. The operating income margins were 17.9% in 2005 and 18.2% in 2004.
Despite the challenges faced in the industry, TDS Telecom was able to increase
equivalent access lines in 2005 primarily through the increase in penetration
of existing markets by its competitive local exchange operations. Costs
increased to accommodate additional customers and services. See TDS Telecom
Operations.
Financing Initiatives
TDS and its subsidiaries had cash and cash equivalents totaling $1,084.5
million, $1,296.3 million of revolving credit facilities available for use and
an additional $75.0 million of bank lines of credit as of September 30,
2005. TDS and its subsidiaries are also generating substantial cash flows from
operations. Cash flows from operating activities totaled $681.9 million in the
nine months ended September 30, 2005. In addition, TDS and its
subsidiaries may have access to public and private capital markets to help meet
their long-term financing needs. TDS anticipates that it may require funding
over the next few years for capital expenditures, for the development of new
wireless markets at U.S. Cellular and to further its growth in all markets. TDS
believes that cash on hand, expected future cash flows from operations and
sources of external financing provide substantial financial flexibility and are
sufficient to permit TDS and its subsidiaries to finance their contractual
obligations and anticipated capital expenditures for the foreseeable future.
TDS continues to seek to maintain a strong Balance Sheet and an investment
grade credit rating.
U.S. Cellular has recently received or will receive licenses covering
markets that may not be launched for several years. U.S. Cellular anticipates
that it may require financing over the next few years for capital expenditures,
for any development of its recently acquired markets and to further its growth
in recently launched markets. U.S. Cellular may also determine to finance the
development of some or all of the 17 licenses for which Carroll Wireless, L.P.
(Carroll Wireless) was the winning bidder in the auction of wireless spectrum
designated by the Federal Communications Commission (FCC) as Auction 58. U.S.
Cellular consolidates Carroll Wireless and its general partner, Carroll PCS, Inc.,
for financial reporting purposes, pursuant to the guidelines of Financial
Accounting Standards Board (FASB) Interpretation No. 46R (FIN 46R).
On January 6, 2006,
the FCC granted Carroll Wireless applications with respect to 16 of the 17
licenses for which it had been the successful bidder and dismissed one
application, relating to Walla Walla, Washington. Following the completion of
Auction 58, the FCC determined that a portion of the Walla Walla license was
already licensed to another party and should not have been included in Auction 58.
Carroll Wireless expects to receive a full refund of the $228,000 paid to the
FCC with respect to the Walla Walla license.
Carroll Wireless is in the process of developing its long-term business
and financing plans. As of September 30, 2005, U.S. Cellular has made
capital contributions and advances to Carroll Wireless and/or its general
partner of approximately $129.9 million. Pending finalization of Carroll
Wirelesss permanent financing plan, and upon request by Carroll Wireless, U.S.
Cellular may agree to make additional capital contributions and advances to
Carroll Wireless and/or its general partner. In November 2005, U.S.
Cellular approved additional funding of up to $1.4 million, of which $0.1
million of funding has been provided to date, for Carroll Wireless and Carroll
PCS.
Pursuant to
the exchange agreement with ALLTEL dated September 12, 2005 discussed
above, U.S. Cellular delivered to ALLTEL $50.0 million in cash, subject to
working capital adjustments, in connection with the closing on December 19,
2005. U.S. Cellular funded this cash payment through borrowings under its
Intercompany Credit Agreement with TDS.
See the Revolving Credit Facilities section of Liquidity and
Capital Resources for further details of the Intercompany Credit Agreement.
On June 30,
2005, TDS Telecom subsidiaries repaid approximately $127.0 million in principal
amount of notes to the Rural Utilities Service (RUS) and the Rural Telephone
Bank (RTB), the Federal Financing Bank (FFB), and the Rural Telephone Finance
Cooperative (RTFC). Interest paid with this repayment totaled $0.8 million
and prepayment costs were $1.2 million. Unamortized debt issuance costs related
to the notes totaling $0.3 million were expensed and included in other income
(expense), net in the Statements of Operations. The RUS, RTB, FFB and RTFC
debt, held at individual TDS Telecom incumbent local exchange carriers, had a
weighted average interest rate of 6.2% and maturity of approximately 15 years.
The RUS, RTB and FFB are agencies of the United States Department of
Agriculture, and the RTFC is a member-owned, not-for-profit lending cooperative
that serves the financial needs of the rural telecommunications industry. TDS
determined that it was advantageous to repay the RUS, RTB and FFB debt to
reduce administrative costs.
43
On March 31,
2005, TDS issued $116.25 million in aggregate principal amount of unsecured
6.625% senior notes due March 31, 2045. Interest on the notes is payable
quarterly. TDS may redeem the notes, in whole or in part, at any time on and
after March 31, 2010, at a redemption price equal to 100% of the principal
amount redeemed plus accrued and unpaid interest to the redemption date. The
net proceeds from this offering, after deducting underwriting discounts, were
approximately $112.6 million.
On March 31,
2005, TDS Telecom subsidiaries repaid approximately $105.6 million in principal
amount of notes to the RUS and the RTB plus accrued interest of $0.6 million.
TDS Telecom subsidiaries incurred prepayment costs of $0.6 million associated
with these repayments. Unamortized debt issuance costs related to the notes
totaling $0.1 million were expensed and included in other income (expense), net
in the Statements of Operations. The RUS and RTB debt, held at individual TDS
Telecom incumbent local exchange carriers, had a weighted average interest rate
of 5.5% and maturity of approximately 12 years.
See Financial Resources and Liquidity and Capital Resources.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2005
Compared to Nine Months Ended September 30, 2004
Operating Revenues increased
$170.8 million, or 6%, to $2,934.4 million during the nine months ended September 30,
2005 from $2,763.6 million during the nine months ended September 30,
2004, primarily as a result of a 9% increase in customers and equivalent access
lines served. U.S. Cellulars operating revenues increased $149.4 million, or
7%, to $2,248.5 million in 2005 from $2,099.1 million in 2004 as customers served
increased by 475,000, or 10%, since September 30, 2004, to 5,303,000. Of
the 10% increase in customers since September 30, 2004, 502,000 were added
through U.S. Cellulars marketing (including reseller) channels while 27,000
net customers were subtracted as a result of divestiture activities, primarily
the divestiture to ALLTEL in November of 2004. TDS Telecoms operating
revenues increased $18.7 million, or 3%, to $671.7 million in 2005 from $653.0
million in 2004 as equivalent access lines increased by 42,400 or 4%, since September 30,
2004, to 1,180,400. An equivalent access line is derived by converting a
high-capacity data line to an estimated equivalent number, in terms of
capacity, of switched access lines.
Operating Expenses
increased $141.7 million, or 6%, to $2,640.5 million in 2005 from $2,498.8
million in 2004 primarily reflecting growth in operations. U.S. Cellulars
operating expenses increased $121.7 million, or 6%, to $2,075.9 million in 2005
from $1,954.2 million in 2004 primarily reflecting costs associated with
acquiring customers, and serving and retaining its expanding customer base. TDS
Telecoms expenses increased $17.5 million, or 3%, to $551.5 million in 2005
from $534.0 million in 2004 primarily reflecting increased cost of goods sold
for digital subscriber lines and long distance services, and costs related to
additional competitive local exchange carrier customers.
Operating Income
increased $29.1 million, or 11%, to $293.9 million in 2005 from $264.8 million
in 2004. The operating margin was 10.0% in 2005 and 9.6% in 2004 on a
consolidated basis. U.S. Cellulars operating income increased $27.8 million,
or 19%, to $172.7 million from $144.9 million in 2004 and its operating margin,
as a percentage of service revenues, increased to 8.3% in 2005 from 7.4% in
2004. TDS Telecoms operating income increased $1.0 million, or 1%, to $120.1
million in 2005 from $119.1 million in 2004 and its operating margin decreased
to 17.9% in 2005 from 18.2% in 2004.
Investment and Other Income
(Expense) primarily includes interest
and dividend income, investment income, gains and losses on investments and
interest expense. Investment and other income (expense) totaled $18.7 million
in 2005 and $(92.3) million in 2004.
Investment income
increased $2.1 million, or 4%, to $51.0 million in 2005 from $48.9 million in
2004. Investment income represents TDSs share of income in unconsolidated
entities in which TDS has a minority interest and follows the equity method of
accounting. Los Angeles SMSA Limited Partnership continues to contribute a
significant portion of the total investment income in 2005.
Interest and dividend income
increased $127.2 million to $141.4 million in 2005 from $14.2 million in 2004
primarily due to a dividend paid from Deutsche Telekom and higher average rates
of interest earned on investments in 2005 than 2004. The Deutsche Telekom
dividend was for EUR 0.62 per Deutsche Telekom share in April 2005 or
$105.7 million before income taxes. Deutsche Telekom did not pay a dividend in
2004.
44
Interest expense
increased $12.8 million, or 9%, to $160.2 million in 2005 from $147.4 million
in 2004 primarily due to interest expense on forward contracts being $17.8
million higher in the nine months ended September 30, 2005 than in the
same period of 2004 as a result of higher LIBOR interest rates on certain
variable rate forward contracts. Interest expense in the nine months ended September 30,
2005 increased by $15.0 million from the issuances of 30-year 7.5% senior notes
and 6.7% senior notes by U.S. Cellular in June 2004 but was offset by $5.9
million and $11.6 million reductions of interest, from the redemptions of U.S.
Cellulars Liquid Yield Option Notes in July 2004 and 7.25% senior notes
in August 2004, respectively.
Gain (loss) on investments
totaled a net gain of $0.5 million in 2005 and a net loss of $2.3 million in
2004. The net gain in 2005 reflects a working capital adjustment recorded on
the investment interests sold by U.S. Cellular and TDS Telecom to ALLTEL in November 2004.
In 2004, TDS recorded a $1.8 million loss to reflect impairment in the carrying
value of a license held in a non-operational market in Florida that remained
with U.S. Cellular after the exchange with AT&T Wireless was completed and
also recorded a $0.5 impairment loss on an investment in a telephone company
accounted for using the cost method.
Other income (expense), net
totaled $(14.0) million in 2005 and $(5.7) million in 2004. In 2005, TDS
Telecom recorded prepayment penalties and unamortized debt issuance costs write
offs of $2.2 million on the repayment of long-term debt in March and June.
In 2005, TDS also incurred $2.9 million of expenses from the Special Common
Share proposal and stock dividend described in Note 2 to the financial
statements in this Form 10-Q.
Income Tax Expense
increased $68.9 million to $127.1 million in 2005 from $58.2 million in 2004
primarily due to higher pretax income in 2005 and tax benefits of $23.8 million
recorded in 2004 primarily resulting from the substantial completion of the
audit of its federal income tax returns for 1997 through 2001 and claims for
research tax credits for prior periods that were allowed in the federal income
tax audit. This was partially offset by income tax expense of $11.6 million
recorded in the third quarter of 2004 relating to the pending sale of certain
assets to ALLTEL. The effective tax rate was 40.7% in 2005 and was 33.7% in
2004. For further analysis and discussion of TDSs effective tax rates in 2005
and 2004, see Note 4 Income Taxes.
Minority Share of Income
includes the minority public shareholders share of U.S. Cellulars net income,
the minority shareholders or partners share of U.S. Cellulars subsidiaries
net income or loss and other minority interests.
|
|
Nine Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Minority
Share of (Income) Loss
|
|
|
|
|
|
U.S.
Cellular
|
|
|
|
|
|
Minority Public Shareholders
|
|
$
|
(16,991
|
)
|
$
|
(12,811
|
)
|
Minority Shareholders or Partners
|
|
(6,953
|
)
|
(6,843
|
)
|
|
|
(23,944
|
)
|
(19,654
|
)
|
Other
|
|
(185
|
)
|
(59
|
)
|
|
|
$
|
(24,129
|
)
|
$
|
(19,713
|
)
|
Income from Continuing Operations totaled
$161.3 million, or $1.39 per diluted share, in 2005 compared to $94.6 million,
or $0.82 per diluted share, in 2004.
Discontinued Operations.
TDS is a party to an indemnity agreement with T-Mobile USA, Inc.
(T-Mobile) regarding certain contingent liabilities for Aerial Communications, Inc.
(Aerial), a former subsidiary of TDS. TDS has recorded an accrual for
expenses, primarily tax related, resulting from Aerials merger into
VoiceStream Wireless Corporation (VoiceStream) in 2000. TDS paid $7.1 million
in the nine months ended September 30, 2005 related to accrued liabilities
for discontinued operations.
In the third quarter of 2005, TDS recorded a gain of $0.3 million ($0.5
million, net of a $0.2 million income tax expense), or $0.00 per diluted share,
for discontinued operations relating to a reduction in this indemnity accrual
due to the favorable outcome of a state tax audit which reduced the potential
indemnity obligation.
45
In the third quarter of 2004, TDS recorded a gain of $7.0 million ($4.4
million, net of a $2.6 million income tax benefit), or $0.04 per diluted share,
for discontinued operations relating to a reduction in indemnity accrual due to
favorable outcomes of federal and state tax audits which reduced the potential
indemnity obligation.
Net Income Available to Common
totaled $161.5 million, or $1.39 per diluted share, in 2005 and $98.8 million,
or $0.86 per diluted share, in 2004, as adjusted for the effects of the Special
Common Share stock dividend. See Note 2 Stock Dividend, to the financial
statements included in this Form 10-Q for adjustment discussion.
46
U.S. CELLULAR OPERATIONS
TDS provides wireless telephone service through United States Cellular
Corporation (U.S. Cellular), an 81.3%-owned subsidiary. U.S. Cellular owns,
manages and invests in wireless markets throughout the United States. Growth in
the customer base is the primary reason for the growth in U.S. Cellulars
revenues and expenses. The number of customers served increased by 10% since September 30,
2004, to 5,303,000 from 4,828,000, primarily due to customer additions from its
marketing channels.
SUMMARY OF HOLDINGS
U.S. Cellular owned, or had the right to acquire pursuant to certain
agreements, net of markets that it has agreed to divest, either majority or
minority interests in 242 wireless markets at September 30, 2005. A
summary of the number of markets U.S. Cellular owns or has rights to acquire as
of September 30, 2005 follows:
|
|
Number of
Markets
|
|
Consolidated
markets (1)
|
|
176
|
|
Consolidated
markets to be divested pursuant to existing agreements (2)
|
|
(2
|
)
|
Consolidated
markets to be acquired pursuant to existing agreements (3)
|
|
44
|
|
Minority
interests accounted for using equity method (4)
|
|
19
|
|
Minority
interests accounted for using cost method (5)
|
|
5
|
|
Total
markets to be owned after completion of pending transactions
|
|
242
|
|
(1) U.S. Cellular owns a controlling interest in
each of these markets. This includes a controlling interest in one
license that U.S. Cellular purchased from Cingular Wireless LLC (Cingular) on April 1, 2005.
(2) U.S. Cellular will divest two markets to a
subsidiary of ALLTEL pursuant to an agreement dated September 12, 2005.
The transaction closed on December 19, 2005.
(3) U.S. Cellular owns rights to acquire controlling
interests in 44 additional wireless licenses. Of such 44 licenses 15 result
from the acquisition agreement with ALLTEL dated September 12, 2005, which
closed on December 19, 2005. An additional 20 licenses result from an
acquisition agreement with AT&T Wireless Services, Inc. (AT&T
Wireless), now Cingular, which closed in August 2003. U.S. Cellular has
up to five years from the transaction closing date to exercise its rights to
acquire the licenses. The remaining 9 licenses relate to Carroll Wireless, L.P. (Carroll Wireless),
an entity in which U.S. Cellular owns a controlling interest for financial
reporting purposes. Carroll Wireless was the winning bidder of 17 wireless
licenses in the auction of wireless spectrum designated by the Federal Communications
Commission (FCC) as Auction 58. Of the 17 licenses for which Carroll Wireless
was the winning bidder, eight are in markets in which U.S. Cellular currently
owns spectrum; the other nine markets represent markets which are incremental
to U.S. Cellulars currently owned or acquirable markets. Only the
incremental markets are included in the number of consolidated markets to be
acquired to avoid duplicate reporting of overlapping markets.
(4) Represents licenses in which U.S. Cellular
owns an interest that is not a controlling financial interest and which are
accounted for using the equity method.
(5) Represents licenses in which U.S. Cellular
owns an interest that is not a controlling financial interest and which are
accounted for using the cost method.
RESULTS OF OPERATIONS
Following is a table of
summarized operating data for U.S. Cellulars consolidated operations.
|
|
Nine Months Ended or At
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
As of September 30,
(1a)
|
|
|
|
|
|
Total market
population (2)
|
|
44,690,000
|
|
45,581,000
|
|
Customers
(3)
|
|
5,303,000
|
|
4,828,000
|
|
Market
penetration (4)
|
|
11.9
|
%
|
10.6
|
%
|
Total
full-time equivalent employees
|
|
7,375
|
|
6,475
|
|
Cell sites
in service
|
|
5,149
|
|
4,713
|
|
For the Nine
Months Ended September 30, (1b)
|
|
|
|
|
|
Net customer
additions (5)
|
|
352,000
|
|
477,000
|
|
Net retail
customer additions (5)
|
|
281,000
|
|
359,000
|
|
Average
monthly service revenue per customer (6)
|
|
$
|
45.10
|
|
$
|
47.00
|
|
Postpay
churn rate per month (7)
|
|
1.5
|
%
|
1.5
|
%
|
Sales and
marketing cost per gross customer addition (8)
|
|
$
|
446
|
|
$
|
390
|
|
(1a) Amounts
in 2005 include: (i) the market acquired from Cingular in April 2005
and (ii) the two markets U.S. Cellular has agreed to divest to ALLTEL
pursuant to the agreement signed in September 2005; and do not include (i) the six markets
sold to AT&T Wireless in February 2004, (ii) the two markets sold
to ALLTEL in November 2004 or (iii) the 15 markets U.S. Cellular has
agreed to acquire from ALLTEL pursuant to the agreement signed in September 2005.
Amounts in 2004 do not include the market acquired from Cingular in April 2005
or the six markets sold to AT&T Wireless in February 2004.
47
(1b) Amounts
in 2005 include (i) the results from April 1, 2005 through September 30,
2005 of the market acquired from Cingular in April 2005 and (ii) the
results from January 1, 2005 through September 30, 2005 of the two
markets U.S. Cellular has agreed to divest to ALLTEL pursuant to the agreement
signed in September 2005; and do not include the results for the entire
period of (i) the six markets sold to AT&T Wireless in February 2004,
(ii) the two markets sold to ALLTEL in November 2004 or (iii) the
15 markets U.S. Cellular has agreed to acquire from ALLTEL pursuant to the
agreement signed in September 2005. Amounts in 2004 include (i) the
results from January 1, 2004 through February 17, 2004 of the six
markets sold to AT&T Wireless in February 2004, and (ii) the
results for the entire period of the two markets sold to ALLTEL in November 2004.
(2) Represents 100% of the population of the
markets in which U.S. Cellular has a controlling financial interest for
financial reporting purposes, as determined using Claritas 2004 and 2003
population estimates for 2005 and 2004, respectively. As of September 30,
2005, such population includes the total market population of the market
acquired from Cingular in April 2005.
As of September 30, 2004, such population includes one additional
market consolidated pursuant to the adoption of Financial Accounting Standards
Board (FASB) Interpretation No. 46 (FIN 46) as of January 1,
2004. This market was subsequently sold in November 2004 and is therefore
not included at September 30, 2005. The total market population of the six
markets sold to AT&T Wireless in February 2004 is not included in the
amounts for 2005 or 2004, as the customers sold to AT&T Wireless are not
included in U.S. Cellulars consolidated customer base as of September 30,
2005 or 2004. The total market population of the two markets sold to ALLTEL in November 2004
is not included in the amounts for 2005, as the customers sold to ALLTEL are
not included in U.S. Cellulars consolidated customer base as of September 30,
2005, but such total market population and customers are included as of September 30,
2004. The population of markets in which U.S. Cellular has deferred the
acquisition of licenses from AT&T Wireless is not included in the total
population for any period, nor is the population of markets for which Carroll
Wireless was the winning bidder in the FCCs Auction 58.
(3) U.S. Cellulars
customer base consists of the following types of customers:
|
|
September 30,
|
|
|
|
2005
|
|
2004
|
|
Customers on
postpay service plans in which the end user is a customer of U.S. Cellular
(postpay customers)
|
|
4,475,000
|
|
4,233,000
|
|
End user
customers acquired through U.S. Cellulars agreement with a third party
(reseller customers) *
|
|
538,000
|
|
433,000
|
|
Total
postpay customer base
|
|
5,013,000
|
|
4,666,000
|
|
Customers on
prepaid service plans in which the end user is a customer of U.S. Cellular
(prepaid customers)
|
|
290,000
|
|
162,000
|
|
Total
customers
|
|
5,303,000
|
|
4,828,000
|
|
* Pursuant to its
agreement with the third party, U.S. Cellular is compensated by the third party
on a postpay basis; as a result, all customers U.S. Cellular has acquired
through this agreement are considered to be postpay customers.
(4) Calculated using
2004 and 2003 Claritas population estimates for 2005 and 2004, respectively.
Total market population is used only for the purposes of calculating market
penetration, which is calculated by dividing customers by the total market
population (without duplication of population in overlapping markets).
(5) Net customer
additions represents the number of net customers added to U.S. Cellulars
overall customer base through all of its marketing distribution channels,
excluding any customers transferred through acquisition or divestiture
activity. Net retail customer additions represents the number of net
customers added to U.S. Cellulars customer base, excluding net reseller
customers added to its reseller customer base, through its marketing
distribution channels, excluding any customers transferred through acquisition
or divestiture activity. Full-year 2005 estimates for U.S. Cellulars net
retail customer additions are included in the overall discussion of full-year
2005 estimates under Operating Income.
(6) U.S. Cellular uses this measurement to assess
the amount of service revenue U.S. Cellular generates each month on a per unit
basis. Variances in this measurement are monitored and compared to variances in
expenses on a per unit basis. Average monthly service revenue per
customer is calculated as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
|
|
|
|
Service
Revenues
|
|
$
|
2,092,889
|
|
$
|
1,953,991
|
|
Divided by
average customers during period (000s) *
|
|
5,156
|
|
4,619
|
|
Divided by
number of months in each period
|
|
9
|
|
9
|
|
Average
monthly service revenue per customer
|
|
$
|
45.10
|
|
$
|
47.00
|
|
* Average
customers during period is calculated by adding the number of total customers,
including reseller customers, at the beginning of the first month of each
period and at the end of each month in the period and dividing by the number of
months in the period plus one. Acquired and divested customers are included in
the calculation on a prorated basis for the amount of time U.S. Cellular served
such customers during each period.
(7) Postpay churn rate
per month represents the percentage of the postpay customer base that
disconnects service each month, including both postpay customers and reseller
customer numbers. Reseller customers can disconnect service without the
associated account number being disconnected from U.S. Cellulars network if
the reseller elects to reuse the customer telephone number; as a result, only
those reseller customer numbers that are disconnected from U.S. Cellulars
network are counted in the number of postpay disconnects. The calculation
divides the total number of postpay and reseller customers who disconnect
service during the period by the number of months in such period, and then
divides that quotient by the average monthly postpay customer base, which
includes both postpay and reseller customers, for such period.
(8) For a discussion of
the components of this calculation, see Operating Expenses Selling, General
and Administrative.
48
On September 12,
2005, U.S. Cellular announced that it had entered into a definitive agreement
with a subsidiary of ALLTEL to exchange certain cellular properties. Under the
agreement, U.S. Cellular acquired fifteen Rural Service Area (RSA) markets in
Kansas and Nebraska in exchange for two RSA markets in Idaho and $50 million in
cash, subject to working capital adjustments.
U.S. Cellular will record the transaction in the fourth quarter of 2005
and, subject to the results of the valuation analysis which is currently underway,
expects to report a pre-tax gain that will increase operating income by
approximately $40 - $45 million. The
gain represents the excess of the estimated fair value of the assets and
liabilities received over the amount of cash and net book value of the assets
and liabilities delivered in the exchange.
On November 30, 2004, U.S. Cellular completed the
sale of two consolidated properties and five minority interests to ALLTEL for
$80.2 million in cash, including repayment of debt and working capital that was
adjusted in the first quarter of 2005. The consolidated markets sold to ALLTEL
are included in consolidated operations in 2004 but are excluded in 2005.
On February 18, 2004, U.S. Cellular completed the
sale of certain of its wireless properties in southern Texas to AT&T
Wireless for $96.9 million in cash, subject to a working capital adjustment.
The U.S. Cellular markets sold to AT&T Wireless included wireless assets
and customers in six cellular markets. The southern Texas markets sold to
AT&T Wireless are included in consolidated operations from January 1,
2004 through February 17, 2004.
Operating revenues
increased $149.4 million, or 7%, to $2,248.5 million in 2005 from $2,099.1
million in 2004. The major components of operating revenues are shown in the
table below.
|
|
Nine Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Retail
service
|
|
$
|
1,839,936
|
|
$
|
1,688,330
|
|
Inbound
roaming
|
|
107,842
|
|
136,788
|
|
Long-distance
and other service revenues
|
|
145,111
|
|
128,873
|
|
Service
Revenues
|
|
2,092,889
|
|
1,953,991
|
|
Equipment
sales
|
|
155,653
|
|
145,067
|
|
|
|
$
|
2,248,542
|
|
$
|
2,099,058
|
|
Service revenues
increased $138.9 million, or 7%, to $2,092.9 million in 2005 from $1,954.0
million in 2004. Service revenues primarily consist of: (i) charges for
access, airtime, roaming, recovery of regulatory costs and value-added
services, including data products and services, provided to U.S. Cellulars
retail customers and to end users through third party resellers (retail
service); (ii) charges to other wireless carriers whose customers use
U.S. Cellulars wireless systems when roaming (inbound roaming); and (iii) charges
for long-distance calls made on U.S. Cellulars systems. The increase in
service revenues was primarily due to the growing number of retail customers.
Monthly service revenue per customer averaged $45.10 and $47.00 for the nine
months ended September 30, 2005 and 2004, respectively. See footnote 6 to
the table above for the calculation of average monthly service revenue per
customer.
Retail service revenues
increased $151.6 million, or 9%, to $1,839.9 million in 2005 from $1,688.3
million in 2004. Growth in U.S. Cellulars customer base, an increase in
average monthly retail minutes of use per customer and growth in revenues from
data products and services were the primary reasons for the increase in retail
service revenue. The number of customers increased 10% to 5,303,000 at September 30,
2005, from 4,828,000 at September 30, 2004. Of the 10% increase in
customers since September 30, 2004, 502,000 were added through U.S.
Cellulars marketing (including reseller) distribution channels while 27,000
net customers were subtracted as a result of acquisition and divestiture
activities, primarily the divestiture to ALLTEL in November 2004.
Monthly retail minutes of use per customer increased to 617 in 2005
from 529 in 2004. The increase in monthly local retail minutes of use was
driven by U.S. Cellulars focus on designing sales incentive programs and
customer billing rate plans to stimulate overall usage. U.S. Cellular
anticipates that the percentage growth in the customer base in U.S. Cellulars
wireless markets will be lower in the future, primarily as a result of the
increased competition in its markets and the increasing maturity of the
wireless marketplace. However, as U.S. Cellular expands its operations in its
recently acquired and launched markets in future years, it anticipates adding
customers and revenues in those markets.
49
The impact on retail
service revenue of the increase in average monthly retail minutes of use was
offset by a decrease in average revenue per minute of use in 2005. The decrease
in average revenue per minute of use reflects the effects of increasing
competition, which has led to the inclusion of an increasing number of minutes
in package pricing plans and the inclusion of features such as unlimited night
and weekend minutes and unlimited inbound call minutes in certain pricing
plans. Additionally, the percentage of U.S. Cellulars customer base
represented by prepaid and reseller customers, which generate less revenue per
customer on average than postpay customers, increased from 12% at September 30,
2004 to 16% at September 30, 2005. U.S. Cellular anticipates that U.S.
Cellulars average revenue per minute of use will continue to decline in the
future, reflecting increased competition and penetration of the consumer
market.
Revenues from data products and services increased to $92.3 million in
2005 from $44.1 million in 2004, as U.S. Cellulars easyedgeSM
products were enhanced and made available in all of its markets. Also, amounts
billed to customers to recover the cost of contributions to the federal
universal service fund and costs related to other federal mandates such as E-911
capability and wireless number portability increased $29.3 million for the nine
months ended September 30, 2005.
As a result of the above
factors, average monthly retail service revenue per customer decreased 2% to
$39.65 in 2005 from $40.61 in 2004.
Inbound roaming revenues
decreased $29.0 million, or 21%, to $107.8 million in 2005 from $136.8 million
in 2004. The decrease in revenue primarily related to the decline in revenue
per roaming minute of use, partially offset by an increase in roaming minutes
of use. The decline in revenue per minute of use is primarily due to the
general downward trend in historical negotiated rates. The increase in inbound
roaming minutes of use was driven by the overall growth in the number of
customers as well as the increase in minutes of use per customer throughout the
wireless industry.
U.S. Cellular anticipates that the rate of growth in inbound roaming
minutes of use will stabilize over the next several quarters, reflecting
continued growth in wireless customers throughout the industry, and that the
average inbound roaming revenue per minute of use will continue to decline over
the next several quarters, reflecting the continued general downward trend in
negotiated rates.
Long-distance and other service revenues
increased $16.2 million, or 13%, to $145.1 million in 2005 from $128.9 million
in 2004. The increase primarily reflected a $12.8 million increase in
competitive eligible telecommunications carrier funds received for the states
in which U.S. Cellular is eligible to receive such funds. Of this amount, $5.1
million represented a one-time payment to U.S. Cellular related to claims for
prior periods; this effect was mostly offset by a $4.4 million one-time
repayment to USAC for reimbursements that were previously received but for
which USAC later determined U.S. Cellular was not eligible. In the nine months
ended September 30, 2005, U.S. Cellular was eligible to receive such funds
in five states compared to three states in the same period in 2004.
Equipment sales revenues
increased $10.6 million, or 7%, to $155.7 million in 2005 from $145.1 million
in 2004. Equipment sales revenues include revenues from sales of handsets and
related accessories to both new and current customers, as well as revenues from
the sales of handsets to agents. In 2005, U.S. Cellular continued to focus on
retaining customers by offering current customers new handsets similar to those offered to new
customers as the expiration dates of customers service contracts approached.
U.S. Cellular also continued to
sell handsets to agents; this practice enables U.S. Cellular to
provide better control over handset quality, establish roaming preferences and
pass along quantity discounts. U.S. Cellular anticipates that it will continue
to sell handsets to agents in the future, and that it will continue to provide
rebates to agents who provide handsets to new and current customers. Equipment
sales revenues from handset sales to agents are recognized upon delivery of the
related products to the agents, net of anticipated agent rebates. In most
cases, the agents receive the rebates from U.S. Cellular at the time these
agents provide handsets to sign up new customers or renew current customers.
The primary driver to the increase
in equipment sales revenues in 2005 was an increase of 7% in the total number
of handsets sold. An increase in handset sales to agents was partially offset
by a decrease in handset sales to new customers, reflecting a 2% decline in
customers added to U.S. Cellulars customer base through its marketing
distribution channels (gross customer activations) and a decrease in handsets
provided to current customers for retention purposes. The average revenue per
handset sold was relatively stable in 2005 compared to 2004.
50
The total cost of equipment sold increased $17.7 million, or 5%, to
$374.9 million in 2005 from $357.2 million in 2004, primarily due to the
increase in the number of handsets sold. Total handset revenues have grown at approximately
the same rate as the total cost of equipment sold, reflecting some stabilizing
in the discounting of handsets sold to new customers and existing customers who
renew service with U.S. Cellular at the time of contract expiration. Handset
discounting is a common practice throughout the wireless industry. Although
substantial handset discounting is expected to continue for the next several
quarters, the level of discounts is not expected to change significantly.
Operating expenses
increased $121.7 million, or 6%, to $2,075.9 million in 2005 from $1,954.2
million in 2004.
|
|
Nine Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
System
operations (exclusive of depreciation, amortization and accretion included
below)
|
|
$
|
444,811
|
|
$
|
436,047
|
|
Cost of
equipment sold
|
|
374,882
|
|
357,154
|
|
Selling,
general and administrative
|
|
875,316
|
|
797,938
|
|
Depreciation,
amortization and accretion
|
|
380,860
|
|
363,749
|
|
Gain on
assets held for sale
|
|
|
|
(725
|
)
|
|
|
$
|
2,075,869
|
|
$
|
1,954,163
|
|
System operations expenses (excluding depreciation,
amortization and accretion) increased
$8.8 million, or 2%, to $444.8 million in 2005 from $436.0 million in 2004.
System operations expenses include charges from landline telecommunications
service providers for U.S. Cellulars customers use of their facilities, costs
related to local interconnection to the landline network, charges for
maintenance of U.S. Cellulars network, long-distance charges, outbound roaming
expenses and payments to third-party data product and platform developers. The
components of system operations expenses were as follows:
maintenance,
utility and cell site expenses increased $21.5 million, or 16%, primarily
driven by a 9% increase in the number of cell sites within U.S. Cellulars
network, to 5,149 in 2005 from 4,713 in 2004, as U.S. Cellular continued to
grow by expanding and enhancing coverage in its existing markets and also by
launching operations in new markets.
the cost of network usage for U.S. Cellulars
systems increased $21.5 million, or 15%, as total minutes used on U.S. Cellulars
systems increased 35% in 2005, partially offset by the ongoing reduction in the
per-minute cost of usage for U.S. Cellulars network; such network usage costs
represent the costs U.S. Cellular incurs to deliver minutes of use on its
network to interconnecting wireline networks; and
expenses incurred when U.S. Cellulars
customers used other wireless carriers networks while roaming decreased $34.2
million, or 22%. Factors contributing to the decline included: 1) reductions in cost per minute, primarily
resulting from the ongoing decline in negotiated roaming rates; 2) the
availability of U.S. Cellulars network in markets launched in 2004 and 2005
which largely eliminated the need for its customers to incur more expensive
roaming charges in those markets; and 3) the sales of markets to AT&T
Wireless and ALLTEL in 2004, which eliminated the roaming costs previously
incurred by those markets customers.
In total, U.S. Cellular expects system operations expenses to increase
over the next few quarters, driven by the following factors:
increases
in the number of cell sites within U.S. Cellulars network as it continues to
add capacity and enhance quality in all markets, and continues development
activities in recently launched markets; and
increases
in minutes of use, both on U.S. Cellulars network and by U.S. Cellulars
customers on other carriers networks when roaming.
These factors are expected to be partially offset by anticipated
decreases in the per-minute cost of usage both on U.S. Cellulars network and
on other carriers networks.
51
Cost of
equipment sold increased $17.7 million, or 5%, to $374.9
million in 2005 from $357.2 million in 2004. The change was primarily due to a
7% increase in the number of handsets sold and partially offset by a 2%
decrease in the average cost per handset. An increase in handset sales to
agents was the primary driver of the increase in the number of handsets sold,
as the number of handsets provided to customers for retention purposes
decreased slightly and the number of gross customer activations from marketing
channels decreased 2%. The primary driver of the decrease in average cost per
handset was the overall decline in average handset pricing, partially offset by
the increase in sales of higher cost data-enabled handsets which increasingly
include other value-added features such as cameras. Data-enabled handsets are
required for customers to access U.S. Cellulars easyedgeSM suite of services.
Selling,
general and administrative expenses increased $77.4
million, or 10%, to $875.3 million in 2005 from $797.9 million in 2004.
Selling, general and administrative expenses primarily consist of salaries,
commissions and expenses of field sales and retail personnel and offices; agent
commissions and related expenses; corporate marketing, merchandise management
and telesales department salaries and expenses; advertising; and public relations
expenses. Selling, general and administrative expenses also include the costs of
operating U.S. Cellulars customer care centers, the non-network costs of
serving customers and the majority of U.S. Cellulars corporate expenses.
The increase in selling, general
and administrative expenses in 2005 is primarily due to the increase in
employee-related expenses associated with acquiring, serving and retaining
customers, primarily as a result of the 10% increase in U.S. Cellulars
customer base and a 14% increase in full-time equivalent employees. Selling,
general and administrative expenses were also affected by the following
factors:
a $16.9 million
increase in advertising expenses, primarily related to the marketing of the
U.S. Cellular brand in the markets launched in 2004 and 2005, and also related
to increases in specific sponsorships and segment and direct marketing
programs;
a $15.5 million
increase in expenses related to federal USF contributions, driven by increases
in both total retail service revenues, upon which contributions are based, and
the specified contribution rates. Most
of the payments made for USF contributions are offset by increases in retail
service revenues for amounts passed through to customers;
a $9.6 million
increase in consulting and outsourcing costs as U.S. Cellular increased its use
of third parties to perform certain functions and participate in certain
projects;
a $5.3 million
decrease in amounts billed to AT&T Wireless and ALLTEL for transition
services, which were provided subsequent to the completion of the sale and
exchange transactions with those companies. Such billings offset selling,
general and administrative expenses U.S. Cellular incurred to provide such
services; and
a $7.1 million
decrease in bad debt expense, primarily attributable to the improvement in U.S.
Cellulars collections of outstanding accounts receivable in 2005.
Sales and marketing cost per gross customer activation increased 14% to
$446 in 2005 from $390 in 2004, primarily due to increased handset subsidies,
sales employee-related expenses and advertising expenses, partially offset by a
decrease in commissions and agent-related payments. U.S. Cellular
uses this measurement to assess both the cost of acquiring customers and the
efficiency of its marketing efforts. Sales and marketing cost per gross
customer activation is not calculable using financial information derived
directly from the Consolidated Statements of Operations. The definition of
sales and marketing cost per gross customer activation that U.S. Cellular uses
as a measure of the cost to acquire additional customers through its marketing
distribution channels may not be comparable to similarly titled measures that
are reported by other companies.
52
Below is a summary of sales and
marketing cost per gross customer activation for each period:
|
|
Nine Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands,
Except per customer amounts)
|
|
Components of cost:
|
|
|
|
|
|
Selling, general and administrative
expenses related to the
acquisition of new customers (1)
|
|
$
|
388,863
|
|
$
|
357,899
|
|
Cost of equipment sold to new customers (2)
|
|
283,078
|
|
249,160
|
|
Less equipment sales revenue from new
customers (3)
|
|
(172,181
|
)
|
(158,653
|
)
|
Total costs
|
|
$
|
499,760
|
|
$
|
448,406
|
|
Gross customer activations (000s) (4)
|
|
1,121
|
|
1,149
|
|
Sales and marketing cost per gross customer
activation
|
|
$
|
446
|
|
$
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Selling,
general and administrative expenses related to the acquisition of new customers
is reconciled to total selling, general and administrative expenses as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Selling, general and administrative
expenses, as reported
|
|
$
|
875,316
|
|
$
|
797,938
|
|
Less expenses related to serving and
retaining customers
|
|
(486,453
|
)
|
(440,039
|
)
|
Selling, general and administrative
expenses related to
the acquisition of new customers
|
|
$
|
388,863
|
|
$
|
357,899
|
|
(2) Cost
of equipment sold to new customers is reconciled to cost of equipment sold as
follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Cost of equipment sold as reported
|
|
$
|
374,882
|
|
$
|
357,154
|
|
Less cost of equipment sold related to the
retention of
current customers
|
|
(91,804
|
)
|
(107,994
|
)
|
Cost of equipment sold to new customers
|
|
$
|
283,078
|
|
$
|
249,160
|
|
(3) Equipment
sales revenue from new customers is reconciled to equipment sales revenues as
follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Equipment sales revenue as reported
|
|
$
|
155,653
|
|
$
|
145,067
|
|
Less equipment sales revenues related to
the retention of
current customers, excluding agent rebates
|
|
(21,272
|
)
|
(22,020
|
)
|
Add agent rebate reductions of equipment
sales revenues
related to the retention of current customers
|
|
37,800
|
|
35,606
|
|
Equipment sales revenues from new customers
|
|
$
|
172,181
|
|
$
|
158,653
|
|
(4) Gross
customer activations represent customers added to U.S. Cellulars customer base
through its marketing distribution channels, including customers added through
third party resellers, during the respective periods presented.
Monthly
general and administrative expenses per customer, including the net costs
related to the renewal or upgrade of service contracts of current U.S. Cellular
customers (net customer retention costs), decreased 5% to $12.82 in 2005 from
$13.51 in 2004. The decrease reflects the net effect of the reduction in bad
debt expense as discussed above, higher selling, general and administrative
expenses as discussed above, including higher employee-related expenses overall
and handset equipment subsidies related to retention transactions, and the
higher average customer base. U.S. Cellular uses this measurement to assess the
cost of serving and retaining its customers on a per unit basis.
53
This
measurement is reconciled to total selling, general and administrative expenses
as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands,
except per customer amounts)
|
|
Components of
cost (1)
|
|
|
|
Selling,
general and administrative expenses as reported
|
|
$
|
875,316
|
|
$
|
797,938
|
|
Less
selling, general and administrative expenses related to the acquisition of
new customers
|
|
(388,863
|
)
|
(357,899
|
)
|
Add
cost of equipment sold related to the retention of current customers
|
|
91,804
|
|
107,994
|
|
Less
equipment sales revenues related to the retention of current customers,
excluding agent rebates
|
|
(21,272
|
)
|
(22,020
|
)
|
Add
agent rebate reductions of equipment sales revenues related to the retention
of current customers
|
|
37,800
|
|
35,606
|
|
Net
cost of serving and retaining customers
|
|
$
|
594,785
|
|
$
|
561,619
|
|
Divided
by average customers during period (000s) (2)
|
|
5,156
|
|
4,619
|
|
Divided
by nine months in each period
|
|
9
|
|
9
|
|
Average
monthly general and administrative expenses per customer
|
|
$
|
12.82
|
|
$
|
13.51
|
|
(1) These components were previously identified in the table which
calculates sales and marketing cost per customer activation and related
footnotes.
(2) Average customers for the nine month periods were previously defined in
footnote 6 to the table of summarized operating data.
Depreciation,
amortization and accretion expense increased $17.2
million, or 5%, to $380.9 million in 2005 from $363.7 million in 2004. The
majority of the increase reflects a $20.4 million, or 6%, increase in
depreciation expense, primarily driven by rising average fixed asset balances,
which increased 12% in 2005. Increased fixed asset balances in 2005 resulted
from the following factors:
the addition of
436 cell sites to U.S. Cellulars network since September 30, 2004; new cell
sites were built to improve coverage and capacity in U.S. Cellulars markets,
both in currently served areas as well as in areas where U.S. Cellular has
launched or is preparing to launch commercial service; and
the addition of
digital radio channels and switching capacity to U.S. Cellulars network to
accommodate increased usage.
See Financial
Resources and Liquidity and Capital Resources for further discussions of
U.S. Cellulars capital expenditures.
In 2005, additional
depreciation expense was recorded related to the following:
$8.4 million of
write-downs of fixed assets related to the disposal of assets or trade-in of
older assets for replacement assets; and
$4.0 million of
write-downs of certain TDMA digital radio equipment related to its disposal or
consignment for future sale. This write-down was necessary to reduce the book
value of the assets to be sold to their estimated proceeds from disposition.
In 2004, a change in the useful
lives of certain asset categories increased depreciation expense $12.1 million.
Also, certain TDMA digital radio equipment consigned to a third party for
future sale was written down by $11.3 million prior to its consignment,
increasing depreciation expense by that amount.
Additionally in 2004, in
preparation for the implementation of a fixed asset management and tracking
software system, including a bar code asset identification system, U.S.
Cellular conducted a physical inventory review of its cell site fixed assets.
U.S. Cellular completed the inventory in the fourth quarter of 2004. U.S. Cellular
estimated that the review, when completed, would result in a write-down of
certain assets with a net book value of approximately $4.0 million, and charged
$4.0 million to depreciation expense for the estimated write-down in the second
quarter of 2004.
54
Amortization and accretion
expense decreased $3.3 million, or 9%, to $33.1 million in 2005 from $36.4
million in 2004, primarily representing a $4.0 million decrease in amortization
related to the customer list intangible assets and other amortizable assets
acquired in the Chicago market transaction during 2002. Customer list
intangible assets are amortized using the declining balance method, which
results in declining amortization expense each year.
(Gain)
loss on assets held for sale for the first nine months of
2004 includes a gain of $725,000, which represents a reduction of loss on
assets held for sale originally reported in the fourth quarter of 2003. This
sale of wireless properties in southern Texas to AT&T Wireless was
completed in February 2004.
Operating
Income
Operating
income increased $27.8 million, or 19%, to $172.7
million in 2005 from $144.9 million in 2004. The operating income margins (as a
percent of service revenues) were 8.3% in 2005 and 7.4% in 2004. The increase
in operating income and operating income margin in 2005 reflects increased
service revenues, primarily driven by growth in the number of customers served
by U.S. Cellulars systems, and lower system operations expenses as a percent
of service revenues, partially offset by the following factors:
increased
selling, general and administrative expense, primarily due to the increase in
expenses related to acquiring, serving and retaining additional customers;
increased depreciation,
amortization and accretion expense, primarily driven by an increase in average
fixed assets related to ongoing improvements to U.S. Cellulars wireless
network;
higher operating
costs associated with increased minutes of use and cell sites in service; and
increased
equipment subsidies, primarily due to the increase in the per unit discount for
handsets sold to new customers as well as to current customers for retention
purposes.
U.S.
Cellular expects all of the above factors to continue to have an effect on
operating income and operating margins for the next several quarters. Any
changes in the above factors, as well as the effects of other drivers of U.S.
Cellulars operating results, may cause operating income and operating margins
to fluctuate over the next several quarters.
U.S. Cellular plans to incur
additional expenses during the remainder of 2005 as it competes in its
established markets and in recently launched markets, including the St. Louis
market which was launched in the third quarter of 2005. Additionally, U.S. Cellular expects to incur
expenses related to its continued marketing of data-related wireless services
in the next few years.
The following estimates of full-year 2005
service revenues; depreciation, amortization and accretion expenses; operating
income; and net retail customer activations were updated by U.S. Cellular on February 27,
2006. Such estimates include the impact of commercially launching service in
the St. Louis market during the third quarter of 2005 and the estimated impact
of the exchange of properties with ALLTEL that was completed on December 19,
2005. The following estimates represent forward-looking statements and should
not be assumed to be accurate as of any future date. U.S. Cellular undertakes
no duty to update such information whether as a result of new information,
future events or otherwise.
|
|
2005 Estimated
Results
|
|
2004 Actual
Results
|
|
|
|
|
|
(As Restated)
|
|
Service revenues
|
|
Approx. $2.8 billion
|
|
$
|
2.62 billion
|
|
Depreciation, amortization and
accretion expenses
|
|
Approx. $515 million
|
|
$
|
498.2 million
|
|
Operating income
|
|
$220-$260 million
|
(1)
|
$
|
183.3 million
|
|
Net retail customer activations
|
|
411,000
|
(2)
|
464,000
|
|
(1) Includes a gain of
$40-$45 million on the exchange of properties with ALLTEL Corp, that was
completed on December 19, 2005.
(2) Actual.
U.S.
Cellular anticipates that its net costs associated with customer growth,
service and retention, initiation of new services, launches in new markets and
fixed asset additions will continue to grow. U.S. Cellular anticipates that its
net customer retention costs will increase in the future as its customer base
grows, as competitive pressures continue and as per unit handset costs increase
without compensating increases in the per unit sales price of handsets to
customers and agents.
55
U.S.
Cellular believes there is a seasonality in both service revenues, which tend
to increase more slowly in the first and fourth quarters, and operating
expenses, which tend to be higher in the fourth quarter than in the other
quarters due to increased marketing activities and customer growth, which may
cause operating income to vary from quarter to quarter. U.S. Cellular
anticipates that the impact of such seasonality will decrease in the future,
particularly as it relates to operating expenses, as the proportion of full
year customer activations derived from fourth quarter holiday sales is expected
to decline to reflect ongoing, rather than seasonal, promotions of U.S.
Cellulars products.
56
TDS
TELECOM OPERATIONS
TDS operates its wireline
telephone operations through TDS Telecommunications Corporation (TDS Telecom),
a wholly owned subsidiary. Total equivalent access lines served by TDS Telecom
increased by 42,400 or 4%, since September 30, 2004 to 1,180,400. An equivalent
access line is derived by converting a high-capacity data line to an estimated
equivalent number, in terms of capacity, of switched access lines. DSL connections are considered equivalent
lines.
TDS Telecoms incumbent local
exchange carrier subsidiaries served 734,800 equivalent access lines at
September 30, 2005, a 1% (9,300 equivalent access lines) increase from 725,500
equivalent access lines at September 30, 2004.
TDS Telecoms competitive local
exchange carrier subsidiaries served 445,600 equivalent access lines at
September 30, 2005, an 8% (33,100 equivalent access lines) increase from
412,500 equivalent access lines served at September 30, 2004.
|
|
Nine months ended
September 30,
|
|
|
|
(Dollars in thousands)
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
Incumbent
Local Exchange Carrier Operations
|
|
|
|
|
|
Operating Revenues
|
|
$
|
494,791
|
|
$
|
487,650
|
|
Operating Expenses
|
|
367,258
|
|
347,995
|
|
Operating Income
|
|
127,533
|
|
139,655
|
|
|
|
|
|
|
|
Competitive
Local Exchange Carrier Operations
|
|
|
|
|
|
Operating Revenues
|
|
180,736
|
|
168,555
|
|
Operating Expenses
|
|
188,123
|
|
189,152
|
|
Operating (Loss)
|
|
(7,387
|
)
|
(20,597
|
)
|
|
|
|
|
|
|
Intercompany
revenue elimination
|
|
(3,864
|
)
|
(3,158
|
)
|
Intercompany
expense elimination
|
|
(3,864
|
)
|
(3,158
|
)
|
|
|
|
|
|
|
TDS Telecom
Operating Income
|
|
$
|
120,146
|
|
$
|
119,058
|
|
Operating
income increased $1.0 million, or 1%, to $120.1
million in the nine months ended September 30, 2005 from $119.1 million in 2004
driven primarily by an increase in competitive local exchange carrier revenues,
offset by increased costs of providing services and products.
The following forward-looking
information with respect to anticipated operating revenues, operating income
and operating losses was updated by TDS Telecom on February 27, 2006. Such
forward-looking statements should not be assumed to be accurate as of any
future date. TDS undertakes no legal duty to update such information whether as
a result of new information, future events or otherwise.
|
|
2005 Estimated
Results
|
|
2004 Actual
Results
|
|
|
|
|
(As Restated)
|
Incumbent Local Exchange
Operations:
|
|
|
|
|
|
Revenues
|
|
$
|
660-670
|
million
|
$
|
658.3
|
million
|
Depreciation, amortization and
accretion expenses
|
|
$
|
135
|
million
|
$
|
131.7
|
million
|
Operating income
|
|
$
|
165-175
|
million
|
$
|
183.2
|
million
|
|
|
|
|
|
|
Competitive Local Exchange
Operations:
|
|
|
|
|
|
Revenues
|
|
$
|
235-245
|
million
|
$
|
226.3
|
million
|
Depreciation, amortization and
accretion expenses
|
|
$
|
30
|
million
|
$
|
38.3
|
million
|
Operating income (loss)
|
|
$
|
(10)-(5
|
) million
|
$
|
(146.1
|
) million
|
|
|
|
|
|
|
|
|
|
57
Incumbent
Local Exchange Carrier Operations
Operating
revenues increased $7.1 million, or 1%, to $494.8
million in the nine months ended September 30, 2005 from $487.7 million in
2004, primarily due to higher digital subscriber line and long distance
subscribers. The increase was impacted by fewer physical access lines and
dial-up Internet customers.
|
|
Nine months ended
September 30,
|
|
|
|
(Dollars in thousands)
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
Local
service
|
|
$
|
150,200
|
|
$
|
152,979
|
|
Network
access and long distance
|
|
275,452
|
|
268,914
|
|
Miscellaneous
|
|
69,139
|
|
65,757
|
|
|
|
$
|
494,791
|
|
$
|
487,650
|
|
Local service revenues
decreased $2.8 million, or 2%, to $150.2 million in 2005 from $153.0 million in
2004 primarily due to a 3% decrease in
physical access lines, 39% of which was due to loss of second lines that was
affected by digital subscriber lines substitution. Lower access lines reduced
revenues by approximately $2.7 million partially offset by an
increase in advanced calling services revenues, driven by higher penetration.
Network
access and long distance revenues increased $6.6
million, or 2%, to $275.5 million in 2005 from $268.9 million in 2004. Revenues
from long distance service increased $2.9 million in 2005 reflecting increased
long distance customers. As of September 30, 2005, TDS Telecom incumbent local
exchange carrier operations were providing long-distance service to 316,100
access lines compared to 289,000 access lines at September 30, 2004.
Compensation from state and national revenue pools for recovery of expenses of
providing network access increased $6.9 million as compared to 2004. These
increases were partially offset by a $2.3 million decrease in intrastate
switched revenues.
Miscellaneous
revenues from Internet, digital subscriber line and
other non-regulated lines of business increased $3.3 million or 5%, to $69.1
million in 2005 from $65.8 million in 2004. As of September 30, 2005, TDS
Telecom incumbent local exchange carrier operations were providing dial-up
Internet service to 89,700 customers compared to 104,800 customers in 2004 and
were providing digital subscriber line service to 60,300 customers compared to
33,000 customers in 2004. The net increase in digital subscriber lines in
service was the primary cause of the revenue increase, with digital subscriber
lines increasing by 27,300 while dial-up Internet customers decreased by
15,100.
Operating
expenses increased by $19.3 million, or 6%, to $367.3
million in 2005 from $348.0 million in 2004, primarily reflecting increased
cost of services and products.
|
|
Nine months ended
September 30,
|
|
|
|
(Dollars in thousands)
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
Cost of services and products (exclusive of
depreciation and amortization included below)
|
|
$
|
134,234
|
|
$
|
120,250
|
|
Selling, general and administrative expense
|
|
131,859
|
|
130,106
|
|
Depreciation and amortization
|
|
101,165
|
|
97,639
|
|
|
|
$
|
367,258
|
|
$
|
347,995
|
|
Cost of services and products
increased $13.9 million, or 12%, to $134.2 million in 2005 from $120.3 million
in 2004. Increases in line charges and circuit expense and other related cost
of goods sold associated with growth in digital subscriber line customers
resulted in $6.0 million of expense increases. Growth in long distance
customers combined with increased long distance usage stimulated by call plans
increased expense $3.1 million. The remainder of the increase is driven by
increased labor and contractor charges.
Selling, general and administrative expenses
increased $1.8 million, or 1%, to $131.9 million from $130.1 million in 2004.
Expenses grew at a rate comparable to inflation, but the year-to-year increase
was impacted by a $1.5 million write-off of development costs incurred for a
product not integrated into a service offering in the first quarter of 2004.
58
Depreciation and amortization expenses
increased $3.6 million, or 4%, to $101.2 million in 2005 from $97.6 million in
2004 primarily due to additions to plant in service.
Operating income
decreased $12.2 million, or 9%, to $127.5 million in 2005 from $139.7 million
in 2004 primarily as a result of the increase in cost of services and products.
Competitive
Local Exchange Carrier Operations
Operating revenues
(revenue from the provision of local and long distance telephone service)
increased $12.1 million, or 7%, to $180.7 million in 2005 from $168.6 million
in 2004, primarily due to the increase in access lines.
|
|
Nine months ended
September 30,
|
|
|
|
(Dollars in thousands)
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
Operating Revenues
|
|
$
|
180,736
|
|
$
|
168,555
|
|
|
|
|
|
|
|
|
|
Retail revenues
increased $15.2 million to $161.8 million in 2005 from $146.6 million in 2004,
primarily due to access line growth of 8% or 33,100. Increased access lines
added approximately $17.1 million to retail revenues.
Wholesale revenues,
which represent charges to incumbent carriers, decreased $3.1 million to $18.9
million in 2005 from $22.0 million in 2004 primarily due to federal and state
mandated decreases in access rates, including approximately $4.5 million due to
interstate switched access rate decreases. These decreases were partially
offset by additional revenues from access line growth.
Operating
expenses decreased $1.1
million, or less than one percent, to $188.1 million in 2005 from $189.2
million in 2004.
|
|
Nine months ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Cost of services and products (exclusive of
depreciation and amortization included below)
|
|
$
|
77,252
|
|
$
|
67,361
|
|
Selling, general and administrative expense
|
|
89,048
|
|
93,656
|
|
Depreciation and amortization
|
|
21,823
|
|
28,135
|
|
|
|
$
|
188,123
|
|
$
|
189,152
|
|
Cost of services and products
increased $9.9 million, or 15%, to $77.3 million in 2005 from $67.4 million in
2004, primarily due to the costs related to providing service to customers
added during the period. Access line growth added $5.8 million to cost of goods
sold and rate increases from an incumbent carrier for unbundled network
elements added another $4.8 million, partially offset by rate decreases in
other costs of goods sold.
Selling,
general and administrative expenses decreased $4.7
million, or 5%, to $89.0 million in 2005 from $93.7 million in 2004. Sales and
marketing expenses have decreased by $3.3 million as a result of changes in
strategy on the mix of targeted customers, but have been offset by increased
administrative costs including consulting costs. Costs for leased network
components also declined $2.1 million and labor charges decreased $1.5 million,
partially offset by additional operating costs to support access line growth.
Depreciation
and amortization expenses decreased $6.3 million, or
22%, to $21.8 million in 2005 from $28.1 million in 2004 as a result of
decreases in the value of fixed assets. In December 2004, TDS Telecom concluded
that the long-lived tangible assets of the competitive local exchange carrier
operations were impaired and recorded a loss of $87.9 million to reduce the
book value of those assets.
59
Operating loss decreased
$13.2 million, or 64%, to $(7.4) million in 2005 from $(20.6) million in 2004,
reflecting increased retail revenue driven by access line growth, and operating
expense declines year over year as increased costs to service additional access
line were offset by reduction in depreciation and selling, general and
administrative expense.
Incumbent and competitive local
exchange carriers are faced with significant challenges, including growing
competition from wireless and other wireline providers, changes in regulation,
and new technologies such as Voice over Internet Protocol. Despite these
challenges, TDS Telecom has successfully maintained equivalent access line
levels and customer satisfaction.
Regulatory Changes
Changes in the
telecommunications regulatory environment, including the effects of potential
changes in the rules governing universal service funding and potential changes
in the amounts or methods of intercarrier compensation, could have a material
adverse effect on TDS Telecoms financial condition, results of operations and
cash flows.
Three Months Ended September 30, 2005 Compared to Three Months Ended
September 30, 2004
Operating
Revenues increased $64.4 million, or 7%, to $1,028.8
million during the third quarter of 2005 from $964.4 million in 2004 for
reasons generally the same as the first nine months.
U.S.
Cellular Operating Revenues
|
|
Three Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Retail
service
|
|
$
|
635,610
|
|
$
|
583,852
|
|
Inbound
roaming
|
|
42,654
|
|
49,572
|
|
Long-distance
and other service revenues
|
|
51,240
|
|
49,834
|
|
Service Revenues
|
|
729,504
|
|
683,258
|
|
Equipment
sales
|
|
66,002
|
|
57,035
|
|
|
|
$
|
795,506
|
|
$
|
740,293
|
|
U.S. Cellular operating
revenues increased $55.2 million, or 7%, to $795.5 million in 2005 from $740.3
million in 2004.
Retail service revenues
increased $51.7 million, or 9%, to $635.6 million in 2005 from $583.9 million
in 2004, primarily due to a 10% increase in U.S. Cellulars customer base. The
effect of a 16% increase in monthly retail minutes of use per customer, to 639
in 2005 from 553 in 2004, was more than offset by a decrease in average revenue
per minute of use in 2005, resulting in a 2% decrease in average monthly retail
service revenue per customer.
Inbound roaming revenues
decreased $6.9 million, or 14%, to $42.7 million in 2005 from $49.6 million in
2004, for reasons generally the same as for the first nine months of 2005,
except that there was no impact on inbound roaming revenue in either period as
a result of the sale of markets to AT&T Wireless in February 2004.
Long-distance and other service
revenues increased $1.4 million, or 3%, to $51.2 million in 2005 from $49.8
million in 2004. This reflected an increase in competitive eligible
telecommunications carrier funds received for the states in which U.S. Cellular
is eligible to receive such funds, revenues for 2004 included $3.5 million
related to amounts received from prior years regulatory filings.
Equipment sales revenue
increased $9.0 million, or 16%, to $66.0 million in 2005 from $57.0 million in
2004. The primary drivers for the increase were an increase in handsets sold to
agents and an increase in overall revenue per handset, partially offset by the
effects of an 8% decrease in gross customer activations. The increase in
overall revenue per handset was primarily due to an increase in revenue per
handset on handsets sold to agents.
60
TDS Telecom
Operating Revenues
|
|
Three Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
Incumbent
Local Exchange Carrier Operations
|
|
|
|
|
|
Local service
|
|
$
|
50,477
|
|
$
|
51,203
|
|
Network access and long distance
|
|
94,139
|
|
91,185
|
|
Miscellaneous
|
|
23,953
|
|
22,450
|
|
|
|
168,569
|
|
164,838
|
|
Competitive
Local Exchange Carrier Operations
|
|
60,697
|
|
56,574
|
|
Intercompany
revenue elimination
|
|
(1,126
|
)
|
(1,230
|
)
|
TDS Telecom
Operating Revenues
|
|
$
|
228,140
|
|
$
|
220,182
|
|
TDS Telecom operating revenues
increased $7.9 million, or 4%, to $228.1 million during the third quarter of
2005 from $220.2 million in 2004. Competitive local exchange carrier access
line equivalents increased 8% since September 30, 2004, while competitive local
exchange carrier digital subscriber line customers increased 29%. Incumbent
local exchange carrier revenues increased $3.7 million or 2%, due to an 83%
increase in digital subscriber line customers since September 30, 2004. In
addition compensation from state and national revenue pools for recovery of
expenses of providing network access increased. These increases were offset by
the loss of physical access lines and dial-up internet customers.
Operating
Expenses increased $45.9 million, or 5%, to $921.0
million during the third quarter of 2005 from $875.1 million in 2004 for
reasons generally the same as the first nine months.
U.S.
Cellular Operating Expenses
|
|
Three Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
System operations (exclusive of
depreciation, amortization and accretion included below)
|
|
$
|
159,102
|
|
$
|
151,102
|
|
Cost of
equipment sold
|
|
130,823
|
|
126,731
|
|
Selling,
general and administrative
|
|
312,777
|
|
281,522
|
|
Depreciation,
amortization and accretion
|
|
126,583
|
|
127,503
|
|
|
|
$
|
729,285
|
|
$
|
686,858
|
|
U.S. Cellular operating
expenses increased $42.4 million, or 6%, to $729.3 million in 2005 from $686.9
million in 2004.
System operations expenses
(excluding depreciation, amortization and accretion) increased $8.0 million, or
5%, to $159.1 million in 2005 from $151.1 million in 2004. The
effects of several offsetting factors, which were generally the same factors that
affected system operations expense in the first nine months of 2005, resulted
in a net increase in expense during the third quarter of 2005.
Cost of equipment sold
increased $4.1 million, or 3%, to $130.8 million in 2005 from $126.7 million in
2004. The primary driver for the increase was an increase in handsets sold to
agents, partially offset by an 8% decrease in gross customer activations and a
decrease in overall cost per handset. The decrease in overall cost per handset
was due to a slight decrease in the cost of data-enabled handsets since the
third quarter of 2004.
61
Selling, general and
administrative expenses increased $31.3 million, or 11%, to $312.8 million in
2005 from $281.5 million in 2004. The increase was primarily attributable to
the increase in employee-related expenses associated with acquiring, serving
and retaining customers, primarily as a result of the increase in U.S. Cellulars
customer base. Selling, general and administrative expenses were also affected
by the following factors:
a $9.7 million
increase in advertising expenses, primarily related to the marketing of the
U.S. Cellular brand in the markets launched in 2004 and the St. Louis market,
which was launched in the third quarter of 2005; and
a $5.2 million
increase in expenses related to federal USF contributions, driven by increases
in both retail service revenues, upon which contributions are based, and the
specified contribution rates. Most of
the payments made for USF contributions are offset by increases in retail
service revenues for amounts passed through to customers.
Sales and marketing cost per
gross customer activation increased to $491 in the third quarter of 2005 from
$407 in 2004, primarily due to increased advertising expenses and handset
subsidies. Below is a summary of sales and marketing cost per gross customer
activation for each period.
|
|
Three Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands, except per
customer amounts)
|
|
Components of cost:
|
|
|
|
|
|
Selling, general and administrative
expenses related to the acquisition of new customers (1)
|
|
$
|
144,202
|
|
$
|
131,889
|
|
Cost of equipment sold to new customers (2)
|
|
99,119
|
|
86,834
|
|
Less equipment sales revenue from new
customers (3)
|
|
(69,032
|
)
|
(61,270
|
)
|
Total costs
|
|
$
|
174,289
|
|
$
|
157,453
|
|
Gross customer activations (000s) (4)
|
|
355
|
|
387
|
|
Sales and marketing cost per gross customer
activation
|
|
$
|
491
|
|
$
|
407
|
|
(1) Selling, general and administrative expenses related to the acquisition
of new customers is reconciled to total selling, general and administrative
expenses as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses, as reported
|
|
$
|
312,777
|
|
$
|
281,522
|
|
Less expenses related to serving and
retaining customers
|
|
(168,575
|
)
|
(149,633
|
)
|
Selling, general and administrative
expenses related to the acquisition of new customers
|
|
$
|
144,202
|
|
$
|
131,889
|
|
(2) Cost of equipment sold to new customers is reconciled to cost of
equipment sold as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Cost of equipment sold as reported
|
|
$
|
130,823
|
|
$
|
126,731
|
|
Less cost of equipment sold related to the
retention of current customers
|
|
(31,704
|
)
|
(39,897
|
)
|
Cost of equipment sold to new customers
|
|
$
|
99,119
|
|
$
|
86,834
|
|
62
(3) Equipment sales revenue from new customers is reconciled to equipment
sales revenues as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Equipment sales revenue as reported
|
|
$
|
66,002
|
|
$
|
57,035
|
|
Less equipment sales revenues related to
the retention of current customers, excluding agent rebates
|
|
(9,169
|
)
|
(9,093
|
)
|
Add agent rebate reductions of equipment
sales revenues related to the retention of current customers
|
|
12,199
|
|
13,328
|
|
Equipment sales revenues from new customers
|
|
$
|
69,032
|
|
$
|
61,270
|
|
(4) Gross customer activations represent customers added to U.S. Cellulars
customer base through its marketing distribution channels, including customers
added through third party resellers, during the respective periods presented.
Monthly general and administrative expenses
per customer, including the net costs related to the renewal or upgrade of
service contracts of current U.S. Cellular customers (net customer retention
costs), decreased 5% to $12.87 in 2005 from $13.58 in 2004. The decrease
primarily represents a reduction in net customer retention costs on a per
customer basis. This measurement is reconciled to total selling, general and
administrative expenses as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands,
except per customer amounts)
|
|
Components of cost (1)
|
|
|
|
|
|
Selling, general and administrative
expenses as reported
|
|
$
|
312,777
|
|
$
|
281,522
|
|
Less selling, general and administrative
expenses related to the acquisition of new customers
|
|
(144,202
|
)
|
(131,889
|
)
|
Add cost of equipment sold related to the retention
of current customers
|
|
31,704
|
|
39,897
|
|
Less equipment sales revenues related to
the retention of current customers, excluding agent rebates
|
|
(9,169
|
)
|
(9,093
|
)
|
Add agent rebate reductions of equipment
sales revenues related to the retention of current customers
|
|
12,199
|
|
13,328
|
|
|
|
|
|
|
|
Net cost of serving and retaining customers
|
|
$
|
203,309
|
|
$
|
193,765
|
|
Divided by average customers during period
(000s) (2)
|
|
5,264
|
|
4,757
|
|
Divided by three months in each period
|
|
3
|
|
3
|
|
|
|
|
|
|
|
Average monthly general and administrative
expenses per customer
|
|
$
|
12.87
|
|
$
|
13.58
|
|
(1) These components were previously identified in
the table which calculates sales and marketing cost per customer activation and
related footnotes.
(2) Average customers for the three month periods
were derived in a manner similar to the average customers definition used in
the discussion of operating revenues.
Depreciation, amortization and
accretion expense decreased $0.9 million, or 1%, to $126.6 million in 2005 from
$127.5 million in 2004. Depreciation expense increased $0.1 million, or less
than 1%, to $115.6 million in 2005 from $115.5 million in 2004. The change in
depreciation expense primarily reflects rising average fixed asset balances,
which increased 11% in the third quarter of 2005, offset by decreases in
specific writedowns of fixed assets in 2005 compared to 2004. Such increased
fixed asset balances resulted from the following factors:
the addition of
436 cell sites to U.S. Cellulars network since September 30, 2004; new cell
sites were built to improve coverage and capacity in U.S. Cellulars markets,
both in currently served areas as well as in areas where U.S. Cellular has
launched or is preparing to launch commercial service; and
the addition of
digital radio channels and switching capacity to U.S. Cellulars network to
accommodate increased usage.
63
In the third quarter of 2005,
additional depreciation expense was recorded related to the following:
$2.1 million of
write-downs of fixed assets related to the disposal of assets or trade-in of
older assets for replacement assets; and
$463,000 of
write-downs of certain TDMA digital radio equipment related to its disposal or
consignment for future sale.
In the third quarter of 2004,
additional depreciation expense was recorded related to the following:
$5.2 million
addition to depreciation expense related to the write-down of certain assets
prior to their disposition;
certain TDMA
digital radio equipment consigned to a third party for future sale was written
down by $5.1 million prior to its consignment, increasing depreciation expense
by that amount. This write-down was necessary to reduce the book value of the
assets to be sold to their estimated proceeds from disposition; and
a change in the
useful lives of certain asset categories, which increased depreciation expense
$2.2 million in 2004.
Amortization and accretion
expense decreased $1.0 million, or 9%, to $11.0 million in 2005 from $12.0
million in 2004, primarily representing a $1.1 million decrease in amortization
related to customer list intangible assets. Customer list intangible assets are
amortized using the declining balance method, which results in declining
amortization expense each year.
TDS
Telecom Operating Expenses
|
|
Three Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Incumbent Local Exchange Carrier Operations
|
|
|
|
|
|
Cost of services and products (exclusive of
depreciation and amortization included below)
|
|
$
|
47,601
|
|
$
|
43,257
|
|
Selling, general and administrative expense
|
|
43,837
|
|
43,508
|
|
Depreciation and amortization
|
|
33,319
|
|
32,667
|
|
|
|
124,757
|
|
119,432
|
|
Competitive Local Exchange Carrier
Operations
|
|
|
|
|
|
Cost of services and products (exclusive of
depreciation and amortization included below)
|
|
26,736
|
|
23,800
|
|
Selling, general and administrative expense
|
|
29,793
|
|
33,311
|
|
Depreciation and amortization
|
|
6,998
|
|
9,387
|
|
|
|
63,527
|
|
66,498
|
|
Intercompany expense elimination
|
|
(1,126
|
)
|
(1,230
|
)
|
TDS Telecom Operating Expenses
|
|
$
|
187,158
|
|
$
|
184,700
|
|
TDS Telecom operating expenses
increased $2.5 million, or 1%, to $187.2 million in 2005 from $184.7 million in
2004. Incumbent local exchange carrier operating expenses increased $5.3
million, primarily due to $2.9 million of increased cost of providing service
to new digital subscriber line customers and long distance customers and $0.6
million of increased depreciation due to increased fixed assets. Expenses from
competitive local exchange carrier operations decreased $3.0 million in 2005 as
increased costs to service additional access lines were offset by declines in
sales and marketing, leased network, labor and depreciation expense.
TDS
Operating Income increased $18.5 million, or 21%, to
$107.8 million in the three months ended September 30, 2005 from $89.3 million
in 2004. U.S. Cellulars operating income increased $12.8 million while TDS
Telecoms operating income increased $5.5 million.
Investment
and Other Income (Expense) totaled
$(24.6) million in 2005 and $(30.9) million in 2004.
Investment income
decreased $0.2 million, or 1%, to $18.1 million in 2005 from $18.3 million in
2004. Investment income represents TDSs share of income in unconsolidated
entities in which TDS has a minority interest and follows the equity method of
accounting.
64
Interest
and dividend income increased $8.1 million to $14.2
million in 2005 from $6.1 million in 2004 primarily due to an increase in the
average rate of interest earned on short term funds of 61%.
Gain (loss)
on investments totaled a loss of $0.5 million in 2004
reflecting the impairment of an investment in a telephone company accounted for
using the cost method. There was no gain (loss) on investments in the third
quarter of 2005.
Interest
(expense) increased $1.8 million, or 3%, to $53.9
million in 2005 from $52.1 million in 2004 for reasons generally the same as
for the first nine months.
Other
income (expense), net totaled $(3.0) million in 2005
and $(2.7) million in 2004.
Income Tax
Expense increased $21.3 million to $32.8 million in
2005 from $11.5 million in 2004 primarily due to higher pretax income in 2005
and tax benefits of $23.8 million recorded in the third quarter of 2004
primarily resulting from the substantial completion of the audit of its federal
income tax returns for 1997 through 2001 and claims for research tax credits
for prior periods that were allowed in the federal income tax audit. This was
partially offset by income tax expense of $11.6 million recorded in the third
quarter of 2004 relating to the pending sale of certain assets to ALLTEL. The effective
tax rate was 39.4% in 2005 and 19.6% in 2004. For further analysis and
discussion of TDSs effective income tax rates in the third quarters of 2005
and 2004, see Note 4 - Income Taxes, to the Consolidated Financial Statements
included in this Form 10-Q.
Minority
Share of (Income) totaled $(9.2) million in 2005
compared to $(7.9) million in the third quarter of 2004.
|
|
Three Months Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Minority
Share of Income
|
|
|
|
|
|
U.S. Cellular
|
|
|
|
|
|
Minority Public Shareholders
|
|
$
|
(6,429
|
)
|
$
|
(4,965
|
)
|
Minority Shareholders or Partners
|
|
(2,734
|
)
|
(2,904
|
)
|
|
|
(9,163
|
)
|
(7,869
|
)
|
Other
|
|
(68
|
)
|
(35
|
)
|
|
|
$
|
(9,231
|
)
|
$
|
(7,904
|
)
|
Income
from Continuing Operations totaled $41.2 million, or
$0.36 per diluted share, in 2005 compared to $39.0 million, or $0.33 per
diluted share, in 2004.
Discontinued Operations.
TDS is a party to an indemnity agreement with T-Mobile USA, Inc. (T-Mobile)
regarding certain contingent liabilities for Aerial Communications, Inc. (Aerial),
a former subsidiary of TDS. TDS has recorded an accrual for expenses, primarily
tax related, resulting from Aerials merger into VoiceStream Wireless
Corporation (VoiceStream) in 2000. In the third quarter of 2005, TDS recorded
a gain of $0.3 million ($0.5 million, net of a $0.2 million income tax
expense), or $0.00 per diluted share, for discontinued operations relating to a
reduction in this indemnity accrual due to favorable outcome of a state tax
audit which reduced the potential indemnity obligation. In the third quarter of
2004, related to the same transaction, TDS recorded a gain of $7.0 million
($4.4 million, net of a $2.6 million income tax benefit), or $0.04 per diluted
share, for discontinued operations due to favorable outcomes of federal and
state tax audits which reduced indemnity obligation accrual requirements.
Net Income
Available to Common totaled $41.5 million, or $0.36
per diluted share, in 2005, compared to $43.3 million, or $0.37 per diluted
share, in 2004, as adjusted for the effects of the Special Common Share stock
dividend. See Note 2 Stock Dividend, to the financial statements included in
this Form 10-Q for adjustment discussion.
65
RECENT ACCOUNTING PRONOUNCEMENTS
Share-Based Payment
SFAS No. 123(R), Share-Based
Payment, was issued in December 2004. In April 2005, the SEC postponed the
effective date of SFAS 123(R) until the issuers first fiscal year beginning
after June 15, 2005. As a result, TDS will be required to adopt SFAS 123(R) in
the first quarter of 2006. The statement requires that compensation cost
resulting from all share-based payment transactions be recognized in the
financial statements. SFAS 123(R) also requires that the benefits of tax
deductions in excess of recognized compensation cost be reported as a financing
cash flow, rather than as an operating cash flow. This requirement may reduce
net cash flows from operating activities and increase net cash flows from
financing activities in periods after adoption. In addition, in March 2005, the
SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SECs
interpretation of SFAS 123(R) and the valuation of share-based payments for
public companies. TDS has reviewed the provisions of these statements and
expects to record additional compensation expense for certain share-based
payment transactions, primarily related to stock options, in the Consolidated
Statements of Operations upon adoption of SFAS 123(R). See the Stock-Based
Compensation disclosure in Note 3 to the Consolidated Financial Statements
included herein for a discussion of pro forma impact of SFAS 123 on reported
net income and earnings per share.
Accounting Changes and Error
Corrections
SFAS No. 154, Accounting
Changes and Error Corrections which replaces Accounting Principles Board
Opinions No. 20 Accounting Changes and SFAS No. 3, Reporting Accounting
Changes in Interim Financial StatementsAn Amendment of APB Opinion No. 28 was
issued in May 2005. SFAS 154 provides guidance on the accounting for and
reporting of accounting changes and error corrections. Specifically, this
statement requires retrospective application of the direct effect of a
voluntary change in accounting principle to prior periods financial
statements, if it is practicable to do so. SFAS 154 also strictly redefines the
term restatement to mean the correction of an error by revising previously
issued financial statements. SFAS 154 replaces APB No. 20, which requires that
most voluntary changes in accounting principle be recognized by including in
net income of the period of the change the cumulative effect of changing to the
new accounting principle. Unless adopted early, SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. TDS does not expect the adoption of SFAS 154 to have a
material impact on its financial position or results of operations except to
the extent that the statement requires retrospective application for voluntary
changes in accounting principle that previously would have been effected in the
period of the change under APB No. 20.
Conditional Asset Retirement
Obligations
FASB Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations, was issued in March 2005. It is
effective no later than December 31, 2005. This Interpretation clarifies that
the term conditional asset retirement obligation, as used in SFAS No. 143, Accounting
for Asset Retirement Obligations, refers to a legal obligation to perform an
asset retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing and (or) method
of settlement. Uncertainty about the timing and (or) method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. FASB Interpretation No. 47
also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. TDS is currently
reviewing the requirements of this Interpretation and expects to record an
asset retirement obligation in the fourth quarter of 2005 for TDS Telecoms
competitive local exchange carrier.
66
FINANCIAL
RESOURCES
TDS operates a capital- and
marketing-intensive business. In recent years, TDS has generated cash from its
operations, received cash proceeds from divestitures, used its short-term
credit facilities and used long-term debt financing to fund its construction
costs. TDS anticipates further increases in wireless customers and wireline
equivalent access lines, and in revenues and operating expenses. Cash flows may
fluctuate from quarter to quarter and from year to year due to seasonality,
market startups and other factors. The following table provides a summary of
TDSs cash flow activities in the nine months ended September 30, 2005 and
2004:
|
|
Nine months ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Cash flows from (used in)
|
|
|
|
|
|
Operating activities
|
|
$
|
681,904
|
|
$
|
499,246
|
|
Investing activities
|
|
(601,034
|
)
|
(450,414
|
)
|
Financing activities
|
|
(167,435
|
)
|
94,658
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
$
|
(86,565
|
)
|
$
|
143,490
|
|
Cash Flows
from Operating Activities
TDS generates substantial internal funds from
the operations of U.S. Cellular and TDS Telecom. Cash flows from operating
activities totaled $681.9 million in the nine months ended September 30, 2005
compared to $499.2 million in 2004. Excluding changes in assets and liabilities,
cash flows from operating activities totaled $719.8 million in 2005 and $633.5
million in 2004. Included in the adjustments to reconcile net income to net
cash provided by operating activities in 2004 is a deduction for the payment of
$68.1 million of accreted interest on the repayment of U.S. Cellulars Liquid
Yield Option Notes. Changes in assets and liabilities, primarily reflecting
timing differences in the payment of accounts payable, payment of accrued
taxes, receipt of accounts receivable and changes in inventory, required $37.9
million in 2005 and required $134.3 million in 2004. TDS received a $105.7
million dividend from Deutsche Telekom, less foreign tax withholdings of $22.3
million, in the second quarter of 2005. Distributions from unconsolidated
investments provided $31.5 million in 2005 and $23.7 million in 2004, as
distributions from certain entities were received in the first half of 2005
whereas similar distributions from the same entities were not received until
the second half of the year in 2004.
The following table is a
summary of the components of cash flows from operating activities:
|
|
Nine months ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Net income
|
|
$
|
161,671
|
|
$
|
98,965
|
|
Adjustments to reconcile net income to net
cash provided by operating activities
|
|
558,437
|
|
606,968
|
|
Discontinued operations
|
|
(340
|
)
|
(4,351
|
)
|
Accreted interest on repayment of U.S.
Cellular long-term debt
|
|
|
|
(68,056
|
)
|
|
|
719,768
|
|
633,526
|
|
Changes in assets and liabilities
|
|
(37,864
|
)
|
(134,280
|
)
|
|
|
$
|
681,904
|
|
$
|
499,246
|
|
Cash Flows
from Investing Activities
TDS makes substantial
investments each year to acquire, construct, operate and upgrade modern
high-quality communications networks and facilities as a basis for creating
long-term value for shareowners. In recent years, rapid changes in technology
and new opportunities have required substantial investments in upgrades to TDSs
networks. Cash flows used for investing activities required $601.0 million in
the first nine months of 2005 compared to $450.4 million 2004.
67
Cash required for
capital additions totaled $470.7 million in the nine months ended September 30,
2005 and $500.9 million in 2004. The primary purpose of TDSs construction and
expansion expenditures is to provide for significant customer and usage growth,
to upgrade service, and to take advantage of service-enhancing and
cost-reducing technological developments in order to maintain competitive services.
U.S. Cellulars capital additions totaled $384.8 million in 2005 and $394.7
million in 2004 representing expenditures to construct cell sites, to replace
retired assets and to improve business systems. TDS Telecoms capital
expenditures for its incumbent local exchange carrier operations totaled $60.0
million in 2005 and $76.1 million in 2004 representing expenditures for switch
modernization and outside plant facilities to maintain and enhance the quality
of service and to obtain new revenue opportunities. TDS Telecoms capital
expenditures for its competitive local exchange carrier operations totaled
$18.7 million in 2005 and $22.3 million in 2004 for switching and other network
facilities. Corporate and other capital expenditures totaled $7.2 million in
2005 and $7.8 million in 2004.
In 2005, U.S. Cellulars
consolidated subsidiary, Carroll Wireless, paid $120.9 million to the FCC to
complete the payment for the licenses in which it was the winning bidder in the
FCCs Auction 58. Also, U.S. Cellular purchased one wireless property and
certain minority interests in wireless markets in which it already owned a
controlling interest for $5.2 million in cash. In 2004, net cash received from
the sale of wireless properties in southern Texas to AT&T Wireless totaled
$96.9 million. A working capital adjustment of $0.6 million for cash received
was made on this transaction in the first quarter of 2005. Cash paid for the
acquisition of certain minority interests in several wireless markets in which
U.S. Cellular already owned a controlling interest totaled $40.4 million in
2004. See Acquisitions, Exchanges and Divestitures in the Liquidity and Capital
Resources section for more information on these transactions.
Cash Flows
from Financing Activities
Cash flows from financing
activities required $167.4 million in the nine months ended September 30, 2005,
and provided $94.7 million in 2004. Cash received from short-term borrowing
under TDSs revolving line of credit provided $350.0 million in 2005, and
$355.0 million in 2004, while repayments required $380.0 million in 2005 and
$300.0 million in 2004. Issuances of long-term debt, consisting of $116.25
million of 6.625% notes by TDS provided proceeds after underwriting discounts
of $112.8 million in 2005. Repayments of long-term debt, including RUS debt,
required $258.6 million in 2005. In 2004, U.S. Cellular issued $330 million in
aggregate principal amount of unsecured 7.5% senior notes and $100 million in
aggregate principal amount of unsecured 6.7% senior notes. The $412.5 million
net proceeds from the long-term debt issuances in 2004 were used to redeem U.S.
Cellulars Liquid Yield Option Notes for $163.3 million. The Liquid Yield
Option Notes redemption includes the repayment of principal amount of the
original debt of $95.2 million, presented as an item reducing cash flow from
financing activities, and the payment of $68.1 million of accreted interest,
presented as an item reducing cash flow from operating activities. The balance
of the net proceeds, together with borrowings under the revolving credit
agreement, was used in 2004 to redeem all $250 million of U.S. Cellulars 7.25%
senior notes. TDS treasury shares reissued for stock options exercised and
other benefit plans provided $18.2 million in 2005 and $29.6 million in 2004.
U.S. Cellular treasury shares reissued for stock options exercised and other
benefit plans provided $22.2 million in 2005 and $4.9 million in 2004.
Dividends paid on TDS Common Shares, Special Common Shares and Preferred
Shares, required $30.4 million in 2005 and $28.5 million in 2004.
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There were no TDS Common Share or Special
Common Share repurchases in the nine months ended September 30, 2005. During
the nine months ended September 30, 2004, cash required for the repurchase of
TDS Common Shares totaled $14.9 million. In total, TDS repurchased 214,800
Common Shares for an average price of $69.15 per share including commissions in
2004. An additional $5.6 million was paid in January 2004 to settle repurchases
that occurred at the end of December 2003. In the nine months ended September
30, 2004, U.S. Cellular repurchased 5,100 U.S. Cellular Common Shares under
this authorization for an aggregate purchase price of $204,000, representing an
average per share price of $40.04 including commissions. No U.S. Cellular
Common Shares were repurchased in the nine months ended September 30, 2005. The
repurchase is reported in Other financing activities on the Consolidated
Statement of Cash Flows.
LIQUIDITY AND CAPITAL RESOURCES
TDS generates substantial
internal funds from the operations of U.S. Cellular and TDS Telecom. Cash flows
from operating activities totaled $681.9 million in the first nine months of
2005 compared to $499.2 million in 2004. TDS and its subsidiaries had cash and
cash equivalents totaling $1,084.5 million at September 30, 2005.
TDS believes that cash
flows from operating activities, existing cash and cash equivalents, funds
available from line of credit arrangements and access to long-term debt provide
sufficient financial resources to finance TDSs near-term capital, business
development and expansion expenditures. TDS and its subsidiaries may have
access to public and private capital markets to help meet their long-term financing
needs. TDS and its subsidiaries anticipate accessing public and private capital
markets to issue debt and equity securities when and if capital requirements,
financial market conditions and other factors warrant.
However, the
availability of financial resources is dependent on economic events, business
developments, technological changes, financial conditions or other factors,
many of which are not in TDSs control. If at any time financing is not
available on acceptable terms, TDS might be required to reduce its business
development and capital expenditure plans, which could have a materially
adverse effect on its business and financial condition. TDS cannot provide
assurances that circumstances that could materially adversely affect TDSs
liquidity or capital resources will not occur.
Economic downturns, changes in financial markets or other factors could
affect TDSs availability of liquidity and capital resources. Uncertainty of
access to capital for telecommunications companies, deterioration in the
capital markets, other changes in market conditions or other factors could
limit or restrict the availability of financing on terms and prices acceptable
to TDS, which could require TDS to reduce its construction, development,
acquisition and share repurchase programs.
Revolving
Credit Facilities
TDS has a $600 million
revolving credit facility available for general corporate purposes. At
September 30, 2005, this credit facility had $596.6 million available for use,
net of $3.4 million committed to support outstanding letters of credit. This
credit facility expires in December 2009. Generally, borrowings bear interest
at the London InterBank Offered Rate (LIBOR) plus a contractual spread based
on TDSs credit rating. At September 30, 2005, the contractual spread was 45
basis points (the one-month LIBOR rate was 3.86% at September 30, 2005). Under
certain circumstances, with less than two days notice of intent to borrow,
interest on borrowings are at the prime rate less 50 basis points (the prime
rate was 6.75% at September 30, 2005).
TDS also has $75 million of
direct bank lines of credit at September 30, 2005, all of which were unused.
The terms of the direct lines of credit provide for borrowings at negotiated
rates up to the prime rate.
U.S. Cellular has a $700
million revolving credit facility available for general corporate purposes. At
September 30, 2005, this credit facility had $699.7 million available for use,
net of $0.3 million of outstanding letters of credit. This credit facility
expires in December 2009. Generally, borrowings bear interest at the London
InterBank Offered Rate (LIBOR) plus a contractual spread based on U.S.
Cellulars credit rating. At September 30, 2005, the contractual spread was 45
basis points. Under certain circumstances, with less than two days notice of
intent to borrow, interest on borrowings are at the prime rate less 50 basis
points.
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Since the interest rates applicable to
borrowings under the revolving credit facilities are based in part on TDSs and
U.S. Cellulars credit rating, TDSs and U.S. Cellulars interest costs on such
borrowings could increase if their credit ratings from either Standard &
Poors or Moodys were lowered. However, their credit facilities would not
cease to be available solely as a result of a decline in their credit ratings.
Nevertheless a downgrade in TDSs or U.S. Cellulars credit ratings could
adversely affect their ability to renew existing, or obtain access to new,
credit facilities in the future. Standard & Poors currently rates both TDS
and U.S. Cellular at A- with a negative outlook. A third rating agency, Fitch
Ratings Ltd. currently rates both TDS and U.S. Cellular at BBB+. On July 11, 2005, Moodys Investors Service
downgraded TDS and U.S. Cellular from a Baa1 rating with a negative outlook to
Baa2 with a stable outlook. As a result of the downgrade, the contractual
spread applied to LIBOR in determining the interest rate applicable to the
borrowings under TDS and U.S. Cellular revolving credit facilities increased to
45 basis points from 30 basis points. In addition, the facility fee charged on
the revolving credit agreements increased to 15 basis points from 10 basis
points.
As
disclosed in Note 1 to the Consolidated Financial Statements, TDS and its audit
committee concluded on November 9, 2005 to restate the Consolidated Financial
Statements as of and for the three years ended December 31, 2004 and the first
and second quarters of 2005. In addition, due to the restatement, TDS did not
file this Form 10-Q by the extended due date of November 14, 2005. On
November 10, 2005, Moodys Investors Service downgraded TDS and U.S. Cellular
from a Baa2 rating with a stable outlook to Baa3 and placed the ratings under
review for possible downgrade. The
contractual spread applied to LIBOR in determining the interest rate applicable
to the borrowings under the TDS and U.S. Cellular revolving credit facilities
increased to 60 basis points from 45 basis points. In addition, the facility fee increased to 20
basis points from 15 basis points.
Standard & Poors did not take any ratings actions holding its
rating at A- with a negative outlook and Fitchs put TDS and U.S. Cellular on
Rating Watch Negative and left the ratings unchanged at BBB+.
The
restatement and delay in filing of this Form 10-Q also resulted in defaults
under the revolving credit agreements and one line of credit agreement. TDS and U.S. Cellular were not in violation
of any covenants that require TDS and U.S. Cellular to maintain certain
financial ratios. TDS and U.S. Cellular
did not fail to make any scheduled payments under such credit agreements. TDS and U.S. Cellular received waivers from
the lenders associated with the credit agreements, under which the lenders agreed
to waive any defaults that may have occurred as a result of the restatement and
delay in filing of this Form 10-Q.
On November 9, 2005, TDS, as
Lender, entered into an Intercompany Revolving Credit Agreement (Intercompany
Credit Agreement) with U.S. Cellular, as Borrower. This Intercompany Credit Agreement was
entered into to provide U.S. Cellular with a senior revolving credit facility
for general corporate purposes, including capital expenditures and working
capital. Amounts could be borrowed, repaid
and reborrowed from time to time under the Intercompany Credit Agreement until
such facility matured. The facility was
$105 million and the maturity date was December 23, 2005. As discussed above, U.S. Cellulars $700
million revolving credit facility was in default and U.S. Cellular was unable
to make borrowings thereunder until it obtained waivers from the lenders. Accordingly, TDS and U.S. Cellular entered
into the Intercompany Credit Agreement to permit U.S. Cellular to borrow funds
from TDS temporarily until it received such waivers. Because such waivers were received, this
Intercompany Credit Agreement has terminated according to its terms and all
borrowings and accrued interest were repaid in full on December 23, 2005.
TDS believes that the
Intercompany Credit Agreement included representations and warranties and
events of default that are usual and customary for senior facilities of this
type. TDS also believes that the Intercompany Credit Agreement contained other
terms and conditions that are usual and customary for senior credit facilities
of this type, The Intercompany Credit Agreement included limitations on U.S.
Cellular and its subsidiaries with respect to liens, indebtedness, sales of
assets, consolidations and mergers that are similar to those contained in U.S.
Cellulars $700 million revolving credit facility with unrelated lenders. The
Intercompany Credit Agreement did not have any financial covenants.
U.S. Cellulars Board of
Directors unanimously approved the terms and conditions of the Intercompany
Credit Agreement and determined that such terms and conditions were fair to
U.S. Cellular and all of its shareholders.
TDSs Board of Directors also unanimously approved the terms and
conditions of the Intercompany Credit Agreement and determined that such terms
and conditions were fair to TDS and all of its shareholders.
70
The
pricing terms of the Intercompany Credit Agreement were the same as those under
the Revolving Credit Facility.
Borrowings bore interest at LIBOR plus a contractual spread based on
U.S. Cellulars credit rating. As of November 9, 2005, U.S. Cellulars
borrowing rate for a seven-day loan was 4.52% based on the seven day LIBOR rate
of 4.07% and a contractual spread of 45 basis points. As a result of the
downgrade on November 10, 2005 by Moodys Investors Services, the contractual
spread increased to 60 basis points.
On January 25, 2006, Standard
& Poors placed its ratings of TDS and U.S. Cellular on Credit Watch with
negative implications. The change in ratings did not have an impact on the
contractual spread applied to LIBOR in determining the interest rate applicable
to the borrowings under the TDS and U.S. Cellular revolving credit facilities.
The maturity dates of
borrowings under TDSs and U.S. Cellulars credit facilities would accelerate
in the event of a change in control. The continued availability of the
revolving credit facilities requires TDS and U.S. Cellular to comply with
certain covenants, maintain certain financial ratios and represent certain
matters at the time of each borrowing. As of the date of filing of this Form
10-Q, TDS and U.S. Cellular believe that they are in compliance with all
material covenants and other requirements set forth in their revolving credit
agreements.
Long-term
Financing
On March 31, 2005, TDS issued
$116.25 million in aggregate principal amount of unsecured 6.625% senior notes
due March 31, 2045. Interest on the notes is payable quarterly. TDS may redeem
the notes, in whole or in part, at any time on and after March 31, 2010, at a
redemption price equal to 100% of the principal amount redeemed plus accrued
and unpaid interest to the redemption date. The net proceeds from this
offering, after deducting underwriting discounts, were approximately $112.6
million.
On March 31, 2005, TDS Telecom subsidiaries
repaid approximately $105.6 million in principal amount of notes to the Rural
Utilities Service (RUS) and the Rural Telephone Bank (RTB) plus accrued
interest of $0.6 million. TDS Telecom subsidiaries incurred prepayment costs of
$0.6 million associated with these repayments. Unamortized debt issuance costs
related to the notes totaling $0.1 million were expensed and included in other
income (expense), net in the Statements of Operations. The RUS and RTB debt,
held at individual TDS Telecom incumbent local exchange carriers, had a
weighted average interest rate of 5.5% and a maturity of approximately 12
years.
On June 30, 2005, TDS Telecom subsidiaries
repaid approximately $127.0 million in principal amount of notes to the RUS,
the RTB, and the Federal Financing Bank (FFB), all agencies of the United
States Department of Agriculture, and the Rural Telephone Finance Cooperative (RTFC),
a member-owned, not-for-profit lending cooperative that serves the financial
needs of the rural telecommunications industry. TDS Telecom subsidiaries paid
accrued interest of $0.8 million and additional prepayment costs of $1.2
million associated with these repayments. Unamortized debt issuance costs
related to the notes totaling $0.3 million were expensed and included in other
income (expense), net in the Statements of Operations. The RUS, RTB, FFB and
RTFC debt, held at individual TDS Telecom incumbent local exchange carriers,
had a weighted average interest rate of 6.2% and a maturity of approximately 15
years. TDS determined it was advantageous to repay the RUS, RTB and FFB debt to
reduce administrative costs.
TDS redeemed $17.2 million of medium-term
notes in January and February of 2005 which carried interest rates of 9.25
9.35%.
TDS has reclassified its $200.0
million unsecured 7% senior notes to current portion of long-term debt on the
Consolidated Balance Sheet as the notes are due in August 2006.
TDS Telecom
has in the past obtained financing from the RTB, which is an agency of the
United States of America. In connection with such financings, TDS Telecom
purchased stock in the RTB. TDS Telecom has repaid all of its debt to the RTB,
but continues to own the RTB stock. In August 2005, the board of directors of
the RTB approved resolutions to liquidate and dissolve the RTB, and legislation
that would enable these resolutions was passed by both Houses of Congress and
was signed into law by the President in November 2005. In order to effect the
dissolution and liquidation, shareholders were asked to remit their shares to
receive cash compensation for those shares. TDS Telecom remitted its shares and
received approximately $100 million from the RTB in the second quarter of 2006.
TDS Telecoms book basis in the RTB stock was approximately $9 million.
71
The late filing of this Form
10-Q and the failure to deliver such Form 10-Q to the trustees of the TDS debt
indentures on a timely basis resulted in non-compliance under such debt
indentures. However, this non-compliance did not result in an event of default
or a default and TDS believes that such non-compliance was cured upon the
filing of this Form 10-Q. In addition,
the late filing of the Form 10-Q for the period ended September 30, 2005 by
U.S. Cellular and the failure to deliver such Form 10-Q to the trustees of the
U.S. Cellular debt indentures on a timely basis resulted in non-compliance
under such debt indentures. However, this non-compliance did not result in an
event of default or a default and U.S. Cellular believes that such
non-compliance was cured upon the filing of this Form 10-Q. Neither TDS nor U.S. Cellular has failed to
make nor does it expect to fail to make any scheduled payment of principal or
interest under such indentures.
As of the date of filing this
Form 10-Q, TDS and its subsidiaries believe that they are in compliance with
all material covenants and other requirements set forth in long-term debt
indentures. Such indentures do not contain any provisions resulting in
acceleration of the maturities of outstanding debt in the event of a change in
TDSs credit rating. However, a downgrade in TDSs credit rating could
adversely affect its ability to obtain long-term debt financing in the future.
Marketable
Equity Securities and Forward Contracts
TDS and its subsidiaries hold a
substantial amount of marketable equity securities that are publicly traded and
can have volatile movements in share prices. TDS and its subsidiaries do not
make direct investments in publicly traded companies and all of these interests
were acquired as a result of sales, trades or reorganizations of other assets.
The investment in Deutsche
Telekom AG (Deutsche Telekom) resulted from TDSs
disposition of its over 80%-owned personal communications services operating
subsidiary, Aerial Communications, Inc., to VoiceStream Wireless Corporation (VoiceStream)
in exchange for stock of VoiceStream, which was then acquired by Deutsche
Telekom in exchange for Deutsche Telekom stock. The investment in Vodafone
Group Plc (Vodafone) resulted from certain dispositions of non-strategic
wireless investments to or settlements with AirTouch Communications, Inc. (AirTouch)
in exchange for stock of AirTouch, which was then acquired by Vodafone whereby
TDS and its subsidiaries received American Depositary Receipts representing
Vodafone stock. The investment in VeriSign, Inc. (VeriSign) is the result of
the acquisition by VeriSign of Illuminet, Inc., a telecommunications entity in
which several TDS subsidiaries held interests. The investment in Rural Cellular
Corporation (Rural Cellular) is the result of a consolidation of several
wireless partnerships in which TDS subsidiaries held interests into Rural Cellular,
and the distribution of Rural Cellular stock in exchange for these interests.
TDSs tax basis in these investments is significantly lower than their current
values and, therefore, a sale would trigger a substantial taxable gain.
TDS and its subsidiaries have
entered into a number of forward contracts with counterparties related to the
marketable equity securities that they hold. The forward contracts mature from
May 2007 to September 2008 and, at TDSs and U.S. Cellulars option, may be
settled in shares of the respective securities or cash. TDS and U.S. Cellular
have provided guarantees to the counterparties which provide assurance that all
principal and interest amounts will be paid when due. If shares are delivered
in the settlement of the forward contract, TDS and U.S. Cellular would incur a
current tax liability at the time of delivery based on the difference between
the tax basis of the marketable equity securities delivered and the net amount
realized under the forward contract through maturity. Deferred taxes have been
provided for the difference between the book basis and the tax basis of the
marketable equity securities and are included in deferred tax liabilities on
the Consolidated Balance Sheets. As of September 30, 2005, such deferred tax
liabilities totaled $1,027.5 million.
TDS and U.S. Cellular are
required to comply with certain covenants under the forward contracts. As of
the date of filing of this Form 10-Q, TDS and U.S. Cellular believe that they
are in compliance with all material covenants and other requirements set forth
in the forward contracts.
72
As
disclosed in Note 1 to the Consolidated Financial Statements, TDS and its audit
committee concluded on November 9, 2005 that TDS would amend its Annual Report
on Form 10-K for the year ended December 31, 2004 to restate the financial
statements and financial information for each of the three years ended December
31, 2004, including quarterly information for 2004 and 2003, and certain
selected financial data for the years 2001 and 2000. TDS and its audit committee also concluded
that TDS would amend its Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 2005 and June 30, 2005 to restate the financial
statements and financial information included therewith. The restatement and late filing of this Form
10-Q resulted in defaults under certain of the forward contracts. TDS and U.S. Cellular were not in violation
of any covenants that require TDS and U.S. Cellular to maintain certain
financial ratios. TDS and U.S. Cellular
did not fail to make any scheduled payments under such forward contracts. TDS and U.S. Cellular received waivers from
the counterparty to such forward contracts, under which the counterparty agreed
to waive any defaults that may have occurred as a result of the restatement.
Capital Expenditures
U.S. Cellulars anticipated capital expenditures for 2005 primarily
reflect U.S. Cellulars plans for construction, system and capacity expansion,
the buildout of certain of its licensed areas. U.S. Cellular plans to finance
its construction program using internally generated cash and short-term and
long-term financing. U.S. Cellulars estimated capital spending for 2005 is
currently expected to range from $580 million to $590 million, including any
additional capital spending required to facilitate the commercial launch of its
services in the St. Louis area. Significant capital expenditures were made
prior to 2005 in the St. Louis area to facilitate the provision of service to
roaming customers in that market. U.S. Cellulars capital expenditures for the
nine months ended September 30, 2005 totaled $384.8 million.
U.S. Cellulars 2005 capital expenditures will primarily address the
following needs:
Expand
and enhance U.S. Cellulars coverage in its service areas.
Provide
additional capacity to accommodate increased network usage by current
customers.
Enhance U.S.
Cellulars retail store network and office systems.
TDS Telecoms anticipated capital expenditures for 2005 are currently
expected to range from $130 to $145 million. The incumbent local exchange
carriers are expected to spend approximately $95 to $100 million to upgrade
plant and equipment to provide enhanced services. The competitive local
exchange carrier is expected to spend approximately $25 to $30 million to build
switching and other network facilities to meet the needs of a growing customer
base. TDS Telecoms incumbent local exchange carriers capital expenditures
totaled $60.0 million and the competitive local exchange carriers capital
expenditures totaled $18.7 million for the nine months ended September 30,
2005. TDS Telecom plans to finance its construction program using primarily
internally generated cash.
Acquisitions, Exchanges and Divestitures
TDS reviews attractive opportunities to acquire additional
telecommunications companies and wireless spectrum, which add value to the
business and, thus
may be engaged from time-to-time in negotiations relating to the acquisition of
companies, strategic properties or wireless spectrum. TDS may participate as a bidder, or member of a
bidding group, in auctions administered by the FCC as it did in Auction 58.
Recently, TDS has been selling or trading markets that are not strategic to
long-term success and redeploying capital to markets it believes offer
strategic benefits. TDS may from time-to-time be engaged in negotiations
relating to the disposition or exchange of other non-strategic properties.
U.S.
Cellular owns approximately 14% of Midwest Wireless Communications, LLC, which holds FCC licenses and operates certain
wireless markets in southern Minnesota. This interest is convertible into
approximately an 11% interest in Midwest Wireless Holdings, LLC, a
privately-held wireless telecommunications company that controls Midwest
Wireless Communications. Midwest
Wireless Holdings, through other subsidiaries, also holds FCC licenses and
operates certain wireless markets in northern and eastern Iowa and western
Wisconsin.
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On November 18,
2005, ALLTEL announced that it had entered into a definitive agreement to
acquire Midwest Wireless Holdings for $1.075 billion in cash, subject to
certain conditions, including approval by the FCC, other governmental
authorities and the members of Midwest Wireless Holdings. U.S. Cellular received a letter dated December 15,
2005, from Midwest Wireless Holdings purporting to constitute notice pursuant
to certain tag-along rights and drag-along rights (as defined in the
agreements referred to below) under certain agreements relating to U.S.
Cellulars interest in Midwest Wireless Communications. By letter dated December 30, 2005,
Midwest Wireless Holdings was advised on behalf of U.S. Cellular that U.S.
Cellular is entitled to exercise certain rights of first refusal with respect
to Midwest Wireless Holdings interest in Midwest Wireless Communications and
demanded that Midwest Wireless Holdings take all steps to afford U.S. Cellular
its rights of first refusal. On
January 25, 2006, Midwest Wireless Holdings and Midwest Wireless Communications
filed an answer denying U.S. Cellulars claims, alleging counterclaims of
breach of contract and tortious interference with contractual relations and
asking for declaratory relief and unspecified damages and costs. U.S. Cellular intends to vigorously pursue
its claims and defend all counterclaims.
If U.S.
Cellular is afforded its rights of first refusal, it would be entitled to
acquire 100% of Midwest Wireless Communications and control of the wireless
markets in southern Minnesota presently operated by Midwest Wireless
Communications. The purchase price for
Midwest Wireless Holdings interest in Midwest Wireless Communications would be
established by agreement of the parties, or by a court order. If U.S. Cellular is not afforded its rights
of first refusal, or determined not to exercise such rights once such rights
were afforded to it, U.S. Cellular would be entitled to receive approximately
$100 million in cash in consideration with respect to its interest in Midwest
Wireless Communications upon the closing of the acquisition of Midwest Wireless
Holdings by ALLTEL.
In addition, U.S. Cellular has a 49% interest in an entity accounted
for under the equity method, which has an approximately 2.9% interest in
Midwest Wireless Holdings. If the transaction with ALLTEL occurs, this entity
will receive cash in consideration for its interest in Midwest Wireless
Holdings.
The net
aggregate carrying value of U.S. Cellulars investments in Midwest Wireless
Communications and Midwest Wireless Holdings was approximately $20.0 million at
September 30, 2005.
2005 Activity
On September 12,
2005, U.S. Cellular announced that it had entered into a definitive agreement
with a subsidiary of ALLTEL to exchange certain cellular properties. The
transaction was completed on December 19, 2005. Under the agreement, U.S. Cellular acquired
fifteen Rural Service Area (RSA) markets in Kansas and Nebraska in exchange
for two RSA markets in Idaho and $50 million in cash, subject to working
capital adjustments. U.S. Cellular will
record the transaction in the fourth quarter of 2005 and, subject to the
results of the valuation analysis which is currently underway, expects to
report a pre-tax gain that will increase operating income by approximately $40
- - $45 million. The gain represents the
excess of the estimated fair value of the assets and liabilities received over
the amount of cash and net book value of the assets and liabilities delivered
in the exchange.
In connection with the pending sale, U.S. Cellular reclassified the
assets and liabilities of the properties to be transferred as Assets and
Liabilities of Operations Held for Sale on the Consolidated Balance Sheet as of
September 30, 2005.
U.S. Cellular is a limited partner in Carroll Wireless, L.P. (Carroll
Wireless), an entity which participated in the auction of wireless spectrum
designated by the Federal Communications Commission (FCC) as Auction 58.
Carroll Wireless was qualified to bid on spectrum which was available only to
companies that fall under the FCC definition of designated entities, which
are small businesses that have a limited amount of assets. Carroll Wireless was
a successful bidder for 17 licensed areas in Auction 58, which ended on February 15,
2005. The aggregate amount paid to the FCC for the 17 licenses was $129.9
million, net of all bidding credits to which Carroll Wireless was entitled as a
designated entity. These 17 licensed areas cover portions of 12 states and are
in markets which are either adjacent to or overlap current U.S. Cellular
licensed areas.
On January 6, 2006, the FCC granted Carroll Wireless applications
with respect to 16 of the 17 licenses for which it had been the successful
bidder and dismissed one application, relating to Walla Walla, Washington.
Following the completion of Auction 58, the FCC determined that a portion of
the Walla Walla license was already licensed to another party and should not
have been included in Auction 58. Carroll Wireless expects to receive a full
refund of the $228,000 paid to the FCC with respect to the Walla Walla license.
74
Carroll Wireless is in the process of developing its long-term business
and financing plans. As of September 30, 2005, U.S. Cellular has made
capital contributions and advances to Carroll Wireless and/or its general
partner of $129.9 million to fund the amount deposited with the FCC; this
amount is included in Licenses in the Consolidated Balance Sheet as of September 30,
2005. U.S. Cellular consolidates Carroll Wireless and Carroll PCS, Inc.,
the general partner of Carroll Wireless, for financial reporting purposes,
pursuant to the guidelines of Financial Accounting Standards Board (FASB)
Interpretation No. 46R (FIN 46R), as U.S. Cellular anticipates absorbing
a majority of Carroll Wireless expected gains or losses. Pending finalization
of Carroll Wireless permanent financing plan, and upon request by Carroll
Wireless, U.S. Cellular may agree to make additional capital contributions and
advances to Carroll Wireless and/or its general partner. In November 2005,
U.S. Cellular approved additional funding of up to $1.4 million, of which $0.1
million of funding has been provided to date, for Carroll Wireless and Carroll
PCS.
In the first
quarter of 2005, TDS adjusted the previously reported gain related to its sale
to ALLTEL of certain wireless properties on November 30, 2004. The
adjustment increased the total gain on investment from this transaction by $0.5
million due to a working capital adjustment which was finalized in the first
six months of 2005 related to the entities sold in which TDS previously owned a
noncontrolling investment interest.
In addition, in the first nine months of 2005 U.S. Cellular purchased
one wireless property and certain minority interests in wireless markets in
which it already owned a controlling interest for $5.2 million in cash. These
acquisition costs were allocated among U.S. Cellulars tangible assets,
investments in licenses, goodwill and customer lists.
2004 Activity
On September 23, 2004, U.S. Cellular announced that it had entered
into a definitive agreement to sell its Daytona Beach, Florida 20 MHz C block
personal communications service license to MetroPCS for $8.5 million. In the
nine months ended September 30, 2004, U.S. Cellular recorded a loss on
investments of $1.8 million to reflect impairment in the carrying value of this
license and reclassified the license to Assets of Operations Held for Sale on
the Consolidated Balance Sheet. The transaction closed on December 20,
2004.
On August 4, 2004, TDS and U.S. Cellular announced that they had
entered into definitive agreements with ALLTEL to sell certain wireless
properties. TDS and U.S. Cellular subsidiaries sold three consolidated
properties and six minority interests to ALLTEL for approximately $143 million
in cash, including repayment of debt and working capital that was adjusted in
the first quarter of 2005. TDS reclassified the assets and liabilities of the
properties to be transferred to Assets and Liabilities of Operations Held for
Sale on the Consolidated Balance Sheet as of September 30, 2004. The closing of the transaction occurred on
November 30, 2005.
On February 18, 2004, U.S. Cellular completed the sale of certain
of its wireless properties in southern Texas to AT&T Wireless for $96.9
million in cash, subject to a working capital adjustment. The U.S. Cellular
markets sold to AT&T Wireless included wireless assets and customers in six
cellular markets. An aggregate loss of $21.3 million (including a $22.0 million
estimate of the loss on assets held for sale in the fourth quarter of 2003 and
subsequent $0.1 million and $0.6 million reductions of the loss in the first
and second quarters of 2004, respectively) was recorded as a loss on assets
held for sale (included in operating expenses), representing the difference
between the carrying value of the markets sold to AT&T Wireless and the
cash received in the transaction. The results of operations of the markets sold
to AT&T Wireless were included in results of operations through February 17,
2004.
In addition, in the first nine months of 2004 U.S. Cellular purchased
certain minority interests in several wireless markets in which it already
owned a controlling interest for $40.4 million in cash. These acquisition costs
were allocated among U.S. Cellulars investment in license, goodwill and
customer lists.
Repurchase of Securities and Dividends
In 2003, the Board of Directors of TDS authorized the repurchase of up
to 3.0 million TDS Common Shares through February 2006. As market
conditions warrant, TDS may repurchase Common Shares on the open market or at
negotiated prices in private transactions, at prices approximating then
existing market prices. TDS may use repurchased shares to fund acquisitions and
for other corporate purposes. Currently, TDS does not have a Special Common
Share repurchase program.
75
No TDS Common Shares were repurchased in the nine months ended September 30,
2005. As of September 30, 2005, shares remaining available for repurchase
under this authorization totaled 824,300. In the nine months ended September 30,
2004, TDS repurchased 214,800 Common Shares under this authorization for an
aggregate purchase price of $14.9 million, representing an average per share
price of $69.15, including commissions. An additional $5.6 million was paid in January 2004
to settle repurchases that occurred at the end of December 2003.
U.S. Cellular
has an ongoing authorization to repurchase a limited amount of U.S. Cellular
Common Shares on a quarterly basis, primarily for use in employee benefit
plans. In the nine months ended September 30, 2004, U.S. Cellular
repurchased 5,100 U.S. Cellular Common Shares under this authorization for an
aggregate purchase price of $204,000, representing an average per share price
of $40.04 including commissions. The repurchase is reported in Other financing
activities on the Consolidated Statement of Cash Flows. No U.S. Cellular Common Shares were
repurchased in the first nine months of 2005.
TDS paid total cash dividends on its Common Shares, Special Common
Shares and Preferred Shares of $30.4 million in the first nine months of 2005
and $28.5 million in 2004. TDS paid quarterly cash dividends per share of
$0.0875 in 2005 and $0.0825 in 2004, as adjusted to reflect the stock dividend.
Because the stock dividend of Special Common Shares in the Distribution
discussed below doubled the number of shares of common stock that are
outstanding, following the stock dividend, the TDS Board of Directors
established a quarterly cash dividend on all classes of common stock in an
amount equal to $0.0875 per share, which is one-half of the immediately
preceding quarterly dividend rate. Shareholders of common stock are entitled to
dividends only if declared by the TDS Board of Directors.
Stock Dividend
On February 17, 2005, the TDS Board of Directors unanimously
approved, and on April 11, 2005, the TDS shareholders approved an
amendment (the Amendment) to the Restated Certificate of Incorporation of TDS
to increase the authorized number of Special Common Shares of TDS from
20,000,000 to 165,000,000. Following such approval, the Amendment was filed
with the Secretary of State of Delaware and became effective on April 11,
2005.
On February 17, 2005, the TDS Board of Directors also approved a
distribution of one Special Common Share in the form of a stock dividend with
respect to each outstanding Common Share and Series A Common Share of TDS
(the Distribution), which was effective May 13, 2005 to shareholders of
record on April 29, 2005.
Following effectiveness of the Distribution, at some time in the future
TDS may possibly offer to issue Special Common Shares in exchange for all of
the Common Shares of U.S. Cellular which are not owned by TDS. TDS currently
owns 81.3% of the shares of common stock of U.S. Cellular. A possible U.S.
Cellular transaction would cause U.S. Cellular to become a wholly owned
subsidiary of TDS. TDS has set no time frame for a possible U.S. Cellular
transaction and there are no assurances that a transaction will occur.
Contractual and Other Obligations
Except as described below, there has been no material change in the
resources required for scheduled repayment of obligations from the table of
Contractual and Other Obligations included in the Managements Discussion and
Analysis of Results of Operations and Financial Condition included in TDSs
Annual Report on Form 10-K for the year ended December 31, 2004.
On March 31,
2005, TDS issued $116.25 million in aggregate principal amount of unsecured
6.625% senior notes due March 31, 2045. Interest on the notes is payable
quarterly. TDS may redeem the notes, in whole or in part, at any time on or
after March 31, 2010, at a redemption price equal to 100% of the principal
amount redeemed plus accrued and unpaid interest to the redemption date. The
net proceeds from this offering, after deducting underwriting discounts, were
approximately $112.6 million.
On March 31,
2005, TDS Telecom subsidiaries repaid approximately $105.6 million in principal
amount of notes to the Rural Utilities Service (RUS) and the Rural Telephone
Bank (RTB) plus accrued interest of $0.6 million.
76
On June 30,
2005, TDS Telecom subsidiaries repaid approximately $127.0 million in principal
amount of notes to the RUS, the RTB, and the Federal Financing Bank (FFB),
all agencies of the United States Department of Agriculture, and the Rural
Telephone Finance Cooperative (RTFC), a member-owned, not-for-profit lending
cooperative that serves the financial needs of the rural telecommunications
industry, plus accrued interest of $0.8 million.
TDS redeemed
$17.2 million of medium-term notes in January and February of 2005
which carried interest rates of 9.25 9.35%.
The following table shows the increases and decreases in contractual
and other obligations, as presented in the Annual Report on Form 10-K for
the year ended December 31, 2004, as a result of the debt transactions
described above:
|
|
Changes in Principal Payments
Due by Period
|
|
(Dollars in millions)
|
|
Additional
Long-Term Debt
Obligations
|
|
Weighted-Avg.
Interest Rates on
Additional Long-Term
Debt Obligations
|
|
Long-Term Debt
Principal
Repayments
|
|
Weighted-Avg.
Interest Rates
on Long-Term
Debt Repayments
|
|
Less than 1
year
|
|
$
|
|
|
|
|
$
|
(29.2
|
)
|
7.9
|
%
|
2 3 years
|
|
|
|
|
|
(39.5
|
)
|
5.9
|
%
|
4 5 years
|
|
|
|
|
|
(37.2
|
)
|
5.9
|
%
|
More than 5
Years
|
|
116.25
|
|
6.625
|
%
|
(143.9
|
)
|
5.8
|
%
|
Total
|
|
$
|
116.25
|
|
6.625
|
%
|
$
|
(249.8
|
)
|
6.1
|
%
|
Off-Balance Sheet Arrangements
TDS has no transactions, agreements or contractual arrangements with
unconsolidated entities involving off-balance sheet arrangements, as defined
by SEC rules, that have or are reasonably likely to have a material current or
future effect on financial condition, changes in financial condition, results
of operations, liquidity, capital expenditures, capital resources, revenues or
expenses.
TDS has certain variable interests in investments in unconsolidated
entities where TDS holds a minority interest. The investments in unconsolidated
entities totaled $223.8 million as of September 30, 2005 and are accounted
for using either the equity or cost method. TDSs maximum loss exposure for
these variable interests is limited to the aggregate carrying amount of the
investments.
Indemnity Agreements. TDS
enters into agreements in the normal course of business that provide for
indemnification of counterparties. These include certain asset sales and
financings with other parties. The terms of the indemnifications vary by
agreement. The events or circumstances that would require TDS to perform under
these indemnities are transaction specific; however, these agreements may
require TDS to indemnify the counterparty for costs and losses incurred from
litigation or claims arising from the underlying transaction. TDS is unable to
estimate the maximum potential liability for these types of indemnifications as
the amounts are dependent on the outcome of future events, the nature and
likelihood of which cannot be determined at this time. Historically, TDS has
not made any significant indemnification payments under such agreements. TDS is
party to an indemnity agreement with T-Mobile regarding certain contingent
liabilities at Aerial Communications for the period prior to Aerials merger
into VoiceStream Wireless. In 2005, TDS paid $7.1 million on behalf of Aerial.
As of September 30, 2005, TDS had a liability balance of $4.3 million
relating to this indemnity.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
TDS prepares its consolidated financial statement in accordance with
accounting principles generally accepted in the United States of America (U.S.
GAAP). TDSs significant accounting policies are discussed in detail in Note 1
to the consolidated financial statements included in its Annual Report on Form 10-K/A
for the year ended December 31, 2004.
77
The preparation of financial statements in accordance with U.S. GAAP
requires TDS to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. TDS bases its estimates on historical
experience and on various other assumptions and information that are believed
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities.
Actual results may differ from estimates under different assumptions or
conditions.
TDS believes the following critical accounting estimates reflect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements. TDSs senior management has discussed the
development and selection of each of the following accounting policies and
estimates and the following disclosures with the audit committee of TDSs Board
of Directors.
Licenses and Goodwill
At September 30, 2005, TDS reported $1,340.5 million of licenses
and $840.9 million of goodwill, as a result of acquisitions of wireless
licenses and markets, and acquisitions of operating telephone companies.
Licenses include those won by Carroll Wireless in the FCC auction completed in February 2005
and license rights related to licenses that will be received when the 2003
AT&T Wireless exchange transaction is fully completed. See footnote 2 to
U.S. Cellulars Summary of Holdings in Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Licenses and goodwill must be reviewed for impairment annually or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. TDS performs the annual impairment review on licenses and goodwill
during the second quarter. There can be no assurance that upon review at a
later date material impairment charges will not be required.
The intangible asset impairment test consists of comparing the fair
value of the intangible asset to the carrying amount of the intangible asset.
If the carrying amount exceeds the fair value, an impairment loss is recognized
for the difference. The goodwill impairment test is a two-step process. The
first step compares the fair value of the reporting unit, as identified in
accordance with SFAS No. 142, to its carrying value. If the carrying
amount exceeds the fair value, the second step of the test is performed to
measure the amount of impairment loss, if any. The second step compares the
implied fair value of reporting unit goodwill with the carrying amount of that
goodwill. To calculate the implied fair value of goodwill, an enterprise
allocates the fair value of the reporting unit to all of the assets and
liabilities of that reporting unit (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination
and the fair value was the price paid to acquire the reporting unit. The excess
of the fair value of the reporting unit over the amounts assigned to the assets
and liabilities of the reporting unit is the implied fair value of goodwill. If
the carrying amount exceeds the implied fair value, an impairment loss is
recognized for that difference.
The fair value of an intangible asset and reporting unit goodwill is
the amount at which that asset or reporting unit could be bought or sold in a
current transaction between willing parties. Therefore, quoted market prices in
active markets are the best evidence of fair value and should be used when
available. If quoted market prices are not available, the estimate of fair
value is based on the best information available, including prices for similar
assets and the use of other valuation techniques. Other valuation techniques
include present value analysis, multiples of earnings or revenue or a similar
performance measure. The use of these techniques involves assumptions by TDS
about factors that are highly uncertain including future cash flows, the
appropriate discount rate and other inputs. Different assumptions for these
inputs or valuation methodologies could create materially different results.
U.S. Cellular tests goodwill for impairment at the level of reporting
referred to as a reporting unit. U.S. Cellular has identified five reporting
units pursuant to paragraph 30 of SFAS No. 142, Goodwill and Other
Intangible Assets. The five reporting units represent five geographic
groupings of FCC licenses, constituting five geographic service areas. U.S.
Cellular combines its FCC licenses into five units of accounting for purposes
of testing the licenses for impairment pursuant to Emerging Issues Task Force
Issue 02-7, Unit of Accounting for Testing Impairment of Indefinite-Lived
Intangible Assets (EITF 02-7), and SFAS No. 142, using the same
geographic groupings as its reporting units.
78
U.S. Cellular prepares valuations of each of the reporting units for
purposes of goodwill impairment testing. A discounted cash flow approach is
used to value each of the reporting units, using value drivers and risks
specific to each individual geographic region. The cash flow estimates
incorporate assumptions that market participants would use in their estimates
of fair value. Key assumptions made in this process are the selection of a
discount rate, estimated future cash flow levels, projected capital
expenditures and selection of terminal value multiples.
U.S. Cellular also prepares valuations of similar groupings of FCC
licenses (units of accounting pursuant to EITF 02-7) using an excess earnings
methodology, through the use of a discounted cash flow approach. This excess
earnings methodology estimates the fair value of the intangible assets (FCC
license units of accounting) by measuring the future cash flows of the license
groups, reduced by charges for contributory assets such as working capital,
trademarks, existing subscribers, fixed assets, assembled workforce and
goodwill.
TDS Telecom has recorded goodwill primarily as a result of the
acquisition of operating telephone companies. TDS Telecom has assigned goodwill
to its incumbent local exchange carrier reporting unit. This goodwill was
valued using a multiple of cash flow valuation technique.
The annual impairment tests for investments in licenses and goodwill
were performed by U.S. Cellular and TDS Telecom in the second quarter of 2005
and 2004. There was no impairment loss as a result of the 2005 impairment
testing. In the second quarter of 2004, an impairment loss of $1.8 million was
recorded related to a non-operating wireless license in Florida that was sold
in December 2004.
TDS Telecom concluded at the end of 2004 that all of the goodwill
associated with the competitive local exchange carrier operations was impaired
and also recorded a loss on impairment of intangible assets of $29.4 million.
Asset Retirement Obligations
SFAS No. 143, Accounting for Asset Retirement Obligations,
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 retire the asset and the liability recorded is
recognized in the Consolidated Statements of Operations as a gain or loss.
The calculation of the asset retirement obligation for TDS is a
critical accounting estimate because changing the factors used in calculating
the obligation could result in larger or smaller estimated obligations that
could have a significant impact on TDSs results of operations and financial
condition. Such factors may include probabilities or likelihood of remediation,
cost estimates, lease renewals and salvage values. Actual results may differ
materially from estimates under different assumptions or conditions.
U.S. Cellular is subject to asset retirement obligations associated
primarily with its cell sites, retail sites and office locations. Asset
retirement obligations include costs to remediate leased land on which U.S.
Cellulars cell sites and switching offices are located. U.S. Cellular is also
required to return leased 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 No. 143, and has recorded a $80.1 million liability,
included in other deferred liabilities and credits in the Consolidated Balance
Sheet, at September 30, 2005.
During the second quarter of 2005, U.S. Cellular reviewed the
assumptions related to its asset retirement obligations and made certain
changes to those assumptions as a result. Such changes did not have a material
impact on U.S. Cellulars financial condition or results of operations.
79
TDS Telecoms
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 FCC, and where
applicable, accounting principles generally accepted in the United States of
America. TDS Telecoms incumbent local telephone carriers have recorded an
asset retirement obligation in accordance with the requirements of SFAS No. 143
and a regulatory liability for the amounts of costs of removal that state
public utility commissions have required to be recorded for regulatory
accounting purposes which are in excess of the amounts required to be recorded
in accordance with SFAS No. 143. These amounts combined make up TDS
Telecoms asset retirement obligation amounts included in other deferred
liabilities and credits on the Consolidated Balance Sheets. The asset
retirement obligation calculated in accordance with the provisions of SFAS No. 143
at September 30, 2005 was $35.4 million. The regulatory liability in
excess of the amounts required to be recorded in accordance with SFAS No. 143
at September 30, 2005 was $33.3 million.
TDS is currently reviewing the requirements of FASB Interpretation No. 47
Accounting for Conditional Asset Retirement Obligations and expects to record
an asset retirement obligation in the fourth quarter of 2005 for TDS Telecoms
competitive local exchange carrier.
The table
below summarizes the changes in asset retirement obligations during the first
nine months of 2005.
|
|
U.S.
Cellular
|
|
TDS
Telecom
|
|
TDS
Consolidated
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Beginning
Balance December 31, 2004
|
|
$
|
72,575
|
|
$
|
65,000
|
|
$
|
137,575
|
|
Additional
liabilities accrued
|
|
4,701
|
|
4,253
|
|
8,954
|
|
Assets of
operations held for sale (1)
|
|
(1,925
|
)
|
|
|
(1,925
|
)
|
Accretion
expense
|
|
4,733
|
|
|
|
4,733
|
|
Costs of
removal incurred in 2005
|
|
|
|
(613
|
)
|
(613
|
)
|
Ending
Balance September 30, 2005
|
|
$
|
80,084
|
|
$
|
68,640
|
|
$
|
148,724
|
|
(1) Reclassified to Liabilities of operations held for sale as a result of
agreement with ALLTEL in 2005, as described in Note 18 of the Consolidated
Financial Statements included in this Form 10-Q.
Income Taxes
The accounting for income taxes, the amounts of income tax assets and
liabilities and the related income tax provision are critical accounting
estimates because such amounts are significant to TDSs financial condition,
changes in financial condition and results of operations.
The preparation of the consolidated financial statements requires TDS
to calculate a provision for income taxes. This process involves estimating the
actual current income tax liability together with assessing temporary
differences resulting from the different treatment of items, such as depreciation
expense, for financial statement and tax purposes. These temporary differences
result in deferred tax assets and liabilities, which are included within the
Consolidated Balance Sheets. TDS must then assess the likelihood that deferred
tax assets will be recovered from future taxable income and to the extent TDS
believes that recovery is not likely, establish a valuation allowance. Judgment
is required in determining the provision for income taxes, deferred tax assets
and liabilities and any valuation allowance recorded against deferred tax
assets. TDSs current net deferred tax asset totaled $18.6 million, and $43.9
million, as of September 30, 2005 and December 31, 2004,
respectively. The net current deferred tax asset primarily represents the deferred
tax effects of federal net operating loss carryforwards expected to be utilized
in the next twelve months and the allowance for doubtful accounts on accounts
receivable.
80
The temporary differences that gave rise to the noncurrent deferred tax
assets and liabilities as of September 30, 2005 and December 31, 2004
are as follows:
|
|
September 30,
2005
|
|
December 31,
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Deferred Tax Asset noncurrent
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
65,642
|
|
$
|
61,977
|
|
Derivative instruments
|
|
279,491
|
|
487,216
|
|
Other
|
|
19,978
|
|
38,815
|
|
|
|
365,111
|
|
588,008
|
|
Less valuation allowance
|
|
(59,607
|
)
|
(55,305
|
)
|
Total Deferred Tax Asset
|
|
305,504
|
|
532,703
|
|
|
|
|
|
|
|
Deferred Tax
Liability noncurrent
|
|
|
|
|
|
Property, plant and equipment
|
|
386,471
|
|
428,355
|
|
Licenses
|
|
229,147
|
|
241,699
|
|
Marketable equity securities
|
|
1,027,468
|
|
1,284,872
|
|
Partnership investments
|
|
79,970
|
|
66,432
|
|
Total
Deferred Tax Liability
|
|
1,723,056
|
|
2,021,358
|
|
Net Deferred Income Tax Liability
|
|
$
|
1,417,552
|
|
$
|
1,488,655
|
|
|
|
|
|
|
|
|
|
|
|
State net operating loss carryforwards are available to offset future
taxable income primarily of the individual subsidiaries which generated the
losses. Certain subsidiaries that are not included in the federal consolidated
income tax return, but file separate federal tax returns, had federal net
operating loss carryforwards available to offset future taxable income. A
valuation allowance was established for a portion of the state and federal net
operating loss carryforwards since it is more likely than not a portion of such
carryforwards will expire before they can be utilized.
The deferred income tax liability relating to marketable equity
securities totaled $1,027.5 million, and $1,284.9 million, as of September 30,
2005 and December 31, 2004, respectively. These amounts represent deferred
income taxes calculated on the difference between the book basis and the tax
basis of the marketable equity securities. Income taxes will be payable when
TDS disposes of the marketable equity securities.
TDS is routinely subject to examination of its income tax returns by
the Internal Revenue Service (IRS) and other tax authorities. TDS
periodically assesses the likelihood of adjustments to its tax liabilities
resulting from these examinations to determine the adequacy of its provision
for income taxes, including related interest. Judgment is required in assessing
the eventual outcome of these examinations. Changes to such assessments affect
the calculation of TDSs income tax expense in the period such a change is
made. The IRS recently concluded its examination of TDSs federal income tax
returns for 1997 through 2001 and claims for research tax credits for 1995
through 2001. As a result, TDS paid an additional $6.1 million tax liability to
the IRS in October 2005. This amount was recorded in Accrued taxes on the
Consolidated Balance Sheet as of September 30, 2005.
In the event of an increase in the value of tax assets or a decrease in
tax liabilities, TDS would decrease the income tax expense or increase the
income tax benefit by an equivalent amount. In the event of a decrease in the
value of tax assets or an increase in tax liabilities, TDS would increase the
income tax expense or decrease the income tax benefit by an equivalent amount.
Property, Plant and Equipment
U.S. Cellular and TDS Telecoms competitive local exchange carrier
operations provide for depreciation using the straight-line method over the
estimated useful lives of the assets. TDS Telecoms incumbent local exchange
carrier operations provide for depreciation on a group basis according to
depreciable rates approved by state public utility commissions. Annually, U.S.
Cellular and TDS Telecom review their property, plant and equipment lives to
ensure that the estimated useful lives are appropriate. The estimated useful
lives of property, plant and equipment are critical accounting estimates
because changing the lives of assets can result in larger or smaller charges
for depreciation expense. Factors used in determining useful lives include
technology changes, regulatory requirements, obsolescence and type of use.
81
In the first quarter of 2004, U.S. Cellular adjusted the useful lives
of TDMA radio equipment, switch software and antenna equipment. TDMA radio
equipment lives were adjusted to be fully depreciated by the end of 2008, which
is the latest date the wireless industry will be required by regulation to support
analog service. U.S. Cellular currently uses TDMA radio equipment to support
analog service, and expects to have substantially all of its digital radio
network fully migrated to CDMA 1XRTT or some future generation of CDMA
technology by that time with only a limited amount of TDMA radio equipment
expected to be in service beyond 2008. The useful lives for certain switch
software were reduced to one year from three years and antenna equipment lives
were reduced from eight years to seven years in order to better align the
useful lives with the actual length of time the assets are in use.
TDS Telecom
did not change the useful lives of its property, plant and equipment in 2005 or
2004.
TDS
periodically evaluates potential impairment of its long-lived assets, including
property, plant and equipment, in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. If indicators of
impairment exist and the amount of impairment is quantifiable, TDS would write
down the net book value of its long lived assets to the determined fair market
value with the difference recorded as a loss in the Consolidated Statements of
Operations. TDS reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount may not be fully recoverable.
The tangible asset impairment test is a two-step process. The first step
compares the carrying value of the assets with the undiscounted cash flows over
the remaining asset life. If the carrying value of the assets is greater than
the undiscounted cash flow, the second step of the test is performed to measure
the amount of impairment loss. The second step compares the estimated fair
value of the assets to the carrying value of the assets. An impairment loss is
recognized for the difference between the fair value of the assets (less costs
to sell) and the carrying value of the assets.
The fair value
of a tangible asset is the amount at which that asset could be bought or sold
in a current transaction between willing parties. Therefore, quoted market
prices in active markets are the best evidence of fair value and should be used
when available. If quoted market prices are not available, the estimate of fair
value is based on the best information available, including prices for similar
assets and the use of other valuation techniques. A present value analysis of
cash flow scenarios is often the best available valuation technique with which
to estimate the fair value of the long-lived asset. The use of this technique
involves assumptions by management about factors that are highly uncertain
including future cash flows, the appropriate discount rate, and other inputs.
Different assumptions for these inputs or valuation methodologies could create
materially different results.
Other
valuation techniques include a market approach and income approach. The market
approach compares the asset group to similar companies whose securities are
actively traded. Ratios or multiples of value relative to certain significant
financial measures, such as revenue and earnings, are developed based upon the
comparable companies. The valuation multiples are applied to the appropriate
financial measures of the asset group to indicate its value. The income
approach uses a discounted cash flow analysis based on value drivers and risks
specific to its asset group. The cash flow estimates incorporate assumptions
that market participants would use in their estimates of fair value. Key
assumptions made in this process are the selection of a discount rate, estimated
future cash flow levels, projected capital expenditures, and determination of
terminal value. TDS Telecom concluded at the end of 2004 that it had an
impairment of CLEC long-lived assets and recorded a loss on impairment of
long-lived assets of $87.9 million.
Contingencies, Indemnities and Commitments
Contingent obligations, including
indemnities, litigation and other possible commitments are accounted for in
accordance with SFAS No. 5, Accounting for Contingencies, which requires
that an estimated loss be recorded if it is probable that an asset has been
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accordingly,
those contingencies that are deemed to be probable and where the amount of such
settlement is reasonably estimable are accrued in the financial statements. If
only a range of loss can be determined, the best estimate within that range is
accrued; if none of the estimates within that range is better than another, the
low end of the range is accrued. Disclosure of a contingency is required if
there is at least a reasonable possibility that a loss has been or will be
incurred, even if the amount is not estimable. The assessment of contingencies
is a highly subjective process that requires judgments about future events.
Contingencies are reviewed at least quarterly to determine the adequacy of the
accruals and related financial statement disclosure. The ultimate settlement of
contingencies may differ materially from amounts accrued in the financial
statements.
82
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The following persons are partners of Sidley Austin LLP, the principal
law firm of TDS and its subsidiaries:
Walter C.D. Carlson, a trustee and beneficiary of a voting trust that
controls TDS, the non-executive chairman of the board and member of the board
of directors of TDS and a director of U.S. Cellular, a subsidiary of TDS;
William S. DeCarlo, the General Counsel of TDS and an Assistant Secretary of
TDS and certain subsidiaries of TDS; and Stephen P. Fitzell, the General
Counsel and/or an Assistant Secretary of U.S. Cellular and certain subsidiaries
of TDS. Walter C.D. Carlson does not provide legal services to TDS or its
subsidiaries.
83
PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This Managements Discussion and Analysis of Financial Condition and
Results of Operations 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 the following:
Increases in the level of competition in the markets in which TDS
operates, or wireless for wireline substitution, could adversely affect TDSs
revenues or increase its costs to compete.
Consolidation in the wireless industry may create stronger competitors
both operationally and financially which could adversely affect TDSs revenues
and increase its costs to compete.
Consolidation of long distance carriers could result in TDS having to
pay more for long distance services which could increase TDSs cost of doing
business.
Advances or changes in telecommunications technology, such as Voice
over Internet Protocol, could render certain technologies used by TDS obsolete,
could reduce TDSs revenues or could increase TDSs cost of doing business.
Changes in the telecommunications regulatory environment, or a failure
to timely or fully comply with any regulatory requirements, such as local
number portability and E-911 services, could adversely affect TDSs financial
condition, results of operations or ability to do business.
Changes in the telecommunications regulatory environment, including the
effects of potential changes in the rules governing universal service and
eligible telecommunications carrier funding and potential changes in the
amounts or methods of intercarrier compensation, could have an adverse effect
on TDSs financial condition, results of operations or cash flows.
Changes in TDSs enterprise value, changes in the supply or demand of
the market for wireless licenses or telephone companies, adverse developments
in the TDS businesses or the industries in which TDS is involved and/or other
factors could require TDS to recognize impairments in the carrying value of TDSs
license costs, goodwill and/or physical assets.
Early redemptions of debt or repurchases of debt, issuance of debt,
changes in forward contracts, changes in operating leases, changes in purchase
obligations or other factors or developments could cause the amounts reported
under Contractual Obligations in TDSs Annual Report on Form 10-K for the
year ended December 31, 2004, as updated by this Quarterly Report on Form 10-Q
to be different from the amounts presented.
Changes in accounting standards or TDSs accounting policies, estimates
and/or in the assumptions underlying the accounting estimates, including those
described under Application of Critical Accounting Policies and Estimates,
could have an adverse effect on TDSs financial condition or results of
operations.
Settlements, judgments, restraints on its current or future manner of
doing business and/or legal costs resulting from pending and future litigation
could have an adverse effect on TDSs financial condition, results of
operations or ability to do business.
Costs, integration problems or other factors associated with
acquisitions/divestitures of properties and/or licenses could have an adverse
effect on TDSs financial condition or results of operations.
Changes in prices, the number of customers, average revenue per unit,
penetration rates, churn rates, selling expenses, net customer retention costs,
customers choosing local number portability, roaming rates, access minutes of
use, the mix of products and services offered or other business factors could
have an adverse effect on TDSs business, financial condition or results of
operations.
Changes in roaming partners rates for voice and data services and the
lack of standards and roaming agreements for wireless data products could place
U.S. Cellulars service offerings at a disadvantage to those offered by other
wireless carriers with more nationwide service territories, and could have an
adverse effect on TDSs business, financial condition or results of operations.
Changes in access to content for data or video services and in access
to new handsets being developed by vendors could have an adverse effect on TDSs
financial condition or results of operations.
Changes in agreements with carriers, including video carriers that TDS
depends upon to provide packages or a wide range of services could have an
adverse effect on TDSs business, financial condition or results of operations.
84
Changes in competitive
factors with national and global wireless carriers could result in product and
cost disadvantages and could have an adverse effect on TDSs operations.
Changes in guidance or interpretations of accounting requirements,
changes in industry practice or changes in management assumptions could require
amendments to or restatements of financial information or disclosures included
in this or prior filings with the SEC.
Uncertainty of access to capital for telecommunications companies,
deterioration in the capital markets, other changes in market conditions,
changes in TDSs credit ratings or other factors could limit or restrict the
availability of financing on terms and prices acceptable to TDS, which could
require TDS to reduce its construction, development and acquisition programs.
Changes in income tax rates, tax laws, regulations or rulings, or
federal and state tax assessments could have an adverse effect on TDSs
financial condition or results of operations.
War, conflicts, hostilities, terrorist attacks and/or natural disasters
could have an adverse effect on TDSs businesses.
Changes in general economic and business conditions, both nationally
and in the markets in which TDS operates, including difficulties by
telecommunications companies, could have an adverse effect on TDSs businesses.
Changes in facts or circumstances, including new or additional
information that affects the calculation of investment income from unconsolidated
subsidiaries, accrued liabilities for contingent obligations under guarantees,
indemnities or otherwise, could require TDS to record charges in excess of
amounts accrued on the financial statements, if any, which could have an
adverse effect on TDSs financial condition or results of operations.
A material weakness in the
effectiveness of internal control over financial reporting could result in
inaccurate financial statements or other disclosures or permit fraud, which
could have an adverse effect on TDSs business, financial condition or results
of operations or access to capital markets. Assurances cannot be provided as to
when such material weaknesses disclosed herein will be remediated.
The possible development of adverse precedent in litigation or
conclusions in professional studies to the effect that radio frequency
emissions from handsets, wireless data devices and/or cell sites cause harmful
health consequences, including cancer or tumors, or may interfere with various
electronic medical devices such as pacemakers, could have an adverse effect on
TDSs wireless business operations, TDSs financial condition or results of
operations.
Any of the foregoing events or other events could cause revenues,
customer additions, operating income, capital expenditures and or any other
financial or statistical information to vary from TDSs forward estimates
included in this report by a material amount.
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.
85
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Long-term Debt
TDS is subject to market risks due to fluctuations in interest rates
and equity markets. The majority of TDSs debt, excluding long-term debt
related to the forward contracts, is in the form of long-term, fixed-rate notes
with original maturities ranging up to 40 years. Accordingly, fluctuations in
interest rates can lead to significant fluctuations in the fair value of such
instruments. The long-term debt related to the forward contracts consists of
both variable-rate debt and fixed-rate zero coupon debt. The variable-rate
forward contracts require quarterly interest payments that are dependent on
market interest rates. Increases in interest rates will result in increased
interest expense. As of September 30, 2005, TDS had not entered into any
significant financial derivatives to reduce its exposure to interest rate
risks.
Reference is made to the disclosure under Market Risk Long Term Debt
in TDSs Annual Report on Form 10-K/A for the year ended December 31,
2004, for additional information about the annual requirements of principal
payments, the average interest rates, and the estimated fair values of
long-term debt.
On March 31,
2005, TDS issued $116.25 million in aggregate principal amount of unsecured
6.625% senior notes due March 31, 2045. Interest on the notes is payable
quarterly. TDS may redeem the notes, in whole or in part, at any time on and
after March 31, 2010, at a redemption price equal to 100% of the principal
amount redeemed plus accrued and unpaid interest to the redemption date. The
net proceeds from this offering, after deducting underwriting discounts, were
approximately $112.6 million.
TDS Telecom
subsidiaries repaid notes with the Rural Utilities Service (RUS) and the
Rural Telephone Bank (RTB) totaling $105.6 million on March 31, 2005.
TDS Telecom subsidiaries also paid accrued interest of $0.6 million and
incurred prepayment costs of $0.6 million associated with these repayments. On June 30, 2005, TDS Telecom
subsidiaries repaid approximately $127.0 million in principal amount of notes
to the RUS, the RTB, the Federal Financing Bank (FFB) and the Rural Telephone
Finance Cooperative (RTFC). Interest paid with this repayment totaled $0.8
million and incurred prepayment costs of $1.2 million. The RUS, RTB and FFB are
agencies of the United States Department of Agriculture, and the RTFC is a
member-owned, not-for-profit lending cooperative that serves the financial
needs of the rural telecommunications industry.
TDS redeemed
$17.2 million of medium-term notes in January and February of 2005
which carried interest rates of 9.25 9.35%.
The following
table shows the changes in the annual requirements for principal payments on
such 2005 long-term debt transactions:
|
|
Changes in Principal Payments
Due by Period
|
|
(Dollars in millions)
|
|
Additional Long-Term
Debt Obligations
|
|
Weighted-Avg.
Interest Rates on
Additional Long-Term
Debt Obligations
|
|
Long-Term Debt
Principal
Repayments
|
|
Weighted-Avg.
Interest Rates on
Long-Term Debt
Repayments
|
|
2005
|
|
$
|
|
|
|
|
$
|
(29.2
|
)
|
7.9
|
%
|
2006
|
|
|
|
|
|
(19.5
|
)
|
5.9
|
%
|
2007
|
|
|
|
|
|
(20.0
|
)
|
5.9
|
%
|
2008
|
|
|
|
|
|
(19.5
|
)
|
5.9
|
%
|
2009
|
|
|
|
|
|
(17.7
|
)
|
5.9
|
%
|
After 5
Years
|
|
116.25
|
|
6.625
|
%
|
(143.9
|
)
|
5.8
|
%
|
Total
|
|
$
|
116.25
|
|
6.625
|
%
|
$
|
(249.8
|
)
|
6.1
|
%
|
86
Marketable
Equity Securities and Derivatives
TDS currently
holds a portfolio of available-for-sale marketable equity securities, the
majority of which are the result of sales or trades of non-strategic assets.
The market value of these investments aggregated $2,797.2 million at September 30,
2005. As of September 30, 2005, the net unrealized holding gain, net of
tax and minority interest included in Accumulated other comprehensive income in
the Consolidated Balance Sheet totaled $747.4 million.
A subsidiary
of TDS and U.S. Cellular has entered into forward contracts related to the
marketable equity securities that they hold. TDS and U.S. Cellular have the
counterparties with guarantees which provide assurance to the counterparties
that all principal and interest amounts will be when due. 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 (downside limit) while retaining a share of gains from increases
in the market prices of such securities (upside potential). The downside
limit is hedged at or above the cost basis thereby eliminating the risk of an
other than temporary loss being recorded on these contracted securities.
Under the
terms of the forward contracts, subsidiaries of TDS and U.S. Cellular continue
to own the contracted shares and will receive dividends paid on such contracted
shares, if any. The forward contracts mature from May 2007 to September 2008
and, at TDSs and U.S. Cellulars option, may be settled in shares of the
respective security or in cash, pursuant to formulas that collar the price of
the shares. The collars effectively limit downside risk and upside potential on
the contracted shares. The collars are typically adjusted for any changes in
dividends on the contracted shares. If the dividend increases above the
dividends assumed in the contracts, the collars upside potential is typically
reduced. If the dividend decreases, the collars upside potential is typically
increased. If TDS and U.S. Cellular elect to settle in shares, they will be
required to deliver the number of shares of the contracted security determined
pursuant to the formula. If shares are delivered in the settlement of the
forward contract, TDS and U.S. Cellular would incur a current tax liability at
the time of delivery based on the difference between the tax basis of the
marketable equity securities delivered and the net amount realized under the
forward contract through maturity. If TDS and U.S. Cellular elect to settle in
cash they will be required to pay an amount in cash equal to the fair market
value of the number of shares determined pursuant to the formula. If cash is
delivered in the settlement of the forward contract, TDS and U.S. Cellular
would incur a current tax liability or a deferred tax benefit, based on the
difference between the amount of cash paid in the settlement and the net amount
realized through maturity.
Deferred taxes
have been provided for the difference between the carrying value and the income
tax basis of the marketable equity securities and are included in deferred tax
liabilities on the Consolidated Balance Sheets. Such deferred tax liabilities
totaled $1,027.5 million at September 30, 2005.
The following
table summarizes certain details surrounding the contracted securities as of September 30,
2005.
|
|
|
|
Collar (1)
|
|
|
|
Security
|
|
Shares
|
|
Downside
Limit
(Floor)
|
|
Upside
Potential
(Ceiling)
|
|
Loan
Amount
|
|
|
|
|
|
|
|
|
|
(000s)
|
|
|
|
|
|
|
|
|
|
|
|
VeriSign
|
|
2,361,333
|
|
$8.82
|
|
$11.46
|
|
$
|
20,819
|
|
Vodafone (2)
|
|
12,945,915
|
|
$15.07 -
$16.07
|
|
$18.76 -
$21.44
|
|
201,038
|
|
Deutsche
Telekom
|
|
131,461,861
|
|
$10.74 -
$12.41
|
|
$13.68 -
$16.37
|
|
1,532,257
|
|
|
|
|
|
|
|
|
|
1,754,114
|
|
Unamortized
debt discount
|
|
|
|
|
|
|
|
51,314
|
|
|
|
|
|
|
|
|
|
$
|
1,702,800
|
|
(1) The per share amounts
represent the range of floor and ceiling prices of all securities monetized.
(2) U.S. Cellular owns 10.2
million and TDS Telecom owns 2.7 million Vodafone American Depositary Receipts.
87
The following
analysis presents the hypothetical change in the fair value of marketable
equity securities and derivative instruments at September 30, 2005, using
the Black-Scholes model, assuming hypothetical price fluctuations of plus and
minus 10%, 20% and 30%. The table presents hypothetical information as required
by SEC rules. TDS has no intention of selling any marketable equity securities
or canceling any derivative instruments at this time.
|
|
Valuation of investments
assuming
indicated decrease
|
|
September
30, 2005
|
|
Valuation of investments
assuming
indicated increase
|
|
(Dollars in millions)
|
|
-30%
|
|
-20%
|
|
-10%
|
|
Fair Value
|
|
+10%
|
|
+20%
|
|
+30%
|
|
Marketable
Equity Securities
|
|
1,958.0
|
|
2,237.8
|
|
2,517.5
|
|
2,797.2
|
|
3,076.9
|
|
3,356.6
|
|
3,636.4
|
|
Derivative Instruments(1)
|
|
$
|
(8.9
|
)
|
$
|
(221.0
|
)
|
$
|
(438.6
|
)
|
$
|
(686.3
|
)
|
$
|
(945.1
|
)
|
$
|
(1,210.5
|
)
|
$
|
(1,481.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents the fair
value of the derivative instruments assuming the indicated increase or decrease
in the underlying securities.
88
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of
Disclosure Controls and Procedures.
TDS maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) that are designed to ensure that information required to be disclosed in
its reports filed or submitted under the Exchange Act is processed, recorded,
summarized and reported within the time periods specified in the SECs rules and
forms, and that such information is accumulated and communicated to TDSs
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
As required by SEC Rule 13a-15(b), TDS carried out an evaluation,
under the supervision and with the participation of management, including its
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of TDSs disclosure controls and procedures as of the
end of the period covered by this Quarterly Report. Based on this evaluation, management
concluded that TDSs disclosure controls and procedures were not effective as
of September 30, 2005, at the reasonable assurance level, because of the
material weaknesses described below.
Notwithstanding the material weaknesses that existed as of September 30,
2005, management has concluded that the consolidated financial statements
included in this Quarterly Report on Form 10-Q present fairly, in all
material respects, the financial position, results of operation and cash flows
of TDS and its subsidiaries in conformity with accounting principles generally
accepted in the United States of America.
A material
weakness is a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected. In connection with the restatement as
discussed in Note 1 to the Consolidated Financial Statements included in this
Quarterly Report on Form 10-Q, the following material weaknesses were
identified in TDSs internal control over financial reporting as of December 31,
2004 which continued to exist at September 30, 2005:
1. TDS
did not have a sufficient complement of personnel with an appropriate level of
accounting knowledge, experience and training in the application of generally
accepted accounting principles commensurate with its financial reporting
requirements and the complexity of its operations and transactions. This control deficiency contributed to the
material weaknesses discussed in items 2 and 3 below and the restatement of TDSs
annual consolidated financial statements for 2004, 2003 and 2002, the interim
financial statements for all quarters in 2004 and 2003, the first and second
quarter financial statements for 2005, as well as adjustments, including audit
adjustments, to the third quarter of 2005 and the 2005 annual consolidated
financial statements. Additionally, this
control deficiency could result in a misstatement of substantially all accounts
and disclosures that would result in a material misstatement to TDSs interim
or annual consolidated financial statements that would not be prevented or
detected.
2. TDS
did not maintain effective controls over its accounting for certain vendor
contracts. Specifically, effective
controls were not designed and in place to ensure that certain vendor contracts
were raised to the appropriate level of accounting personnel or that accounting
personnel reached the appropriate conclusions in order to accurately and timely
record the effects of the contracts in conformity with generally accepted
accounting principles. This control
deficiency primarily affected, network operations expense, selling, general and
administrative expense, accounts payable, other deferred charges and accrued
liabilities. This control deficiency
resulted in the restatement of TDSs annual consolidated financial statements
for 2004, 2003 and 2002, the interim financial statements for all quarters in
2004 and 2003, the first and second quarter financial statements for 2005, as
well as adjustments, including audit adjustments, to the third quarter of 2005
and the 2005 annual consolidated financial statements. Additionally, this control deficiency could
result in a misstatement of the aforementioned accounts that would result in a
material misstatement to TDSs interim or annual consolidated financial
statements that would not be prevented or detected.
89
3. TDS
did not maintain effective controls over the completeness, accuracy,
presentation and disclosure of its accounting for income taxes, including
determination of income tax expense, income taxes payable, liabilities accrued
for tax contingencies and deferred income tax assets and liabilities.
Specifically, TDS did not have effective controls designed and in place to
accurately calculate the income tax expense and income tax payable, monitor the
difference between the income tax basis and the financial reporting basis of
assets and liabilities and reconcile the resulting basis difference to its
deferred income tax asset and liability balances. This control deficiency
resulted in the restatement of TDSs annual consolidated financial statements
for 2004, 2003 and 2002, the interim financial statements for all quarters in
2004 and 2003, the first and second quarter financial statements for 2005, as well
as adjustments, including audit adjustments, to the third quarter of 2005 and
the 2005 annual consolidated financial statements. Additionally, this control deficiency could
result in a misstatement of the aforementioned accounts that would result in a
material misstatement to TDSs interim or annual consolidated financial
statements that would not be prevented or detected.
Remediation of Material Weaknesses in
Internal Control Over Financial Reporting
Prior to the identification of the material weaknesses described above,
TDS had begun the following processes to enhance its internal control over
financial reporting:
Focus
on Fundamentals
This
program, initiated in the second quarter 2004, was a self-assessment of TDSs
policies and processes surrounding reporting and financial analysis, internal
controls, and implementation of new accounting pronouncements.
Controller
Review Committee
The
Controller Review Committee was formed in the fourth quarter of 2004 and
consists of TDSs Corporate Controller and Assistant Corporate Controller, U.S.
Cellulars Controller and TDS Telecoms Chief Financial Officer. The Committee meets regularly to discuss
accounting treatment for current, unusual or nonrecurring matters. In addition,
the Committee engaged external consultants to provide technical accounting
training related to current accounting developments on a quarterly basis.
Enhancements
and additions to technical accounting personnel
TDS
a Vice President and Assistant Corporate Controller was hired in the second
quarter of 2005; a Manager, Accounting and Reporting was added in the second
quarter of 2005 and a Manager, External Reporting was added in the third
quarter of 2005.
U.S.
Cellular a Vice President and Controller was hired in the second quarter of
2005 and was designated as U.S. Cellulars principal accounting officer in the
third quarter of 2005; a Director, Operations Accounting was hired in the
second quarter of 2005 and a Manager, Accounting Policy was added in the first
quarter of 2005.
TDS believes the above changes have improved its internal control over
financial reporting.
Management is currently addressing each of the material weaknesses in
internal control over financial reporting and is committed to remediating them as
expeditiously as possible. Management will devote significant time and
resources to the remediation effort. Managements remediation plans include the
following:
Review
of Existing Internal Control Over Financial Reporting TDS has engaged
external consultants to assist in reviewing its existing internal control over
financial reporting with the intent of improving the design and operating
effectiveness of controls and processes. In addition, management has currently
enhanced controls related to restatement items.
Training
Management has engaged external consultants to assist TDS in developing and
implementing a training program specific to the needs of accounting personnel.
Recruiting
TDS is actively recruiting the necessary personnel to improve its internal
control processes and enhance the overall level of expertise.
90
Finance
Leadership Team In late 2005, the Finance Leadership Team, consisting of key
finance leaders from each of TDSs business units and Corporate headquarters,
formed a Financial Infrastructure Committee. The Committee is planning for
longer-term improvements in key business processes and support systems with an
emphasis on preventive controls versus detective controls, and system-based
controls versus manual controls.
Income
Tax Accounting TDS has engaged external tax advisors to assist in enhancing
controls with respect to monitoring the difference between the income tax basis
and financial reporting basis of assets and liabilities and reconciling the
difference to the deferred income tax asset and liability balances. The scope
of this project encompasses controls over income taxes on a TDS enterprise-wide
basis, including U.S. Cellular. In
addition, TDS is in the process of implementing a tax provisioning software
which TDS believes will enhance its internal controls related to income taxes
on a TDS enterprise-wide basis.
Accounting
for Contracts TDS has enhanced controls related to monitoring, review and communication
of contract activity. These controls
include additional monitoring procedures, enhanced review processes and
increased communication.
Changes in Internal Control Over Financial
Reporting
Except the addition of technical accounting personnel as discussed
above, there were no changes in TDSs internal control over financial reporting
during the quarter ended September 30, 2005, that have materially
affected, or are reasonably likely to materially affect TDSs internal control
over financial reporting. Also, as discussed herein, TDS has made or intends to
make material changes to internal control over financial reporting in order to
remediate the material weaknesses discussed above.
91
TELEPHONE AND
DATA SYSTEMS, INC. AND SUBSIDIARIES
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings.
TDS is involved in a number of legal proceedings before the FCC and
various state and federal courts. If TDS believes that a loss arising from such
legal proceedings is probable and can be reasonably estimated, an amount is
accrued in the financial statements for the estimated loss. If only a range of loss can be determined, the
best estimate within that range is accrued; if none of the estimates within
that range is better than another, the low end of the range is accrued. The
assessment of legal proceedings is a highly subjective process that requires
judgments about future events. The legal proceedings are reviewed at least
quarterly to determine the adequacy of the accruals and related financial
statement disclosure. The ultimate settlement of proceedings may differ
materially from amounts accrued in the financial statements.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.
The following table provides certain information with respect to all
purchases made by or on behalf of TDS, and any open market purchases made by
any affiliated purchaser (as defined by the SEC) of TDS, of TDS Common Shares
during the quarter covered by this Form 10-Q.
TDS PURCHASES OF COMMON SHARES
(1)
Period
|
|
(a)
Total Number of
Common Shares
Purchased
|
|
(b)
Average
Price Paid per
Common Share
|
|
(c)
Total Number of
Common Shares
Purchased as Part of
Publicly Announced
Plans or Programs
|
|
(d)
Maximum Number of
Common Shares that
May Yet Be
Purchased Under the
Plans or Programs
|
|
July 1
31, 2005
|
|
|
|
$
|
|
|
|
|
824,300
|
|
August 1
31, 2005
|
|
|
|
|
|
|
|
824,300
|
|
September 1
30, 2005
|
|
|
|
|
|
|
|
824,300
|
|
Total for or
as of end of the quarter ended September 30, 2005
|
|
|
|
$
|
|
|
|
|
824,300
|
|
(1) All of the above Common Shares were purchased
under TDSs publicly announced Common Share repurchase program. The repurchase
program does not include TDS Special Common Shares.
The following is additional information with respect to TDSs publicly
announced Common Share repurchase program:
i. The
program was announced on February 28, 2003 by press release.
ii. The
share amount originally approved for repurchase was 3,000,000 Common Shares
(representing a reauthorization of 1,009,746 unpurchased shares under a program
that was scheduled to expire in April 2003, plus 1,990,254 shares under a
new authorization).
iii. The
expiration date of the program is February 28, 2006.
iv. No
stock repurchase program has expired during the quarter covered by this Form 10-Q.
v. During,
the quarter covered by this Form 10Q, TDS did not make any decision to
terminate the foregoing stock repurchase program prior to expiration, or to
cease making further purchases thereunder, during the quarter covered by this Form 10-Q.
92
Item 5. Other Information.
The following information is being provided to update prior disclosures
made pursuant to the requirements of Form 8-K, Item 2.03 Creation of a Direct
Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of
a Registrant.
U.S. Cellular had no borrowings on its Revolving Credit Facility as of September 30,
2005. During the quarter covered by this Form 10-Q, U.S. Cellular repaid
$50.0 million of Revolving Credit Facility borrowings that were outstanding as
of June 30, 2005. Such borrowings were repaid with cash flows from
operating activities.
The foregoing description is qualified by reference to the description
of the Revolving Credit Facility under Item 1.01 in U.S. Cellulars Current
Report on Form 8-K dated December 9, 2004, and a copy of the
Revolving Credit Facility, which is included as Exhibit 4.1 of U.S.
Cellulars Current Report on such Form 8-K dated December 9, 2004 and
is incorporated by reference herein.
Item 6.
Exhibits
Exhibit 2.1
Exchange Agreement dated September 12, 2005 between U.S. Cellular and
ALLTEL Communications, Inc., is hereby incorporated by reference to Exhibit 2.1
to TDSs Form 8-K dated September 12, 2005.
Exhibit 10.1
Amended and Restated 2004 Long-Term Incentive Plan, is hereby incorporated by
reference to Exhibit 10.1 to TDSs Form 8-K dated April 11,
2005.
Exhibit 10.2
Amended and Restated 2003 Employee Stock Purchase Plan, is hereby
incorporated by reference to Exhibit 10.2 to TDSs Form 8-K dated April 11,
2005.
Exhibit 10.3
Amended and Restated Non-Employee Director Compensation Plan, is hereby
incorporated by reference to Exhibit 10.3 to TDSs Form 8-K dated April 11,
2005.
Exhibit 10.4
Form of Stock Option Award Agreement for John E. Rooney, is hereby
incorporated by reference to Exhibit 10.1 to U.S. Cellulars Form 8-K
dated March 31, 2005.
Exhibit 10.5
Form of Restricted Stock Award Agreement for John E. Rooney, is hereby
incorporated by reference to Exhibit 10.2 to U.S. Cellulars Form 8-K
dated March 31, 2005.
Exhibit 11
Computation of earnings per common share is included herein as Note 7 to the
Consolidated Financial Statements included in this Form 10-Q.
Exhibit 12
Statement regarding computation of ratio of earnings to fixed charges.
Exhibit 31.1
Chief Executive Officer certification pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934.
Exhibit 31.2
Chief Financial Officer certification pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934.
Exhibit 32.1
Chief Executive Officer certification pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code.
Exhibit 32.2
Chief Financial Officer certification pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code.
The foregoing exhibits include only the exhibits that relate
specifically to this Form 10-Q or that supplement the exhibits identified
in the Companys Form 10-K/A for the year ended December 31, 2004.
Reference is made to the Companys Form 10-K/A for the year ended December 31,
2004 for a complete list of exhibits, which are incorporated herein except to
the extent supplemented or superseded above.
93
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
|
April 26, 2006
|
|
|
/s/ LeRoy T. Carlson, Jr.
|
|
|
LeRoy T. Carlson, Jr.,
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
Date
|
April 26, 2006
|
|
|
/s/ Sandra L.
Helton
|
|
|
Sandra L.
Helton,
|
|
|
Executive Vice President and
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
Date
|
April 26, 2006
|
|
|
/s/ D. Michael Jack
|
|
|
D. Michael Jack,
|
|
|
Senior Vice President and
|
|
|
Corporate Controller
|
|
|
(Principal Accounting Officer)
|
Signature page for the TDS
2005 Third Quarter Form 10-Q
94
EX-12
2
a06-1473_3ex12.htm
STATEMENTS REGARDING COMPUTATION OF RATIOS
Exhibit 12
TELEPHONE AND DATA SYSTEMS,
INC.
RATIOS OF EARNINGS TO FIXED
CHARGES
|
|
Nine months ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(As Restated)
|
|
|
|
(Dollars
in thousands)
|
|
EARNINGS:
|
|
|
|
|
|
Income before income taxes and minority
interest
|
|
$
|
312,601
|
|
$
|
172,528
|
|
Add (deduct):
|
|
|
|
|
|
Earnings on equity method investments
|
|
(51,007
|
)
|
(48,911
|
)
|
Distributions from unconsolidated entities
|
|
31,488
|
|
23,718
|
|
Minority interests in pre-tax income of
subsidiaries that do not have fixed charges
|
|
(6,931
|
)
|
(7,381
|
)
|
|
|
286,151
|
|
139,954
|
|
Add fixed charges:
|
|
|
|
|
|
Consolidated interest expense
|
|
160,240
|
|
147,378
|
|
Interest portion (1/3) of consolidated rent
expense
|
|
25,348
|
|
22,215
|
|
|
|
$
|
471,739
|
|
$
|
309,547
|
|
|
|
|
|
|
|
FIXED CHARGES:
|
|
|
|
|
|
Consolidated interest expense
|
|
$
|
160,240
|
|
$
|
147,378
|
|
Interest portion (1/3) of consolidated rent
expense
|
|
25,348
|
|
22,215
|
|
|
|
$
|
185,588
|
|
$
|
169,593
|
|
|
|
|
|
|
|
RATIO OF EARNINGS TO FIXED CHARGES
|
|
2.54
|
|
1.83
|
|
|
|
|
|
|
|
Tax-effected preferred dividends
|
|
$
|
256
|
|
$
|
225
|
|
Fixed charges
|
|
185,588
|
|
169,593
|
|
Fixed charges and preferred dividends
|
|
$
|
185,844
|
|
$
|
169,818
|
|
|
|
|
|
|
|
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED DIVIDENDS
|
|
2.54
|
|
1.82
|
|
|
|
|
|
|
|
|
|
|
|
EX-31.1
3
a06-1473_3ex31d1.htm
302 CERTIFICATION
Exhibit 31.1
Certification
of Chief Executive Officer
I, LeRoy T. Carlson, Jr., certify that:
1. I have reviewed
this quarterly report on Form 10-Q of Telephone and Data Systems, Inc.;
2. Based on my
knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge,
the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrants
other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated the
effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this
report any change in the registrants internal control over financial reporting
that occurred during the registrants most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and
5. The
registrants other certifying officer(s) and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent functions):
a) all
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and
report financial information; and
b) any fraud, whether or
not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
Date: April 26, 2006
|
/s/ LeRoy T. Carlson, Jr.
|
|
|
LeRoy
T. Carlson, Jr.
|
|
President and Chief Executive Officer
|
EX-31.2
4
a06-1473_3ex31d2.htm
302 CERTIFICATION
Exhibit 31.2
Certification of Chief Financial
Officer
I,
Sandra L. Helton, certify that:
1. I have reviewed
this quarterly report on Form 10-Q of Telephone and Data Systems, Inc.;
2. Based on my
knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my
knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrants
other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated the
effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this
report any change in the registrants internal control over financial reporting
that occurred during the registrants most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and
5. The
registrants other certifying officer(s) and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent functions):
a) all
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and
report financial information; and
b) any fraud, whether or
not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
Date: April 26, 2006
|
/s/ Sandra L.
Helton
|
|
|
Sandra
L. Helton
|
|
Executive Vice President and
|
|
Chief Financial Officer
|
EX-32.1
5
a06-1473_3ex32d1.htm
906 CERTIFICATION
Exhibit 32.1
Certification
Pursuant to Section 1350 of Chapter 63
of Title
18 of the United States Code
I, LeRoy T. Carlson, Jr., the chief
executive officer of Telephone and Data Systems, Inc., certify that (i) the
quarterly report on Form 10-Q for the third quarter of 2005 fully complies
with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and (ii) the information contained in the Form 10-Q
fairly presents, in all material respects, the financial condition and results
of operations of Telephone and Data Systems, Inc.
|
/s/ LeRoy T. Carlson, Jr.
|
|
|
LeRoy T. Carlson, Jr.
|
|
April 26, 2006
|
A signed original of this written statement required by Section 906
of the Sarbanes-Oxley Act of 2002 has been provided to Telephone and Data
Systems, Inc. and will be retained by Telephone and Data Systems, Inc.
and furnished to the Securities and Exchange Commission or its staff upon
request.
EX-32.2
6
a06-1473_3ex32d2.htm
906 CERTIFICATION
Exhibit 32.2
Certification
Pursuant to Section 1350 of Chapter 63
of Title
18 of the United States Code
I, Sandra L. Helton, the chief financial
officer of Telephone and Data Systems, Inc., certify that (i) the
quarterly report on Form 10-Q for the third quarter of 2005 fully complies
with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and (ii) the information contained in the Form 10-Q
fairly presents, in all material respects, the financial condition and results
of operations of Telephone and Data Systems, Inc.
|
/s/ Sandra L. Helton
|
|
|
Sandra L. Helton
|
|
April 26, 2006
|
A signed original of this written statement required
by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to
Telephone and Data Systems, Inc. and will be retained by Telephone and
Data Systems, Inc. and furnished to the Securities and Exchange Commission
or its staff upon request.
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end
-----END PRIVACY-ENHANCED MESSAGE-----